Daily Archives: February 9, 2022

Not long ago, at malls and strip centers across Illinois, shoppers could count on finding Dress Barns, Lane Bryants, Ann Taylors, Justices and other apparel stores run by Ascena Retail Group. Five years ago, the retailer operated nearly 5,000 bricks-and-mortar locations catering to women, teens and tweens. As of 2020, that number had been halved and the bankrupt chain has agreed to sell off its surviving stores.

Fashion apparel is a tough business for any merchant, given powerful e-commerce competition and the effects of the pandemic on all retail sectors. In the case of Ascena, some of its wounds were self-inflicted, and the efforts of its leaders to avoid a courtroom reckoning have turned its bankruptcy case into a landmark. We hope the U.S. Supreme Court will take notice.

Ascenas troubles began in 2015, when it paid more than $2 billion for Ann Inc., parent of Ann Taylor, Loft and other retail clothing chains. Over the next two years, executives at the then-publicly held company told investors on at least several occasions that business was going well. In May of 2017, Ascena warned of trouble ahead and its stock plunged. Weeks later, it took a $1.3 billion restructuring charge, and the operation only went downhill from there.

In its bankruptcy reorganization, Ascena received sweeping legal protections for the companys former senior officers and other insiders. These so-called third-party releases protect individuals who never filed for bankruptcy themselves from lawsuits arising from their conduct, ending potential claims that normally would be resolved by judges or juries in other courts.

These legal releases have become common in corporate bankruptcy cases, and, to put it bluntly, they stink.

Readers of this page may recall that the Sackler family of Purdue Pharma, the notorious pusher of opioids, received these same releases. Though none of the Sacklers had filed for personal bankruptcy, the judge in their companys case approved a settlement allowing family members to walk off with billions they had made selling addictive drugs and with no worries about being sued in other courts.

The outcome was so outrageous that it prompted a backlash, and a New York district judge overturned the Purdue settlement. Her ruling highlighted how these releases have become common in bankruptcy reorganizations. Debtors file their cases in venues known for doling them out routinely or threaten to drag out proceedings at the expense of creditors unless they get the free legal passes they want.

Neither the Sacklers nor any other stewards of busted companies should have so much leverage to distort justice. Finally, it appears that a re-consideration is at hand, as district judges scrutinize the use of these releases in other bankruptcies besides Purdues, which was especially antagonizing because so many people died from its drugs.

Nothing about the Ascena case is as bad as the deadly facts behind the Purdue case. Whenever publicly held companies take huge write-downs, as Ascena did, securities fraud claims typically follow. Often those claims go nowhere or settle for relatively small amounts.

Still, the claims deserve to be heard, and its fundamentally wrong that a bankruptcy judge can, as a regular practice, waive them away. If there was misconduct, those involved should be held accountable.

In a sharply worded ruling, U.S. District Judge David Novak last month overturned the Ascena bankruptcy settlement and sent it back to bankruptcy court, pointedly directing it to a new judge.

Novak described the broad legal releases in Ascenas reorganization plan as shocking, saying they would have released practically everyone involved from practically every possible claim, including a pair of former executives targeted in the investor fraud case.

Novak called out a lack of due diligence undertaken by the bankruptcy court before the sweeping releases were granted. In theory, the releases could have been necessary to protect the reorganized business from ongoing litigation costs, such as defending lawsuits against the companys former executives.

Enough, already. There may be rare instances where these releases are needed, but their mindless proliferation has got to stop.

While legislation is pending in Congress to address the issue, the ultimate authority is the U.S. Supreme Court. We urge the nine justices to take up the first available case to rein in this disturbing practice once and for all.

The above editorial was published Feb. 4 by the Chicago Tribune. Its views are its own.

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End the free passes at bankruptcy court - bedfordgazette.com

08 February 2022

Cooley LLP

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An official notice from the Judicial Conference of the United States wasjust published announcing that certain dollar amounts in theBankruptcy Code will be increased a larger than usual 10.973% thistime for new cases filed on or after April 1, 2022. Follow thislink for the Federal Register page with a chart listing allof the updated dollar amounts. Among the most meaningfulincreases for Chapter 11 and other business bankruptcy cases:

Other adjustments will affect consumers more than businessdebtors. For example, the debt limit for an individual to qualifyfor a Chapter 13 bankruptcy case will rise to $1,395,875 of secureddebt, and certain exemption amounts will also increase.

