2009 Chapter 11 Recent Developments (Part I)

protect equity holders' interests. The bankruptcy court is instructed to increase the post-petition interest charged to the highest amount that still permits the Debtors to repay their unsecured creditors in full.

Reasoning: Under Nextwave, section 525 "prohibits the FCC from revoking or canceling a debtor's licenses upon the debtor's failure to make full and timely installments to the FCC." Gabriel's interest survived the FCC's cancellation of the licenses due to the fact that it was an ineffective cancellation under Nextwave. Because the Debtors sold the licenses for $140 million, Gabriel is an oversecured creditor of the Debtors and is entitled to receive postpetition interest at the contract rate. And, because the four factors to equitably reduce the contract rate do not exist, the court reverses the bankruptcy court's reduction of interest rates, which was based on the protection of the interests of the Debtors' equity. The bankruptcy court misapplied Vanston Bondholders Protective Comm. v. Green, 329 U.S. 156 (1946), which allowed a reduction in post-petition interest paid by an insolvent debtor when subordinate creditors would be prejudiced. The Second Circuit has said that Vanston does not apply to contests between a debtor's creditors and its equity holders.

c. Proof of Claim: Allowance, Disallowance and Amendments

Bankruptcy Services, Inc. v. Ernst & Young, et. al. (In re CBI Holding Co., Inc.), 529 F.3d 432 (2d Cir. 2008)

Facts: In August 1994, CBI Holding Co., Inc. and all but one subsidiary (collectively, "CBI") declared chapter 11 bankruptcy. Ernst & Young and Ernst & Young LLP (together, "E&Y"), CBI's prepetition accountants, filed a proof of claim (the "E&Y Claim") in CBI's estate for the payment of auditing and consulting services. Under the plan of reorganization (the "Plan"), Bankruptcy Services, Inc. ("BSI") was appointed as disbursing agent and the successor to CBI's claims. In 1996, BSI sued (the "Complaint") E&Y relating to the services E&Y's rendered CBI prior to the bankruptcy between 1992 and 1994 (the "CBI Claims"). The Complaint alleged seven causes of action. The Plan also assigned the claims of Trust Company of the West ("TCW") to BSI and the Complaint also contained causes of action based on the TCW's assigned claims (the "TCW Claims"). And, lastly, BSI also sued as assignee of an objection to the E&Y Claim filed by the Official Committee of Unsecured Creditors (the "Committee"). On April 5, 2000, the bankruptcy court granted BSI judgment on six of the seven claims. And, later, the District Court for the Southern District of New York affirmed in part and reversed in part (the bankruptcy court's decision that E&Y was not entitled to a jury trial on the TCW Claims was reversed). Later, on E&Y's motion for rehearing, the district court overruled itself and ruled in E&Y's favor on the remaining issues.

Issues:

(1)

Whether the fraudulent acts of CBI's management are imputed to CBI, thereby denying BSI of standing to file the CBI Claims. In other words, whether the fraudulent scheme at the heart of CBI's bankruptcy "was intended solely to benefit its perpetrators personally or whether those perpetrators also had CBI's interests in mind."

(2)

Whether BSI, as assignee of TCW's claims, lacks standing to file the TCW Claims.

(3)

Whether the CBI Claims and the TCW Claims are core proceedings that may be heard by a bankruptcy court under 28 U.S.C. § 157(b).

(4)

Whether E&Y waived its right to a jury trial on the CBI Claims because it filed the E&Y Claim. And, to the extent E&Y has a right to a jury trial on the TCW Claims but not to the CBI Claims, whether, under Lytle v. Household Manufacturing, Inc., 494 U.S. 545 (1990), the CBI judgment needs to be vacated.