Category Archives: Bankruptcy

The Bankruptcy Amendment (Service of Documents) Regulations 2022 (New Regulations) came into effect on 6 April 2022, altering the requirements for the service of bankruptcy notices electronically.

Historically, the service of bankruptcy notices was governed by the Bankruptcy Regulations 1996 (Cth) (1996 Regulations). Regulation 16.01 of the 1996 Regulations stated that the methods of service included personal delivery, posting, courier or document exchange, or electronic mail. However, the 1996 Regulations were replaced by the Bankruptcy Regulations 2021 (Cth) (2021 Regulations) which whilst providing welcome amendments to sections of the legislation, made the process of distilling the correct procedural avenue for service an extremely convoluted one.

The 2021 Regulations required the reader to trawl through several pieces of legislation before finding the regulations governing electronic service. First, Section 102 of the 2021 Regulations stated that service may either be effected by courier or document exchange if the recipient uses one. It made no reference to service by any other means. A note directs the reader to section 28A of the Acts Interpretation Act 1901 (Cth).

Section 28A of the Acts Interpretation Act 1901 (Cth) sets out that personal delivery and sending documents via pre-paid post to the persons residence or place of business can be used for service. It also then directs the reader to the Electronic Transactions Act 1999 (Cth). Under this Act, it is a requirement that electronic service would be consented to by the recipient before it could be considered effective service.

In addition to burying the requirements in a figurative babushka doll of legislation, the actual requirement itself of requiring consent from the recipient for electronic service is a problematic one. Many recipients are not going to want to have bankruptcy notices served upon them, effectively eliminating email as a method of service.

In the recent case of Pegios in his own capacity and as trustee for Pegios Superannuation Fund v Arambasic [2022] FedCFamC2G 17 it was held that service had not been properly effected because the recipient had not consented to service by email.

Furthermore, even if the recipient consents to the service retroactively, this is still inadequate to satisfy the service requirements. In Re Robert Henry Hanlin Ex Parte: South Properties Development Pty Ltd [1985] FCA 447, it was held that the need for strict compliance cannot be waived by the debtor. This is the case even though no damage or injustice may have resulted from the notice being served in this fashion.

Bankruptcy notices have always been the subject of rigorous adherence to strict rules. In Ciftci, M v Colquhoun A.J.G [1994] FCA 756, Einfield J said:

[in] many ways such a finding brings about a very unjust result, but the law relating to bankruptcy has always been susceptible not only to a degree of technicality, but to a high degree of strict application. [the] duty [is] to act in accordance with the law as presently understood, and this would not be the first case in which an apparently unjust result flowed from the application of the appropriate rules.

The need for strict compliance of service regulations is understandable given the gravity of bankruptcy proceedings. However the requirement for consent for electronic service is one that presents a significant administrative hurdle, particularly when you consider the ever increasing digitalisation of society. The New Regulations however now provide the welcome change that prior consent of the recipient is not required for electronic service. It should be noted that where service is effected electronically, the 21 day compliance period is usually calculated from the time of transmission rather than of actual receipt.

The New Regulations come into effect alongside the Insolvency Practice (Bankruptcy) Amendment Rules 2022 which make trustee registration requirements more flexible, introduce more efficiencies, transparency and certainty to creditor meetings and streamline provisions so they are consistent with similar in the Insolvency Practice Rules (Corporations) 2016.

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The Evolution of Electronic Service of Bankruptcy Notices - Lexology

I still remember the blissful winter of 2018 as a MoviePass cardholder.

I joined in on the chaos at the end of January, jumping on the bandwagon to see one movie a day for merely $9.95 a month. I wasnt much of a theater-goer at the time. After all, movies in New York City, where I was living at the time, could run around $25 a pop. But soon, it became routine to put off my mile-long trudge back home through the snow with a warm detour to see Call Me By Your Name, The Post, Black Panther, or Isle of Dogs.

Instead of gathering over drinks or dinner, my friends and I started revolving our plans around movie showingstypically saving a chunk of cash in the process. Of course, this new routine wouldnt last long. About 3 million people were only paying $9.95 a monthand I, for one, was seeing about four or five movies in that window.

By July, MoviePass said it was removing certain titles, such as Mission: Impossible Fallout as an option while it adjusted its business model. By August, my subscription had updated to only allow three movies a month, and they werent really offering any movies I wanted to see anymore. That was around the time I threw in the towel.

But now, MoviePass is backthis time reportedly with tiered pricing options and in-app credits for friends and family tickets that can be earned by watching ads. A new MoviePass website is running down a countdown clock for an invite-only beta version with a waitlist that opens in two days. Yesterday, the company blasted an email to old customers, one of which was seen by Fortune, announcing that its back in business. Stacy Spikes, one of MoviePasss co-founders says he bought back the assets of the company and is re-launching itthis time, without private equity dollars.

So many of you have called, emailed and even stopped me on the street to show that you still had your original MoviePass card and talk about how much you loved the service, Spikes wrote in the email. A MoviePass spokesperson hadnt responded to an immediate request for comment before publication.

Earlier this year, Time Magazine published a story outlining what had gone wrong and warning that the movie-going subscription company was going to try for a redo. In the Time interview, Spikes laid out why he thinks MoviePass 2.0 has a shot given COVID-induced empty movie theaters and detailed how he had allegedly been ignored when he pushed back against the $9.95 business plan put forth by Helios and Matheson, the company that had bought a majority stake in MoviePass in 2017 and later filed for bankruptcy.

MoviePass had originated as a venture-backed idea. Spikes and his co-founder Hamet Watt had raised $1 million for the initial idea back in 2011 from AOL and True Ventures. But when former Netflix exec Mitch Lowe came on board as CEO in 2016, Time reports the company was losing around $50,000-$110,000 per month and was struggling to pick up traction from investors. Spikes, who is Black, blames that in part on racial discrimination.

It was Helios and Matheson, which acquired a majority stake in the company in 2017, that introduced the $9.95 promotion. When it blew up in popularity, the company allegedly ignored Spikes requests to bring the price back up, even though it was costing big bucksapparently somewhere between $17-30 a subscriber per month. At the end of 2017, Spikes was allegedly removed from the board and was informed he was no longer needed at the company the following month. By the end of 2019, MoviePass had shut down.

