Category Archives: Bankruptcy

An Ann Taylor Store "LOFT" in Encinitas, California. REUTERS/Mike Blake

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(Reuters) - A Virginia federal judge has shut down legal protections for insiders of Ann Taylors former parent company, calling the company's use of a popular tool in corporate bankruptcies "shocking."

In an 87-page decision, U.S. District Judge David Novak of the Eastern District of Virginia on Thursday overturned a bankruptcy courts approval of Mahwah Bergen Retail Groups Chapter 11 reorganization plan and held that the so-called nondebtor releases are void and unenforceable. The company had said the releases, which protect non-bankrupt people and entities with ties to company, are key to the plan.

The sheer breadth of the releases can only be described as shocking, Novak wrote.

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Novak found that the bankruptcy court that approved the deal exceeded "the constitutional limits of its authority," reflecting similar concerns raised by a judge who ruled on the nondebtor releases in the bankruptcy of OxyContin maker Purdue Pharma.

Mahwah, formerly known as Ascena Retail Group, filed for bankruptcy in July 2020 with more than $1 billion in debt and plans to close many of its stores. The companys brands, including Ann Taylor, Lane Bryant and Loft, were later sold to private equity firm Sycamore Partners. Mahwah now exists solely to wind down its estate.

Last year, U.S. Bankruptcy Judge Kevin Huennekens approved the company's plan, which included the nondebtor releases for company insiders against litigation that had accused Ascena and former executives of securities fraud. Lead plaintiffs in the securities litigation and the U.S. Department of Justices bankruptcy watchdog, the U.S. Trustee, appealed.

Novak said in Thursdays decision that nondebtor releases have become too frequent. He said the 4th U.S. Circuit Court of Appeals has made clear that such releases are disfavored and should be granted cautiously and infrequently.

He also referred to a Manhattan federal judge's recent reversal of the approval of Purdue Pharmas bankruptcy plan based on similar concerns about nondebtor releases, which in Purdues case were intended to protect the companys Sackler family owners. Novak said that Mahwahs contention that the releases are critical to its reorganization is undermined by the fact that they have become so commonplace.

As District Judge Colleen McMahon astutely observed: When every case is unique, none is unique, Novak wrote.

A lawyer for Mahwah did not immediately respond to a request for comment.

A spokesperson said the U.S. Trustee is extremely gratified by the courts opinion and will continue to argue its legal position in other districts around the country.

The case is Joel Patterson et al v Mahwah Bergen Retail Group, Inc., U.S. District Court, Eastern District of Virginia, No. 3:21-cv-00167.

For Mahwah: George Hicks Jr., Andrew Lawrence, Edward Sassower, Steven Serajeddini and John Luze of Kirkland & Ellis and Cullen Speckhart and Olya Antle of Cooley

For the U.S. Trustee: Ramona Elliott, P. Matthew Sutko and Sumi Sakata of the DOJ and John Fitzgerald III, Kathryn Montgomery and Hugh Bernstein of the U.S. Trustee's office

For the securities plaintiffs: Mickey Etkin, Andrew Behlmann and John Schneider of Lowenstein Sandler and Ronald Page Jr. of Ronald Page PLC

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Purdue Pharma ruling targets controversial U.S. bankruptcy tactic

Bankruptcy judge approves Ann Taylor, Lane Bryant sale to Sycamore

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Maria Chutchian reports on corporate bankruptcies and restructurings. She can be reached at maria.chutchian@thomsonreuters.com.

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Judge rejects legal shield in bankruptcy of former Ann Taylor parent - Reuters

Moby operates a fleet of ferries in the Mediterranean (Moby)

PublishedJan 17, 2022 3:31 PM by The Maritime Executive

Italian ferry operator Moby S.p.A. filed for bankruptcy in a U.S. Court on January 14 as the latest step in a drawn-out reorganization process in Italy. Controlled by Italys Onorato family, Moby has been working to gain acceptance of a reorganization plan that would permit the family to retain control of the operations.

In June 2020, the company reported that it would seek a court-guided reorganization citing the pressures of pandemic and travel restrictions on its operations. The company has a fleet of approximately 20 ferries sailing between Italy and the Mediterranean islands of Sardinia, Corsica, and the Isle of Elba. In 2015, the Onoratos also acquired another Italian ferry company, Tirrenia, and recently launched an operation in the Baltic with St. Peter Line. The company with its destinations to the popular tourist destinations in the Mediterranean was heavily impacted by travel restrictions, while operations in the Baltic were suspended in 2020 and 2021.

Moby and its subsidiary Compagnia Italiana di Navigazione have been seeking to reach an agreement with bondholders and other creditors to restructure the companys debt. The bondholders and banks are reported owed more than 500 million euros. Initial negotiations for the refinancing were complicated by an improvement in the companys financial results as operations recovered, especially during the summer of 2021 when travel restrictions were loosened and more people were traveling.

The case has played out like a drama in the courts with the Onorato family at times accusing a splinter group of creditors of seeking control of the company. The negotiations went through a series of back-and-forth developments. In the fall, the Onorato family said it had won support from a third of the bondholders for the reorganization, but late in the fall the court froze assets from the parent company valued at 20 million euro in a dispute with Tirrenia.

Italian media reports suggested recently that an agreement had been reached which callsfor Moby to be split into an operating company that would continue under the control of the Onorato family. The ships and other assets along with the debt would be transferred to a new holding company, which would be recapitalized in part by selling some of the older ships, as well as a tugboat operation and other assets. Creditors were expected to forgive up to a third of the debt while also providing to recapitalize the new company in exchange for participation. Moby would operate the vessels under charter from the new company.

