BUSINESS RESTRUCTURING REVIEW

RECENT DEVELOPMENTS IN BANKRUPTCY AND RESTRUCTURING

VOLUME 3 NO. 1 JANUARY 2004

2003: THE YEAR IN REVIEWAfter 2002’s record-breaking volume of business bankruptcies, 2003 was bound to

be a bit of a letdown. Unlike personal bankruptcies, which continued to soar, busi-

ness filings declined nearly 8% in fiscal 2003 (from 39,091 to 36,183), according to U.S.

court officials. At year-end, public company chapter 11 filings dropped from 195 in

2002 to approximately 140, representing a decrease in total aggregate assets under

administration from $382 billion to $97 billion. Electric services provider Mirant Corp.

was the largest public company to file for chapter 11 in 2003. Closely on its heels

were energy producer NRG Energy, Inc. and insurer Trenwick Group Ltd. Rounding

out the top 15 largest public filings in 2003 were three telecoms (Touch America

Holdings, Inc., Leap Wireless International, Inc. and Allegiance Telecom, Inc.), one

retail chain (Speigel, Inc.) and representatives of eight other industries ranging from

oil and gas exploration to chemical production. Jones Day’s global team of restruc-

turing professionals was and continues to be actively involved in most of these

cases and a great many others.

Despite the decrease in filings, bankruptcy courts continued to provide a forum for

airing and attempting to remedy the ills of the beleaguered telecom, airline, health-

care and steel industries. The emergence of MCI, Global Crossing and AboveNet

(formerly Metromedia Fiber Networks) from chapter 11 in 2003 could be a sign that

better days are in store for a telecom industry still reeling from over expansion.

Still, analysts postulate that 2004 promises additional rounds of consolidation and

upheaval as companies scramble to snap up broadband capability and compete for

a share of the lucrative internet telephone market.

IN THIS ISSUE

1 Bankruptcy Strategy

A discussion of strategic considerations highlighted in 2003 ranging from claims trading to critical vendor motions and tax-free asset transfers under a plan of reorganization.

2 Legislative Update

A summary of breaking developments at home and abroad concerning bankruptcy, insolvency and related legislation.

3 Transnational Bankruptcies

As global commerce explodes, so too proliferates the number of cross-border bankruptcy cases, underscoring the need for comprehensive and coordinated judi-cial and legislative infrastructures to deal with them.

4 Noteworthy Decisions in 2003

A brief survey of the most notable court decisions reported in the Business Re-structuring Review in 2003. Review in 2003. Review

2

2003 also galvanized attention to developments abroad, as

European Union member nations and the rest of the world

grappled with a global economic downturn and the need to

reform outmoded insolvency laws to afford some measure

of relief for struggling businesses. Europe, like the U.S., was

tinged with corporate scandal in 2003. Italian dairy giant

Parmalat disclosed massive accounting indiscretions to the

tune of several billions of euros and filed for protection from

its creditors at the end of December with an estimated $9 bil-

lion dollar deficit. The war in Iraq showed that bankruptcy is

a national as well as a business issue: President George W.

Bush tapped former U.S. Secretary of State James Baker to

preside over one of the largest out-of-court debt restructur-

ings ever in an effort to deal with Iraq’s $120 billion national

debt.

We have attempted to keep you abreast of these

and other significant developments in bankrupt-

cy and insolvency during 2003 as they occurred.

This special edition of the Business Restructuring

Review will briefly recap what we believe to be

the most important events. Refer to the Business

Restructuring Review Cumulative Index for 2003 to

find a more detailed discussion of the issues and/or

cases involved.

