Texas Bar Journal • December 2024

Bankruptcy Law

Written by Duston Mcfaul, Maegan Quejada, and Chelsea Mcmanus

Opinions generated this year addressed issues such as governance, avoidance actions, and third-party releases, and settled inconsistencies among circuit courts.

Managerial and Voting Rights Cannot Be Stripped
Parting with previous Delaware court rulings, the Bankruptcy Court for the Southern District of Texas held that an LLC member’s managerial and voting rights are not stripped when a member files for Chapter 11.1 In In re Envision Healthcare Corp., certain members of an LLC argued that the debtor-member’s managerial and voting rights were stripped pursuant to Section 18-304 of the Delaware Limited Liability Company Act, which provides that a person ceases to be a member of an LLC upon that person’s voluntary bankruptcy filing.2 The court determined that there is a direct conflict between Section 541(a) of the Bankruptcy Code and Section 18-304 of the Delaware Limited Liability Company Act. Ultimately, the court held “a member of a Delaware LLC who starts a bankruptcy case keeps all legal and equitable interests in the LLC that it held as of the commencement of the case.”3

Preference Actions Can Be Sold
Agreeing with the 8th and 9th circuits, the U.S. Court of Appeals for the 5th Circuit held “that preference actions may be sold pursuant to 11 U.S.C. § 363(b)(1) because they are property of the estate under 11 U.S.C. §§ 541(a)(1) and (7).”4 In In re South Coast Supply Co., a corporate officer made a prepetition loan to the debtor and was paid a significant portion by the debtor prior to filing. The debtor filed a preference suit on this action and proposed a Chapter 11 plan that sold the preference suit to a secured creditor.5 The 5th Circuit determined that this holding is supported by the clear language of Sections 541(a)(1) and 541(a) (7), as well as the previous rulings in the 8th and 9th circuits.6

Liens Following Uptiering Transactions
In In re Wesco Aircraft Holdings, Inc., movants sought to ratify and validate the debtors previous uptiering transaction that resulted in the subordination and lien stripping of the debtors’ existing pre-exchange notes.7 Ultimately, Judge Isgur determined that existing pre-exchange notes survived the uptier exchange transaction. The debtors’ previously proposed a plan that assumed the uptiering transaction stripped the liens securing the pre-exchange notes; however, due to this ruling, the parties have been in mediation in hopes of a global resolution.

The Supreme Court Weighs in on Nonconsensual
In Harrington v. Purdue Pharma L.P., the U.S. Supreme Court resolved the circuit split on nonconsensual third-party releases, holding that such releases require consent of that third party.8 Following the decision, the Bankruptcy Court for the Southern District of Texas has held that Harringtonv.PurduePharma L.P. does not change the propriety of opt-out mechanisms for releases under Chapter 11 plans as Purdue explicitly only affects nonconsensual third-party releases.9 Yet Judge Everett’s post-Purdue decision in Ebix, Northern District of Texas, concluded that releases based on opt-outs do not sufficiently evidence consent.10

The U.S. Supreme Court also determined that Chapter 11 debtors who paid unconstitutionally higher U.S. trustee fees are not entitled to refunds.11 Looking ahead, the Supreme Court has granted certiorari to decide the circuit split on whether the waiver of immunity in section 106(a) permits a bankruptcy trustee to sue the federal government for receipt of a fraudulent transfer.12

NOTES

1. See In re Envision Healthcare Corporation, Case No. 23-90342 (Bankr. S.D. Tex. Dec. 12, 2023), ECF No. 1915.
2. Del. Code Ann. tit. 6, § 18-304(1)(b) (West).
3. In re Envision, Case No. 23-90342, at *5.
4. Briar Capital Working Fund Capital LLC v. Remmert (In re South Coast Supply Co.), 22-20536, at *15 (5th Cir. Jan. 22, 2024).
5. Id. at 5.
6. Id.at 7-10; InreSimplyEssentials,LLC,78 F.4th at 1011 (“Chapter 5 avoidance actions are property of the estate”); In re Lahijani, 325 B.R. 282, 288 (9th Cir. 2005) (“While there is some disagreement among courts about the exercise by others of the trustee’s bankruptcy- specific avoiding power causes of action, the Ninth Circuit permits such actions to be sold or transferred.”) (first citing In re P.R.T.C., Inc., 177 F.3d 774, 781 (9th Cir. 1999); and then citing InreProf’lInv.Props.ofAm.,955 F.2d 623, 625–26 (9th Cir. 1992)).
7.In re Wesco Aircraft Holdings, Inc., et al. v. SSD Investments Ltd., No. 23-90611, 2024 WL 156211 (Bankr. S.D. Tex. Jan. 14, 2024).
8. Harrington v. Purdue Pharma L.P., 144 S.Ct. 2071 (2024).
0000
9. Memorandum Decision on Plan Confirmation at 27-30, In re Robertshaw US Holding Corp., et al., Case No. 2490052 (Bankr. S.D. Tex Aug. 16, 2024), ECF No. 959.
10. Jul. 30, 2024 H’rg Tr 53:17-55:4, In re Ebix, Inc., Case No. 23-80004 (Bankr. N.D. Tex. Aug. 1, 2024), ECF No. 840.
11.Office of the U.S. Trustee v. Hammons, 144 S.Ct. 1588, 1597-98, 1600-01 (2024).
12. U.S. v. Miller, 144 S.Ct. 2678 (2024).

duston mcfaulDUSTON MCFAUL is a partner of Sidley Austin, leading the Restructuring Practice of its Texas offices, with 27 years of practice since graduating from the University of Texas School of Law and Duke University.

maegan quejadaMAEGAN QUEJADA is a senior managing associate of Sidley Austin. She serves as vice president of communications and publications of the State Bar of Texas Bankruptcy Law Section Council. Quejada is a double Longhorn who clerked for Judge Tony M. Davis in the Bankruptcy Court for the Western District of Texas.

Headshot of jacob mcintosh who is wearing a white shirt, dark red tie and dark suit jacket.CHELSEA MCMANUS is an associate of Sidley Austin, where her practice focuses on both debtor and creditor representations. McManus attended Wake Forest University and Southern Methodist University School of Law.

We use cookies to analyze our traffic and enhance functionality. More Information agree