Spikes is writing a memoir that will be out in coming months, Black Founder: The Hidden Power of Being an Outsider. But his re-envisiong of MoviePass starts Labor Day weekend, when the new iteration of the MoviePass product will first become available.

This time around, MoviePass is facing competitors that stepped in when MoviePass was trickling off the scene, including AMC, which launched its A-List membership in mid-2018, where subscribers can pay $19.95 a month to see up to three movies a week. It will be interesting to see how MoviePass new model holds up.

One thing is clear: Spikes doesnt seem like someone who gives up easily.

See you tomorrow,

Jessica MathewsTwitter: @jessicakmathewsEmail: jessica.mathews@fortune.comSubmit a deal for the Term Sheet newsletter here.

Jackson Fordyce curated the deals section of todays newsletter.

VENTURE DEALS

- Tamara, a Riyadh, Saudi Arabia-based payments platform for the Middle East, raised $100 million in Series B funding. Sanabil Investments led the round and was joined by investors including Coatue, Shorooq Partners, Endeavor Catalyst, and Checkout.com.

- PeakData, a Zug, Switzerland-based data analysis software platform for pharmaceutical companies and health care workers, raised 12.1 million ($12.03 million) in Series A funding. AlbionVC led the round and was joined by inventors including Octopus Ventures and Heal Capital.

- Worldfavor, a Stockholm-based sustainability platform, raised 10.2 million ($10.14 million) in Series A funding. SEB Private Equity led the round and was joined by investors including Brightly Ventures and Spintop Ventures.

- ModernLoop, a San Francisco-based recruiting operations platform, raised $9 million in Series A funding. Accel led the round and was joined by investors including Web Investment, Quiet Capital, and other angels.

- Violet Labs, a San Francisco-based cloud-based software integration platform for hardware engineering, raised $4 million in seed funding. Space Capital led the round and was joined by investors including MaC Venture Capital, Felicis, V1.VC, and other angels.

- dPRIME Asset Modules Finance, a Miami-based protocol for creating purchasing power across portfolios, raised $1.8 million in pre-seed funding led by Digital Finance Group and Jsquare.

PRIVATE EQUITY

- Kinderhook agreed to acquire Tank and Pump, a Baytown, Texas-based environmental solutions firm, for $323 million.

- Arsenal Capital Partners acquired Innovative Products & Equipment, a Hudson, N.H.-based provider of automation and product & process development solutions. Financial terms were not disclosed.

- Guidehouse, a portfolio company of Veritas Capital, agreed to acquire the public sector advisory practice of Grant Thornton, a Chicago-based audit, tax, and advisory firm. Financial terms were not disclosed.

- Prescotts, a portfolio company of Atlantic Street Capital, acquired Heartland Medical Sales & Service, a Louisville, Ky.-based service, repair, refurbishment, and sales of anesthesia machines and related equipment. Financial terms were not disclosed.

- Tencarva Machinery Company, backed by Bessemer Investors, acquired Fischer Process Industries, a Loveland, Ohio-based pumps, valves, and process equipment servicing distributor. Financial terms were not disclosed.

EXITS

- SSI Diagnostica, a portfolio company of Adelis Equity, acquired TechLab, a Blacksburg, Va.-based diagnostic tests developer for infectious disease, intestinal inflammation, and parasitology, from its portfolio company Pharos Capital Group. Financial terms were not disclosed.

- Thrive Foods acquired Freeze-Dry Foods, an Albion, N.Y.-based freeze-dried foods company, from Cumming Capital. Financial terms were not disclosed.

OTHER

- Kinaxis acquired MPO, a Rotterdam, Netherlands-based SaaS platform for multi-party orchestration, for approximately $45 million.

- DigitalOcean Holdings agreed to acquire Cloudways, a Saint Julians, Malta-based managed cloud hosting and SaaS provider for SMBs. Financial terms were not disclosed.

- Firmament acquired a majority stake in Panacea Healthcare Solutions, a St. Paul, Minn.-based software and consulting services provider to health care companies. Financial terms were not disclosed.

- Lukoil acquired Spartak Moscow, a Moscow-based soccer team. Financial terms were not disclosed.

- Productive Technologies Company acquired the China solar business of RENA, a Gtenbach, Germany-based wet-chemical surface treatment company. RENA is a portfolio company of Equistone Partners Europe. Financial terms were not disclosed.

PEOPLE

- GTCR, a Chicago-based private equity firm, hired Jodi Rubenstein as managing director, investor relations. Formerly, she was with Goldman Sachs.

- One Rock Capital Partners, a New York-based private equity firm, hired Phil Gaudreau as an operating partner. Formerly, he was with Armstrong Flooring.

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MoviePass co-founder bought back its assets after a bankruptcy auction. Now hes back for a second run - Fortune

The major cryptocurrencies have experienced significant declines in 2022; with the crypto market shedding $2 trillion of its peak $3 trillion market capitalization in November 2021. Amid this crypto winter, Terra Luna and its algorithmic stablecoin collapsed, triggering a domino effect of losses and illiquidity throughout the crypto industry. The hedge fund Three Arrows Capital was the first big domino to fall, defaulting on $1 billion in loans including $650 million owed to Voyager Digital (Voyager). To avoid the proverbial run on the bank, many crypto exchanges halted trading and froze customer accounts, and some have filed for chapter 11 bankruptcy protection, like Voyager and Celsius Network (Celsius).

The Voyager and Celsius chapter 11 filings have enabled these crypto exchanges to use the breathing-spell of bankruptcy (e.g., the automatic stay)[1] to hopefully ride out the crypto winter and attempt to reorganize or pursue some other strategy to maximize recoveries for all stakeholders, perhaps at the expense of their customers.

The Voyager and Celsius bankruptcies raise a critical question: are customers custodially-held crypto assets property of the bankruptcy estate (which can be used to facilitate a reorganization and satisfy debts of other creditors)?[2] If so, the customers will be left with a general unsecured claim and stand to lose most, if not all, of the value of their crypto assets. If not, the customers should be entitled to relief from the automatic stay and reclaim their crypto assets. While the Voyager and Celsius bankruptcy courts have yet to weigh in on this question; their rulings will likely turn on the following factors: (i) the parties intent, evidenced by the agreements between the crypto exchange and the customer, (ii) whether a customers crypto assets are commingled or can be readily traced and (iii) who controls the crypto assets.

