May 02, 2019

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Termination Of Contract Held Not To Be A Transfer

By Michael Enright

Trustees and Debtors often consider whether to challenge the prepetition termination of a contract as a constructively fraudulent transfer under Section 548 of the Bankruptcy Code, or applicable state fraudulent transfer law. The support for this lies in the notion that the termination is a parting by the Debtor with an interest in its property. On the other hand, some courts have reasoned that the only rights the Debtor had under the contract included the termination rights, to which it was already subject, and concluded that such a termination was not a transfer for fraudulent transfer purposes. We can now add In re Pazzo Pazzo, Inc., Case No. 18-13516 (Bankr. D.N.J., April 24, 2019) to the mix. There, the court had to decide whether the prepetition termination of a purchase option connected with the Debtor’s lease of its premises could be avoided as a fraudulent transfer. In concluding that the termination of the option could not be attacked under Section 548, the court cited to cases holding that termination in accordance with contractual terms was not a transfer at all, because the Debtor had not lost any rights other than its contract rights that were dependent upon compliance with contractual terms. The court also relied on the policy of protecting parties’ expectations in real estate contracts and avoiding unnecessary uncertainty in the marketplace. The court noted that the presence of collusion might lead to a different outcome. The decision merits consideration in any controversy concerning the review of prepetition terminations of contracts with the Debtor.    

UCC

Missing UCC Attachments in Pennsylvania

By Darrell Pierce and Paul Hodnefield

The Pennsylvania Department of State Bureau of Corporations and Charitable Organizations (“Bureau”) recently began notifying parties who submitted UCC records by mail or across the counter during the period of March 1 through April 3, 2019 that the Bureau mistakenly separated and discarded attachments to such records. The attachments, therefore, may not have been scanned and made a part of the filed record. 

The Bureau has asked those who submitted written records during the above-mentioned time period (“Affected Filers”) to review their records and notify the Bureau of any UCC records that do not contain submitted attachments.  The Affected Filers should then send to the Bureau full copies of any such UCC records in PDF format.  Presumably, the Bureau will accept the copies and update the filed records using a filing officer statement. Affected Filers will want to maintain a record of what they submitted to the Bureau, in case there is ever a challenge to the Bureau’s correction process.

Those who search the UCC records must also take care when reviewing search results.  Searchers should assume that all written records filed during the relevant time frame may have omitted attachments and investigate accordingly.  Particularly in cases where an attachment is referenced but does not appear, the searcher should assume the worst; e.g., the missing attachment contained a blanket lien collateral description.  Remember, the risk of filing office errors falls on those who search the UCC records.   

As a final note, the situation indicates why the use of attachments should be carefully considered and avoided when possible. It also demonstrates the importance of a post-filing search to verify what the filing office actually filed.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.