Monthly Archives: June 2021

In 2018, the liquidating trustee for Venoco, LLC and its affiliated debtors (collectively, the Debtors) commenced an action in the United States Bankruptcy Court for the District of Delaware seeking monetary damages from the State of California and its Lands Commission (collectively, the State) as compensation for the alleged taking of a refinery (the Onshore Facility) that belonged to the Debtors (the Adversary Proceeding). The State moved to dismiss, claiming, among other things, sovereign immunity. The Bankruptcy Court denied the motion to dismiss, and the District Court affirmed the denial. The State appealed to the Third Circuit, and the Third Circuit affirmed.

Writing for a unanimous three-judge panel, Circuit Judge Ambro began by observing that States can generally assert sovereign immunity to shield themselves from lawsuits, but bankruptcy proceedings are one of the exceptions. The Supreme Court held in Central Virginia Community College v. Katz, that, by ratifying the Bankruptcy Clause of the U.S. Constitution, states waived their sovereign immunity defense in proceedings that further a bankruptcy courts exercise of its jurisdiction over property of the debtor and its estate (called in rem jurisdiction).[1] So, the single question before the Court was whether, under Katz, the State could assert a defense of sovereign immunity in the Adversary Proceeding.

Judge Ambro said no. He acknowledged that Katz did not define the range of proceedings that further a bankruptcy courts in rem jurisdiction, but explained that it did tell us bankruptcys three critical functions: [1] the exercise of exclusive jurisdiction over all of the debtors property, [2] the equitable distribution of that property among the debtors creditors, and [3] the ultimate discharge that gives the debtor a fresh start by releasing him, her, or it from further liability for old debts.[2]

Based on this guidance, Judge Ambro concluded that to determine whether a state can assert sovereign immunity in a particular proceeding, courts must ask whether a proceeding directly relates to one or more of these three functions.[3] Here, he concluded that the adversary proceeding furthers at least two of those three critical bankruptcy functions:

[T]he Adversary Proceeding furthers the Bankruptcy Courts exercise of jurisdiction over property of the Debtors and their estates, as it seeks a ruling on rights in the Onshore Facility. [ . . . ] The Adversary Proceeding also furthers the second critical functionfacilitating equitable distribution of the estates assets. The Onshore Facility is a significant asset for Venoco and its creditors. Indeed, the liquidation analysis [included in the Debtors plan] acknowledged the [State] was receiving significant value from the use of the Debtors assets and that the value of the use of those assets [was] being negotiated between the parties. Further, the [State] is a major creditor and filed a proof of claim against Venoco, so the [State has] a stake in how the Trusts assets are liquidated and distributed.[4]

Finally, Judge Ambro was unmoved by the States insistence that sovereign immunity is fundamental to our constitutional design and the exercise of eminent domain power is especially central to their sovereignty.

[B]ankruptcy is a different ball game, and the effect on state sovereignty is not the focus of our analysis. The focus is instead on ensuring that sovereign immunity will not interfere with the bankruptcy courts jurisdiction over the estates property as well as its orderly administration. The driving principle of the Katz decision is that the Bankruptcy Clause has a unique history and is sui generis among Article Is grants of authority, the result being that federal courts could impose on state sovereignty in bankruptcy proceedings.[5]

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Blurred Immunity: California Cannot Escape Adversary Proceeding on Grounds of Sovereign Immunity - Lexology

Nothing is more frustrating to a trade creditor holding a large unpaid balance owed by a debtor in bankruptcy than the risk that payments the trade creditor received before the debtor filed bankruptcy may be clawed back by the debtors estate as preference payments. This frustration has been compounded since the onset of the COVID-19 pandemic early last year, during which time vendors have supported struggling customers by agreeing to defer or postpone payments under the terms of their goods or services contracts, even while the vendors themselves may have struggled to stay afloat. Pursuant to section 547(b) of the Bankruptcy Code, a debtor in possession or a trustee can seek to recover certain payments made within 90 days of the bankruptcy filing date, subject to various defenses.

