May 01, 2020

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Increase in US Trustee Fees Upheld

By Michael Enright

In an unusual joint decision, Judge Bernstein and Judge Glenn in New York ruled that the amendments to 28 U.S.C. § 1930(a)(6)(B) that significantly increased U.S. Trustee’s fees effective January 1, 2018 were not unconstitutional in their application to cases that were pending at the time. In re MF Global Holdings Ltd., Case No. 11-15059; In re SunEdison, Inc., Case No. 16-10992 (Bankr. S.D.N.Y. April 24 2020). Ruling on cross motions for summary judgment, the opinion noted that the issues and the parties (other than the identity of the debtors) were essentially identical. Both adversary proceedings were filed to challenge the application of the increased quarterly fees to cases where a plan had been confirmed and become effective prior to January 1, 2018.  In both cases, the increase in fees was challenged on a variety of constitutional grounds, as it has been in bankruptcy courts throughout the country. The opinion rejected the challenges regarding retroactivity, due process, uniformity, the takings clause and the bankruptcy clause.  Recognizing the split in bankruptcy court decisions on these issues, Judge Bernstein and Judge Glenn certified their decisions for immediate appeal to the Second Circuit. Litigation over the application and constitutionality of the increased fees undoubtedly will continue to proliferate, given the amount of money involved, and may end up in the Supreme Court.

 Commercial Law

Recent Cases on Security Interests: Attachment and Perfection Issues

By Stephen L. Sepinuck, Frederick N. & Barbara T. Curley Professor & Director of the Commercial Law Center at Gonzaga University School of Law

Attachment

Behrend v. New Windsor Group, LLC, 2020 WL 559565 (N.Y. App. Div. 2020).  Regardless of whether the plaintiff’s agreement with the debtor provided for an outright assignment of, or a security interest in, the debtor’s interest in a LLC, the plaintiff acquired no interest because the LLC operating agreement required the consent of all other members to any transfer and there was no evidence that such consent was obtained.  Moreover, the plaintiff could have no interest in the assets of the LLC because the debtor, as a member of the LLC, had no interest in, and could not transfer any interest in, the LLC’s property.

Seemingly dissimilar reasoning informed the court’s decision in Landress v. Sparkman, 2020 WL 561893 (E.D.N.C.), appeal filed, (4th Cir. 2020). (See the author's analysis of the case on page 11 of the ABA Business Law Section's most recent Commercial Law Newsletter.)  A guarantor granted a security interest in his interest in a Delaware limited partnership, as well as in dividends and distributions therefrom, even though the partnership agreement provided that any purported transfer would be void unless approved by the Board, and no such approval was given.  The issue was governed by New York law because the security agreement selected New York as the governing law.  Although, under the internal affairs doctrine, Delaware law governs matters relating to the partnership’s governance and its relationship to the partners, the pledge of the guarantor’s economic interest and distributions did not involve such matters.  New York’s § 9-406 overrode the restriction on transfer of the guarantor’s economic interest in the partnership because the partnership is an account debtor with respect to a payment intangible and the restriction on transfer was in an agreement between the debtor and the account debtor (the partnership agreement expressly stated that is was made by and between the partners and the partnership).  For similar reasons, § 9-408 overrode the transfer restriction with respect to general intangibles.

Perfection

Among other issues, this case underscores the importance of getting the debtor’s name right.  In re Keast Enterprises, Inc., 2020 WL 534717 (Bankr. S.D. Iowa 2020) involved a financing statement filed by the holder of an Iowa agricultural lien that identified the debtor as “Russel Keast,” when the debtor was actually Keast Enterprises, Inc. The financing statement was ineffective to perfect.  The fact that a search under the name “Keast Enterprises” now revealed the filed financing statement, which had been amended to include that name for the debtor, did not make the financing statement effective when filed.  The amendment does not relate back to the filing date, and thus the financing statement was not effective to perfect within the 31- day period required under the agricultural lien statute.

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.