The U.S. Bankruptcy Code contains a labyrinth of laws and procedures that govern bankruptcy cases for individuals and businesses. Federal courts often have needed to interpret these statutes in defining the rights and obligations of debtors, creditors, and third parties. A student of this topic thus should understand how courts have refined the legislative framework over time. Below is an outline of key cases in bankruptcy law with links to the full text of virtually every case, provided free by Justia.
Any eligible entity can start a bankruptcy case, while involuntary cases are limited to Chapters 7 and 11, and often to situations involving three or more creditors. A court can dismiss a case if the debtor’s filing was not made in good faith. This requirement tends to be defined broadly.
Butner v. U.S. 一 Unless some federal interest requires a different result, there is no reason why property interests created and defined by state law should be analyzed differently simply because an interested party is involved in a bankruptcy proceeding.
In re Integrated Telecom Express, Inc. 一 Two inquiries that are relevant to the question of good faith are whether the petition serves a valid bankruptcy purpose and whether the petition is filed merely to obtain a tactical litigation advantage.
In re Cloudeeva, Inc. 一 The existence of good faith depends on an amalgam of factors rather than a specific fact. Even when the timing of a bankruptcy filing is suspicious because it suggests forum shopping, this is not enough by itself to find bad faith.
In re General Growth Properties, Inc. 一 Grounds for dismissing a Chapter 11 bankruptcy case exist if it is clear on the filing date that there was no reasonable likelihood that the debtor intended to reorganize and no reasonable probability that it would eventually emerge from bankruptcy proceedings. A bankruptcy petition will be dismissed if both objective futility of the reorganization process and subjective bad faith in filing the petition are found.
In re Colonial Ford, Inc. 一 Determining whether dismissal will better serve the interests of creditors and debtors under Section 305(a)(1) involves considering factors such as speed, economy, and freedom from litigation, as well as fairness, priorities in distribution, capacity for dealing with frauds and preferences, and the importance of a discharge to the debtor.
The Automatic Stay
The automatic stay pauses most efforts to collect from a debtor during bankruptcy. It helps debtors reorganize and prevents creditors from infringing on the interests of other creditors by depleting the assets of a debtor. Relief from the stay may be granted for cause.
Solis v. SCA Restaurant Corp. 一 To determine whether the Section 362(b)(4) exception applies, courts may use the pecuniary purpose (pecuniary interest) test, the pecuniary advantage test, or the public policy test. The pecuniary purpose test addresses whether the government proceeding relates to public safety and welfare or the government’s interest in the debtor’s property. The pecuniary advantage test addresses whether the acts that the government wishes to carry out would give the government a pecuniary advantage over other creditors. The public policy test distinguishes proceedings that adjudicate private rights from those that effectuate public policy. When an action furthers both public and private interests, it is exempt from the automatic stay if the private interests do not significantly outweigh the public benefit.
In re Spansion, Inc. 一 The continuous nature of a patent infringement tort does not override a paramount function of the bankruptcy court: to serve as the clearinghouse for attempted enforcement of pre-petition claims or continuation of pre-petition litigation against the debtor.
In re Cahokia Downs, Inc. 一 The Bankruptcy Code is extremely broad in giving the Bankruptcy Court jurisdiction and broad powers over the contractual relations of a debtor in order to permit the debtor’s rehabilitation.
In re M.J.K. Co., Inc. 一 When deciding whether to modify the automatic stay, the court must consider the particular circumstances of the case and ascertain what is just to the claimants, the debtor, and the estate. The moving party has the initial burden of showing a legally sufficient basis, or cause, for lifting the automatic stay. Once cause is shown to exist, the debtor must prove that it is entitled to the protections afforded by the stay.
Chrysler, LLC v. Plastech Engineered Products, Inc. 一 Cause is an elastic concept. If relief from the stay is requested at the early stages of the bankruptcy case, the burden on the debtor is less stringent. If relief from the stay is requested later in the case, the debtor’s showing is closely scrutinized.
Claims Against a Bankruptcy Estate
Under Section 101(5) of the Bankruptcy Code, a creditor has a pre-petition claim when they have a right to payment that arose before the debtor filed for bankruptcy. The bankruptcy court has the authority to discharge claims within the meaning of this provision. A debtor’s obligation to perform may be discharged through bankruptcy if it can be reduced to money damages under Section 101(5)(B).
