September 04, 2014 Articles

Common Issues When a Party to Litigation Faces Financial Distress

Familiarity with certain issues that arise in bankruptcy litigation can help you better protect your client’s economic interest.

By Mark A. Platt and Ryan E. Manns

When signs of financial distress of a party to litigation emerge, familiarity with certain issues that arise in bankruptcy litigation can help you better protect your client’s economic interest.  The purpose of this article is not to address all of those scenarios; rather, it is to present some of the bankruptcy litigation topics that arise most frequently, including (1) how a bankruptcy filing may affect a settlement; (2) substantive laws and procedural rules that apply upon the commencement of a bankruptcy filing; and (3) director and officer (D&O) issues that are common to many corporate bankruptcy filings.

The argument that bankruptcy courts could not do so went as follows: (1) 28 U.S.C. § 157(c)(1), which authorizes bankruptcy courts to recommend findings and conclusions, applies only to “a proceeding that is not a core proceeding, but is otherwise related to a case under title 11” (emphasis added); (2) a matter that is statutorily defined as core (even if outside the bankruptcy court’s constitutional authority to decide) cannot be a non-core related matter; and (3) therefore, there is no basis in the statute for a bankruptcy court to recommend a ruling. Thus, proponents of the argument contended that there was a “statutory gap” or “dead zone” in the statute where the bankruptcy court lacked the statutory authority to do anything.

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