The Bankruptcy Hotline

The availability of Credit Event Futures is likely to have a significant impact upon future corporate restructurings. Accordingly, The Bankruptcy Strategist intends to publish in its April edition an article discussing the anticipated impact of this event on the restructuring community.

Lease Payment Was Not an Antecedent Debt and Not Avoidable

The Eighth Circuit has affirmed a BAP ruling that a settlement agreement calling for a lessor to pay a lessee more than $46,000 less than two months before the lessor filed a Chapter 11 petition was not made on account of an antecedent debt and therefore, not avoidable as a preferential transfer under ' 547(b). The consideration for the payment in question, the court found, was to buy out the tenant's future lease option to renew for two more three-year terms. Peltz v. Edward C. Vancil Inc. (In re Bridge Information Systems Inc.), Nos. 05-3108, 05-3196 (Jan. 10, 2007).

The defendant in the preference action (brought by the Chapter 11 plan administrator) leased office space in a property owned by the debtor. The lessee was notified that the lessor would not be renewing its existing leases because it needed the building for its own purposes. The lessor offered the lessee nearly $11,000 if it would vacate the premises two months before its unrenewed lease would expire. The lessee rejected the offer and also notified the lessor that it would be exercising the first of two three-year options to renew its existing lease. In turn, the lessor set the market rate for the lease extension at $30 per square foot, double its current value. The lessee disputed the market rate and brought suit in state court, seeking a declaration that its lease continued to be in full force and effect at a fair market rate of between $17.50 and $19.50 per square foot. Eventually, the parties executed a settlement agreement that called for the lessee to receive $61,176 to be paid in two installments: $46,176 upon execution of the agreement, and the second for $15,000 to be delivered when the lessee vacated the premises. The first payment was made and as agreed, the lessee vacated the premises. The second payment was not made, however, because the debtor filed the instant Chapter 11. As noted, an adversary action to avoid the $46,176 payment as a preferential transfer was brought and the bankruptcy court ruled for the Chapter 11 plan administrator. On appeal, the BAP reversed.

On appeal before the Eighth Circuit, the plan administrator argued that the bankruptcy court correctly found that the first installment under the settlement was a preferential transfer because it was made on account of an antecedent debt. Under ' 547, a plan administrator can avoid a transfer on account of an antecedent debt made within 90 days before the filing of a bankruptcy petition, if the debtor was insolvent on the date of the transfer or became insolvent because of it, and if the creditor received more than it would have received in a Chapter 7 liquidation. Here, the parties agreed that all of the elements of section 547(b) were satisfied except that they disputed whether the payment was made on account of an antecedent debt. The appellate court concurred with the BAP's conclusion that the payment was not on account of an antecedent debt, but rather, 'a payment by the landlord to the tenant to buy out the tenant's future option, as provided in its lease, to renew for two more three-year terms.' In distinguishing this case from the 'typical scenario in lessor-lessee preference actions, where a debt is antecedent because the debtor lessee incurred it before making the payment that is allegedly preferential,' the court stated that in these cases, 'the lessee's legal obligation to pay arises each month the lessee fails to pay rent.' But as I was the case here, '[N]o such periodic obligation to pay arises on the part of the lessor.'

Supreme Court to Review Pension Plan Sponsor's Duty Under ERISA

The Supreme Court has agreed to consider the issue of whether a pension plan sponsor's seeking to terminate a pension plan in bankruptcy breached its fiduciary duties under the Employee Retirement Income Security Act when it decided to terminate the plan by purchasing an annuity rather than merging it with another plan (Beck v. PACE Int'l Union, No. 05-1448 (cert. granted Jan. 19, 2007).

In the decision under review, the Ninth Circuit held that a bankrupt employer breached its fiduciary duties under ERISA when it elected to annuitize the pension plans as a method of terminating them instead of pursuing a union's suggestion that the employer merge its pension plans with a multiemployer pension fund. The Ninth Circuit reasoned that under ERISA and its regulations, merger into a multiemployer plan is not a prohibited means of terminating a pension plan, and that the bankruptcy court did not err in concluding that the debtor breached its fiduciary duties by failing to thoroughly consider the union's proposal and discharge its duties in the sole interest of the participants and beneficiaries. The conclusion reached by the Ninth Circuit conflicts with rulings in the Third and Sixth circuits.

CME to Offer Exchange Traded Credit Default Derivatives

On Jan. 31, 2007, the Chicago Mercantile Exchange (CME) obtained regulatory approval from the Commodity Futures Trading Commission to offer the first credit default derivatives that are exchange-traded, centrally cleared and guaranteed. These instruments, known as 'Credit Event Futures,' are intended to provide a transparent, liquid and standardized means of acquiring protection against the risk of the bankruptcy of certain entities selected by the CME based upon such entities' liquidity in the over-the-counter credit default swap marketplace.