Voyager customers have reason to be concerned. Voyagers customer agreement provides that Voyager does not hold custodially-held crypto assets in segregated accounts and can freely use these assets for its own account; only promising to make like-kind crypto available to its custodial customers when they seek to trade or withdraw.

Celsius customers have reason to be concerned as well, though their situation is not quite as bad. Under pressure from regulatory authorities, earlier this year, Celsius changed its customer agreement to provide that customers retain title to custodially-held assets; however, the agreement provides that custodially-held crypto assets are commingled with assets of other customers and the custodial arrangement may not be respected in bankruptcy.[4] Why? It is virtually impossible to trace fungible crypto; so, customers cannot make a claim to their crypto. Will the bankruptcy court provide some type of equitable relief; can it find a basis for imposing a constructive trust over the commingled account for the benefit of custodial customers? In any case, pending a ruling by the bankruptcy court, custodially-held crypto remains with the exchange, inaccessible to customers and subject to the crypto market volatility.

While too late to help Voyager and Celsius customers, efforts are underway, at the state and federal level, to address the uncertainty surrounding crypto custodial arrangements.

The Uniform Law Commission and the American Law Institute have recently approved and recommended for enactment in all states amendments to the Uniform Commercial Code (the UCC) to address emerging technologies. The proposed amendments include amendments to Article 8 which provide that, as with traditional securities, if a securities intermediarywhich would include a crypto exchangeagrees with a customer to treat the customers fungible crypto assets as financial assets, it holds those assets as custodian, and the customer retains its property interests even if the exchange holds the assets outside of an account for the customers benefit and are commingled. If an intermediary commingles a customers crypto assets, the customer will have a pro-rata property interest in the commingled crypto assets. It bears emphasizing that the proposed amendments to Article 8, if adopted by the states, will only be helpful if the exchanges adopt the protocols and agree with customers to treat custodial crypto as financial assets. Notably, under SEC guidelines for publicly traded crypto exchanges, Coinbase recently updated its agreement for retail customers to indicate that it is a securities intermediary under the UCC and has agreed that customers crypto are financial assets.

At the federal level, there are dozens of bills which have been introduced in Congress to regulate the crypto industry which would attempt to reign in the crypto industrys cowboy ways and provide protection to customers. Two of the more prominent bills, the Responsible Financial Innovation Act (RFIA)and the Digital Commodities Consumer Protection Act (the DCCPA), provide for fungible crypto assets to be treated as commodities and confer authority on the Commodity Futures Trading Commission to regulate the industry. They would require crypto exchanges to treat and deal with all crypto assets of any customer as belonging to the customer and prohibit commingling (though a customer can opt out of the commingling protections). The RFIA and DCCPA would also amend the definition of commodity broker in the Commodities Exchange Act and the Bankruptcy Code to include crypto exchanges,[3] which would be subject to specialized liquidation provisions for commodity brokers in which customers crypto assets would effectively be excluded from the bankruptcy estate.

It remains to be seen whether the RFIA or DCCPA (or like legislation) will become law, but there is growing consensus among lawmakers that there is a need for meaningful federal regulation of the crypto industry which includes protection of custodial accounts. Stay tuned.

[2] Here, it is important to distinguish a custodial arrangement from other arrangements a customer could have with an exchange, such as Voyagers Rewards account or Celsius Earn account in which a customer lends its crypto assets to the exchange for a yield (typically in the form of like-kind crypto) and transfers ownership to the exchange which, in turn, lends the crypto assets to a third party.

[3] RFIA, Section 4.07 and DCCPA, Section 5(i).

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Vulnerability of Customers Crypto in Bankruptcy; Is Help on the Way? - JD Supra

With the passage of the Small Business Reorganization Act (the"SBRA") in 2019,1 Congress made significantchanges to the Bankruptcy Code2 that affect smallbusinesses.3 These changes include removing theappointment of a creditors' committee as a matter of course forsmall businesses and the creation of subchapter V,4 anew, additional, and streamlined bankruptcy option for eligiblesmall businesses.5 Two recent cases, In reBonert6 and In re Lear Capital,Inc.,7 offer an opportunity to examine thesechanges and may offer insight into what lies in store for smallbusiness chapter 11 bankruptcy cases.

Congress has long attempted to assist small businesses seekingto reorganize rather than liquidate their business. In 1994, theBankruptcy Reform Act8 created the "small businessdebtor" designation and procedures applicable to qualifyingdebtors, which the Bankruptcy Abuse Prevention and ConsumerProtection Act of 2005 ("BAPCPA")9 modified.However, while such Acts introduced various procedural protections,the substantive statutory regime for small business debtors largelymirrored the regime in place for traditional chapter 11 debtors,including its administrative costliness andcomplexity.10 Accordingly, the changes introduced in1994 and 2005 proved largely ineffective to reduce the costsassociated with the administration of chapter 11 cases, and manysmall business reorganizations failed.11

The SBRA amended the provisions of the Bankruptcy Code,introducing several substantive changes to the provisions affectingsmall businesses. Two notable changes are: (1) the creation ofsubchapter V, a streamlined alternative to a traditional smallbusiness chapter 11 case; and (2) the modification of the proceduresurrounding the appointment of creditors' committees in smallbusiness and subchapter V cases.

