Texas Supreme Court Rejects Repackaging of Professional Claims
Artful Pleading Suffers Smackdown from Texas Supreme Court
On February 21, 2025, in Pitts v Rivas, the Texas Supreme Court finally accepted and applied the “anti-fracturing rule” to professional liability claims. The rule “limits the ability of plaintiffs to recharacterize a professional negligence claim as some other claim – such as fraud or breach of fiduciary duty – in order to obtain a litigation benefit like a longer statute of limitations.”1 This rule shall apply to any professional liability claim. Long recognized by Texas Courts of Appeals – primarily in legal malpractice cases – the Court applied the anti-fracturing rule in an accountant’s malpractice case.
BackgroundIn Pitts, a former client alleged multiple causes of action including fraud, breach of fiduciary duty, and breach of contract, as well as negligence, gross negligence, and professional malpractice against a group of accountants. On summary judgment, the accountant defendants argued the negligence claims were barred by Texas’s two-year limitations statute, and the fraud, contract, and fiduciary duty claims were barred by the anti-fracturing rule. The accountant defendants also claimed the breach of contract action was barred by Texas’s four-year limitations. The trial court granted summary judgment and dismissed the suit. The Court of Appeals disagreed regarding dismissal of the fraud and fiduciary duty claims and allowed them to proceed. The Texas Supreme Court reversed and held that under the undisputed facts, there was no viable claim for breach of fiduciary duty, and the fraud claim was barred by the anti-fracturing rule.
The Texas Supreme Court explained that the anti-fracturing rule limits plaintiffs’ attempts “to artfully recast a professional negligence allegation as something more – such as fraud or breach of fiduciary duty – to avoid a litigation hurdle such as the statute of limitations.”2 The Court cautioned that it is the “gravamen of the facts alleged” that must be examined closely rather than the “labels chosen by the plaintiff.”3
If the essence, “crux or gravamen of the plaintiff’s claim is a complaint about the quality of professional services provided by a defendant, then the claim will be treated as one for professional negligence even if the petition also attempts to repackage the allegations under the banner of additional claims.”4 To survive application of the rule, a plaintiff needs to plead facts that extend beyond the scope of what has traditionally been considered a professional negligence claim.5
In Pitts, the gravamen of the claims was that the accountants made accounting errors that eventually were fatal to the Rivas’s business, resulting in its bankruptcy. Although certain the accountants’ alleged errors occurred outside of the confines of their engagement agreement, the Court noted those errors still fell within the work that an accountant might generally perform for a small business. “The rule extends to any allegation that traditionally sounds in professional negligence[.]”6 The thrust of the claim based upon the facts was that the accountants were allegedly merely negligent in providing competent accounting services, which did not fall within a breach of fiduciary duty or fraud.7
AnalysisIn dissecting the difference between fraud and negligence, the Court noted that “[o]verstating one’s professional competence is a classic example of malpractice.”8 While the accountants realized their mistakes, failed to confess hoping “nothing would come of it,” and “finally suggested ways to hide them,” the Court noted that there was no evidence that the accountants were “engaged in a fraudulent scheme” against the business and its owners or intended in any way to harm them.9 Indeed, the actual harm to the business was due to the accounting errors made by the defendants and not from any misrepresentations associated with those errors.10
With respect to the claim for breach of fiduciary duty, the Court held that whether the anti-fracturing rule was applicable, no fiduciary duty existed as a matter of law.11
___________________________________________________________________________________________________________
1 Pitts v Rivas, 2025 Tex. LEXIS 131 *1 (Tex. 2025).2 Id. at *6-7.3 Id. at *7.4 Id.5 Id. at *8.6 Id. at *12.7 Id. at *13-14.8 Id.at *14.9 Id. at *14-15. 10 Id. at *15.11 Id. at *17.
MIDDLE EAST: New Saudi Netting Regulation Creating a Buzz
There was a buzz during the joint association conference in Riyadh, Saudi Arabia on the 19 February. A collaboration by ISDA, ISLA and ICMA, the industry associations representing parties that enter into transactions such as derivatives, securities lending and repurchase transactions, is indeed unusual.