Given recent inflation, these increases are larger than usual.Be sure to keep them in mind when assessing cases filed after April1, 2022. Official bankruptcy forms will likely be updated as April1st draws near.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

POPULAR ARTICLES ON: Insolvency/Bankruptcy/Re-structuring from United States

Jones Day

One year ago, we wrote that, unlike in 2019, when the large business bankruptcy landscape was generally shaped by economic, market, and leverage factors, the COVID-19 pandemic dominated the narrative in 2020.

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Moving Up: Bankruptcy Code Dollar Amounts Will Increase On April 1, 2022 - Insolvency/Bankruptcy/Re-structuring - United States - Mondaq News Alerts

The United States Supreme Court ruled that 11 U.S.C. 330(a)(1) does not authorize compensation to debtors attorneys from estate funds. Lamie v. U.S. Trustee, 540 U.S. 1023 (2004). A chapter 7 lawyer cannot look to the estate or to the debtor postpetition for payment of fees for services rendered or to be rendered if the obligation to pay the fee arose prepetition. That leaves four payment options:

(1) delay filing the case until all the fees are paid;

(2) file the chapter 7 case without getting paid and hope that the debtor will voluntarily pay additional fees postpetition;

(3) the attorney can bifurcate the legal services; or

(4) the debtor can file a chapter 13 case so that the fees can be paid post- petition.

In an opinion that represents the legal conclusions of all the judges of the Bankruptcy Court of the Southern District of Florida, Judge Isicoff held that

so long as attorneys offering a bifurcated fee arrangement comply with the terms of this Order, those arrangements do not violate the Bankruptcy Code or Bankruptcy Rules, this Courts Local Rules, or the Florida Bar Rules. In re Brown, 631 B.R. 77, 105 (Bankr. S.D. Fla. 2021).

In an opinion that represents the the legal conclusions of all the judges of the Bankruptcy Court for the Western District of Kentucky, Judge Lloyd held that

the bifurcated fee agreements entered . . .in each of the eleven cases herein violate the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, and the Kentucky Rules of Professional Conduct. Such contracts are not to be used by any attorney practicing bankruptcy law in the United States Bankruptcy Courts for the West District of Kentucky. In re Balwin, 2021 Bankr. LEXIS 2753 at *50 (Bankr. W.D.Ky. 2021).

What made the difference?

Local Rules?

Local Rule 2091-1 of the Bankruptcy Court for the Southern District of Florida provides:

(D) Attendance at Hearings Required for Debtors Counsel. An attorney who makes an appearance on behalf of a debtor must attend all hearings scheduled in the debtors case that the debtor is required to attend under any provision of the Bankruptcy Code, the Bankruptcy Rules, the Local Rules, or order of the court, unless the court has granted a motion to withdraw pursuant to Local Rule 2091-1.

(E) Duties of Debtors Counsel. Unless the attorney has withdrawn as attorney for the debtor pursuant to Local Rule 2091-1, an attorney who files a petition on behalf of a debtor must advise the debtor of, and assist the debtor in complying with, all duties of a debtor under 11 U.S.C. 521.

Local Rule 9011-1 of Local Rules of United States Bankruptcy Court of the Western District of Kentucky provides:

AttorneysDuties

(a) Extent of an Attorneys Duty to Represent.

(1) An attorney who files a bankruptcy petition for or on behalf of a debtor will remain the responsible attorney of record for all purposes including the representation of the debtor in all proceedings that arise in conjunction with the case.

(2) An attorney is relieved of his duties when the debtors case is closed, or when the attorney is specifically relieved after notice and a hearing upon motion and order of this court.

Courts Mindsets

The Florida court looked for a way to authorize bifurcated fee arrangements.

These three cases present this Court with the opportunity to provide a framework for when and under what circumstances bifurcation of chapter 7 fees is allowable. 631 B.R. 77, 85.

The Kentucky court was satisfied that it could not be done.

The attorney cannot bifurcate his or her representation of the debtor. 2021 Bankr. LEXIS 2753 at *35.

With BAPCPA, Congress greatly encouraged debtors to file chapter 13. In the Western District of Kentucky debtors must only tender a filing fee or a motion to pay the filing fee in installments to get the Chapter 13 case filed, as counsel are paid over time through a plan administered by a standing Chapter 13 trustee. While Chapter 13 is not necessarily available to all debtors, its (sic) flexibility is well-known in the district and is used quite often when debtors cannot pay their lawyers the full Chapter 7 fee up front on a pre-petition basis. 2021 Bankr. LEXIS 2753 at *51.

The two courts agree on some issues.