The SBRA introduced a new type of chapter 11 case, called asubchapter V case, for eligible small businesses that electsubchapter V designation. Subchapter V cases differ from smallbusiness cases in several ways.12 For example, the SBRAprovides for the appointment of a subchapter V trustee, who doesnot displace management in the operation of the debtor, to assistin developing a consensual restructuring plan.13 Inaddition, subchapter V debtors face stricter timelines than smallbusiness debtors, encouraging a prompt confirmation process andreducing the administrative costs associated with lengthier chapter11 cases.14

Additional advantages of subchapter V for debtors include: (a)equity holders' ability to retain their ownership interestswithout paying all creditors in full (elimination of the"absolute priority rule");15 (b) eliminationof the general requirement to file a disclosurestatement;16 (c) the subchapter V debtor's exclusiveright to file a plan;17 and (d) the ability to confirm aplan even if all classes reject the plan so long as the plan doesnot discriminate unfairly, is fair and equitable to any dissentingclass, and the debtor commits its projected disposable income (orthe value thereof) for a period of three to five years todistributions to creditors.18 In addition, in order toalleviate the costs of chapter 11 administration, subchapter Vdebtors do not have to pay quarterly U.S. trustee fees19and are allowed to pay administrative expenses over time under aplan.20

The SBRA, as originally enacted, provides that thequalifications to be a subchapter V debtor are the same as for anysmall business debtor.21 However, the Coronavirus Aid,Relief, and Economic Security ("CARES") Act temporarilyincreased the debt limit for subchapter V debtors to$7,500,000.22 This temporary increase has been extendedtwice,23 with the current extension set to sunset onJune 21, 2024.

The SBRA alters the appointment of creditors' committees insmall business chapter 11 cases. In traditional chapter 11 casesand small business cases before the enactment of the SBRA, theUnited States Trustee ("UST") is required to appoint acommittee of general unsecured creditors to represent the interestsof general unsecured creditors.24 The UST may alsoappoint additional creditors' or equity holders' committeesas appropriate.25 The bankruptcy court may also order,upon request, the appointment of additional committees "toassure adequate representation of creditors or of equity securityholders."26

Whereas, before the SBRA, a party in interest could request thatno creditors' committee be appointed in a small business case,under the SBRA a committee is only appointed in either a smallbusiness or subchapter V case if a court so orders "forcause" shown.27 In at least one case,Bonert, the court held that where a debtor opted forsubchapter V treatment after the passage of the SBRA, acreditors' committee that had been appointed before thesubchapter V designation would not be automatically grandfatheredin, but instead needed to show cause why it ought to remain inplace after the case became a subchapter V case.28

Creditors' committees possess a number of powers andresponsibilities.29 These include: (1) consulting withthe chapter 11 trustee or the debtor in possession;30(2) investigating the debtor or its businessactivities;31(3) participating in the formulation of achapter 11 plan;32 and (4) requesting the appointment ofa chapter 11 trustee or an examiner.33 Many courts haveheld that creditors' committees may seek "derivativestanding" from the bankruptcy court to bring actions to avoidfraudulent or preferential transfers on behalf of a debtor inpossession who unjustifiably refuses to do so.34 Inaddition, a creditors' committee may employ professionals suchas attorneys and accountants to represent it or perform services onits behalf.35

Creditors' committees can pose challenges in small businessand subchapter V cases. From a practical perspective, excessivelyadversarial participation by a creditors' committee can hinderor delay confirmation of a plan of reorganization. From anadministrative perspective, a creditors' committee can becostlyits retained professionals' fees are paid, withcourt approval, from the debtor's estate.36 Suchadministrative expenses receive priority in payment (i.e., they arepaid off before most kinds of debts) and thereby leave fewer fundsavailable for distribution to unsecured creditors under adebtor's plan. A chapter 11 case without a creditors'committee will reduce costs, arguably facilitating the ability ofdebtors to more quickly formulate and fund their plans.Accordingly, changing the default so that no creditors'committee is automatically appointed in small business andsubchapter V cases forces interested parties to justify theattendant cost as compared to any benefit.37

A creditors' committee may still be appointed "forcause."38 The SBRA does not define"cause," and no published cases have yet attempted todefine "cause" in small business or subchapter V cases.The Lear Capital case, in which the Bankruptcy Courtordered the appointment of a creditors' committee, offers anopportunity to examine the issues that might inform future courtsthat address the issue of "cause" in small business andsubchapter V cases.

Lear Capital, Inc. ("Lear") is a metal and coininvestment firm. In the years before its subchapter V chapter 11bankruptcy filing, Lear had reached settlements with the LosAngeles City Attorney's Office and the State of New Yorkregarding its alleged business practices. In anticipation offurther legal action by government agencies and customers, Learsought chapter 11 bankruptcy relief to resolve potential claims ina single forum.

A group of Lear's customers sought the appointment of anofficial committee of unsecured creditors to represent theinterests of Lear's customers, most of whom had insufficientresources to effectively hire their own representation to protecttheir interests in the case.39 The customers' motionfurther argued that other parties, such as the government agenciesthat were pursuing their own claims against the debtor, and thesubchapter V trustee, whose role was not to advocate for anyparticular group of creditors, could not adequately provide a"voice" for customers.

Lear initially opposed the appointment of a creditors'committee.40 It contended that Congress intended theappointment of a creditors' committee "only in rare andunusual circumstances." Lear also argued that oversight fromthe UST and the involvement of the subchapter V trustee and severalstate agencies provided sufficient oversight of the debtor.Moreover, Lear argued that, because a subchapter V debtor canconfirm a plan without the acceptance of an impaired class if itcommits its projected disposable income for three to five years todistributions to creditors, a creditors' committee could notresult in creditors receiving more under a plan; rather, thecommittee's professional fees could only reduce the amountavailable to creditors.

Despite these initial objections, Lear ultimately submitted forcourt approval a settlement with state agencies and customers thatwould provide for, among other things, the appointment of acommittee of customer creditors.41 On June 23, 2022, theBankruptcy Court approved the settlement.42

Although the court did not have to address what might constitute"cause" for the appointment of a committee under theSBRA, the case highlights various issues that may prove critical infuture cases.

Different Standards for Small Business Cases andSubchapter V Cases

The Bankruptcy Code does not distinguish between small businesscases and subchapter V cases in mandating that a creditors'committee not be appointed except for cause shown. This suggeststhat the distinctions between small business cases and subchapter Vcases should not result in different standards for what constitutes"cause." However, Lear Capital raises thepossibility that courts may develop separate tests for smallbusiness and subchapter V cases to determine whether"cause" to appoint a creditors' committee exists.Lear (a subchapter V debtor) made two arguments against appointinga creditors' committee that would be inapplicable to a smallbusiness case: (1) that the subchapter V trustee can providenecessary oversight, and (2) that the ability to confirm a planover creditors' objections and to commit three to fiveyears' worth of projected disposable income to distribution tocreditors eliminates the ability of creditors' committees tomaximize payment in favor of their constituents.