However, it was the introduction two days prior, on the 17 February, by the Saudi Central Bank (SAMA) of the Close-out Netting and Related Financial Collateral Regulation that caused the excitement. It is effective from that date. The regulation establishes the enforceability of netting agreements and related financial collateral arrangements with SAMA supervised entities, particularly in the event of a failure by one of the parties to such transactions. The primary objective is to ensure that the contractual provisions of netting agreements are enforceable both inside and outside bankruptcy proceedings, reducing credit risk exposure and enhancing financial stability.
The impact of this regulation on cross-border transactions and business in Saudi Arabia is significant. By streamlining the process of settling obligations between defaulting and non-defaulting parties, the regulation reduces the risk and uncertainty associated with financial transactions. Firms can now engage in transactions with greater confidence, knowing that their netting agreements will be upheld even in the event of a default.
The next step is for the associations to publish legal opinions that support the enforceability of close out netting provisions, in their published agreements, on a cross-border basis. These annual opinions are published globally. Parties rely on these opinions to reduce credit risk exposure and, where applicable, reduce their regulatory capital requirements. Publication will provide the ‘green light’ for financial institutions to commence trading of such transactions on a greater scale. This development can certainly be regarded as another step in Saudi’s Vision 2030 to become a global investment powerhouse. Hence the buzz.
Weekly Bankruptcy Alert February 24, 2025 (For the week ending February 23, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Because your business extends beyond the borders of a single state, ours does too. Today, we are a multi-disciplinary team of highly creative, hard working, responsive, business savvy and experienced bankruptcy and creditors’ rights professionals serving you from offices located in four New England states and the District of Columbia.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Nikola Corporation2(Phoenix, AZ)
Motor Vehicle Manufacturing
Wilmington(DE)
$500,000,001to$1 Billion
$1,000,000,001to$10 Billion
2/19/25
Elfand Organization LLC(New York, NY)
Not Disclosed
Manhattan(NY)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/18/25
DanPowr64 LLC(Salem, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/19/25
679 Columbia Realty, LLC(Franklin, MA)
Residential Building Construction
Worcester(MA)
$0to$50,000
$0to$50,000
2/19/25
JW Realty Holdings LLC(Monroe, NY)
Activities Related to Real Estate
Poughkeepsie(NY)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/20/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Sky Properties LLC(Providence, RI)
Not Disclosed
Providence(RI)
$100,001to$500,000
$500,001to$1 Million
2/20/24
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include Nikola Properties, LLC, Nikola Subsidiary Corporation, Nikola Motor Company LLC, Nikola Energy Company LLC, Nikola Powersports LLC, Nikola H2 2081 W Placentia Lane LLC, 4141 E Broadway Road LLC, Free Form Factory, Inc., and Nikola Desert Logistics LLC.
TMA Chicago/Midwest Podcast Hosted by Paul Musser | Jonathan Weinberg on Private Credit and the Importance of Early Intervention in Workouts [Podcast]
In the latest TMA Chicago/Midwest podcast episode, host and Insolvency and Restructuring Partner Paul Musser sat down with Jonathan Weinberg, Co-Head of the Portfolio Group at Monroe Capital LLC. Together, they discussed Jonathan’s career path in restructuring, comparisons and contrasts between private credit and traditional bank lending horizons, and the importance of early intervention in workouts. Jonathan also noted highlights from his involvement in the Turnaround Management Association (TMA) as well as the benefits of building one’s network and fostering relationships within the restructuring community.
Jonathan explained that his career began in investment banking, where he developed a keen interest in capital structures during the subprime mortgage boom. This experience led to his transition into restructuring and distressed investment banking, where he found fulfillment in using his deep understanding of capital markets to solve complex financial issues. Jonathan said that in his role at Monroe Capital, early intervention and proactive management have been instrumental in leading strategies for stressed credits.
Paul and Jonathan went on to discuss comparisons and contrasts between private credit and traditional bank lending, particularly in terms of flexibility and decision-making. Jonathan explained that private credit lenders such as his firm have more leeway in managing stressed and distressed situations due to fewer regulatory constraints, as compared to traditional banks. This flexibility allows them to engage in creative solutions, including taking equity positions or working closely with sponsors to navigate financial challenges. In any workout, both Jonathan and Paul emphasized the value of maintaining strong borrower relationships in order to foster collaborative problem-solving.