The policy behind the preference statute is to treat creditors equitably and level the playing field by requiring preferred creditors to share their recovery with all other creditors. Paradoxically, however, when the estate recovers preference payments made to a particular creditor, that creditor often will not share in the recovery at all. Pursuant to the absolute priority rule, higher-priority claims, such as secured claims, unpaid chapter 11 administrative expense claims incurred by the debtor (such as professional fees), and other priority claims typically all must be paid in full before unsecured creditors receive any distribution. With increasing frequency, and particularly in retailer bankruptcies, preference recoveries are used to fund chapter 11 administrative expenses and to improve the recoveries of underwater secured lenders rather than to facilitate pro rata distributions to unsecured creditorsnot at all what Congress intended when it enacted the statute. While the preference statute is intended to promote fairness and equity among creditors, the creditor that finds itself defending a preference action is more likely to characterize the action as punishment for continuing to support a financially distressed customer.

So, what should a creditor do when it first receives a preference demand letter? What should it do when it is subsequently sued? What arguments and defenses can the creditor raise in opposition to a preference claim? How should the creditor go about putting this information to use when responding to, defending, and (hopefully) settling the preference claim? This article answers these questions, including by providing a list of action items that a creditor should be mindful of, beginning with the date that a customer files for bankruptcythe petition datethrough the resolution of a preference litigation. Creditors are nearly always far better off spending the time compiling and presenting proof of potential defenses to a preference demand than simply paying the amount demanded.

Some Necessary Background: Preference Claims and Defenses

The Elements of a Preference ClaimPursuant to section 547(b) of the Bankruptcy Code, a trustee, a debtor in possession, or a successor to the estate such as a liquidating trust can avoid and recover a transfer of property of the debtor as a preference by proving all the following required elements:

The Small Business Reorganization Act of 2019 (SBRA), which became effective on February 19, 2020, amended section 547(b) to require the plaintiff in a preference suit to allege, as part of its burden of proof, that the preference claim is based on reasonable due diligence in the circumstances of the case and takes into account a partys known or reasonably knowable affirmative defenses. This seemingly heightened burden of proof for preference claims has raised numerous questions that will need to be answered by the courts. How much of an additional burden will be placed on a plaintiff to prove a preference claim? What constitutes reasonable due diligence? What is a reasonably knowable affirmative defense? And can the plaintiff in a preference action rely on the debtors records to satisfy these requirements, or must the plaintiff engage in additional diligence? Given the relatively short time this change has been in place, few courts have had occasion to address these questions.

Defenses to a Preference ClaimSection 547(c) of the Bankruptcy Code provides several affirmative defenses that a creditor can assert to reduce or eliminate its preference exposure. These defenses are designed to encourage creditors to continue doing business with and extending credit to financially distressed companies. In the rare case that goes to trial, the creditor bears the burden of proving its defenses.

547(c)(1)Contemporaneous Exchange of Value: The contemporaneous exchange of value defense, set forth in section 547(c)(1), is one such defense. This defense excuses any payment or other transfer that the debtor and creditor had intended as a contemporaneous exchange for new value and that was a substantially contemporaneous exchange. A creditor that provides new goods or services to a debtor in exchange for a substantially contemporaneous payment, such as a cash-on-delivery transaction, replenishes the debtor and should not be subject to preference liability.

547(c)(4)Subsequent New Value: The subsequent new value defense, set forth in section 547(c)(4), is perhaps the most frequently invoked preference defense. The new value cannot be secured by a security interest in the debtors assets that is otherwise unavoidable, and it cannot be paid by an otherwise unavoidable transfer to or for the benefit of the creditor. The subsequent new value defense reduces a creditors preference liability dollar for dollar based on new value provided to the debtorsuch as sale and delivery of goods or provision of services to the debtor on credit termsafter the creditors receipt of an alleged preference payment. The defense is predicated on protecting a creditor from preference risk where the creditor replenished the debtor by continuing to extend credit after receiving a transfer otherwise alleged to be a preference.

The section 547(c)(4) new value defense clearly applies to new value that was unpaid as of the petition date. Several United States Circuit Courts of Appeals (the federal courts immediately below the United States Supreme Court) and other courts have reached conflicting results on the applicability of the new value defense to paid new valuevalue that the creditor provided to the debtor after receiving an alleged preference payment but that the debtor repaid before the petition date. The majority viewfollowed by the Fourth, Fifth, Eighth, Ninth, and, most recently, Eleventh circuits and many lower courtshas applied the new value defense to new value paid by an otherwise avoidable transfer (such as a subsequent preference payment) and unpaid new value. On the other hand, the Seventh Circuit and a minority of other courts have ruled that the new value defense applies only to unpaid new value. A creditors ability to assert paid new value, in addition to unpaid new value, could substantially reduce preference liability but depends on the jurisdiction in which the debtor filed bankruptcy.

