Commercial Bankruptcy: Selected 2015 Cases Of Interest To Banking And Finance


While bankruptcy filings have been down this past year, the number of decisions of interest for the banking and finance industries continues to remain steady. Hot topics decided continue to relate to bankruptcy court jurisdiction, safe harbors, make-whole premiums, customer status under SIPA and interest calculation. Many of the cases that were decided this year are being appealed to higher courts, ensuring that these topics will remain a focus of attention well into 2016.

We have summarized below some of the top rulings rendered this past year that impact banking and finance. It is not meant to be an exhaustive survey, just a summary of the top opinions you should be aware of as you start the New Year. After reviewing the case summaries, please feel free to reach out to us with any questions you may have. Contact details for members of the Troutman Sanders Bankruptcy Group are at the end of this publication.

Stern Issues - Bankruptcy Court Jurisdiction:

Wellness Int'l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (U.S. 2015).

Reversing the United States Court of Appeals for the Seventh Circuit, the United States Supreme Court held that Article III does not prevent bankruptcy judges from entering a final judgment on Stern claims ("non-core" proceedings) if the parties to the proceeding knowingly and voluntarily consent. This implied consent hinges on whether "the litigant or counsel was made aware of the need for consent and the right to refuse it, and still voluntarily appeared to try the case." Wellness, 135 S.Ct. at 1948. The Court remanded the case to the Seventh Circuit to determine whether the objecting party's actions evinced a requisite knowing and voluntary consent to "forfeit" his Stern argument. This case is extremely important because it lightens the tight restrictions placed on bankruptcy courts by the Court's 2011 decision in Stern v. Marshall (131 S. Ct. 2594 (2011)), where the Court held that Congress violated Article III by authorizing bankruptcy judges to decide claims for which parties are constitutionally entitled to Article III adjudication. In Wellness, the Court held that entitlement to an Article III judge is a "personal right" that can be waived by a party, and that this waiver need not be express. This opinion returns some lost power to the bankruptcy courts.

Lehman SIPA Customer Status Cases:

In re Lehman Bros., 791 F.3d 277 (2d Cir. 2015).

The United States Court of Appeals for the Second Circuit affirmed the decision of the United States Bankruptcy Court for the Southern District of New York, holding that an investor that delivered securities to a broker-dealer as part of a repurchase agreement (repo) did not qualify for treatment as a "customer" under the Securities Investor Protection Act of 1970 ("SIPA").

Several parties had objected to the trustee's position that claims relating to their inability to repurchase securities from Lehman should be categorized as general creditor claims and not customer claims. Under SIPA, only "customers" are entitled to receive a pro rata share of "customer property" insurance protection from the Securities Investor Protection Company ("SIPC"). The Court held that the investor was not a customer under SIPA, because a customer must have "entrusted" assets to the broker-dealer, and the repos at issue did not involve entrustment of assets to Lehman. The Court stated that mere delivery is not entrustment, holding that entrustment "must bear the indicia of the fiduciary relationship between a broker and his public customer." 791 F.3d at 283. "This fiduciary relationship . . . arises out of the broker's obligation to handle the customer's assets for the customer's benefit." Id. Here, the securities were not entrusted to Lehman; instead, they were sold to Lehman. In fact, Lehman had the discretion to do "as it saw fit," even if its interests were adverse to the investor's.

*** CarVal UK Limited filed a petition for a writ of certiorari before the United States Supreme Court on September 25, 2015. The deadline to file responses to the petition is January 19, 2016. This is definitely something to lookout for next year.

In re Lehman Bros., 2015 Bankr. LEXIS 3981...

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