The Milan court has scheduled a hearing on the proposed reorganization plan for January 20. A deadline was set for April. The U.S. filing was made under Chapter 15 of the bankruptcy law. It provides for a foreign company to gain access to the U.S. courts as part of an existing foreign proceeding.

Moby has continued to operate during the drawn-out reorganization process while also taking steps to continue the modernization of its operations, In November 2021, the first of two new ferries was launched for the company in China. The Moby Fantasy, due to enter service this year, is one of the worlds largest cruise ferries and will be the largest operating in the Mediterranean. Along with its sister ship, the Moby Fantasy is being built to replace four older vessels. The new ships are being outfitted with the possibility of switching from traditional fuel to LNG, should that be required at a later date.

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Italy's Moby Files US Bankruptcy in Ongoing Reorganization Battle - The Maritime Executive

On December 22, 2021, Judge Mary Walrath of the Bankruptcy Courtfor the District of Delaware held in In re The Hertz Corp.that redemption premiums may potentially qualify as unmaturedinterest, and that, to the extent that such redemption premiums areunmatured interest on unsecured debt, then creditors would only beentitled to receive the federal judgment rate, not the contractualrate of interest.1 The decision departs from a recentdecision from the Texas bankruptcy court in the UltraPetroleum case, which held that unimpaired unsecured creditorsof a solvent debtor would be entitled to receive the contractualrate of interest.

In the wake of the COVID-19 pandemic, the Hertz Corporation andits affiliates (the "Debtors") filed voluntary petitionsunder chapter 11 of the Bankruptcy Code. During the course of itsbankruptcy case, Hertz's liquidity position improved and thus,under Hertz's plan of reorganization, all creditors were beingpaid in full. However, the plan provided that unsecured creditorswould receive post-petition interest accruing at the federaljudgment rate or at any rate necessary to render creditorsunimpaired.2 The federal judgment rate was lower thanthe default interest provided in the indentures. The plan alsoprovided that prepetition equity holders would receivedistributions of cash and equity.3

In July 2021, Wells Fargo Bank, N.A., as indenture trustee forthe Debtors' unsecured senior noteholders, filed an adversarycomplaint against the Debtors seeking to recover (1) a make-wholepremium due under the senior notes (totaling approximately $147million) and (2) post-petition interest on their claims at thecontract default rate in excess of the federal judgment rate(approximately $125 million).4 The Debtors moved todismiss the complaint.

In a comprehensive opinion, the Court granted in part and deniedin part the Debtors' motion to dismiss. Of significance, theCourt held that only some of the senior noteholders were entitledto receive a redemption premium under the indentures, that theredemption premiums may potentially qualify as the economicequivalent of unmatured interest (and thus could be subject todisallowance), and that unsecured creditors of a solvent debtor areonly entitled to receive post-petition interest at the federaljudgment rate.

Indentures and credit agreements may require a borrower to pay aprepayment or redemption premium to "protect the lenders'right to a yield that was expected at the time that they made theirloans."5 A redemption premium thus refers to therepayment of a debt at or before its maturity date at a certainpercentage above its face value, which in certain circumstances maycompensate the lender or noteholder for lost interest as a resultof the early redemption of the debt.6

The Court first addressed whether the senior noteholders wereentitled to redemption premiums. The Debtors moved to dismiss thecomplaint on the grounds that the redemption premiums were notpayable under the express language of the indentures because theacceleration provisions (which were triggered automatically uponthe Debtors' filing) in the indentures did not provide for thepayment of redemption premiums. However, the Court rejected theDebtors' arguments that the indentures did not provide for thepayment of a redemption premium upon automatic acceleration byvirtue of the bankruptcy filing. Relying on the Third Circuit'sdecision in Energy Future Holdings, the Court held thatthe applicable contractual provision for determining thenoteholders' entitlement to redemption premiums was thespecific redemption provision, not the automatic accelerationprovision.7

Therefore, turning to the express language of the redemptionprovisions, the Court determined that some-but not all-of thenoteholders were entitled to receive a redemption premium.Specifically, the Court held that holders of certain senior notes(the "2022/2024 Notes") were not entitled to a redemptionpremium because the applicable redemption provisions only providedfor redemption "prior to maturity thereof at the applicableredemption price set forth below."8 Given that theredemption provision referred to an undefined term for maturity ofthe debt, the Court held that no redemption premium was due on the2022/2024 Notes because the notes matured as a result of thebankruptcy filing.9 In other words, because thebankruptcy filing and not the stated maturity date triggeredmaturity under the terms of the indenture, no such right to anyredemption premium existed post-petition.

By contrast, the Court held that holders of other senior notes(the "2026/2028 Notes") were entitled to a redemptionpremium under the express language of their indenture, whichdiffered from that of the 2022/2024 Notes. The redemptionprovisions for the 2026/2028 Notes provided that "[a]t anytime prior to [a specified date], the [senior notes] may also beredeemed (by the Company or any other person) in whole or in part,at the Company's option, at . . . the Redemption Price . . .." The Court read this provision to "simply [provide] theDebtors with the ability to redeem under the circumstances"specified in that provision, and notably did not contain therequirement that redemption must occur before maturity. Because thebonds were redeemed prior to the dates specified in the redemptionprovision, the Court found that, unlike the 2022/2024 noteholders,the 2026/2028 noteholders stated a plausible claim for relief as tothe 2026/2028 noteholders' entitlement to a redemptionpremium.10

The Court next addressed the Debtors' contention that theredemption premium should be disallowed as unmatured interest undersection 502(b)(2) of the Bankruptcy Code. Section 502(b)(2) of theBankruptcy Code provides that a claim is disallowed "to theextent that . . . such claim is for unmatured interest."Notably, "unmatured interest" is not defined in theBankruptcy Code, but rather has been interpreted by courts toinclude post-petition interest and contractual charges that are the"contractual equivalent" of futureinterest.11