■ BANKRUPTCY STRATEGY

2003 saw the emergence or continuation of a number of

trends that may affect strategic planning during or in antici-

pation of a bankruptcy case. One of these involved restric-

tions on claims trading. High profile chapter 11 cases involv-

ing foundering corporate giants like United Airlines, Conseco,

Kmart, WorldCom and Enron brought renewed attention in

The prognosis for the airline sector in 2004 isn’t much bet-

ter, notwithstanding U.S. Airway’s successful emergence from

bankruptcy in 2003. Federal loan guarantees issued to U.S.

carriers in the aftermath of the 2001 terrorist attacks did little

to shore up the industry, as tourists and businesspeople alike

thought better of traveling far afield while war and recon-

struction smolders in Iraq. The $2.75 billion scandal at Health

South is widely perceived by experts as merely the tip of an

iceberg that may fully surface in 2004 to plague the troubled

healthcare industry. Finally, consolidation of both the steel

and textile industries continued in 2003, owing in large part

to the efforts of financier Wilbur Ross. International Steel

Group, of which Ross is chairman, became one of the lead-

ing U.S. producers in May of 2003 with its $1.5 billion takeover

of bankrupt Bethlehem Steel Corp. Late in 2003, W.R. Ross &

Co. acquired textile giant Burlington Industries out of chapter

11 for over $600 million.

If 2002 was the year that the nation’s attention turned to cor-

porate responsibility, 2003 was the year that enforcement of

the new rules went into full swing. The headlines were littered

with the continuing sagas of corporate executives whose

indiscretions propelled corporate giants such as Enron,

WorldCom, Global Crossing, Adelphia Communications and

HealthSouth into bankruptcy in the last two years. 2004 may

see the same for companies embroiled in the late-breaking

mutual fund scandal. Perhaps as a testament, albeit belated,

to his foresight, 2003 marked the death of Marvin Bower, a

one-time Jones Day lawyer who more than 50 years before

the enactment of the Sarbanes-Oxley Act in 2002 lobbied for

the creation of restrictions on the ability of auditors to pro-

vide consulting services to the corporations whose books

they were auditing.

Reform was supposed to be the watchword on several fronts

in 2003, but with limited success. For the seventh year in a

row, lawmakers left on the table proposed amendments that

would effect the most sweeping changes to U.S. bankruptcy

law since 1994. The creation of a $10 billion trust to deal with

the spiraling asbestos litigation morass — a subject that also

got a significant amount of press coverage in 2003 — looked

as if it might succeed until negotiations concerning the extent

of contributions and victim recovery broke down late in 2003.

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approach a potential bankruptcy filing and the best means to

preserve ongoing relationships with vendors deemed critical

to the success of a reorganization.

The utility of a bankruptcy case to facilitate the sale of a debt-

or’s property free of otherwise applicable transfer taxes was

the subject of the Third Circuit’s opinion in In re Hechinger

Investment Company of Delaware, Inc. The Court of Appeals Investment Company of Delaware, Inc. The Court of Appeals Investment Company of Delaware, Inc.

ruled that a transfer must be “authorized” by a plan of reorga-

nization to be eligible for the Bankruptcy Code’s tax exemp-

tion. From a strategic viewpoint, the decision is significant

because it limits a debtor’s options in deciding the best

means to derive value from its assets — i.e., by selling them i.e., by selling them i.e.

under a plan or in standalone non-ordinary course sale trans-

actions prior to confirmation.

■ LEGISLATIVE UPDATE

The rocky road to the most comprehensive overhaul of U.S.

bankruptcy laws since 1994 was once again paved with dis-

appointment in 2003. Congress never really took the mat-

ter up seriously this year, after the legislation died on Capitol

Hill in 2002 due to lawmakers’ inability to reach an accord

on a controversial provision in the proposed legislation that

would make certain debts incurred by abortion protesters

nondischargeable in a bankruptcy case. On March 19, 2003,

the House of Representatives resurrected the reforms, but

the measure was not taken up in the Senate as lawmakers

grappled with other legislative priorities, such as funding

the occupation of Iraq and sweeping Medicaid reform, and

looked ahead to next year’s presidential election. A behind-

the-scenes effort in December by Senators Charles Grassley

and Orrin Hatch to attach the measure to the catchall, year-

end bill to fund the government was not successful.

Reporting on legislative developments abroad

affecting bankruptcy, insolvency and restructuring

was a regular feature of the Business Restructuring

Review in 2003.