The filing fee is a prepetition charge

Both courts agree that a law firms payment of the filing fee with post-petition repayment by the debtor violates Bankruptcy Code 526(a)(4)(a debt relief agency shall not advise any assisted person or prospective assisted person to incur more debt in contemplation of such person filing a case under this title), 362 and 524 (effect of discharge), and Rule of Professional Conduct 4-1.8(a)(prohibiting financial assistance to a client).

Required disclosure

Both courts agree that adequate disclosure to the debtors and the court is required.

The Florida court held that the disclosures to a potential client are adequate so long as

The Kentucky court seems satisfied with this list. 2021 Bankr. LEXIS 2753 at *38.

Factoring of fee agreements is prohibited.

The Florida court determined that it will not allow any attorney to factor its legal fees. This creates an inherent conflict of interest between the attorney and the debtor, and violates R. Regulating Fla. Bar 4-5.4, 4-1.8, and 4-1.7. 631 B.R. 77,99 n. 34.

The Kentucky court held that the factoring of fees violates the United States Bankruptcy Code, the Federal Rules of Bankruptcy Procedure, the Local Rules of the United States Bankruptcy Court for the Western District of Kentucky and the Kentucky Rules of Professional Conduct. 2021 Bankr. LEXIS 2753 at *25.

Fees must be reasonable.

Both courts specify that fees must be reasonable, but they interpret this statement differently.

For the Florida court reasonableness is not measured by a comparison between theprepetition charges and the postpetition charges. The court will review the reasonableness of the postpetition flat fee charged taking into account not only the work that was done but also the services that might have been required in the case for which there would have been no additional charge. The court holds fees of $1262 and $1362 for postpetition services was reasonable. 631 B.R. 77, 104.

The Kentucky court found that a fee of $2,500 for postpetition services was unreasonable by comparing it to the fees charged by that attorney in other chapter 7 cases of $1,250.

Conclusion

Know your local courts.

[View source.]

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Bifurcated Fee Agreements Approved in Southern District of Florida, But Barred in Western District of Kentucky - JD Supra

The Mumbai bench of the National Company Law Tribunal (NCLT) has directed the liquidator of Sterling Biotech to stay the auctioning process of the company until further orders.

The NCLT was hearing a petition filed by one of Sterling Biotechs successful qualified bidders, India Gelatine and Chemicals Ltd.

Gujarat-based Sterling Biotech is the worlds sixth-largest manufacturer of pharmaceutical gelatin and owes over Rs 8,100 crore to financial and operational creditors.

In view of the fact that the assets of the corporate debtor (Sterling Biotech) are not perishable, no harm or prejudice will be caused to the respondent (liquidator) as far as the auction is concerned even if the same is postponed for a short time, the NCLT bench led by Justice Pradeep Deshmukh said in its order of January 31.

NCLT will hear the matter next on February 16.

Originally, this lease was given by another group company Sterling SEZ to Sterling Biotech, which was later cancelled by the former company. Sterling Biotechs plea challenging that termination by Sterling SEZ is also pending in the NCLT. Later, the collector in Gujarat cancelled the lease on the same land parcel.

To be sure, Sterling SEZ is a separate group entity and the tribunal has also ordered the liquidation of the company on October 18, 2021.

Now, India Gelatine and Chemicals has sought the tribunals intervention to get more clarity on the issue.

The lawyers for the liquidator have informed the tribunal that the company is being sold as a going concern and that all the bidders have been informed about the latest developments with regard to the cancellation of the lease and other matters.

Currently, India Gelatine and Chemicals in a consortium with Shamrock Pharmachemi Pvt Ltd is among five qualified bidders to participate in an auction of Sterling Biotech. Other bidders include US-based startup Perfect Day Inc, Belgian firm Tessenderlo Chemie International NV, ACG Associated Capsules and Progressive Star Finance Pvt Ltd.

The liquidator has set a reserve price of Rs 548.46 crore for the company.

Mamta Binani, the liquidator for Sterling Biotech, and her associate Lovkesh Batra refused to comment since the matter is sub judice.

It is critical that the auction occurs within the stipulated time frame to maintain bidders' interest, and also that the lease in question is not terminated, since this would diminish the value of the corporate debtor's assets, which are a critical component of the assets, said Sonam Chandwani, managing partner, KS Legal.

The group and its subsidiaries, Sterling SEZ and Sterling International, collectively owe Rs 15,000 crore to financial and operational creditors.

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Bankruptcy court temporarily stays auction of Gujarat-based Sterling Biotech - Economic Times