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The Second Circuit handed down a key creditors' rights decision on April 1 in <i>Sharp Int'l Corp. v. State Street Bank &amp; Trust Co. (In re Sharp Int'l Corp. &amp; Sharp Sales Corp.)</i>, 2005 U.S. App. LEXIS 5241(2d Cir. Apr. 1, 2005). The court affirmed the lower courts' finding that a secured lender was not liable for aiding and abetting management's breach of fiduciary duty, and not liable for receiving a $12.25 million loan repayment from a closely held borrower it correctly suspected of engaging in massive fraud. The decision limits the scope of a lender's duties to its borrower and other creditors. Absent the lender's participation in its borrower's fraud, the lender should have no liability on a fraudulent transfer theory or on any other basis, at least in New York, where Sharp arose.

Recent rulings you need to know.

This Special Edition of <i>The Bankruptcy Strategist</i> is devoted entirely to the recently enacted "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," which makes the most sweeping changes to the Bankruptcy Code seen in the last 20 years (although the law does nothing to address some significant issues that have been much debated, such as asbestos, forum shopping, and pension liability). The legislation primarily takes aim at perceived consumer bankruptcy abuses, but will also affect numerous aspects of business bankruptcy practice. This article analyzes key changes to the Bankruptcy Code that will be important to most business bankruptcy participants. Other articles in this issue address in detail the changes related to cross-border insolvencies, executory contracts, financial contracts, investment bankers, and plan exclusivity. Neither we nor the other contributors to this edition have attempted to address the substantial changes affecting only individuals who file for Chapter 11 relief, or changes to the special provisions for "small business" and "single asset real estate" debtors, as those terms are defined in the Code.

Esoteric and arcane, the financial contract provisions of the new Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 -- those dealing with repurchase agreements, securities contracts, swap agreements, forward and commodity contracts -- have been given short shrift by a mainstream media focused on the more "newsworthy" consumer provisions of that legislation. However, to bankruptcy practitioners focusing on larger commercial cases or involved in the capital markets, these amendments are important and deserve a close look.

The major investment banks secured a big win with the Bankruptcy Abuse Prevention &amp; Consumer Protection Act of 2005 (the Act). They quietly convinced Congress to remove the strongest limitation in the Bankruptcy Code (' 101(14)) on a Chapter 11 debtor's employment of an investment banker. That prohibition, in effect since the Depression, had essentially prevented the debtor's retention of a banker for any of the debtor's outstanding securities The securities industry called the statutory ban "anti-competitive."

The filing of a case under Chapter 11 of the Bankruptcy Code bestows certain "inalienable" rights upon a debtor. In addition to the hallmarks of a bankruptcy case, such as the automatic stay's "breathing space" and the "fresh start" of a discharge, debtors have traditionally enjoyed rather protracted periods of "plan exclusivity." Plan exclusivity, as it is commonly referred, is that period in a Chapter 11 case in which the debtor has the "exclusive" right to file a plan of reorganization. With the passage of the amendment to Bankruptcy Code section 1121, Congress has encroached upon this particular "inalienable" right.

After many years of delayed efforts, the Act finally adds a new Chapter 15 to the Bankruptcy Code, which incorporates the provisions of the UNCITRAL Model Law on Cross-Border Insolvency (adopted in May, 1997). Since 1997, strong support has existed in the United States to amend the Bankruptcy Code to modify and apply the Model Law here. However, this non-controversial cross-border amendment was held up by the "all or nothing" approach taken by Congress to the bankruptcy amendments. Eight years later, the United States adapts and adopts the Model Law, which has the goal of harmonizing procedural rules for recognition of foreign insolvency proceedings so that the various countries that enact the Model Law will have generally consistent approaches.

Lessors of commercial property and providers of utility services should benefit from several key changes to the Code. Revisions to Sections 365 and 366 will provide lessors and utilities, respectively, with protections not found in the prior version of the Code.

Last month, we discussed "The Debtor's Nightmare," explaining how the Fourth Circuit joined the Ninth, Third and Eleventh Circuits in adopting the "hypothetical test" in denying a debtor in possession's assumption of an executory contract under section 365 (c) of the Bankruptcy Code despite an express assignability provision in the contract. <i>RCI Tech. v. Sunterra Corp.</i> (<i>In re Sunterra Corp</i>), 361 F.3d 257 (4th Cir. 2004). This month, we continue with "the debtor's paradox."

Under ' 546(e) of the Bankruptcy Code (the so-called "stockbroker defense" to select voidance actions), Congress has exempted from avoidance any "settlement payment" that is made "by or to a commodity broker, forward contract merchant, stockbroker, financial institution, or securities clearing agency, that is made before the commencement of the case," except where the transfer is fraudulent under ' 548(a)(1)(A) of the Bankruptcy Code. 11 U.S.C. ' 546(e). So what exactly is a "settlement payment"? Prior to the BAP decision in <i>In re Grafton Partners</i>, the answer to this question was surprisingly unclear.