2003 to the role played by bankruptcy courts in regulating

the multibillion dollar distressed securities industry. This is

so chiefly because a significant volume of trading during a

bankruptcy case can cause the debtor to forfeit tax attri-

butes (e.g., net operating losses) that may be essential to the e.g., net operating losses) that may be essential to the e.g.

success of a reorganization. Debtors intent upon preserving

those attributes have increasingly looked to the bankruptcy

court as a means of limiting and in some cases precluding

stock and claim transfers — so much so, in fact, that NOL

preservation motions are almost routine in large chapter 11

cases.

Another major development during 2003 in the realm of

bankruptcy strategy pertained to “first day” motions. Chapter

11 debtors in large bankruptcy cases routinely seek court

authority at the inception of a case to pay the pre-bankrupt-

cy claims of certain “critical” vendors whose continued rela-

tionship with the debtor is deemed essential to a successful

reorganization. However, notwithstanding the prevalence of

the practice rationalized by the court-fashioned “doctrine of

necessity,” it is not specifically authorized in the Bankruptcy

Code. The absence of express authority led an Illinois district

court to conclude in Kmart Corporation’s chapter 11 cases

that the bankruptcy court erroneously authorized Kmart to

make over $280 million in “first day” payments.

Although the court was not the first to find that such pay-

ments are not authorized by the Code, the payments at issue

were unquestionably the largest ever to be deemed invalid.

Kmart, as it turned out, was able to confirm a plan of reorgani-

zation despite the ruling. Other debtors may not be so lucky.

Courts in the aftermath of Kmart have already begun to train

a more critical eye on routine critical vendor motions. For

instance, in Mirant Corporation’s chapter 11 case, the bank-

ruptcy court ruled that such payments will be authorized only

where the debtor can demonstrate that: (1) a continued rela-

tionship with the creditor is critical; (2) failure to do so creates

the risk of harm or loss of economic advantage to the estate

that is disproportionate to the amount of the creditor’s pre-

petition claim; and (3) there is no practical or legal alternative

by which the debtor can cause the creditor to deal with it

other than by payment of the pre-petition claim. These rul-

ings will undoubtedly cause debtors to rethink the way they

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Canada, Britain, France, Bulgaria, Brazil, Thailand, Italy and

China are among the countries that took steps to overhaul

their insolvency laws in 2003. We will continue to keep read-

ers informed concerning these developments in the Review’s Review’s Review

periodic “Focus Abroad” feature articles. For example, a

detailed comparison of chapter 11 of the U.S. Bankruptcy

Code and the recently enacted U.K. Enterprise Act of 2002

accompanied the October 2003 edition of the Review (vol. Review (vol. Review

2., no. 10). The December edition (vol. 2, no. 12) described

proposed reforms to France’s insolvency laws designed to

establish a legislative framework comparable to chapter 11 of

the U.S. Bankruptcy Code.

■ TRANSNATIONAL BANKRUPTCIES

2003 saw more than its fair share of cross-border bankrupt-

cies involving competing proceedings in the courts of two

or more countries. As commerce continues to go global,

these cases highlight the need for lawmakers throughout

the world to devise a workable framework of rules govern-

ing insolvency proceedings involving companies, creditors

and investors from two or more countries based upon a spirit

of cooperation and mutual respect between and among sov-

ereign nations. U.S. lawmakers’ efforts to rise to this chal-

lenge by enacting new laws specifically designed to apply

to cross-border cases (in a new chapter 15 of the Bankruptcy

Code) once again came to naught when Congress adjourned

for another year without considering proposed bankruptcy

amendments that have long been stalled on Capitol Hill.

The long-heralded European Union Regulation on Insolvency

Proceedings finally became effective in 2002. Much specu-

lation ensued concerning the impact that it would have on

non-EU companies doing business in the EU and vice versa.

Some of the fallout was evident in 2003 based upon bank-

ruptcy/insolvency proceedings involving English and U.S.

companies. BRAC-Rent-a-Car saw a group of companies

incorporated in Delaware but whose operations were con-

ducted almost exclusively in England file parallel bankrupt-

cy cases in the U.S. and the U.K. Regus Group involved an

England-based and registered office property rental com-

pany with extensive operations in the U.S. filing for chapter

11 in the U.S. U.K. ferry operator Cenargo International PLC

and various affiliates filed for chapter 11 protection in the

U.S. in early 2003 even though Cenargo was incorporated in

England and its principal assets consisted of stock in sub-

sidiaries that were largely U.K. companies. Global commerce

means that these kinds of cross-border cases will continue

to proliferate.