Ohio v. Kovacs 一 A cleanup order was converted into an obligation to pay money that was dischargeable in bankruptcy when the state would have been satisfied had the debtor furnished the necessary funds, either before or after bankruptcy, to defray cleanup costs.
Pacor, Inc. v. Higgins 一 The test for determining whether a civil proceeding is related to bankruptcy is whether the outcome of the proceeding could conceivably have any effect on the estate being administered in bankruptcy. An action is related to bankruptcy if the outcome could alter the debtor’s rights, liabilities, options, or freedom of action positively or negatively and which in any way affects the handling and administration of the bankrupt estate.
In re Federal-Mogul Global, Inc. 一 The test articulated in Pacor for whether a lawsuit could conceivably have an effect on the bankruptcy proceeding inquires whether the allegedly related lawsuit would affect the bankruptcy proceeding without the intervention of yet another lawsuit.
In re Combustion Engineering, Inc. 一 The bankruptcy court had no jurisdiction to implement releases of non-derivative liability for non-debtor affiliates. Neither corporate affiliation between peer companies, significant financial contributions by the affiliates, nor shared insurance between the debtor and its affiliates could support the “related to” connection needed to justify the exercise of jurisdiction over the non-debtors and their creditors.
Bittner v. Borne Chemical Co., Inc. 一 When the subsidiary findings of the bankruptcy court plainly indicated that a counterclaim in a state action against the debtor lacked legal merit, and there was only a remote possibility that the state court would find otherwise, the bankruptcy court correctly valued the claims of stockholders of the company that had filed the counterclaim at zero.
In re KB Toys, Inc. 一 A trade claim that is subject to disallowance under Section 502(d) in the hands of the original claimant is similarly disallowable in the hands of a subsequent transferee.
Associates Commercial Corp. v. Rash 一 Under Section 506(a), the value of property retained because the debtor has exercised Chapter 13’s cram down option is the cost that the debtor would incur to obtain a like asset for the same proposed use.
In re Sunnyslope Housing Limited Partnership 一 Under Rash, Section 506(a)(1) requires the use of replacement value rather than a hypothetical value derived from the very foreclosure that the reorganization was designed to avoid.
Till v. SCS Credit Corp. 一 The prime-plus or formula rate approach best comports with the purposes of the Bankruptcy Code. This entails a straightforward, familiar, and objective inquiry, and minimizes the need for potentially costly additional evidentiary proceedings.
Property of a Bankruptcy Estate
A bankruptcy estate is usually defined broadly to include tangible and intangible property acquired before and after the petition, as well as contractual rights and legal causes of action. The estate even may include interests in property that the debtor does not possess and interests that do not exist under non-bankruptcy law.
Board of Trade of Chicago v. Johnson 一 Decisions of state courts defining property rights do not bind the federal courts in bankruptcy when contrary to the policy and proper construction of the Bankruptcy Act.
In re LTV Steel Co., Inc. 一 A debtor was entitled to use cash collateral that had been transferred to two special purpose entities (SPEs) of the debtor, which had been formed to purchase the accounts and inventory of the debtor.
In re Allen 一 The Negotiated Rates Act does not conflict with Section 541 of the Bankruptcy Code because it is not triggered by the financial condition of the debtor. The NRA applies when a carrier is no longer transporting property between the places described in the statute, and this is separate and distinct from a requirement that depends on the financial status of the debtor. (The financial condition of the debtor is only one reason why a motor carrier may cease transporting property.)
In re AMR Corp. 一 Indenture clauses declaring a debtor’s default upon the filing of a voluntary bankruptcy petition and providing for automatic debt acceleration were not unenforceable ipso facto provisions. (Ipso facto clauses are clauses in a contract that seek to modify the relationships of contracting parties due to the filing of a bankruptcy petition.)
In re W.R. Grace & Co. 一 The prohibition against ipso facto clauses is not limited to actions based on Sections 541(c) and 365(e) of the Bankruptcy Code.
In re Residential Capital, LLC 一 Bankruptcy policy should not penalize a debtor for filing by awarding default interest when the only default was the filing.
Executory Contracts in Bankruptcy
Subject to the court’s approval, the bankruptcy trustee may assume or reject any executory contract or unexpired lease of the debtor, with certain exceptions. An executory contract is usually defined by the Countryman Test, as described by In re Sunterra Corp. below. The contract functions as both an asset and a liability of the debtor.