The Court noted that while the Third Circuit in EnergyFuture Holdings did characterize a redemption premium as the"contractual substitute for interest lost on Notes redeemedbefore their expected due date,"12 it was notaddressing the issue in the context of section 502(b)(2)disallowance.13 Further, the Court discussed thedecision in Ultra Petroleum, where the Fifth Circuit notedthat a make-whole premium could be considered unmatured interestand remanded to the bankruptcy court to determine theissue.14 On remand, the Bankruptcy Court for theSouthern District of Texas concluded that the make-whole premiumwas not the economic equivalent of unmatured interest and notdisallowed under Section 502(b)(2).15 This decision iscurrently on appeal.

When deciding whether a contractual charge is unmaturedinterest, "courts look to the economic substance of thetransaction to determine what counts asinterest."16 In Hertz, the Court concludedthat to determine whether the redemption premium is the economicequivalent of unmatured interest is not a legal question, but afactual one.17 Put another way, simply characterizingthe makewhole claim as liquidated damages, breach of contractdamages, or another separate contract right could avoid the effectof section 502(b)(2) in the hands of an astute drafter. Inpractice, a contract could provide that upon default or redemption,"all unmatured interest" would be immediately due andpayable, therefore avoiding Bankruptcy Code section 502(b)(2)disallowance in contravention of the Bankruptcy Code.

In considering the redemption premium provision here, the Courtfound it significant that the premium is calculated on the presentvalue of unmatured interest due as of the redemption date, but leftthe door open for the noteholders to introduce evidence to thecontrary. The Court thus denied the Debtors' motion to dismissthe noteholders' claim that it must pay a redemption premium onthe 2026/2028 Notes.18

Finally, the Court addressed which interest rate would apply tothe redemption premium. Section 1124 of the Bankruptcy Codeprovides that a claim is unimpaired if, among other things, theplan "leaves unaltered the legal, equitable, and contractualrights" of the holder of that claim.19 However,section 502(b)(2) provides for the disallowance of any unmaturedinterest.20 Whether a claim is impaired has significantimplications: creditors that are impaired generally are entitled tocertain rights in the context of plan confirmation, including (i)the right to vote to accept or reject the plan and (ii) the rightto receive consideration equal to what the creditor would havereceived in a hypothetical chapter 7 liquidation.21

The noteholders contended that because the plan designatedsenior noteholders as unimpaired for purposes of section 1124 ofthe Bankruptcy Code (which provides that a class of claims orinterests is impaired under a plan unless the plan leaves suchclass's legal, equitable, and contractual rights to such claimsor interests unaltered), the noteholders should be entitled toreceive interest at the contract rate. On the other hand, theDebtors argued that because it was section 502(b)(2) of theBankruptcy Code that disallowed unmatured interest, rather than theDebtors' plan, the senior noteholders' claim was unimpairedunder Third Circuit precedent.22 The Court ruled infavor of the Debtors, holding that unsecured creditors "arenot impaired within the meaning of section 1124(1)" becausethe senior noteholders' claim to unmatured interest or theredemption premium was modified by section 502(b)(2) of theBankruptcy Code, and not the Debtors' plan.23

Nevertheless, the noteholders argued that they were entitled totheir contract rate of interest because "the Debtors are awashin cash, paid all creditors in full, and provided a substantialreturn on investment to equity."24 The Courtacknowledged that prior to the enactment of the Bankruptcy Code,courts applied a "solvent debtor" exception. Thisexception provided that the contractual rights of unimpairedcreditors must be preserved in bankruptcy when a debtor is solvent.The Court found, however, that "the solvent debtor exceptionsurvived the passage of the Bankruptcy Code only to a limitedextent."25 Indeed, the Court noted that Congressexpressly codified the solvent debtor exception in two sections ofthe Bankruptcy Code: section 506(b) (which provides for payment ofpost-petition interest to oversecured creditors)26 andsection 726(a)(5) as to impaired unsecured creditors.

However, the Bankruptcy Code "is silent on what treatmentunimpaired creditors must receive in a solvent chapter 11 debtorcase."27 The Court found that nothing in theexpress text of the Bankruptcy Code or in its legislative historyrequired the payment of post-petition interest at the contract rateof interest. Thus, the Court held that even if the solvent debtorexception survived the enactment of the Bankruptcy Code, theBankruptcy Code did not specify what interest rate would berequired to establish that an unsecured creditor is unimpaired. TheCourt noted that Congress could have provided a solvent debtorexception for unimpaired unsecured claims by (i) exceptingunmatured interest from disallowance under section 502(b) when thedebtor is solvent or (ii) by amending section 1124 to provide thatunimpaired creditors must receive their contract rate of interest,in addition to payment in full of their allowed claim. But Congresscreated neither exception.