Finally, Jonathan shared takeaways from his experiences as a member of the TMA organization and how it fostered his own professional growth and business development. He underscored the value of building relationships with industry peers across different functions, such as legal, financial advisory and lending. He encourages professionals at the beginning of their restructuring careers to proactively foster their skills and networks, as such connections can be crucial when seeking guidance on complex distressed or financial situations.
The Nuts and Bolts of a Chapter 11 Plan
Editors’ Note: Most business people, finance professionals, and even attorneys have no more than a passing familiarity with bankruptcy. If your company is (or you, personally are) having financial difficulties, then bankruptcy may be an option (although there are other options). A business and its owner/senior executives often have two types of bankruptcy available to them: Chapter 7 and Chapter 11. Chapter 13 is also available to individuals but there are limits that apply that commonly make the option unavailable to business owners.
The word ‘Chapter’ refers to how the US Bankruptcy Code is organized: Chapter 7 is titled “Liquidation” and Chapter 11 is titled “Reorganization.” The title of Chapter 11 is, however, misleading because one (a company or a person) who files Chapter 11 can use it to reorganize or liquidate. In either case, a ‘successful’ Chapter 11 usually — but not always — involves the confirmation of a Chapter 11 plan.
Chapter 11 bankruptcy serves as a vital mechanism for businesses aiming to restructure their debts and continue operations. This article delves into the intricacies of Chapter 11 plans, highlighting the process, key participants, and essential elements for successful reorganization.
What Is a Chapter 11 Plan?
A Chapter 11 plan is essentially a contract — a legally binding document that dictates how a company will distribute its assets and/or equity in itself to satisfy its financial obligations. Once approved by a bankruptcy court, the plan dictates how creditors are repaid and how the company will proceed financially.
Evan Hill, a partner at Skadden, Arps, Slate, Meagher & Flom, describes it as a roadmap that lays out how creditors will be treated and how the company will be structured post-bankruptcy. Once confirmed by the court, the plan becomes binding on all parties involved.
Initially, the debtor (the business filing for bankruptcy) has the exclusive right to propose a plan for the first 120 days after filing. This exclusivity period can be extended or challenged by creditors if they believe the debtor isn’t making sufficient progress.
Key Players in a Chapter 11 Case
There can be many parties involved in a Chapter 11 plan, often with different or competing motivations:
The Debtor: The company (or individual) filing for bankruptcy, aiming to restructure debt and continue operations or to sell its assets for the highest price possible to repay creditors as much as possible.
Secured Creditors: Lenders with collateral, such as banks holding a mortgage.
Unsecured Creditors: Suppliers, vendors, or litigation claimants without collateral. Their interests vary widely depending on their relationship with the debtor.
Equity Holders: Shareholders who are at the bottom of the distribution hierarchy.
The US Trustee: A branch of the US Department of Justice ensuring the process is fair and compliant.
The Bankruptcy Judge: The final authority who confirms or denies the Chapter 11 plan.
David Wood, a partner at Marshack Hays Wood, notes that secured creditors usually just want to get paid, while unsecured creditors may have business interests beyond just repayment.
Creating a Chapter 11 Plan
Some companies enter bankruptcy with a pre-negotiated plan in place, which can expedite the process. Others develop their plans during the bankruptcy case through negotiations with creditors.
Matt Christensen, a partner at Johnson May, explains that the more a debtor can pre-negotiate with major creditors, the smoother the process tends to be. Otherwise, the debtor may face competing plans from creditors who have their own ideas about how the company should be restructured. In smaller cases, debtors often draft a plan after filing, once they have a clearer picture of their financials and creditor positions.
Key Requirements for Plan Confirmation
To be confirmed by the court, a Chapter 11 plan must meet several legal requirements under Section 1129 of the Bankruptcy Code:
Feasibility: The plan must be realistic and demonstrate that the reorganized company can survive.
Good Faith: The plan must be proposed in a fair and honest manner.