In re Sunterra Corp. 一 A contract is executory if the obligations of both the bankrupt party and the other party to the contract are so far unperformed that the failure of either party to complete the performance would constitute a material breach excusing the performance of the other party.
Perlman v. Catapult Entertainment, Inc. 一 Under the “hypothetical test,” a debtor in possession may not assume an executory contract over the non-debtor’s objection if applicable law would bar assignment to a hypothetical third party, even when the debtor in possession has no intention of assigning the contract in question to any such third party.
Institut Pasteur v. Cambridge Biotech Corp. 一 When the particular transaction envisions that the debtor in possession would assume and continue to perform under an executory contract, the bankruptcy court cannot presume as a matter of law that the debtor in possession is a legal entity materially distinct from the pre-petition debtor with whom the non-debtor party contracted. Sensitive to the rights of the non-debtor party, the bankruptcy court must focus on the performance actually to be rendered by the debtor in possession with a view to ensuring that the non-debtor party will receive the full benefit of its bargain.
In re Trump Entertainment Resorts, Inc. 一 For Section 365(c)(1) to apply, the applicable law must specifically state that the contracting party is excused from accepting performance from a third party under circumstances in which it is clear from the statute that the identity of the contracting party is crucial to the contract.
In re Philadelphia Newspapers, LLC 一 The standard applied to determine whether the rejection of an executory contract or unexpired lease should be authorized is the business judgment standard.
In re Pinnacle Airlines Corp. 一 A debtor may reject a collective bargaining agreement only if it complies with procedural requirements and shows that the modifications that it seeks are necessary to permit the reorganization of the debtor, the proposal assures that all affected parties are treated fairly and equitably, the authorized representative of the employees has refused to accept the proposal without good cause, and the balance of the equities clearly favors the rejection of the agreement.
Mission Product Holdings, Inc. v. Tempnology, LLC 一 A debtor’s rejection of an executory contract under Section 365 has the same effect as a breach of that contract outside bankruptcy. Such an act cannot rescind rights that the contract previously granted.
Avoidance Powers and Fraudulent Transfers
Section 544 of the Bankruptcy Code allows a trustee to avoid unperfected security interests by providing them with the rights of ideal, hypothetical creditors and purchasers. This provision also allows a trustee to avoid fraudulent transfers by giving them the rights of certain actual creditors. Section 548 provides additional ways to avoid fraudulent transfers.
In re Kors, Inc. 一 The trustee’s subrogation powers under Sections 544(a)(1) and 551 do not extend to a subordination agreement protected by Section 510(a). While Section 544(a)(1) enables the trustee in bankruptcy to step into the shoes of a hypothetical lien creditor to avoid unperfected liens in the debtor’s property, they may (pursuant to Section 551) preserve only those rights that existed against the bankrupt party.
Moore v. Bay 一 When a transfer is subject to avoidance, the transfer may be avoided in its entirety, and the recovery shall be shared by all unsecured creditors, including creditors who could not themselves avoid the transfer under state law.
BFP v. Resolution Trust Corp. 一 A reasonably equivalent value for foreclosed real property is the price in fact received at the foreclosure sale, as long as all the requirements of the state’s foreclosure law have been met.
Boyer v. Crown Stock Distribution, Inc. 一 Even if there is no fraudulent intent, a corporate transfer is fraudulent under the Uniform Fraudulent Transfer Act if the corporation did not receive reasonably equivalent value in return for the transfer and was left with insufficient assets to have a reasonable chance of surviving indefinitely.
Moody v. Security Pacific Business Credit, Inc. 一 Under Section 5 of the Pennsylvania Uniform Fraudulent Conveyance Act, a conveyance made by a person engaged in a business or transaction is fraudulent if it is made or incurred without fair consideration and leaves that person with unreasonably small capital. The test for unreasonably small capital is reasonable foreseeability. This allows a court to consider the availability of credit.
In re Iridium Operating, LLC 一 In determining whether a company was adequately capitalized, courts examine not what ultimately happened to the company, but whether the company’s then-existing cash flow projections were reasonable and prudent when made.
In re Tribune Co. Fraudulent Conveyance Litigation 一 The safe harbor under Section 546(e) of the Bankruptcy Code shields a transfer from avoidance when the transferor utilizes a financial institution as its agent in connection with the challenged transfer.