Due to the lack of guidance from the text of the BankruptcyCode, courts have remained split on the applicable "legalrate" of interest for unimpaired unsecured creditors in asolvent chapter 11 debtor case. Some courts have held thatunsecured creditors are entitled to receive post-petition interestat the "contract rate," meaning the interest ratespecified in the prepetition contract (or if there is no contract,the interest rate specified under state law).28 However,other courts have held that creditors of a solvent debtor are onlyentitled to receive interest at the federal judgment rate, which istypically lower than the contract rate.29

The Court concluded that the federal judgment rate was theappropriate applicable rate of interest in Hertz. Insupport of its conclusion, the Court noted that neither theBankruptcy Code nor its legislative history indicated any intentfor unimpaired unsecured creditors of a solvent debtor to receivebetter treatment than impaired unsecured creditors.30The Court thus found no basis to distinguish between unimpaired andimpaired unsecured creditors in a solvent debtor case.31Pursuant to sections 1129(a)(7) and 726(a)(5) of the BankruptcyCode,32 impaired unsecured creditors in a solvent debtorchapter 11 case are entitled to receive post-petition interest atthe federal judgment rate. Specifically, section 726(a)(5) requirespayment of interest at the "legal rate" before anydistributions to equity holders can be made, and section 1129(a)(7)provides that with respect to each impaired class of claims orinterests, creditors are entitled to receive what they would havereceived in a liquidating chapter 7 case.

The Court noted that adopting a uniform rule to apply to allunsecured creditors regardless of whether they are impairedprovides more certainty and fairness in bankruptcy cases. The Courtstated that providing that "all general unsecured creditorsare entitled to the same post-petition interest in a solventchapter 11 debtor case prevents a debtor from paying preferredcreditors more than others simply by classifying them asunimpaired."33 While the noteholders complainedthat designation of their claims as unimpaired deprived them of theright to vote on the plan, the Court found that thenoteholders' impairment would not have resulted in differenttreatment. Specifically, the Court stated that if the noteholders"had been treated as impaired and if they had voted againstthe Plan, they would have received the same treatment: payment infull in cash of their allowed claim plus post-petition interest inaccordance with sections 1129(a)(7) and726(a)(5)."34 In other words, the noteholders wouldhave still received interest at the federal judgment rate.

The Court thus rejected the noteholders' reliance on theTexas bankruptcy court's decision in Ultra Petroleum.In that case, the Texas bankruptcy court held that the BankruptcyCode did not abolish the solvent debtor exception and that thesolvent debtor exception would require payment of default interestprovided in the contracts. The Ultra Petroleum court'sdecision hinged on its determination that unimpaired creditors wereentitled to have their equitable rights fully enforced undersection 1124(1) in a "solvent debtor" case.35Judge Walrath did not find this reasoning persuasive because"[a] bankruptcy court cannot use equitable principles tomodify express language of the Code," such as section502(b)(2), which "expressly disallows claims of unsecuredcreditors for unmatured interest."36 TheDebtor's solvency, according to the Court, does not "waivethe application of section 502(b)(2)."37 Therefore,the Court concluded that the noteholders failed to state aplausible claim that the Debtors must pay post-petition interest onthe senior notes at the contract rate rather than at the federaljudgment rate and dismissed this count in the noteholders'complaint.

Judge Walrath's decision in Hertz confirms thatunder Third Circuit precedent, it is the applicable redemptionprovision-not the acceleration provision-that is determinative asto a creditor's entitlement to receive a redemption premium inbankruptcy. Where, as with the 2026/2028 noteholders inHertz, the entitlement to receive a premium is notdependent on a redemption occurring prior to a maturity date, thencreditors may be entitled under their contracts to receive theredemption premium in bankruptcy. By contrast, as with the2022/2024 noteholders, if the redemption premium is dependent onthe redemption occurring prior to the maturity date and theindenture provides for automatic acceleration upon a bankruptcyfiling, then a court could conclude, as the Court did here, thatthe creditors are not entitled to the redemption premium under theexpress language of the governing agreements.

Judge Walrath's decision also underscores the split amongcourts as to the proper treatment of unimpaired unsecured creditorsin a solvent chapter 11 case. Consistent with a recent decision inthe PG&E case in California,38 JudgeWalrath held that both impaired and unimpaired unsecured creditorsin a solvent chapter 11 debtor case are entitled to receive thefederal judgment rate, not the contractual rate of interest. TheHertz decision thus conflicts with the UltraPetroleum decision in Texas, which held that unimpairedunsecured creditors of a solvent debtor are required to receivetheir contractual default rate of interest.

Unimpaired unsecured creditors of a solvent debtor shouldtherefore be mindful that this is an evolving issue in bankruptcythat remains unsettled and can vary among courts and districts.Even where a debtor is solvent and has sufficient liquidity to paypost-petition interest, a court may conclude that an unsecuredcreditor of a solvent debtor may only be entitled to post-petitioninterest at the federal judgment rate, which likely issubstantially lower than the default rate of interest.

Footnotes

1 Wells Fargo Bank, N.A. v. The Hertz Corp. (In reThe Hertz Corp.), Adv. No. 20-11218 (MFW), 2021 WL 6068390, at*3 (Bankr. D. Del. Dec. 22, 2021).

2 Id. at *2.

3 Id.

4 Id. at *3.

5 See In re Chemtura Corp., 439 B.R. 561, 596(Bankr. S.D.N.Y. 2010).

6 See In re MPM Silicones LLC, 874 F.3d 787, 802(2d Cir. 2017).

7 In re The Hertz Corp., 2021 WL 6068390, at *3(citing In re Energy Future Holdings Corp., 842 F.3d 247(3d Cir. 2016)).

8 Id. at *5.

9 Id. at **5-6.

10 Id. at *7.

11 Id. at n.11.

12 In re Energy Future Holdings Corp., 842 F.3dat 251; see also In re MPM Silicones, 874 F.3d, 787, 802(2d Cir. 2017) (noting that a make-whole premium "was intendedto ensure that the Senior-Lien Note holders received additionalcompensation to make up for the interest they would not receive ifthe Notes were redeemed prior to the maturitydate.").