NOTEWORTHY DECISIONS IN 2003

2003 did not lack for significant and sometimes troubling

developments in the bankruptcy and appellate courts regard-

ing a host of issues ranging from the scope of a creditor’s

rights in a bankruptcy case to the permissible parameters

of a chapter 11 plan of reorganization. Some of the most

noteworthy decisions that were analyzed in the Business

Restructuring Review in 2003 (in addition to those mentioned Restructuring Review in 2003 (in addition to those mentioned Restructuring Review

in the “Bankruptcy Strategy” section) are briefly discussed

below.

■ USE, SALE OR LEASE OF ESTATE PROPERTY

Asset sales free and clear of competing interests were the

subject of several opinions in 2003. In In re Qualitech Steel

Corp., the Seventh Circuit ruled that such sales are not lim-Corp., the Seventh Circuit ruled that such sales are not lim-Corp.

ited to liens and security interests, but can include a lessor’s

possessory interest under an unrecorded lease despite the

protections afforded to the interests of non-debtor lessees

in the Bankruptcy Code. In In re Trans World Airlines, Inc.,

the Third Circuit Court of Appeals ruled that the Bankruptcy

Code’s free and clear sale provisions apply to employment

discrimination and other successor liability claims. Finally, in

In re WDH Howell LLC, a New Jersey district court held that In re WDH Howell LLC, a New Jersey district court held that In re WDH Howell LLC

a chapter 11 debtor cannot sell real property free and clear

of all liens unless the sales price is greater than the aggre-

gate face value, rather than economic value, of all liens on

the property.

A debtor’s business judgment in deciding to sell assets was

called into question by a New York district court in In re Enron

Corp., where the court vacated a bankruptcy court order Corp., where the court vacated a bankruptcy court order Corp.

approving certain aspects of a sale involving affiliated debt-

ors because it may have been infected by self-dealing. The

finality of an order approving a bankruptcy asset sale was

the subject of the Eighth Circuit’s ruling in In re Trism, Inc.,

where the Court held that a committee’s appeal was moot

because it failed to obtain a stay pending appeal and the

5

aspect of the sale challenged by the committee was integral

to the transaction. In In re M Capital Corporation, the Ninth In re M Capital Corporation, the Ninth In re M Capital Corporation

Circuit bankruptcy appellate panel concluded that the “good

faith” harbor afforded to the buyer of an asset in bankruptcy

is available only if the court expressly includes a finding to

that effect in its order approving a sale on the basis of evi-

dence presented to it.

■ PLANS OF REORGANIZATION

Addressing the “cure” amount controversy to leave a credi-

tor unimpaired by reinstating a defaulted obligation and the

Bankruptcy Code’s dictate that a plan be proposed in good

faith, the Ninth Circuit Court of Appeals held in In re Sylmar

Plaza, L.P. that a plan “crafted solely” to deprive a secured Plaza, L.P. that a plan “crafted solely” to deprive a secured Plaza, L.P.

creditor of a contractual default rate of interest was unobjec-

tionable. The Eighth Circuit bankruptcy appellate panel dis-

cussed the circumstances that warrant extension of the peri-

od during which a debtor has the exclusive right to propose

and solicit acceptances for a plan of reorganization in In re

Hoffinger Industries, Inc., ruling that the bankruptcy court did Hoffinger Industries, Inc., ruling that the bankruptcy court did Hoffinger Industries, Inc.

not abuse its discretion in granting a third extension to the

debtor. In In re Dial Business Forms, Inc., the Eighth Circuit In re Dial Business Forms, Inc., the Eighth Circuit In re Dial Business Forms, Inc.

Court of Appeals ruled that the priority of a secured claim

granted to a creditor under a plan of reorganization vis-

à-vis the claims of other plan creditors was unaffected by

the secured creditor’s failure to file a continuation financing

statement required by applicable state law.