Best Interests Test: Creditors must receive at least as much as they would if the company were liquidated under Chapter 7.
Impaired Class Acceptance: At least one class of impaired creditors must vote in favor of the plan.
Cramdown Provisions: If not all creditors agree, the plan can still be confirmed if it meets certain fairness criteria.
Christensen notes that Subchapter V of Chapter 11, which smaller businesses can opt into, have fewer hurdles and allow for debtor-friendly provisions like the elimination of the absolute priority rule.
The Role of the Disclosure Statement
In traditional Chapter 11 cases (but not in Subchapter V cases), the court must approve a disclosure statement before a plan can move to a vote. In some cases, debtors seek conditional approval to streamline the process. A disclosure statement, which accompanies the Chapter 11 plan, provides detailed information for creditors. Creditors and other interested parties need to understand what they’re voting on. A disclosure statement lays out the financial situation, how debts will be treated, and why the plan is viable.
Voting and Confirmation Process
Once the disclosure statement is approved, creditors vote on the plan.
Acceptance: A class of creditors approves if two-thirds in amount and more than half in number vote in favor.
Cramdown: If certain classes object, the court can confirm the plan anyway, provided it is fair and equitable.
Wood emphasizes that this is where negotiation skills come into play. The process of building consensus can go more smoothly with more buy-in upfront.
Reorganization vs. Liquidation Plans
Not all Chapter 11 cases aim to keep a company operating. Sometimes, a debtor files a liquidation plan, which outlines how assets will be sold to maximize creditor recovery. Hill points out that liquidation plans don’t typically grant the debtor a discharge from debts, making them different from reorganization plans.
Understanding Key Legal and Financial Considerations in Chapter 11
1. Debtor-in-Possession (DIP)
In Chapter 11 cases, the debtor often continues to operate the business as a ‘debtor-in-possession’ (DIP). This means that the debtor retains control of assets and business operations during the bankruptcy process, without the appointment of a trustee. The DIP has fiduciary duties to creditors and must operate within the confines of the Bankruptcy Code.
2. Automatic Stay
Upon filing for Chapter 11, an automatic stay is enacted, which halts all collection activities, foreclosures, and lawsuits against the debtor. This provision provides the debtor with temporary relief from creditors, allowing time to propose a reorganization plan.
3. Priority Claims
Certain creditors have priority claims under the Bankruptcy Code, meaning they are entitled to be paid before general unsecured creditors. Priority claims include certain tax obligations, employee wages, and administrative expenses incurred during the bankruptcy process.
4. DIP Financing
Businesses in Chapter 11 may require financing to continue operations during the bankruptcy process. DIP financing allows debtors to secure new loans, often with court approval, giving these lenders priority repayment status.
Final Thoughts
Although the confirmation process commonly takes place long after the filing of the Chapter 11 case, it is typically critical to consider the strategy for confirmation before filing the case.
To learn more about this topic view The Nuts & Bolts of Chapter 11 (Series I) / The Nuts & Bolts of a Chapter 11 Plan. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about Chapter 11.
This article was originally published on here.
©2025. DailyDACTM, LLC. This article is subject to the disclaimers found here.
Risky Business: Distressed Companies and Payments in the Shadow of Bankruptcy
Doing business with a customer in the shadow of bankruptcy is risky.
A hallmark of bankruptcy law is equal treatment of similarly-situated creditors. The Bankruptcy Code frowns upon a debtor who, while insolvent, pays some creditors but not others in the run-up to bankruptcy – whether voluntarily or due to pressure. Under the Bankruptcy Code, payments by an insolvent debtor to creditors in the 90 days before bankruptcy, on account of an antecedent debt, are presumptively avoidable. That means if you get one of these “preference payments,” you may be forced to return it.
There are, however, defenses to a preference payment, one of which is the “ordinary course of business” defense. A recent decision from a bankruptcy court in Delaware provides an illuminating case study on behavior that will and won’t be considered “ordinary course.” In doing so, it educates companies on best practices in dealing with a customer headed towards bankruptcy and suggests the likelihood that a bankruptcy court would order you to disgorge preference payments you received.
