Recent Legal and Statutory Developments in Bankruptcy and Restructuring
In an effort to keep you apprised of what’s happening in the realm of bankruptcy and restructuring, here are five significant legal and statutory developments from the last month.
1. Chapter 11 business bankruptcy filings increased 74 percent to 345 in November 2022. That’s up from 198 filings recorded in November 2021, according to data from Epiq's Bankruptcy Analytics platform. The next “restructuring wave” has been predicted (often inaccurately) for years now, but it seems to be upon us.
2. It looks like the anonymity that cryptocurrency owners/investors have come to expect may be coming to an end as a cascading number of crypto-related companies file for bankruptcy protection. The bankruptcy judge adjudicating the Celsius Network, LLC bankruptcy case in the Southern District of New York recently ordered the disclosure of customer names. This was a departure from the approach of judges in In re Altegrity, Inc. and In re Cred, Inc. in the District of Delaware. It will be interesting to see what happens in the FTX case, which is also in Delaware.
3. The U.S. Courts of Appeal for the Fifth and Eleventh Circuits recently ruled that the “solvent-debtor exception” is alive and well. The exception provides that a solvent debtor's chapter 11 plan must pay postpetition, pre-effective date interest to unsecured creditors to render their claims unimpaired.
4. One of the most interesting issues to watch in the various pending bankruptcy cases involving cryptocurrency platforms such as FTX is whether customer withdrawals made in the 90 days before the filing will be “clawed back” as preferential payments. Many of these cases, if and when brought, will likely hinge on whether customer deposits are “interest of the debtor in property,” which is a key element of a preference claim. This will be a fact-driven argument in each case related to each platform’s terms of service and customer agreements.
5. A contract can be rejected, assumed or assigned in a bankruptcy case if it is an “executory” contract, which is, generally speaking, a contract pursuant to which performance is due to some extent on both sides. The U.S. Court of Appeals for the Fifth Circuit, in Matter of Falcon V, L.L.C., recently upheld lower-court rulings finding that a surety contract was not executory because the surety had already posted irrevocable surety bonds and, therefore, did not owe further performance to the debtors. In the process, the Fifth Circuit adopted a flexible approach to the “Countryman Test,” under which a contract is deemed executory only if both parties have unperformed obligations as of the petition date that would constitute a material breach if not performed. The Fifth Circuit explained that, when it comes to multiparty contracts, courts "should apply the Countryman test to multiparty contracts in a flexible manner that accounts for the various obligations owed to all of the parties, rather than focusing exclusively on the flow of obligations between the debtor and the creditor."
To learn more about these issues, or if you have additional questions regarding bankruptcy and restructuring legal issues, please contact David Dragich.