In certain instances, new value provided before the petition date might be paid after the petition date pursuant to an order authorizing the debtor to pay critical vendor claims or administrative claims arising under section 503(b)(9) of the Bankruptcy Code. As discussed later in this article, a creditor may have some or all of its prepetition claim paid after the petition date by being deemed a critical vendor during the bankruptcy case. Also, a creditor may be granted an allowed administrative expense claim under section 503(b)(9) of the Bankruptcy Code for the value of goods received by the debtor within 20 days before the petition date (a 503(b)(9) claim). Courts are divided on whether new value that is paid after the petition date pursuant to a critical vendor order or as an allowed 503(b)(9) claim nevertheless can be used to reduce preference liability as subsequent new value. Some courts, including the Third Circuit (whose rulings are binding on the lower federal courts in Delaware, New Jersey, Pennsylvania, and the United States Virgin Islands), have held that such new value may still count toward the new value defense, because new value is determined based on a snapshot as of the petition date. Other courts have denied the application of such new value toward the new value defense, largely under the premise that permitting such new value would permit the creditor to double-dip by reducing its preference exposure based on credit extended before the petition date where such credit was fully paid after the petition. This issue, specifically as it relates to 503(b)(9) claims, is presently on appeal in the Eleventh Circuit.

547(c)(2)Ordinary Course of Business: Another frequently invoked defense is the ordinary course of business defense set forth in section 547(c)(2) of the Bankruptcy Code. The creditor must first prove the alleged preference payment satisfied a debt that the debtor incurred in the ordinary course of business or financial affairs of the debtor and the creditor. A trade creditor that extended credit to the debtor should have little difficulty satisfying this requirement. The creditor must then prove the preference payment was either (A) made in the ordinary course of business or financial affairs of the debtor and the creditor (the subjective test), or (B) made according to ordinary business terms (the objective test). The subjective test requires proof that the alleged preference payments were consistent with the debtors payments to the creditor prior to the preference period. A creditor can prove the objective part of the defense by showing that the alleged preference payments were consistent with the terms and payment practices in the creditors industry, the debtors industry, or some subset of either or both. Needless to say, this defense is fact-intensive, and courts and parties have approached it in a wide variety of ways.

During the COVID-19 pandemic, vendors and customers frequently negotiated extended terms for the payment of invoices. If a customer subsequently filed for bankruptcy protection and sought to recover payments made to the vendor as alleged preferences, the vendorby giving the customer more time to payrisked losing the ordinary course of business defense. To address this seemingly unfair result, Congress, through the Consolidated Appropriations Act of 2020 (CAA), which became effective on December 27, 2020, amended section 547 to create a new, temporary preference exception in new subsection (j), under which covered payment[s] of supplier arrearages[1] may not be avoided as preferences. According to section 547(j)(1)(B), a covered payment of supplier arrearages means a payment of arrearages that is made in connection with an agreement or arrangement made or entered into on and after March 13, 2020 (the generally recognized onset of the COVID-19 pandemic in the United States), between a debtor and a supplier of goods or services to delay or postpone payment of amounts due under an executory contract. The payment of arrearages cannot exceed the amount due under the contract before March 13, 2020, and does not include fees, penalties, or interest in an amount greater than that scheduled to be paid under the contract or which the debtor would owe if the debtor had made all payments on time and in full before March 13, 2020. As with the SBRAs amendment to section 547, this statutory language leaves much unanswered about the scope and application of this new exception that the courts will need to decide. Absent further congressional action, this temporary provision expires on December 27, 2022, but will continue to apply to bankruptcy cases filed before that date.

Critical Vendors: Another defense creditors have asserted with mixed success is the critical vendor defense. Chapter 11 debtors frequently seek and obtain authority to pay the prepetition claims of critical vendors based on the premise that the debtors businesses would be irreparably disrupted and their efforts to maximize value for their estates and creditors would be severely impaired if such vendors refuse to continue extending credit. When defending preference actions, creditors that have been granted critical vendor status have argued that a preference claim against them must fail in light of the fact that the court granted authority for the debtor to pay the creditors prepetition claim, because the plaintiff cannot prove one of the necessary elements of the claimthat the alleged preferential transfer enabled the creditor to receive more than the creditor would have received in a hypothetical chapter 7 bankruptcy liquidation. This argument has had mixed success, largely depending on whether the estate was required to pay the creditors prepetition claim or merely had discretionary authority to do so. Under the latter circumstance, courts tend to uniformly reject the critical vendor defense. Therefore, creditors considering extending credit to a debtor after the petition date in exchange for the payment of prepetition claims pursuant to a critical vendor order in the bankruptcy case should carefully review how the debtors critical vendor program is structured and should consider entering into a trade agreement that requires payment of the prepetition claim if the creditor wishes to minimize the risk of preference liability.