The Delaware case involved Fred’s, a chain of retail stores like Dollar General. C.H. Robinson provided transportation and logistics to Fred’s under a $3 million credit line. Fred’s was required to pay invoices within 30 days. When Fred’s started closing stores and struggling to make payments, C.H. Robinson tightened the credit terms by reducing the credit line to $1.75 million and then $1 million. C.H. Robinson also warned Fred’s that it would not ship Fred’s product if Fred’s did not pay to catch-up on past-due invoices. C.H. Robinson also threatened to reduce the credit terms to a 14-day payment on invoices.
Fred’s ultimately filed bankruptcy and confirmed a liquidating plan. The court-appointed liquidating trustee sued C.H. Robinson to recover 15 payments totaling over $3.4 million it received from Fred’s during the 90-day preference period.
In defense, C.H. Robinson raised the “ordinary course” defense. They argued that it was standard practice in the transportation and logistics industry to tighten credit limits based on changes in a client’s financial status and predicted future performance, so any payments resulting from that tightening were in the “ordinary course of business.”
The Bankruptcy Code requires the recipient of a preference payment to show that the debt itself was incurred in the ordinary course of the business of both parties and that the payment of that debt was (a) made in the ordinary course of the business of both parties (what is sometimes described as the “subjective” test) or (b) made according to ordinary business terms (the “objective” test). The phrase “ordinary business terms” in the objective test looks to the general norms of the creditor’s industry.
The Court stressed that “ordinary course” and “ordinary business terms” mean conduct that is ordinary when dealing with a healthy company. “Ordinary course” does not apply to how either the defendant or the industry treats a distressed company. Thus, preference payments made under a payment plan are not “ordinary course,” nor are payments resulting from pressure tactics. The relevant yardstick is a healthy debtor, not a distressed one.
The upshot is that “ordinary course” means business as usual. A distressed debtor can pay you the way they always paid you. But if the distressed debtor singles you out as special among all his creditors and brings your past-due obligation current before bankruptcy, it might not be ordinary course. And if you resorted to a demand letter, threat, workout agreement, or full nelson to get the distressed debtor to cough up his payments, then it’s probably not ordinary course.
Doing business with a distressed debtor can pose a dilemma for companies. When faced with this situation, seek all the financial information you can get your hands on to understand the debtor’s situation. Continuing to provide the debtor credit or goods and services under ordinary terms may save it from bankruptcy. And if they stop paying you, you can do everything allowed under your contract to collect. But you need to be prepared for a preference claim if the debtor files bankruptcy.
Weekly Bankruptcy Alert February 17, 2025 (For the Week Ending February 16, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Splashlight Holding LLC(New York, NY)
Not Disclosed
Manhattan(NY)
$50,000,001to$100 Million
$50,000,001to$100 Million
02/12/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
Westford ILKB, LLC(Westford, MA)
Not Disclosed
Worcester(MA)
$0to$50,000
$100,001to$500,000
02/13/25
Camston Wrather LLC2(Fort Lauderdale, FL)
Remediation and Other Waste Management Services
Wilmington(DE)
$10,000,001to$50 Million
$100,000,001to$500 Million
02/13/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: Camston Wrather Sub Co., LLC, Camston Wrather Plants Co., LLC, Camston Wrather Management Co., LLC, Camston Wrather Tech Co., LLC, Camston Wrather Lab Co., LLC, Stream Recycling Solutions, LLC, Stream Recycling Solutions of California, LLC, Camston Wrather (PA) LLC, Camston Wrather (TX) LLC, Three D Security, LLC, Camston Carlsbad, LLC, and Camston Carlsbad Asset I, LLC.
Independent Manager Consent Requirement Upheld
Recently, the Bankruptcy Court for the Northern District of Illinois issued an opinion in In re 301 W N. Ave., LLC, dismissing a debtor’s bankruptcy filing for lack of proper authority to file and discussing the considerations for enforcing a requirement that an Independent Manager approve a bankruptcy filing for a Delaware limited liability company. 2025 WL 37897 (Bankr. N.D. Ill. 2025). The opinion is consistent with “Authority to File” opinions regularly provided in structured finance transactions involving Delaware LLCs that have Independent Managers whose consent is required to file bankruptcy. Practitioners should be aware of the Bankruptcy Court’s analysis concerning LLC agreements and may want to update future Authority to File opinions to reference this case.