■ CLAIMS AND PROPERTY BELONGING TO THE

BANKRUPTCY ESTATE

Courts were called upon to adjudicate a number of significant

issues in 2003 related to the scope of the bankruptcy estate

and litigation commenced on behalf of the bankruptcy estate

by trustees, chapter 11 debtors-in-possession and other par-

ties. Whether the proceeds of a directors’ and officers’ insur-

ance policy constituted estate property was addressed by

a New York district court in In re Adelphia Communications

Corporation. Addressing a matter of first impression in the Corporation. Addressing a matter of first impression in the Corporation

Second Circuit, the court concluded that the proceeds were

not estate property because the proceeds were payable to

the officer and director beneficiaries under the policy and

the debtor had no interest in them.

In In re ORBCOMM Global, L.P., a Delaware bankruptcy court In re ORBCOMM Global, L.P., a Delaware bankruptcy court In re ORBCOMM Global, L.P.

ruled that public debt must be valued at face value rather

than market value to determine whether the issuer was sol-

vent at the time it made certain allegedly preferential trans-

fers. Standing to sue was the subject of the Second Circuit’s

ruling in In re The Bennett Funding Group, where the Court of In re The Bennett Funding Group, where the Court of In re The Bennett Funding Group

Appeals held that a debtor could not sue its pre-bankruptcy

professionals for malpractice and related claims because a

claim alleging that a third party defrauded a corporation with

the cooperation of management accrues to creditors under

state law.

In In re Metropolitan Electric Manufacturing Company,

a New York bankruptcy court concluded that claims or

causes of action belonging to the bankruptcy estate can-

not be sold to third parties unless the estate benefits from

the sale. The preclusive nature of a stipulated order allow-

ing a claim was addressed by a Delaware bankruptcy court

in In re Cambridge Industries Holdings, Inc., where the court In re Cambridge Industries Holdings, Inc., where the court In re Cambridge Industries Holdings, Inc.

ruled that the allowance of a claim pursuant to an agreement

between the creditor and an entity designated under a plan

of reorganization to resolve claims precluded the commence-

ment of preference litigation against the creditor. Finally, in

In re Farmland Industries, Inc., the Eighth Circuit bankruptcy In re Farmland Industries, Inc., the Eighth Circuit bankruptcy In re Farmland Industries, Inc.

appellate panel ruled that, because the bankruptcy court

never included a specific directive in its retention order that

success fees payable to a committee’s financial advisors

were to be paid from the entire pool of estate assets, such

fees had to be paid with funds that were earmarked for dis-

tribution to the committee’s constituency under the debtor’s

plan of reorganization.

■ CREDITOR’S RIGHTS

2003 saw several noteworthy decisions concerning the scope

of creditor rights in bankruptcy. Perhaps the most significant

of these was the Third Circuit Court of Appeals’ reconsidera-

tion of an issue it had first presided over in 2002. In In re

Cybergenics Corporation, the Court initially ruled that no one Cybergenics Corporation, the Court initially ruled that no one Cybergenics Corporation

other than a trustee or chapter 11 debtor-in-possession can

prosecute an avoidance action on behalf of the bankruptcy

estate. The decision was widely criticized as being con-

trary to the express language of the Bankruptcy Code itself

and bankruptcy practice according to which committees or

individual creditors are commonly authorized to bring litiga-

6

tion on the estate’s behalf. The Third Circuit later vacated its

ruling and agreed to rehear the case in 2003. The upshot

was an abrupt about-face. Observing in its opinion that “the

Code itself anticipates the existence of derivative standing”

and that “derivative standing is a prudent way for bankruptcy

courts to remedy lapses in a trustee’s execution of its fiducia-

ry duty,” the Court of Appeals reaffirmed the continued vitality

of a longstanding bankruptcy practice.

In In re Sunbeam Corporation, a New York district court held In re Sunbeam Corporation, a New York district court held In re Sunbeam Corporation

that the unqualified right of a creditor to intervene in an

adversary proceeding does not confer derivative standing

upon the creditor to prosecute estate claims. The interaction

between a creditor’s obligation to turn over estate property

to a bankruptcy trustee and its right to adequate protection

was the subject of a New York bankruptcy court’s decision

in In re Metromedia Fiber Network, Inc. The court held that In re Metromedia Fiber Network, Inc. The court held that In re Metromedia Fiber Network, Inc.

the creditor’s refusal to surrender collateral violated the auto-

matic stay and that its obligation to do so is not conditioned

upon adequate protection of the creditor’s security interest.