The CME anticipates that it will begin offering the first three Credit Event Futures contracts this month. The prices of these contracts are expected to fluctuate based upon traders' expectations of whether the subject company will become a debtor in bankruptcy.

The availability of Credit Event Futures is likely to have a significant impact upon future corporate restructurings. Accordingly, The Bankruptcy Strategist intends to publish in its April edition an article discussing the anticipated impact of this event on the restructuring community.

Lease Payment Was Not an Antecedent Debt and Not Avoidable

The Eighth Circuit has affirmed a BAP ruling that a settlement agreement calling for a lessor to pay a lessee more than $46,000 less than two months before the lessor filed a Chapter 11 petition was not made on account of an antecedent debt and therefore, not avoidable as a preferential transfer under ' 547(b). The consideration for the payment in question, the court found, was to buy out the tenant's future lease option to renew for two more three-year terms. Peltz v. Edward C. Vancil Inc. (In re Bridge Information Systems Inc.), Nos. 05-3108, 05-3196 (Jan. 10, 2007).

The defendant in the preference action (brought by the Chapter 11 plan administrator) leased office space in a property owned by the debtor. The lessee was notified that the lessor would not be renewing its existing leases because it needed the building for its own purposes. The lessor offered the lessee nearly $11,000 if it would vacate the premises two months before its unrenewed lease would expire. The lessee rejected the offer and also notified the lessor that it would be exercising the first of two three-year options to renew its existing lease. In turn, the lessor set the market rate for the lease extension at $30 per square foot, double its current value. The lessee disputed the market rate and brought suit in state court, seeking a declaration that its lease continued to be in full force and effect at a fair market rate of between $17.50 and $19.50 per square foot. Eventually, the parties executed a settlement agreement that called for the lessee to receive $61,176 to be paid in two installments: $46,176 upon execution of the agreement, and the second for $15,000 to be delivered when the lessee vacated the premises. The first payment was made and as agreed, the lessee vacated the premises. The second payment was not made, however, because the debtor filed the instant Chapter 11. As noted, an adversary action to avoid the $46,176 payment as a preferential transfer was brought and the bankruptcy court ruled for the Chapter 11 plan administrator. On appeal, the BAP reversed.

On appeal before the Eighth Circuit, the plan administrator argued that the bankruptcy court correctly found that the first installment under the settlement was a preferential transfer because it was made on account of an antecedent debt. Under ' 547, a plan administrator can avoid a transfer on account of an antecedent debt made within 90 days before the filing of a bankruptcy petition, if the debtor was insolvent on the date of the transfer or became insolvent because of it, and if the creditor received more than it would have received in a Chapter 7 liquidation. Here, the parties agreed that all of the elements of section 547(b) were satisfied except that they disputed whether the payment was made on account of an antecedent debt. The appellate court concurred with the BAP's conclusion that the payment was not on account of an antecedent debt, but rather, 'a payment by the landlord to the tenant to buy out the tenant's future option, as provided in its lease, to renew for two more three-year terms.' In distinguishing this case from the 'typical scenario in lessor-lessee preference actions, where a debt is antecedent because the debtor lessee incurred it before making the payment that is allegedly preferential,' the court stated that in these cases, 'the lessee's legal obligation to pay arises each month the lessee fails to pay rent.' But as I was the case here, '[N]o such periodic obligation to pay arises on the part of the lessor.'

Supreme Court to Review Pension Plan Sponsor's Duty Under ERISA

The Supreme Court has agreed to consider the issue of whether a pension plan sponsor's seeking to terminate a pension plan in bankruptcy breached its fiduciary duties under the Employee Retirement Income Security Act when it decided to terminate the plan by purchasing an annuity rather than merging it with another plan (Beck v. PACE Int'l Union, No. 05-1448 (cert. granted Jan. 19, 2007).

In the decision under review, the Ninth Circuit held that a bankrupt employer breached its fiduciary duties under ERISA when it elected to annuitize the pension plans as a method of terminating them instead of pursuing a union's suggestion that the employer merge its pension plans with a multiemployer pension fund. The Ninth Circuit reasoned that under ERISA and its regulations, merger into a multiemployer plan is not a prohibited means of terminating a pension plan, and that the bankruptcy court did not err in concluding that the debtor breached its fiduciary duties by failing to thoroughly consider the union's proposal and discharge its duties in the sole interest of the participants and beneficiaries. The conclusion reached by the Ninth Circuit conflicts with rulings in the Third and Sixth circuits.