Case Background
On January 6, 2025, the Bankruptcy Court dismissed a chapter 11 bankruptcy case, holding that the Debtor, which was organized as a Delaware LLC, lacked the requisite authority to file its bankruptcy petition under Delaware law. Prior to the bankruptcy filing, the Debtor entered into a $26 million secured Loan Agreement, which required the appointment of an Independent Manager. The Loan Agreement further required that the Debtor’s governing documents require the Independent Manager to consent to certain significant business decisions, including whether to authorize the Debtor to file bankruptcy. The Debtor’s LLC Agreement complied with the Loan Agreement’s requirements. The Debtor’s LLC Agreement also required the Independent Manager to consider the interests of the Debtor, including the Debtor’s creditors, when making any significant business decision, including any decision to file bankruptcy. Id. at *11. Nevertheless, the Debtor filed bankruptcy without the Independent Manager’s consent.
The Debtor’s lender filed a motion to dismiss the bankruptcy case, arguing that the Debtor lacked authority to file the bankruptcy petition because it failed to obtain the Independent Manager’s consent, as required by the LLC Agreement. The Bankruptcy Court agreed. The Bankruptcy Court first noted that under Delaware law, an LLC can act only through the authorization provided by its operating agreement, and that here, the LLC Agreement required the consent of the Independent Manager to file a bankruptcy petition. Id. at *7. As a result, the Bankruptcy Court concluded that the Debtor lacked the proper authority to file.
The Bankruptcy Court next considered whether the LLC Agreement impermissibly restricted the Debtor’s right to file bankruptcy. In this case, the LLC Agreement required the Independent Manager to consider only the interests of the Debtor, including the Debtor’s creditors, when deciding whether to file bankruptcy. Id. at *11. The LLC Agreement also expressly instructed the Independent Manager not to consider the interests of other third parties, including affiliates or groups of affiliates, when exercising its decision-making authority. Id. at *12. Although the Debtor argued that these provisions constituted an inappropriate restriction on the Debtor’s ability to file bankruptcy, the Bankruptcy Court concluded that restricting or eliminating the Independent Manager’s duties to the Debtor’s affiliates or groups of affiliates was “entirely consistent with Delaware law and cannot be construed to contravene public policy.” Id. at *12. After concluding that the LLC Agreement did not impermissibly restrict the Independent Manager’s obligation to consider the Debtor’s interests, and having already concluded that the Independent Manager did not consent to the bankruptcy, the Bankruptcy Court granted the motion to dismiss.
The Debtor appealed the Bankruptcy Court’s decision (appeal pending).
Potentially Updating Authority to File Opinions
Authority to File opinions are legal opinions provided in many structured finance transactions that address whether, under the terms of the applicable LLC agreement, the requirement that an Independent Manager consent to a bankruptcy filing of the LLC would be governed by state law, and not federal law. In other words, Authority to File opinions address whether a provision requiring an Independent Manager to consent to a bankruptcy filing would be preempted by federal law as an impermissible restriction. Authority to File opinions are only provided for LLCs because the law regarding corporations and partnerships is well settled.
The language in the 301W N. Ave Debtor’s LLC Agreement concerning what the Independent Manager should, and should not, consider is similar to language used in many LLC agreements that are subject to Authority to File opinions. In particular, since the In re General Growth Properties, Inc. bankruptcy case in 2009, many LLC agreements provide that Independent Managers should consider only the interests of the LLC, including its creditors, in deciding whether to consent to a bankruptcy, and should not consider the interests of affiliates or groups of affiliates. As the Bankruptcy Court here expressly analyzed such a provision, practitioners may want to update their Authority to File opinions to specifically reference 301 W N. Ave.
Conclusion
301 W N. Ave re-affirms the validity of LLC agreement provisions requiring an Independent Manager’s consent to file bankruptcy when the Independent Manager is required to consider the interests of only the LLC, including its creditors, and not the interests of the LLC’s affiliates or groups of affiliates. Accordingly, 301 W N. Ave also re-affirms the analysis used in Authority to File opinions in structured finance transactions.