A comparison of Lear Capital with Bonertsuggests that the appointment of creditors' committees will bestrongly disfavored, but that there may be instances, such as inLear Capital, where the need for a subset of creditors tohave a voice may constitute cause to appoint a committee. InLear Capital, the customers' motion sought, and Learultimately agreed to, the appointment of a special committee torepresent customers' interests. In Bonert, however,the committee appointed and eventually disbanded was a generalcommittee of unsecured creditors.

Lear Capital may prove to be unique given certainunderlying factors. Unlike "the typical bonafide Chapter 11case, [in which] the debtor is dealing with tradecreditors,"[43] Lear sought bankruptcy relief to addressanticipated legal claims in a single forum. Had these claimsreached judgment and become liquidated prepetition, Lear would haveexceeded even the increased debt limit for subchapter V cases andwould have had to proceed in a traditional chapter 11 case.Arguably there would have been a strong basis for the BankruptcyCourt to find "cause" given that: (1) there is a largeclass of similarly situated creditors holding contingent,unliquidated claims; (2) their claims, if they had becomenon-contingent and liquidated prepetition, would have rendered thedebtor ineligible to be a small business or subchapter V debtor;and (3) use of the bankruptcy forum to settle or litigate theclaims was a primary motivation for the bankruptcy filing.

It is too early to tell whether the Lear Capital casewill remain an exception or become the rule and creditors'committees become more commonplace in the post-SBRA world.Nevertheless, the outcome in Lear Capital suggestspossibilities for what the future holds for creditors'committees in small business and subchapter V cases.

Footnotes

1. Pub. L. No. 116-54 (August 23, 2019).

2. 11 U.S.C. 101 et seq.

3. Prior to the SBRA, section 101(51D)(A) of theBankruptcy Code defined a "small business debtor"as:

[A] person engaged in commercial or business activities... that has aggregate noncontingent liquidated secured andunsecured debts as of the date of the filing of the petition or thedate of the order for relief in an amount not more than $2,000,000[as adjusted pursuant to 11 U.S.C. 104] ... for a case inwhich the United States trustee has not appointed under section1102(a)(1) a committee of unsecured creditors or where the courthas determined that the committee of unsecured creditors is notsufficiently active and representative to provide effectiveoversight of the debtor[.]

The current definition is:

[A] person engaged in commercial or business activities... that has aggregate noncontingent liquidated secured andunsecured debts as of the date of the filing of the petition or thedate of the order for relief in an amount not more than $3,024,725[adjusted effective April 1, 2022] (excluding debts owed to 1 ormore affiliates or insiders) not less than 50 percent of whicharose from the commercial or business activities of thedebtor[.]

4. 11 U.S.C. 11811195.

5. The Bankruptcy Code as amended by the SBRA defines a"small business case" as "a case filed under chapter11 of this title in which the debtor is a small business debtor andhas not elected that subchapter V of chapter 11 of this title shallapply." 11 U.S.C. 101(51C). Eligible debtors may pursuesmall business bankruptcies without opting for subchapter Vtreatment. Accordingly, for simplicity, this article uses"small business case" and "small businessdebtor" to refer only to cases and debtors, respectively, thatare not proceeding under subchapter V, and uses "subchapter Vcase" and "subchapter V debtor" to refer,respectively, to cases and debtors under subchapter V.

6. Case No. 2:19-bk-20836-ER (Bankr. C.D.Cal.).

7. Case No. 1:22-bk-10165-BLS (Bankr. D.Del.).

8. H.R. 5116, Pub. Law No. 103-394 (October 22,1994).

9. Pub. L. No. 1098 (April 20, 2005).

10. These procedural changes include: (1) a longer"exclusivity period," during which only the debtor mayfile a plan; (2) the ability of a debtor to seek conditionalapproval of the disclosure statement, with final approval to followat a hearing before or combined with the hearing on confirmation;and (3) tighter deadlines to file the disclosure statement and planand confirm the plan. See 11 U.S.C. 1121(e)(1)-(2) & 1129(e); Fed. R. Bankr. P. 3017 & 3017.1.A disclosure statement is a statement filed by a debtor, or otherparty that has proposed a plan, that describes the contents of theplan. See 11 U.S.C. 1125.

11. See In re Wright, No. CV20-01035-HB, 2020 WL 2193240, at *3 n.6 (Bankr. D.S.C. Apr. 27,2020) (noting small business debtors' difficulties inreorganizing even after BAPCPA) (citing Report from the HouseCommittee on the Judiciary (Report No. 116-54)).

12. For a more extensive overview of these differences,see In re Seven Stars on the Hudson Corp., 618B.R. 333, 340 (Bankr. S.D. Fla. 2020).

13. 11 U.S.C. 1183(b)(7). In a small businesscase, a trustee (who would displace management) is only appointedupon a showing of fraud, mismanagement, or similarproof.

14. See, e.g., 11 U.S.C. 1189(b)(requiring debtor to file a plan "not later than 90 days afterthe order for relief under this chapter," and only allowingthe court to extend the time to file a plan "if the need forthe extension is attributable to circumstances for which the debtorshould not justly be held accountable").

15. 11 U.S.C. 1181(a), 1191(b).

16. 11 U.S.C. 1191(b).

17. 11 U.S.C. 1189(a).

18. 11 U.S.C. 1191(b).

19. 28 U.S.C. 1930(a)(6)(A).

20. 11 U.S.C. 1191(e).

21. See 11 U.S.C. 1182(1) (providingqualifications to be subchapter V debtor); In re RS Air,LLC, 638 B.R. 403, 409 (B.A.P. 9th Cir. 2022) (noting that theSBRA "as originally enacted defined the debtor under 101(51D), in the same way as a small business debtor who does notelect to proceed under subchapter V").

22. See RS Air, LLC, 638 B.R. at 409(noting that the SBRA "as originally enacted defined thedebtor under 11 U.S.C. 101(51D), in the same way as a smallbusiness debtor who does not elect to proceed under subchapterV") (citing Pub. L. No. 116-136, 134 Stat. 281 (Mar. 27,2020)).

23. See id. (citing Pub. L. No. 117-5 (Mar. 27,2021) (the "COVID-19 Bankruptcy Relief Extension Act of2021") and Pub. L. No. 117-151 (S. 3823) (June 21, 2022) (the"Bankruptcy Threshold Adjustment and Technical CorrectionsAct")).

