2009 Chapter 11 Recent Developments (Part I)

under New York law, to dismiss a claim filed by Kam Chan ("Chan") for an unsecured nonpriority claim (the "Claim"). The Claim alleges that the Debtor owes Chan payments on two promissory notes (the "Notes") that identify the Debtor and Vincent Tomasino ("Tomasino"), the Debtor's principal, as makers and Chan and Robert Yip ("Yip"), who transferred his rights to Chan, as payees. The Notes were executed in connection with Chan and Yip's sale of 70% of their interest in the Debtor to Tomasino for $1.9 million and for payments to be guaranteed by the Debtor.

Issues: Whether the Notes are legally unenforceable for lack of consideration by the Debtor (the sale of the interests were for the benefit of Tomasino) and because any payments that Chan received under the Notes violate § 508 of New York's Limited Liability Company Law (the "NYLLC Law").

Rules:

(1)

"'Absent fraud or unconscionability, the adequacy of consideration is not a proper subject for judicial scrutiny... A benefit to a third party may satisfy the requirement of consideration. As one court found, 'under contract law, a contract is supported by consideration even if the consideration flows solely to a third party.'" "Detriment to a promisee may also satisfy the requirement of consideration."

(2)

NYLLC Law § 508 prohibits distributions to members of LLCs when the LLC is insolvent or the distributions will render it insolvent.

Holding: The Notes are enforceable.

Reasoning: Because the Debtor bargained for a benefit to a third party - Tomasino - such benefit is consideration for the Notes. As to the NYLLC Law, because Chan and Yip sold their stock in the Debtor and resigned their positions in the Debtor, they were no longer members of the Debtor. And, for the same reason, the payments made by the Debtor were not distributions as defined under NYLLC Law § 508. Moreover, the Debtor made the payments as a result of its contractual obligations under the Notes, not as distributions to Tomasino (although the payments benefitted Tomasino) and are not impermissible under NYLLC Law § 508.

Ravin v. Morris Truman, L.L.C. (In re Popular Club Plan, Inc.), 395 B.R. 587 (Bankr. D.N.J. 2008)

Facts: In August 2006, Popular Club Plan, Inc. (the "Debtor") filed for bankruptcy and quickly rejected a commercial lease in which Morris Truman LLC ("Morris") was the lessor. In December 2006, Morris filed a proof of unsecured claim for the damages resulting from the lease rejection in the amount of $2.5 million. Thereafter the parties negotiated and agreed that Morris would be allowed an unsecured claim in the amount of approximately $2.3 million. The court entered a consent order reflecting Morris' reduced allowed claim. The Debtor then confirmed a plan of reorganization. Post-confirmation, the litigation trustee filed this complaint against Morris to avoid and recover preferential transfers in the amount of around $350,000. Morris moved to dismiss the complaint.

Issues:

(1) "Whether a bankruptcy trustee, having agreed with a creditor to a modified, reduced claim, thereby waives his rights to later bring a preference action against that creditor."

Rules:

(1) Notwithstanding the trustee's failure to raise a preference objection to a creditor's claim, the trustee does not waive his rights pursuant to § 502(d).

Holding: the creditor's motion to dismiss the trustee's complaint is overruled.