Are you Making Progress? The Scottish Court Provides Helpful Pointers to English Administrators Seeking to Extend on the Content of Progress Reports
Although the case of Anthony John Wright and Alastair Rex Massey vs. Scottish Court of Session [2024] CSOH 105 is (as the name suggests) a Scottish decision, there are several takeaways from the case relating to the content of progress reports, which could usefully be applied and followed by English practitioners when making their own application. Not least, because of the words of warning from the judge:
“It is important that administrators and their advisers bear in mind that an extension of an administration should never be applied for, or granted, as a matter of formality. It is not uncommon for the court to encounter cases where serial applications have been made, often on (literally) the same grounds from 1 year to the next, with no discernible sign of progress being made; and of course, if there is an expectation that extensions will be granted without difficulty, there is a danger that administrators will not be incentivised into completing the administration within the existing deadline, confident that another one will be along in the fullness of time“
This case concerned an application to extend an administration that had originally commenced on 19 November 2020 and had been extended on three previous occasions. The court was keen to understand what progress had been made, that creditors had been informed of the application and given a chance to object and that the extension period was the appropriate length.
Despite the warning above the judge acknowledged that this administration was complex and did not fall into that category and was prepared to take at face value the assertion that further time was required to conclude the administration, despite some misgivings about the information in the progress reports.
Progress Reports
Typically, when making an application to extend, an administrator will rely on the last progress report to evidence what work has been undertaken and what additional work is still to be done.
However as noted by the judge it is not uncommon to see applications to extend made on the same grounds from one year to the next – and this is something which we also see in applications made before the English courts. That is not to say that an extension will not be granted where the reasons for the extension are the same, but there are some helpful lessons from this judgment which could usefully be utilised by English practitioners.
Evidence of progress following previous extensions
In this case the judge said that at the very least, when a previous extension has been granted on essentially the same grounds, the administrators should explain why they have been unable to complete the outstanding steps in the time available.
The judge extracted a few examples from the progress reports where it was not obvious (without further explanation) why it had taken the administrators more than four year to complete the work:
reconcile issues with a small number of trade suppliers,
interrogate the company’s records,
continue investigations into the affairs and transactions of the company, as well as the conduct of directors,
continue liaising with the purchaser’s finance and property teams,
review and deal with any third-party assets.
Each time an extension had been requested the progress reports had listed much of the same work that needed to be completed and the same, or similar wording appeared in the reports.
That is not to say that an extension won’t be granted when the reasons for an extension are the same, but the court was critical of the fact that year on year the same statements were used in the progress report to explain what work was still to be done. For example, this statement was repeatedly given:
“The Administrators’ trading account is not yet complete due to unreconciled positions with several of the cash processing providers and trade suppliers alike. It is envisaged that all these matters will be finalised in the next reporting period“
The same or similar wording appeared in multiple reports and the judge said that repeating the expression that it was envisaged that “these matters” will be finalised in the following reporting period was starting to sound “somewhat hollow”.
The underlying message was that a progress report should evidence what progress had been made in the last period and simply tweaking a report without giving meaningful updates and explanations is unsatisfactory – becoming more so, the longer the administration continues.
Statutory Tasks
In this case multiple reasons were given to support the extension including finalising “all costs associated with the administration” and attending to and completing “all statutory and administrative matters necessary for completion of the administration”. The judge noted that those tasks are applicable in any administration, and to say that they are outstanding does not really go any way towards explaining why an extension is necessary.
Regardless of whether an application is made before an English or Scottish court it would be unusual to rely on these as the only reasons for an extension, but clearly as the judge’s comments indicate, more is required to justify an extension than statutory tasks that a practitioner can be expected to undertake as a matter of course.
Information to creditors
The process and expectations of the Scottish courts in dealing with an administration extension are different, compared to English practice and procedure – the Scottish courts expect unsecured creditors to be notified of the application and to be given an opportunity to object even where they are not expected to get a return. Actively inviting objections is not, as a rule of thumb, something that English courts expect practitioners to do.