24. 11 U.S.C. 1102(a)(1). Inpractice, the UST will fulfill this duty by analyzing the need forsuch a committee and, where appropriate, appoint such committee, orotherwise inform the Court that the UST was unable to doso.

25. Id.

26. 11 U.S.C. 1102(a)(2).

27. 11 U.S.C. 1102(a)(3).

28. See In re Bonert, 619 B.R. 248, 254(Bankr. C.D. Cal. 2020) ("[T]he Court will provide theCommittee an opportunity to show cause why it should be permittedto continue in existence after the Debtors' Subchapter Velection takes effect."). In subsequent briefing, thesubchapter V trustee argued that his role and the role of acommittee would be duplicative. In light of the subchapter Vtrustee's brief, the committee did not oppose disbandment, andthe court entered an order disbanding the creditors' committee.See In re Bonert, Case No. 2:19-bk-20836-ER(Bankr. C.D. Cal.), Docket Nos. 277 (June 18, 2020) (subchapter Vtrustee's brief), 278 (June 19, 2020) (creditors'committee's statement that it did not object to disbandment)& 287 (July 10, 2020) (order disbanding thecommittee).

29. 11 U.S.C. 1103(c).

30. 11 U.S.C. 1103(c)(1).

31. 11 U.S.C. 1103(c)(2).

32. 11 U.S.C. 1103(c)(3).

33. 11 U.S.C. 1103(c)(4).

34. See, e.g., In re Roman Cath. Diocese ofHarrisburg, 640 B.R. 59, 67 (Bankr. M.D. Pa. 2022) (citingCybergenics Corp. ex rel. Cybergenics Corp. v. Chinery,330 F.3d 548, 553 (3d Cir. 2003)); In re Roman Cath. Bishop ofGreat Falls, Montana, 584 B.R. 335, 338 (Bankr. D. Mont. 2018)(citing In re Valley Park, Inc., 217 B.R. 864, 866 (Bankr.D. Mont. 1998)); In re Dzierzawski, 518 B.R. 415,41719 (Bankr. E.D. Mich. 2014) (discussing Sixth Circuitcases).

35. 11 U.S.C. 1103(a).

36. 11 U.S.C. 330(a), 503(b).

37. 11 U.S.C. 1102(a)(3).

38. Id.

39. Case No. 1:22-bk-10165-BLS (Bankr. D. Del.), DocketNos. 130 (April 20, 2022) (motion) & 175 (May 2, 2022) (replybrief).

40. Case No. 1:22-bk-10165-BLS (Bankr. D. Del.), DocketNos. 133 (April 20, 2022) (objection to motion to shorten time)& 171 (April 30, 2022) (opposition brief).

41. Case No. 1:22-bk-10165-BLS (Bankr. D. Del.), DocketNo. 241 (June 7, 2022).

42. Case No. 1:22-bk-10165-BLS (Bankr. D. Del.), DocketNo. 251 (June 23, 2022).

43. In re Albrechts Ohio Inns, Inc., 152 B.R.496, 502 (Bankr. S.D. Ohio 1993).

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The Future Of Small Business Bankruptcies And Creditors' Committees After The SBRA: In Re Bonert And In Re Lear Capital - Insolvency/Bankruptcy -...

Nearly one-in-five small business owners are preparing to permanently close under the pressure ofpandemic-related debts, lagging revenue, and mounting costs, according to a poll from the Canadian Federation of Independent Business (CFIB).

In a recent survey of its members, the CFIB found that 54 percent of small businesses are still reporting below-normal revenues and 62 percent are carrying unpaid debt taken on during the pandemicwhich averages $158,000according to the latest available estimates.

When respondents were asked if they agreed with the statement We are actively considering bankruptcy or winding down our business, 17 percent gave an affirmative answer.

Small firms are in for a rough recovery, but governments can step in and help by taking concrete measures, CFIB President Dan Kelly said in a statement issued on Aug. 18. Governments need to decide whether they will make the problem worse by raising taxes or take immediate actions to keep many businesses from disappearing for good.

The CFIB found that only 10 percent of Canadas small business owners would choose to file for bankruptcy if they were unable to keep their doors open, while nearly half (46 percent) of businesses at risk of closure would simply stop operating rather than go through the bankruptcy process.

Bankruptcy is a major issue for Canadian small businesses in all sectors but it does not measure the full scope of the problem, the CFIB said.

Of all the methods business owners would use to close their business due to financial hardship filing for bankruptcy is only a small piece.

The Office of the Superintendent of Bankruptcy last year reported the number of insolvencies in Canada actually fell seven percent from 2020 to a total of 92,572, according to Blacklocks Reporter.

Insolvency is a lagging indicator, Superintendent Elisabeth Lang said while testifying at a House of Commons finance committee meetingon July 7, 2o2o. If, as many are suggesting, we face a recession and our GDP goes down, our historical data shows that we will see an increase [in insolvencies], but I dont think it will be sudden. Im not sure it will be a crisis, but its very difficult to predict.

We are keeping a very close eye on insolvency rates compared with the last significant Canadian recession in 2008, Lang said at the time, in regards to government readiness for a likely increase in insolvency filings under the COVID-19 pandemic.

Insolvencies following the 2008 financial panic peaked at 158,441, according to a 2016 federal report titled Ten-Year Insolvency Trends In Canada.

Volumes were noticeably affected by the 2008-2009 recession, the report said.

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Andrew Chen is an Epoch Times reporter based in Toronto.

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Nearly One-in-Five Canadian Small Businesses on the Verge of Bankruptcy: CFIB Survey - The Epoch Times

On July 28, 2012, the City of Stockton filed for Chapter 9 Bankruptcy facing over $2 billion in long-term debt.

STOCKTON, California 10 years ago, the City of Stockton held a dubious, historic distinction. It became the largest city in U.S. history to file for bankruptcy.

"I would use the word terrifying for not only the community but the business community and everybody," said Doug Wilhoit, who was CEO of the Stockton Chamber of Commerce in 2012.

Less than a year later, the City of Detroit would eventually knock Stockton out of the top spot. However, when the dark financial cloud engulfed the city, Wilhoit said things became scary because of fear of the unknown.