In the Matter of Clark Pipe & Supply Co., Inc. 一 The purpose of equitable subordination is to distinguish between the unilateral remedies that a creditor may properly enforce pursuant to its agreements with the debtor and other inequitable conduct, such as fraud, misrepresentation, or the exercise of such total control over the debtor as to have essentially replaced its decision-making capacity with that of the lender.
In re Yellowstone Mountain Club, LLC 一 When the remedy of equitable subordination involves a non-insider, non-fiduciary, the level of pleading and proof is elevated. Gross and egregious conduct will be required before a court can equitably subordinate a claim.
Managing a Bankruptcy Estate
The trustee has certain rights under Section 363 of the Bankruptcy Code to use, sell, and lease property of the bankruptcy estate. They can use, sell, or lease property in the ordinary course of business without court permission, except for cash collateral, but a court must approve the use, sale, or lease of property outside the ordinary course of business. Other interest holders have a right to demand adequate protection of their interests during this process.
In re Kmart Corp. 一 Even if Section 362(b)(1) allows critical-vendors orders in principle, preferential payments to a class of creditors are proper only if the record shows the prospect of benefit to the other creditors.
In re LTAP US, LLLP 一 Priming is extraordinary relief, requiring a strong showing that the loan to be subordinated is adequately protected. Bankruptcy judges are required to grant Section 364(d) financing only upon a tangible demonstration of adequate protection.
First Security Bank & Trust Co. v. Vegt 一 To obtain financing secured by a priming lien pursuant to Section 364(d), the debtor must demonstrate that no suitable alternative financing is available from other sources, and that the proposed financing arrangement adequately protects the existing lienholders’ interests.
In re Lionel Corp. 一 A judge determining a Section 363(b) application must expressly find from the evidence presented before them at the hearing a good business reason to grant such an application. The judge should consider all salient factors pertaining to the proceeding and act to further the diverse interests of the debtor, creditors, and equity holders.
In re Braniff Airways, Inc. 一 The debtor and the bankruptcy court should not be able to short circuit the requirements of Chapter 11 for confirmation of a reorganization plan by establishing the terms of the plan sub rosa in connection with a sale of assets.
In re Trans World Airlines, Inc. 一 While some courts have narrowly interpreted “interests in property” under Section 363(f) to mean in rem interests in property, such as liens, the trend is toward a more expansive reading of “interests in property,” which encompasses other obligations that may flow from ownership of the property.
In re Chrysler, LLC 一 Braniff does not support the argument that a Section 363(b) asset sale must be rejected simply because it is a sale of all or substantially all of a debtor’s assets.
Reorganization in Corporate Bankruptcy
Shareholders and creditors must discuss issues such as how much the total debt of the company must be reduced, whether some creditors must reduce their claims more than others, and whether shareholders will transfer their ownership interests to creditors.
In re Woodbrook Associates 一 Significant disparities exist between the legal rights of the holder of a Section 1111(b) claim and the holder of a general unsecured claim, which render the two claims not substantially similar and preclude the two from being classified together. Separate classification of a Section 1111(b) claim should not be considered nearly conclusive evidence of a debtor’s intent to gerrymander an affirmative vote for confirmation.
Pacific Western Bank v. Fagerdala USA-Lompoc, Inc. 一 A bankruptcy court may not designate claims for bad faith simply because a creditor offers to purchase only a subset of available claims to block a reorganization plan, or blocking the plan will adversely affect the remaining creditors.
DISH Network Corp. v. DBSD North America, Inc. 一 Bad faith was found when an indirect competitor of the debtor (and part-owner of a direct competitor) bought a blocking position in a class of claims after a plan had been proposed, with the intention not to maximize its return on the debt but to enter a strategic transaction with the debtor and to use status as a creditor to provide advantages over proposing a plan as an outsider, or making a traditional bid for the company or its assets.
In re Quigley Co., Inc. 一 A court denied confirmation of a plan when it was designed to free the parent company of the debtor from derivative liability and only incidentally to reorganize the debtor to the extent necessary to confirm the plan.
This outline has been compiled by the Justia team for solely educational purposes and should not be treated as an independent source of legal authority or a summary of the current state of the law. Students should use this outline as a supplement rather than a substitute for course-specific outlines.