Preference Action ItemsUnsecured trade creditors seeking to analyze and prepare their defenses and respond to a potential or asserted preference claim should be mindful of the action items listed below, beginning even before receiving a preference demand:

ConclusionNotwithstanding Congress recognition of the realities of doing business during the COVID-19 pandemic, and indeed in light of the recent amendments to the Bankruptcy Code concerning preferences, it is absolutely critical for trade creditors to be prepared to address and respond to potential preference claims following a customers bankruptcy filing. The information and action items provided above are a great start for doing so. However, upon receipt of a demand letter or a preference complaint, a trade creditor should consult an attorney to assist in the defense of the claim and to help navigate the choppy and unclear waters underlying preference risk.

[1] The CAA also added new section 547(j)(2)(A), which provides that a trustee or debtor-in-possession may not avoid a covered payment of rental arrearages. This additional covered payment exception is substantially similar to the covered payment of supplier arrearages exception discussed in this article.[2] It could be argued that the SBRAs new venue threshold applies more narrowly to bankruptcy cases (as opposed to lawsuits) filed on or after February 19, 2020.

Excerpt from:

Preference Defense In the Wake Of The Pandemic: A Primer - JD Supra

(Bloomberg) -- Puerto Ricos financial oversight board is aiming to get the commonwealth out of its record bankruptcy by the end of 2021, a move that is expected to help lift the island out of years of economic decline.

The oversight board, which Congress created in 2016 to fix Puerto Ricos financial crisis, filed a restructuring plan this month to the bankruptcy court to reduce $22 billion of debt. Judge Laura Taylor Swain is set to hear arguments on the restructuring at a July 13 hearing.

We hope that we are on track for Puerto Rico to emerge from bankruptcy, ideally before the end of the year, David Skeel, the boards chairman, said Thursday during a public meeting for the panel.

Puerto Rico has been in bankruptcy, called Title III, for four years as it has suffered hurricanes, earthquakes, political turmoil and the coronavirus pandemic. Leaving bankruptcy will allow the commonwealth to borrow again in the capital markets and help improve economic growth on the island, Skeel said.

Getting out of bankruptcy will move Puerto Rico to where its having access to the capital markets, he said. It will make Puerto Rico attractive and an exciting place, I think, for development.

Puerto Ricos Electric Power Authority is also in bankruptcy. The board anticipates filing to the court a restructuring plan in early 2022, Natalie Jaresko, the boards executive director, said during the meeting.

Prepa, as the power utility is known, is seeking to reduce $9 billion of debt. If Prepa had to pay that full amount of debt, it would cost customers 5 cents to 6 cents per kilowatt hour, according to the utilitys multi-year fiscal plan. Not restructuring debt and implementing changes to the utilitys pension would result in electricity rates of 25.4 cents to 29.6 cents per kilowatt hour.

The board Thursday approved Prepas fiscal plan as well as those for several Puerto Rico entities, including the University of Puerto Rico and the Aqueduct and Sewer Authority. The spending frameworks help to balance budgets and implement expense reductions.

Story continues

Collectively, these fiscal plans provide an ambitious set of reforms that complement the commonwealth fiscal plan and will continue to put Puerto Rico toward long-term economic growth and opportunity, Jaresko said during the meeting.

(Updates with potential timing of Prepa debt plan in the sixth paragraph.)

More stories like this are available on bloomberg.com

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Puerto Rico Board Seeks Islands Bankruptcy Exit This Year - Yahoo Finance

On May 14, 2021, the Department of Justice of the government of the Hong Kong Special Administrative Region announced that the Secretary for Justice of Hong Kong and the Vice-president of the Supreme Peoples Court (the SPC) had signed the Record of Meeting on Mutual Recognition of and Assistance to Bankruptcy (Insolvency) Proceedings between the Courts of the Mainland and of the Hong Kong Special Administrative Region (the ROM). The ROM concerns the commencement and implementation of the much anticipated cross-border mutual recognition, assistance and cooperation arrangement between Hong Kong and mainland China (the Mainland) in relation to corporate insolvency and restructuring matters (the Cooperation Arrangement).