"What was going to happen to the community? Just the reputation of the community, more or less the services that might be lost. Would it be police, fire, public works?" Wihoit said.

Just a few years earlier, like most of America, the economy was in a much different place, and it was at time where the economy was doing well. The housing market was a seller's market, and homes were easy to buy. But then the housing bubble burst in 2008 and the financial crisis began.

Unable to pay a laundry list of creditors and facing over $2 billion in labor agreements and long term debt, Stockton filed Chapter 9 bankruptcy on July 28, 2012 .

The city was running a $26 million deficit.

"We were negotiating with our labor units, so I was very involved in that to find out what can we do to change things so that we can afford them in the long term," said Kim Trammel, who was city's budget analyst in 2012.

She said one big lesson learned was not assuming the economy will remain positive when securing long-term contracts with employees.

"Our revenues declined dramatically, and so we just couldn't afford the commitments that we had made prior to the economy turning down," Trammel said.

Today, Stockton City Manager Harry Black says Stockton is financially solvent but proceeding with caution.

"I think with all the sacrifices and the hard decisions that the city had to make to set itself up for the future developed a greater degree of appreciation and respect for adhering to a high level of fiduciary responsibility," Black said.

"We're solid from a financial stand point. But again, it's never forgetting that it's very easy to quickly... get into financial trouble versus being able to get out of it," Black added.

On Feb. 25, 2015, the city announced it was exiting bankruptcy. As part of the plan, the city was able to settle with retirees to eliminate free retiree healthcare. However, the impacts of the bankruptcy still exist today and into the future.

The city's bankruptcy plan to pay off its debts extends to 2053.

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'I would use the word terrifying' | Lessons learned 10 years later from Stockton's historic bankruptcy - ABC10.com KXTV

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A decade of colossal debt accrual and economic mismanagement by communist authorities in Laos has finally tipped the country towards bankruptcy, with its foreign reserves incapable of meeting its loan obligations without outside help.

Long lines for fuel, rapidly rising food prices, and the inability of households to pay their monthly bills have also led to rare public criticism from around the land-locked country where authorities take a dim view of anyone who disagrees openly with government policies.

It would be too easy to blame China, which accounts for about 47 percent of Laos debt accumulated on the back of major infrastructure project, and its debt traps, which have left their mark on countries like Pakistan, Sri Lanka, and Fiji.

Nor is the war in Ukraine or the crushing impact of the COVID-19 pandemic an excuse. The chief reason behind Laos economic collapse is the perennial thorn in the side of many Asian countries: corruption.

Get briefed on the story of the week, and developing stories to watch across the Asia-Pacific.

Prime Minister Phankham Viphavanh has admitted as much, telling the National Assembly this week that embezzlement by executives and staff, combined with poor management, are the main reasons for the chronic losses racked-up by 178 state enterprises.

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Administration of these enterprises typically did not follow a sound business plan. In addition, the recruitment of executives and staff was largely based on nepotism, with these factors being the main reason for deep-seated management failure,state-run mediasaid,politely.

Warnings, at leastfrom this publication, about Laos festering debt problems date back 10 years.

But the damage is done and the immediate problem is the livelihoods of 7.3 million Laotians who rank among the poorest populations on the planet and have witnessed a significant widening in the wealth gap, prompting more warnings from the Asian Development Bank.

Today annual foreign debt servicing has grown to $1.4 billion from $1.2 billion in 2018 and just $160 million in 2010, when external debt servicing could be met with domestic income.

By the end of last year, according to World Bankfigures, Laospublic debtstood at88percentof gross domestic productandforeign debt at $14.5 billion.Vientiane needs $1.3 billion a year to meet its obligations until 2025but onlyholds about $1.2 billion in foreign reserves.

In a desperate bid to prop up the economy thegovernmentis offering about $340 million worth of bonds at a staggering six-month interest rate of 20 percent. Sources told Radio Free Asia that the bond issue is for everyone except commercial banks and financial institutions.

However, few believed the government would be capable of meeting such a generous rate designed to combat inflation running at 12.8 percent, and described by many as too good to be true.

Phankham has served as prime minister since March last year. He was vice president for the previous five years and has served as executive secretary of the communist partys executive committee since 2011.

For more than a decade the prime minister has been a significant player who also failed to heed the warning signs when formulating the deals and economic policy that has pushed Laos to the point of sovereign default. His choices are now stark.

Because of Laos strategic position on Chinas southern flank, Beijing might break with past practices and agree to a debt restructuring. The alternative is to go cap in hand to the International Monetary Fund (IMF), like Pakistan and Sri Lanka, and ask for a bailout.

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An IMF intervention would come with strings attached, and lots of them. Frugal spending policies would be enforced and to some extent Laos economic sovereignty would be eroded.

But the greater irony in rescuing Laotians from an incompetent government that rules by force would be the use of what is essentially a U.S.-Western financial institution to pay-off Chinese debts that were incurred despite the warnings, made loud and clear.

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Laos Is On the Brink of Sovereign Bankruptcy - The Diplomat

Revlon signage is seen on display in a Boots store in London, Britain, June 16, 2022. REUTERS/Hannah McKay/File Photo

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June 27 (Reuters) - Even for a veteran meme stock trader like Mike Minutelli, Revlon Inc (REV.N) is a wild bet.

The 30-year-old plumber from Oxford, North Carolina, scored a 350% profit last week by selling half the shares in the U.S. cosmetics maker he bought after it filed for bankruptcy protection on June 16. He thinks he can make even more by holding on to the rest of his shares through the bankruptcy.

Minutelli dabbles in shares such as GameStop Corp (GME.N) and AMC Entertainment Holdings Inc (AMC.N) - dubbed meme stocks because of their popularity with retail investors. He was emboldened by the success that individual investors enjoyed with another bankrupt company, Hertz Global Holdings Inc , that defied Wall Street's conventional wisdom.

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Retail investors who bought Hertz shares after it filed for bankruptcy in May 2020 ended up with handsome profits when a group of investment firms offered $6 billion a year later to take over the car rental firm.

Minutelli said he hoped the same would happen with Revlon. "If there is a buyout at a higher price, then all of the people shorting the stock have to cover their position," he said, noting he had spent "a few hundred dollars" to bet on Revlon.