13 In re Energy Future Holdings Corp., 842 F.3dat 251, 253 n.1.

14 In re Ultra Petroleum Corp., 943 F.3d 758,765 (5th Cir. 2019).

15 In re Ultra Petroleum Corp., 624 B.R. 178,188-95 (Bankr. S.D. Tex. 2020).

16 In re Doctors Hosp. of Hyde Park, Inc., 508B.R. 697, 705 (Bankr. N.D. Ill. 2014).

17 In re The Hertz Corp., 2021 WL 6068390, at*8.

18 Id.

19 11 U.S.C. 1124(1).

20 Id. 502(b)(2).

21 See 11 U.S.C. 1129(a)(7),1126.

22 In re PPI Enters. (US), Inc., 324 F.3d 197,204 (3d Cir. 2003) (holding that a creditor is unimpaired if it isthe effect of the Bankruptcy Code that modifies its rights, not thedebtor's plan).

23 In re The Hertz Corp., 2021 WL 6068390, at*11.

24 Id.

25 Id. at *16.

26 Id.

27 Id. at *11.

28 See, e.g., In re Dow Corning Corp.,456 F.3d 668 (6th Cir. 2006) (&ldquldquo;When a debtor issolvent, then, the presumption is that a bankruptcy court'srole is merely to enforce the contractual rights of the parties,and the role that equitable principles play in the allocation ofcompeting interest is significantly reduced.").

29 See, e.g., In re Cuker Interactive,622 B.R. 67, 71 (Bankr. S.D. Cal. 2020) ("[A]ssuming theCreditors are unsecured, they must receive postpetition interest atthe Federal Judgment Rate to be unimpaired by the Plan.");In re PG&E, 610 B.R. 308, 312-313 (Bankr. N.D. Cal.2019) (holding that unimpaired unsecured creditors are onlyentitled to receive post-petition interest at the federal judgmentrate).

30 In re The Hertz Corp., 2021 WL 6068390, at**11-13.

31 Id. at *14 (distinguishing DowCorning, 456 F.3d at 678-80 because its ruling was premised onsection 1129(b), which considers the rights of impaired creditors,not unimpaired creditors, in a solvent chapter 11 debtorcase).

32 See 11 U.S.C. 726(a)(5) (providingpayment of post-petition interest at "the legal rate" tocreditors, before any distribution to the debtor (or equity), inthe event there are funds left after paying all other claims in achapter 7 liquidation case); id. 1129(a)(7)(providing that with respect to each impaired class of claims orinterests, each holder of such claim has either accepted the planor will receive at least what it would have received in aliquidating chapter 7 case).

33 In re The Hertz Corp., 2021 WL 6068390, at*17.

34 Id. at *16.

35 See In re Ultra Petroleum Corp., 624 B.R.178, 196 (Bankr. S.D. Tex. 2020).

36 In re The Hertz Corp., 2021 WL 6068390, at*15.

37 Id.

38 In re PG&E Corp., 610 B.R. 308 (Bank.N.D. Cal. 2019).

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Delaware Bankruptcy Court Rules That Unsecured Creditors Of A Solvent Debtor Are Entitled To Post-Petition Interest At The Federal Judgment Rate, Not...

Owners of a Roanoke, VA, restaurant chain have closed one location and are filing bankruptcy for two others in relation to a deadly hepatitis A outbreak that swept through the community this past fall.

At least four people have died, more than 50 were sickened and 36 people were hospitalized in the outbreak associated with an infected employee who worked at three Famous Anthonys locations. An infected person can transmit the virus to others up to two weeks before and one week after symptoms appear.

Attorney Andrew Goldstein said the Chapter 11 bankruptcy filing allows the company to reorganize and remain open. In 90 days, the company owners will submit a plan outlining a payment schedule for the people who have claims against their restaurants.

In a public statement on behalf of the owners, Goldstein said:

Famous Anthonys has had the privilege of serving this community for over 35 years. This unforeseen hepatitis A exposure at two of our restaurants has impacted many in our close knit community including many loyal customers, employees and their families. In an effort to provide adequate compensation for those affected by the exposure and to preserve the jobs of the dedicated Famous Anthonys team members, Famous Anthonys at Oak Grove Plaza and Williamson Road have each filed voluntary Chapter 11 petitions with the bankruptcy court for the Western District of Virginia. This allows restaurants to operate as usual while also giving them an opportunity to reorganize their business and meet their obligations. Business generated over this time will enhance the outcome of these goals. As always, Famous Anthonys appreciates the support of their staff, patrons and the community, and hopes to continue serving this community for many years to come.

Seattle food safety attorney Bill Marler who currently represents more than two dozen people who were sickened from or died in the outbreak has long advocated for restaurant owners and other foodservice operators to vaccinate their employees against the virus.

About hepatitis AHepatitis A is a highly contagious liver infection. The virus is generally spread when people come into microscopic amounts of stool from an infected person through food, drink or an object. The disease can also be spread through close contact. It can be prevented by vaccination.

Typical symptoms include fever, fatigue, loss of appetite, nausea, vomiting, abdominal pain, diarrhea, dark urine, clay-colored bowel movements, joint pain, or jaundice (yellowing of the skin or eyes). It can range in severity from a mild illness lasting a few weeks to a severe illness lasting several months. A person can transmit the virus to others up to two weeks before and one week after symptoms appear.

Hepatitis A is preventable through vaccination. Hepatitis A vaccine has been recommended for school children for many years, and one dose of the vaccine has been required for entry into kindergarten and first grade since 2014. Most adults are likely not vaccinated but may have been if they received vaccinations prior to traveling internationally.

Editors note: Bill Marler of the Marler Clark law firm is the publisher of Food Safety News.

(To sign up for a free subscription to Food Safety News, click here.)

