A Chapter 9 bankruptcy offers protection to a financially-distressed municipality so that it may develop a plan for addressing its debts. A product of the Great Depression, bankruptcy protection for municipalities was first enacted in 1934. However, the Supreme Court held the act unconstitutional as an improper interference with the sovereignty of states. See Ashton v. Cameron County Water Improvement Dist. No. 1, 298 U.S. 513 (1936). Congress subsequently passed a revised Municipal Bankruptcy Act in 1937, which was eventually upheld by the Supreme Court. See United States v. Bekins, 304 U.S. 27 (1938).
Farmers attempting to reorganize under Chapter 12 of the Bankruptcy Code may propose selling land as a means of generating cash to pay creditors. This sale creates a large capital gains tax, as the cost basis for the land is likely low. That capital gains tax has priority over general unsecured creditors, and the farmer needs to pay that capital gains tax in full to get a Chapter 12 plan confirmed.
On February 27, 2018, a unanimous Supreme Court held in Merit Management Group, LP v. FTI Consulting, Inc. (link here) that an otherwise-avoidable transfer is not subject to the safe harbor in Section 546(e) (which provides, in relevant part, a trustee may not avoid a transfer that is a “settlement payment . . . made by or to (or for the benefit of) a . . . financial institution” or that “is a transfer made by or to (or for the benefit of) a . . . financial institution . . . in connection with a securities contract”) of the Bankruptcy Code merely because funds flow through covered financial entities. Rather, the availability of the Section 546(e) safe harbor depends on the particular transfer sought to be avoided.
In January 2018, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced a bill that would require corporate debtors to file for bankruptcy protection in the district in which their principal assets or principal place of business is located. In other words, the Bankruptcy Venue Reform Act of 2018 would eliminate a corporate debtor’s ability to commence a case in its state of incorporation if the state of incorporation is neither the debtor’s principal place of business nor the location of its principal assets. Moreover, the bill would do away with the so-called “Affiliate Rule” that allows corporate debtors to file in any district where an affiliate has a pending bankruptcy case. If signed into law, the act would also put an end to protracted, expensive battles over venue: judges would be required to make a decision on a venue transfer request within fourteen days of the objecting party’s request.
Various business formations and financial transactions utilize alternative entity forms, such as limited liability companies (“LLC”), limited partnerships, master limited partnerships, limited liability partnerships, limited liability limited partnerships—you get the idea. In turn, commercial borrowers may offer—and lenders may request—interests in such entities as collateral. This blog post focuses on LLC membership interests (“LLC Interests”) as collateral.
The Bankruptcy Appellate Panel for the First Circuit recently held that a creditor holding a perfected security interest in accounts and payment intangibles did not have a perfected security interest in the proceeds of an insurance settlement.