A Massachusetts district court addressed a senior creditor’s

right to post-bankruptcy interest under a subordination agree-

ment in In re Bank of New England Corporation, ruling that In re Bank of New England Corporation, ruling that In re Bank of New England Corporation

the language of a subordination agreement was not explicit

enough to warrant the payment of post-petition interest to

senior creditors before subordinated creditors could receive

a distribution from the estate. A creditor’s right to assign

its claim in a bankruptcy case was the featured issue in

Commodore Holdings, Inc. v. Exxon Mobil Corporation, where Commodore Holdings, Inc. v. Exxon Mobil Corporation, where Commodore Holdings, Inc. v. Exxon Mobil Corporation

the Eleventh Circuit Court of Appeals refused to impute an

assignee’s misconduct to the assignor and emphasized that

assigning a claim is not an unlawful collection practice. In

In re Bethlehem Steel Corporation, a New York district court In re Bethlehem Steel Corporation, a New York district court In re Bethlehem Steel Corporation

ruled that section 503(b) of the Bankruptcy Code is not

the exclusive mechanism for a creditor to recover expense

incurred in connection with a bankruptcy case.

■ EXECUTORY CONTRACTS AND LEASES

Continuing a split among the courts concerning payments

due under a nonresidential real property lease during a bank-

ruptcy case, the Tenth Circuit bankruptcy appellate panel,

in In re Furr’s Supermarkets, Inc., adopted the “proration In re Furr’s Supermarkets, Inc., adopted the “proration In re Furr’s Supermarkets, Inc.

approach” in ruling that a bankruptcy trustee need only pay

as an administrative expense that portion of a commercial

lease obligation that actually “accrues” after the case is filed.

The Seventh Circuit Court of Appeals presided over a similar

case in HA-LO Industries v. Center Point Properties Trust, rul-HA-LO Industries v. Center Point Properties Trust, rul-HA-LO Industries v. Center Point Properties Trust

ing that the proration approach does not apply to ordinary

post-petition rent such that a debtor must pay the monthly

rent due under a lease in full even if it rejects the lease and

surrenders the premises.

In RCC Technology Corp. v. Sunterra Corp., a Maryland district RCC Technology Corp. v. Sunterra Corp., a Maryland district RCC Technology Corp. v. Sunterra Corp.

court chose sides in a conflict that has been smoldering for

15 years, ruling that Bankruptcy Code section 365(c) does not

preclude the debtor from assuming a contract that cannot be

assigned nonconsensually under applicable non-bankruptcy

law.

■ FILING REQUIREMENTS

The Eleventh Circuit Court of Appeals, confronting a debt-

or that engaged in “bankruptcy abuse” by filing to prevent

a purchaser from acquiring property sold by the debtor

before undergoing a change in control, ruled in In re The Bal

Harbour Club, Inc. that the case should be dismissed as hav-Harbour Club, Inc. that the case should be dismissed as hav-Harbour Club, Inc.

ing been filed in bad faith. A creditor’s eligibility to file an

involuntary bankruptcy was broached by the Second Circuit

in In re BDC 56 LLC. There, the Court of Appeals, in a case of In re BDC 56 LLC. There, the Court of Appeals, in a case of In re BDC 56 LLC

first impression, ruled that an “objective” test must be applied

to determine whether an unsecured claim is subject to bona

fide dispute such that its holder cannot qualify as an involun-

tary petitioner.

■ AUTOMATIC STAY

The Second Circuit Court of Appeals ruled in Queenie, Ltd. v.

Nygaard that the automatic stay could be expanded to pre-Nygaard that the automatic stay could be expanded to pre-Nygaard

clude continued litigation against the debtor’s wholly owned

corporation because adjudication of a claim against the

corporation would have an “immediate adverse economic

impact” on the debtor.