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Famous Anthony's owners filing for bankruptcy in wake of hepatitis A outbreak - Food Safety News

NEW YORK, Jan 7 (Reuters) - A U.S. judge on Friday allowed Purdue Pharma to immediately challenge her rejection of legal protections for Sackler family members who own the OxyContin maker, and which were a major component of its bankruptcy reorganization plan.

U.S. District Judge Colleen McMahon's ruling means Purdue will have another shot at keeping intact a $4.5 billion opioid litigation settlement at the heart of the company's plan. She gave Purdue until Jan. 17 to file the appeal to the New York-based 2nd U.S. Circuit Court of Appeals.

McMahon reversed a bankruptcy judges order approving the deal in December. The settlement provides so-called nondebtor releases that shield the Sacklers against future opioid-related lawsuits.

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Several states and the U.S. Department of Justices bankruptcy watchdog opposed the releases, saying the Sacklers should not be afforded such protections since they did not file for bankruptcy themselves.

McMahon said in Friday's ruling that the appeal should be handled quickly "given the urgency of the opioid crisis and the importance of the issue to the resolution of this case."

Purdue filed for bankruptcy in 2019 in the face of thousands of lawsuits accusing it and the Sacklers of fueling the opioid epidemic through deceptive marketing.

The Sacklers, who have denied wrongdoing, contributed the $4.5 billion to the settlement in exchange for the releases. Under Purdues reorganization plan, settlement funds would be directed toward opioid abatement programs.

Purdue said in a statement that McMahon's ruling on Friday underscored the need for a speedy resolution to the case.

"At a time when drug overdose deaths are at record levels, using Purdues settlement funds for opioid abatement programs and overdose rescue medicines is more needed than ever, so we hope to move as quickly as possible through the appeals process," the company said.

A lawyer for several states that opposed the fast-tracked appeal did not immediately respond to a request for comment. Representatives for the Sacklers declined to comment or did not immediately respond to a request.

While the appeal works its way through the courts, Purdue and the Sacklers are in mediation with the states that opposed the releases with the goal of coming up with a new deal that, if reached, would likely moot the ongoing appeal.

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Reporting by Maria Chutchian; Editing by Alexia Garamfalvi, Bill Berkrot and Marguerita Choy

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Purdue Pharma can appeal rejection of bankruptcy plan - Reuters

By Vince Sullivan (January 11, 2022, 1:28 PM EST) -- The federal judge overseeing the bankruptcy case of Puerto Rico issued an order late Monday saying if certain modifications are made to the island's plan of adjustment this week, the court will confirm the plan after more than four years in court.

The federal judge overseeing Puerto Rico's bankruptcy case said late Monday she would confirm the island's plan of adjustment if certain modifications are made. (iStock.com/Mary Baratto) U.S. District Judge Laura Taylor Swain listed a number of amendments to sections of the plan put forward by the Financial Oversight and Management Board pursuing confirmation of that plan, saying if the...

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Puerto Rico To Get Bankruptcy OK With Plan Modifications - Law360

The beloved family-friendly seafood chain The Lost Cajun is making a steady comeback after the pandemic pushed it into bankruptcy and forced it to close several locations.

In April of last year, the gumbo-and-seafood concept ended up filing for Chapter 11 bankruptcy, reporting liabilities of more than $1.4 million and assets of about $338,000. While it operated two dozen locations across seven states, the chain's franchisees were experiencing major losses and announcing they may be forced to shutter their restaurants.

RELATED: 7 Restaurant Chain Bankruptcies That Shook the Industry in 2021

However, the chain has emerged from bankruptcy on December 7, and it's far from the end of the road for the regional darling and its fans. The company said it netted out without any restaurant losses during the pandemic. While it did permanently close three locations in Texas and one in Colorado, it also managed to open four locations across the two states and South Carolina.

And the chain has further growth in the works. Two more locations are scheduled to open early this yearone in Rancho Cucamonga, Calif., and one in downtown Florence, S.C.which will bring the chain's tally to 26 restaurants in total. Additionally, the company has plans to continue growing with six to eight new locations a year, according to a spokesperson.

The chain started as a family affair, founded by Raymond "Griff" Griffin and wife Belinda in Colorado in 2010. The entrepreneurial couple used 100-year-old recipes for gumbos, fried fish platters, and po'boys to develop the chain's menu with a traditional Cajun flair. The first franchisee was onboarded in 2015.

"I never could have imagined that what started out as a fun idea to bring authentic Cajun food and culture to Colorado would grow into such a well-loved brand," said Griffin. "Thankfully, through the support of our corporate team, franchisees, and, most importantly, our guests, we have been able to navigate successfully through COVID-19. Today we are well poised for significant growth in 2022 and beyond."

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This Beloved Seafood Chain Is Making a Comeback After Bankruptcy Eat This Not That - Eat This, Not That

Overview

In Highland Capital Mgmt. v. Dondero (In re Highland Capital Mgmt.), Case No. 21-03007-sgj (Bankr. N.D. Tex. 2021), the U.S. Bankruptcy Court for the Northern District of Texas held that a debtor could not be compelled to abide by an arbitration clause in an agreement that was rejected pursuant to Section 365 of the Bankruptcy Code.

Background

Plaintiff Highland Capital Management L.P. (Highland) originally filed four adversary proceedings to collect on large promissory notes owed to it (collectively, the Note Adversary Proceedings) from the various obligors under the notes (the Note Obligor Defendants). Each Note Obligor Defendant was closely related to Highlands former president, James Dondero, and collectively borrowed tens of millions of dollars from Highland prepetition.