To give effect to this milestone agreement, on the same day the SPC issued The Supreme Peoples Courts Opinion on Taking Forward a Pilot Measure in relation to the Recognition of and Assistance to Insolvency Proceedings in the Hong Kong Special Administrative Region (the SPC Opinion) and the Hong Kong government issued a Practical Guide setting out the procedure for a Mainland administrators application to the Courts of Hong Kong for recognition and assistance (the Guide).

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The New Cross-Border Arrangement Between Hong Kong and Mainland China on Insolvency and Restructuring Matters A Comparison with Chapter 15 of the...

Deepa Aathreya, a Chennai-based entrepreneur, set up Alt School (formerly known as 'School of Success') to inculcate leadership qualities in children and introduced programmes for holistic development of parents, and teachers. She even holds a Guinness Record for conducting program on child safety. However, Aathreya had to face several ups and downs in order to succeed.

Born as an obese child, Aathreya often found herself being fat-shamed in her childhood. Her academic life started getting impacted but things gradually changed for good. When she was in ninth standard, a teacher motivated her to take charge of her life. Soon after, she participated as a candidate for the school election and won which added to her confidence.

After completing school, Aathreya completed her bachelor's degree in Arts and thereafter pursued an MBA (Master of Business Administration). She then joined an internship and while still in the internship period, she decided to tie the knot. Within nine months after her marriage, their son was born and she had to discontinue her internship.

Aathreya felt bad for passing on the entire financial burden to her husband, but fortunately, she soon received a call from her former employer asking her to plan the birthday party of her son. She took the opportunity and executed it, and this proved to be the turning point.

She started getting requests to conduct summer camps and the business started to flourish. But within a couple of months, life came to a standstill for the family after Aathreya was cheated by a business partner. They had lost her home, car and even had to get their son enrolled out of the school as they could not afford the fees.

She went bankrupt to the extent that survival had become a great challenge for her. "Now it does not affect me but at that point, it seemed like the whole world came to an end. We were angry and also feared how are we going to manage everything. Being an entrepreneur, we had the responsibilities of the people working with us, then there was our own child whom we had to take care of. There was a lot of mixed feelings," Aathreya said to The Logical Indian.

To make ends meet, she started selling balloons at the beach. She used to tell stories to children at the beach and then sold them balloons. Eventually, she became quite popular amongst the children who used to visit the beach just to listen to her stories. Media, too, noticed this and covered her innovative approach to teach life lessons to kids which eventually paved the way for her big start-up.

A school in Madurai, on reading about her, reached out to conduct storytelling sessions in the school. This was when the idea of School of Success (now known as 'Alt School') came to Aathreya.

"When I was called into the school in Madurai and I conducted the storytelling session. Firstly I felt like I thoroughly enjoyed the experience and secondly I realised that it can be a brilliant idea by itself as it does not require much investment and you are your investment initially. At that point in time investment was the biggest barrier, so I thought this could be the right way forward."

School of Success (now known as 'Alt School') is based on "classroom without walls" concept, which targets the multidimensional development of students. She also introduced the concept of "Leadership for kids" where they learn leadership skills by working on social causes. She firmly believes that changes begin with children and therefore started the "Be The Change" movement. Her venture now includes over 2,500 schools where she also conducts parenting and teacher training programmes.

In 2011, Aathreya and her husband met with an accident. After recovering, the entrepreneur said that the experience turned out to be life-changing for her.

"Until 2011, all I was seeking was a materialistic pleasure. Before the accident, if someone would ask me why am I in this business of working with children, I would say earning opportunities. But after my accident when I put my life mission and purpose of what I want to do further, I think that is when a phenomenal and exponential growth happened," she said.

After finding the purpose, her start-up had touched more than a lakh students all over the country. She does not even charge any fixed fees for her courses but accepts whatever amount the schools wish to pay according to their budget.

Emphasising the role of her family, Deepa said, "I always say this 'No place like home, no strength like family'. We had lost everything but our biggest asset is we struck on together with each other as a family even during our toughest times. The family has been a great support, my husband, my son, and my daughter."

Also read: Social Distancing To Beat COVID: These Tribal People Of Wayanad Show How It Is Done

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From Bankruptcy To Building Her Start-Up, This Chennai-Based Entrepreneur Is Now Coaching Students On... - The Logical Indian