■ PROFESSIONALS

In a decision indicative of an emerging trend among courts

assessing the propriety of indemnifying professionals

retained during a chapter 11 case, the Third Circuit Court of

Appeals, in a case of first impression, rejected any per se

ban on indemnifying financial advisors for ordinary negli-

7

gence in In re United Artist Theatre Corp. The Sixth Circuit In re United Artist Theatre Corp. The Sixth Circuit In re United Artist Theatre Corp.

bankruptcy appellate panel also weighed in on professional

retentions in 2003, ruling in In re Airspect Air, Inc., that a bank-In re Airspect Air, Inc., that a bank-In re Airspect Air, Inc.

ruptcy court can revisit its decision to approve the retention

of a professional under a special fee arrangement only if the

arrangement proves to be ill-advised due to circumstances

that could not have been contemplated at the time of the

retention.

A professional’s obligation to disclose potential conflicts

of interest before being retained in a bankruptcy case was

the subject of a New York district court’s ruling in In re Enron

Corporation. There, the court ruled that so long as counsel to Corporation. There, the court ruled that so long as counsel to Corporation.

the creditors’ committee disclosed its connections with other

parties involved in the bankruptcy case, it need not speculate

concerning how those connections might ripen into actual

conflicts that would preclude its employment.

■ ALLOWANCE AND PRIORITY OF CLAIMS

There were several interesting decisions in 2003 regarding

the validity and priority of creditor claims, including the prior-

ity claims of administering a debtor’s bankruptcy estate. In

In re Tama Beef Packing, Inc., the Eighth Circuit bankruptcy In re Tama Beef Packing, Inc., the Eighth Circuit bankruptcy In re Tama Beef Packing, Inc.

appellate panel held that a break-up fee payable to a poten-

tial (but disappointed) assignor under a letter of intent was

entitled to administrative status because it benefited the

estate by allowing the debtor to auction its lease. The prior-

ity of a subrogee’s claim was the subject of a New York dis-

trict court’s opinion in In re Premier Operations Ltd., where the In re Premier Operations Ltd., where the In re Premier Operations Ltd.

court ruled that a creditor’s claims against a debtor cruise

line based upon chargebacks associated with customer

deposits on travel tickets were not entitled to the same prior-

ity as the deposits themselves.

In re FBI Distribution Corporation dealt with the priority of an In re FBI Distribution Corporation dealt with the priority of an In re FBI Distribution Corporation

executive’s claims for severance pay under pre-bankruptcy

employment agreement. In that case, the First Circuit Court

of Appeals held that the executive’s claims would be entitled

administrative priority only if the debtor assumed her employ-

ee agreement after filing for bankruptcy. The consequence

of a post-petition lender’s failure to advance funds under a

final bankruptcy court order was illustrated by In re Visionaire

Corporation, where the 8th Circuit bankruptcy appellate panel Corporation, where the 8th Circuit bankruptcy appellate panel Corporation

held that part of the financing was not entitled to administra-

tive “super-priority” because it was advanced after the expi-

ration of an interim financing order.

Both In re Brown and In re Brown and In re Brown In re EXDS, Inc. dealt with proof of a In re EXDS, Inc. dealt with proof of a In re EXDS, Inc.

creditor’s claim. In the former, the Third Circuit Court of

Appeals ruled that an untimely filed proof of claim would

not be disallowed because a stay relief motion filed by the

creditor qualified as an informal proof of claim. In the latter,

a Delaware bankruptcy court denied a creditor’s request to

withdraw its claim and held that the creditor waived its right

to a jury trial in preference litigation by filing a proof of claim.

■ CONSTITUTIONAL CHALLENGES/POWER OF

BANKRUPTCY COURTS

In Hood v. Tennessee State Assistance Corporation, the Sixth Hood v. Tennessee State Assistance Corporation, the Sixth Hood v. Tennessee State Assistance Corporation

Circuit weighed in on the interaction between the Bankruptcy

Code and a state’s constitutional immunity from suit .

Departing from the majority view, the Court of Appeals ruled

that the Bankruptcy Code’s abrogation of sovereign immunity

is constitutional. The power of a bankruptcy court to treat a

debt obligation as if it were an equity interest was the sub-

ject of an Illinois district court’s opinion In re Outboard Marine

Corporation, where the court ruled that a bankruptcy court Corporation, where the court ruled that a bankruptcy court Corporation

has the inherent power to recharacterize debt as equity not-

withstanding the Bankruptcy Code’s omission of any express

authority to do so.