Subsequently, Highland amended its original complaints in each of the Note Adversary Proceedings to add one of its largest limited partners, Dugaboy Investment Trust (Dugaboy), which is a family trust of Dondero, of which the trustee is his sister Nancy Dondero (collectively, the Defendants), and to add new counts alleging, among other things, declaratory judgment as to certain provisions of Highlands limited partnership agreement (the LPA), breach of fiduciary duty, and aiding and abetting breach of fiduciary duty (collectively, the Amended Complaints).

Relying on a mandatory arbitration clause (the Arbitration Clause) in Highlands LPA, the Defendants sought to compel arbitration of the Amended Complaints and stay litigation altogether in the Note Adversary Proceedings pending the arbitration. Notably, the LPA was an executory contract that Highland had rejected pursuant to Section 365 of the Bankruptcy Code. Thus, Highland argued that it was no longer bound by the LPAs provisions that impose specific performance obligations on it such as the Arbitration Clause and may only be responsible for monetary damages.

Opinion

The court agreed with Highland, holding that the LPA was an executory contract duly rejected in its confirmed Chapter 11 plan, and that the Arbitration Clause should likewise be considered a separate executory agreement that was rejected. Id. at 9. Therefore, as the court explained, Highland cannot be forced to specifically perform under the Arbitration Clause or the LPA by mandatorily participating in arbitration of [the Amended Complaints]. Id.

In reaching its decision, the court relied on a district court opinion from the Northern District of Texas and a law review article by Prof. Jay L. Westbrook. See Janvey v. Alguire, 2014 U.S. Dist. LEXIS 193394 (N.D. Tex. Jul. 20, 2014), affd on different grounds at 847 F.3d 231 (5th Cir. 2017) (holding that the court could not require specific performance by the trustee, i.e., to compel arbitration, pursuant to a rejected arbitration agreement); Jay Westbrook, The Coming Encounter: International Arbitration and Bankruptcy, 67 Univ. of Minn. L. Rev. 595 (1983) (an arbitration agreement is like any other executory contract which the trustee may reject). The court distinguished a contrary holding from the Delaware bankruptcy court.

Why This Case Is Interesting

Notably, though not the direct basis for its opinion, the court also found that requiring arbitration would impose an undue and unwarranted burden and expense on the parties to the detriment of Highlands creditors. This decision is important because it preserves the protection afforded to debtors under Section 365 of the Bankruptcy Code by allowing debtors to reject arbitration provisions when doing so is in the best interest of the estate. The court did not address the impact, if any, of the U.S. Supreme Courts most recent decision addressing executory contracts in Mission Products. Interestingly, the court also added that the Defendants waived any right to invoke the Arbitration Clause because of their delay in raising the issue after months of litigation.

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Bankruptcy Court Holds Arbitration Clause Unenforceable When Underlying Contract Is Rejected Pursuant to Section 365 of the Bankruptcy Code - Lexology

Section 11 of Official Bankruptcy Form 105, Involuntary Petition Against an Individual, provides:

Allegation

Each petitioner is eligible to file this petition under 11 U.S.C. 303(b).

The debtor may be the subject to an involuntary case under 11 U.S.C. 303(a).

At least one box must be checked:

[ ] The debtor is generally not paying such debtors debts as they become due, unless they are the subject of a bona fide dispute as to liability or amount.

[ ] Within 120 days before the filing of this petition, a custodian, other than a trustee, receiver, or agent appointed or authorized to take charge of less than substantially all of the property of the debtor for the purpose of enforcing a lien against such property, was appointed or took possession.

Two recent cases have held that an involuntary petition which used Official Bankruptcy Form 105 was legally sufficient to state a claim and, thereby, defeat a motion to dismiss. In re Hammond, 2021 Bankr. LEXIS 2651 (Bankr. S.D. Tex. Sept. 28, 2021); In re Gutierrez, 2020 Bankr. LEXIS 1304 (Bankr. S.D. Miss. May 15, 2020).

The Petitioning Creditor in Hammond used Official Form 105 by checking the applicable boxes to read as follows:

[X] Each Petitioner is eligible to file this petition under 11 USC 303(b).

[X] The debtor may be the subject of an involuntary case under 11 USC 303(a).

[X] The debtor is generally not paying such debtors debts as they become due, unless they are subject of a bona fide dispute as to liability or amount.

On the third page of the involuntary petition, where it is asked to list information about all of the petitioning creditors, the petitioning creditor listed only itself and inserted Matured loans remain unpaid under the heading of Nature of petitioners claim and listed $1,690,359 under the heading Amount of value of any lien.

The alleged debtor filed a motion to dismiss under Federal Rule of Civil Procedure 12(b)(6) challenging the sufficiency of the allegations of the involuntary petition. To defeat a motion to dismiss, Petitioning Creditor must meet Federal Rule of Civil Procedure 8(a)(2)s requirements of a short and plain statement showing that the pleader is entitled to relief. The United States Supreme Court in Ashcroft v. Iqbal, 556 U.S. 662, 678 (2009) stated:

To survive a motion to dismiss, a complaint must contain sufficient factual matter, accepted as true, to state a claim to relief that is plausible on its face. A claim has facial plausibility when the plaintiff pleads factual content that allows the court to draw the reasonable inference that the defendant is liable for them is conduct alleged.

Both Hammond and Gutierrez courts relied on Federal Rule of Bankruptcy Procedure 9009(a), which requires parties to use, without alteration, the Official Forms prescribed by the Judicial Conference of the United States in filing a bankruptcy petition. The Rule states:

The Official Forms prescribed by the Judicial Conference of the United Sates shall be used without alteration, except as otherwise provided in these rules, in a particular Official Form, or in the national instructions for a particular Official Form. Official Forms may be modified to permit minor changes not affecting wording or order of presenting information, including changes that:

Each court denied the motion to dismiss and concluded that the better approach for issues such as those raised by the motion to dismiss was a prompt trial.