A Revlon spokesperson declined to comment.

Retail investors' fascination with Revlon has pushed its shares up by more than 300% since it filed for bankruptcy 11 days ago. It is unusual for a bankrupt company's shares to trade in such a way, because investors usually worry that its assets will be insufficient to settle the claims of creditors and suppliers to leave equity holders with any value.

But retail investors, who often exchange ideas and organize on social media platform Reddit, were emboldened when those who invested in Hertz got lucky.

Hertz suffered a major blow at the onset of the COVID-19 pandemic when travel shut down and demand for its cars plummeted. But by the time the company exited bankruptcy a year later, vaccines had become available and travel was re-opening.

Private equity firms and hedge funds got into a bidding war for Hertz which resulted in a deal that delivered about $8 per share for meme stock investors, most of whom had paid $2 to $5 per share.

Revlon has said it was forced to file for bankruptcy not because its products are unpopular, but because of supply chain issues, labor shortages and raging inflation.

The investors hope these problems will go away by the time its bankruptcy protection ends in April 2023, and that someone will swoop in to buy Revlon and deliver them a windfall.

"My rationale was that Hertz got bought out of bankruptcy, and I think investors will do the same thing with Revlon," said Justin Benchtold, a 41 year-old retail sector worker in Asheville, North Carolina, who bought Revlon shares following its bankruptcy filing.

Revlon's bankruptcyfiling, however, said its focus was on restructuring debt rather than pursuing a sale.

USC Gould School of Law professor Robert Rasmussen, a bankruptcy expert, said he was skeptical that Revlon's fortunes could turn substantially to put the meme stock investors in the black.

"You need a story that, all of a sudden, demand for Revlon is going to increase to such an extent that the company is now worth more than its outstanding debt. I'm not saying it can't happen, but I'm certainly not betting on the stock," said Rasmussen.

Retail investors are also exploiting the strong short interest in Revlon. By snapping up shares, the investors drive up their value, forcing those who have shorted them to buy stock to close their positions, leading to further gains in the price.

Revlon is one of the most heavily shorted stocks. About 46% of its free float is sold short, up from 38% at the start of the month, according to S3 data.

Aaron Jackson, a 40-year-old former chef in Prince Edward Island, Canada, who is now a full-time trader, said he had seen retail investors successfully squeezing short sellers and was looking to score such a win with Revlon.

"When I saw that was a winning formula, I started looking for these stocks that could rally a community behind them, like Revlon," Jackson said.

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Reporting by Angelique Chen and Krystal Hu in New YorkAdditional reporting by Dietrich Knatuh and Saqib Ahmed in New YorkEditing by Greg Roumeliotis and Richard Chang

Our Standards: The Thomson Reuters Trust Principles.

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Analysis: Meme stock investors bet on bankrupt Revlon being the next Hertz - Reuters

By Jeff Marwil and Ashley Weringa (June 28, 2022, 5:55 PM EDT) -- This article analyzes PWM Property Management LLC'sbankruptcy filing in the U.S. Bankruptcy Court for the District of Delaware to explain the impact of the use of corporate governance blocking provisions.

The filing also highlights the significance of a creditor-filed proposed plan of reorganization, and a corresponding cooperation agreement, on a debtor's exclusive right to file a Chapter 11 plan as provided under Bankruptcy Code Sections 1121(b) and 1125.

Background

PWM Property Management owns a commercial office tower located at 245 Park Ave. in New York City. On Oct. 31, 2021, PWM filed for Chapter 11.

HNA Group North America LLC, the...

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NYC Office Tower Ch. 11 Shines Light On Blocking Provisions - Law360

In a recent decision, the Ontario Court of Appeal held that the sale proceeds of a property held in trust can be applied to a beneficiarys bankruptcy obligations.

Richards (Re), 2022 ONCA 216 dealt with a situation where real property was held in a trust that was created by a father for the benefit of his son (the Beneficiary). The trust held the property during the lives of the Beneficiarys parents, with a life interest permitting them to live at the Property. As per the terms of the trust, the date of death of the second parent was designated as the Time of Division. At the Time of Division, the trustees were to distribute the trust fund, which included the property and any Chattels, to the Beneficiary, if he was alive at the time.

In 2010, the father passed away and his wife continued to live at the Property until she passed away in July 2020. Prior to her death, the trustees of the trust sold the property and held the proceeds of sale in the amount of $1,172,120.90 in trust.

At the Time of Division, the Beneficiary was an undischarged bankrupt and faced an outstanding judgement by the bank for $987, 613, plus costs and interest. In October 2020, the bank obtained an order under s. 38 of the Bankruptcy and Insolvency Act (the Act) and was assigned the rights of the Beneficiarys trustee in bankruptcy to make a claim against the proceeds of sale. The bank brought a motion to recover the sale proceeds up to the amount owed by the Beneficiary and a declaration that the Beneficiary was the trusts beneficiary and had an interest in the property, as per the terms of the trust. The bank argued that the sale proceeds constituted property of the bankrupt.

The Beneficiary argued that his interest in the property was suspended while he is bankrupt, and the property would only vest upon his discharge from bankruptcy. The bankruptcy judge rejected this argument. It was held that the Trusts provisions which applied to the property during the lifetimes of the Beneficiarys parents were overridden by the provisions which applied to the property after the parents death.

Ultimately, the bankruptcy judge found that the property vested in the Beneficiary at the Time of Division and thus vested in the bankruptcy trustee. Since the bank was assigned the rights of the trustee, the bank was entitled to the proceeds of sale up to the amount owed by the Beneficiary

The Beneficiary appealed and the Ontario Court of Appeal upheld the bankruptcy judges order. In coming to its decision, the court noted that to decide otherwise would offend the public policy which underlies the Act, as it would allow a person to place assets out of the reach of creditors.

This decision presents an interesting analysis of the interplay between a beneficiarys rights under a trust and in a bankruptcy situation. It also serves as a reminder that beneficiaries in such situations cannot use the terms of a trust to shield their obligations from creditors.

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The interplay between benefits under a trust and bankruptcy: A beneficiary cannot shield its obligations to creditors by hiding behind the terms of a...