■ FROM THE TOP

Most of the U.S. Supreme Court’s decisions in 2003 involv-

ing bankruptcy issues dealt with consumer or individual

bankruptcies. However, the Court did address commercial

bankruptcy issues in one case. In FCC v. NextWave Personal

Communications, Inc., the Court held that the Bankruptcy Communications, Inc., the Court held that the Bankruptcy Communications, Inc.

Code prohibited the Federal Communications Commission

from revoking licenses auctioned to a telecommunications

company that later filed for bankruptcy due to the company’s

failure to pay the full amount of the purchase price in a time-

ly manner. The decision reaffirmed the broad scope of the

Bankruptcy Code’s protection of debtors against discrimina-

tory treatment by governmental entities. It also put an end to

protracted litigation that had for many years limited access

to dispute broadband capacity. The repercussions of the

decision were swift but predictable. NextWave was merely

one of many companies that prevailed at auction and later

found that the capital market for telecom development had

dried up. Closely on the heels of the NextWave ruling, the NextWave ruling, the NextWave

Tenth Circuit ruled in In re Kansas Personal Communications

Services, Ltd. that the FCC was barred from taking any action Services, Ltd. that the FCC was barred from taking any action Services, Ltd.

against broadband licenses awarded to the debtor without

first obtaining court authority to do so.

The Court later turned its sights on individual bankruptcies,

ruling in Archer v. Warner that a debt owed under a settle-

ment agreement in which an underlying fraud claim was

released in exchange for an obligation to pay on a promis-

sory note should be considered a debt for money obtained

by fraud such that it is not dischargeable in bankruptcy.

As of this writing, the Court had yet to issue rulings in three

cases that it heard in 2003. In Lamie v. U.S. Trustee, the Court Lamie v. U.S. Trustee, the Court Lamie v. U.S. Trustee,

must decide whether a chapter 7 debtor’s attorney can be

compensated by the bankruptcy estate even though amend-

ments to the Bankruptcy Code in 1994 omitted a debtor’s

lawyer from the list of professionals eligible for compensation

during a bankruptcy case. Three circuits have found the omis-

sion to be a scrivener’s error and continue to allow payment

from the estate; three other circuits have not. The Supreme

Court granted certiorari to resolve the split. On November 3, certiorari to resolve the split. On November 3, certiorari

2003, the Court heard argument in Kontrick v. Ryan, where it Kontrick v. Ryan, where it Kontrick v. Ryan

will decide whether procedural rules creating the deadline for

objecting to a debtor’s discharge in bankruptcy are manda-

tory and jurisdictional, and thus cannot be waived.

The High Court heard argument on December 2, 2003 in Till

v. SCS Credit Corporation. That case involves the “cramdown” v. SCS Credit Corporation. That case involves the “cramdown” v. SCS Credit Corporation

provisions of the Bankruptcy Code, which allow courts to con-

firm a chapter 13 plan even if a secured creditor objects, pro-

vided that the plan allows the creditor to retain its lien on the

collateral and offers the creditor property (usually a stream

of payments) that is not less than the value of the collater-

al. To calculate the amount of the payments, the court must

select an interest rate. Courts have used at least three differ-

ent methods for selecting the rate. Presumably, the Supreme

Court granted certiorari to establish a uniform rule.certiorari to establish a uniform rule.certiorari

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Managing Editor: Mark G. Douglas

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The Supreme Court was also busy in 2003 modifying vari-

ous procedural rules applying to bankruptcy cases. Notable

among the changes to the Federal Rules of Bankruptcy

Procedure that became effective on December 1, 2003. are

certain corporate disclosure requirements. Under the new

rules, a corporate debtor must disclose as part of its bank-

ruptcy filings the identity of any corporation owning 10% or

more of its equity. The amendments contain similar disclo-

sure requirements for a corporation that is party to an adver-

sary proceeding in a bankruptcy case. Other rules have

been modified to reflect the eligibility of multilateral clearing

organizations for bankruptcy relief.