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COMPLIANCE WITH OFFICIAL BANKRUPTCY FORM 105 SATISFIES ASHCROFT V. IQBAL - JD Supra

Summary

If a person presents a petition for their own bankruptcy (self-petition), are there any safeguards to ensure that the self-petition is genuine, as opposed to a cynical device by the person to buy themselves time to pay, or to give themselves some negotiating position with their creditors?

This interesting question was considered in a recent Hong Kong judgment.

On 6 December 2021, at a hearing of four debtors petitions (with the neutral citation [2021] HKCFI 3732), the Court dismissed each of the self-petitions on the ground that it constituted an abuse of process.

On 10 December 2021, the Court gave its reasons for judgment, and the judgment gives helpful guidance as to the likely judicial approach when dealing with self-petitions in the future.

The Court considered four debtors petitions which shared a similar fact pattern - Re So Tsz Man (HCB 7033/2020), Re Lee Wing (HCB 7299/2020), Re Tam Wai Yiu (HCB 7569/2020) and Re Qiu Wenjun (HCB 3930/2021)::-

Section 10 of the Bankruptcy Ordinance (Cap. 6) (BO) provides as follows:-

Grounds of debtors petition

The Court emphasised that presenting a self-petition is a serious matter.

When filing a debtors petition for bankruptcy, the debtor is required to complete:-

These procedural requirements under the Forms Rules are designed to ensure that a debtor presents a petition to seek a bankruptcy order only if they (1) are unable to pay a debt and (2) genuinely wish to seek a bankruptcy order.

The statutory purpose of section 10 of the BO is to permit an insolvent debtor to invoke the bankruptcy jurisdiction where they are unable to pay their debts. By invoking the bankruptcy jurisdiction, however, the debtor gives up all their property in return for being freed from the burdens of their debts and, upon discharge from bankruptcy, to make a clean start.

The statutory scheme of bankruptcy is designed to avoid multiple executions and other forms of enforcement against the debtors assets, so as to ensure that all creditors will be dealt with fairly and equitably through the bankruptcy process, and to achieve a fair and orderly distribution of the debtors assets amongst their creditors.

Section 5(3) of the BO provides that the Court has a general power to dismiss or a stay a petition if it appears to it appropriate to do so on the grounds that there has been a contravention of rules or for any other reason.

The Court in Re So Tsz Man indicated that the Court should dismiss a self-petition as an abuse of process if it is shown that the debtor is able to pay their debts.

In the present case, the Court said it was clear that the debtors did not intend to seek genuinely a bankruptcy order from the Court. Instead, they used self-petitions as the means to suspend their obligations to make repayment of the debts and to negotiate with the creditors on the terms of repayment.

The Court emphasised that, it is not open to a debtor to make a request for a bankruptcy order in the self-petition if they do not in fact intend to seek the order when the petition comes to be heard by the Court. If a debtor does not wish the Court to make a bankruptcy order against him, they should not present a self-petition in the first place. Further, it is not the function of a self-petition to allow a debtor to achieve a moratorium with their creditors. The debtor is free to negotiate with their creditors, and does not need to maintain a self-petition to carry on such negotiations.

The Court regarded it was an abuse of process for a debtor to present a self-petition but then to seek to postpone the determination of the petition by not attending the scheduled hearing(s) or by asking for an adjournment for the purpose of negotiating with their creditors.

As a result, the Court in Re So Tsz Man dismissed each of the four self-petitions for being abusive of the Courts process.

The Court expressed the view that it is a matter of concern that many debtors had chosen to present a self-petition, which process comes at a not insignificant cost to the debtor, including (1) a deposit to the Official Receiver pursuant to rule 52(1)(a) of the Bankruptcy Rules (Cap.6A) (currently at $8,000), (2) a filing fee of $1,045 to the Court and (3) other fees which may be charged by the agents or solicitors for assisting the debtor in the preparation and filing of the petition and the statement of affairs.

To ensure that in future debtors will not be misled by others as to the proper purpose of self-petitions, and to prevent further abuse of process, the Court (save in exceptional circumstances ) is likely to adopt the following approach in dealing with self-petitions:

In all of the above scenarios, the costs of the Official Receiver will be borne by the debtor and be paid out of the deposit. The Court reminded debtors who do not wish to seek a bankruptcy order that it will be to their advantage to withdraw the self-petition at the hearing before Master so as to minimise the costs payable to the Official Receiver.

On 10 December 2021 (the same day as the handing down of the reasons for judgment in Re So Tsz Man), the Official Receivers Office (ORO) announced an Important Notice for Petitioner in Bankruptcy Proceedings. The ORO reminded, among others, debtors in self-petition cases and their legal representatives of their duties to ensure their bankruptcy petitions are prosecuted efficiently and expeditiously. Their duties include but are not limited to the following:-

The ORO further reminded potential self-petitioners and their advisers that any petitions presented that (a) are not in compliance with the relevant requirements or (b) amount to an abuse of process (e.g. the bankruptcy proceedings being invoked in an improper manner or for an improper purpose such as using it as a means for negotiation with creditors) are liable to be dismissed by the court with costs ordered against the debtors in self-petition cases.

Re So Tsz Man, together with the OROs announcement, serve as a timely and important reminder that the self-petition is a tool which can employed only be under specific conditions. Debtors should obtain proper legal advice before presenting a self-petition to avoid dismissal of the petition and adverse costs consequence.

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The Hong Kong approach where debtors lodge a petition for their own bankruptcy - how to prevent abuse of process - JD Supra