However, English practitioners will, as standard, notify all creditors of their intention to seek an extension and their reasons for doing so in a progress report. The Insolvency Service has previously suggested (see Dear IP October 2010) that this should be done only where there is a realistic expectation that an application for an extension will be made within three or four months of the progress report. This is a much shorter period than that mentioned by the judge in this Scottish case who said that it was likely to be acceptable for administrators to rely on a report that was 6 months old, where creditors had been told that an extension was required.
There isn’t, in our view, a hard and fast rule about the age of a progress report, the key question must be whether at the time of the report the administrator knew and could give reasons why an extension was required. Where a creditor portal is being used, informing creditors is much easier and if circumstances have changed or the progress report is a bit older updating creditors with a letter via the portal seems a sensible thing to do – the court can then be satisfied that creditors are informed.
However, there was no suggestion by the Insolvency Service in Dear IP October 2010 that English administrators should actively invite objections – this seems to be a long-standing practice confined to the Scottish Courts and we are sure that English administrators will hope it stays that way!
Key Takeaways
Although this decision is not binding on the English courts, the below takeaways are sensible and would undoubtedly assist English practitioners with an application to extend given that an English court will also want to understand why an extension is required and what progress has been made:
Simply saying that more time is required, for the same task without more detail is unlikely to be viewed favourably especially so where the task appears on the face of it to be something that can be completed within the extended period.
If a prior report says that the administrators expect/hope that a task will be completed in the next reporting period, but it hasn’t, explain why that hasn’t been possible.
Ensure reports contain ‘meaningful’ and sufficient information. Avoid simply repeating or regurgitating the same statements in successive progress reports as a matter of course. A progress report should evidence progress.
If using a previous version of a progress report to produce the next one, review the statements given previously and add an update.
If the circumstances have changed since a progress report was produced or it is becoming a bit old, consider updating creditors with a letter via the creditor portal (if there is one).
Requiring an extension to complete statutory tasks is unlikely on its own to be sufficient justification for an extension.
Separately, the court was required to consider the length of the extension having agreed to extend. The secured creditor had consented to an extension (but only for a 6-month period) the administrators wanted a 12-month extension. The judge confirmed that there isn’t a policy of granting year long extensions and that granting an extension for a year should not therefore be presumed. He also referenced instances of where administrators had asked for 12 months but when pressed they had accepted a shorter period.
As noted at the outset, administrators have to be incentivised to conclude an administration, and countless extensions are unlikely to do achieve that. But there is a balance between imposing a realistic deadline so that the tasks which need to be done, can be, and not giving enough time such that further cost will be incurred in having to come back to court to extend again. Each case will be considered on its own merits, and we have seen the English courts grant long extensions where administrators have been able to justify why a long period is required, but as with any application to extend practitioners should not assume that these will be rubber stamped without full explanation and justification for the extension as this case also demonstrates.
Bankruptcy Dollar Amounts Set to Rise Significantly on April 1, 2025
Every three years on April 1, the dollar amounts in the Bankruptcy Code are adjusted to account for inflation. The April 1, 2025, increase will be approximately 13.2%, even larger than the nearly 11% increase three years ago.
Bankruptcy Code section 104 requires the Judicial Conference of the United States to publish the changes at least a month before they take effect. On February 4, 2025, the Judicial Conference published this year’s increase in the Federal Register.[1] The planned 13.2% increase in statutory dollar limits will affect nearly everything in bankruptcy that has a dollar limit, including
the amount of property that a debtor may exempt from the estate,
the maximum amount of certain “priority” claims, such as for employee wages and for deposits for certain undelivered products and services,
the minimum aggregate claims needed to file an involuntary bankruptcy petition, and
the aggregate debt limits used to determine which debtors qualify to file cases under chapter 13 or subchapter V of chapter 11.
Anyone who relies on specific dollar limits in the Bankruptcy Code should note these changes.
Note, subchapter V of chapter 11 previously had a debt limit of $7,500,000, but as we reported earlier, this debt limit reverted on Friday, June 21, 2024, to $3,024,725. The subchapter V debt limit will rise to $3,424,000 on April 1, 2025, as part of this triennial adjustment.
Michigan has dollar limits for its own set of state-specific bankruptcy exemptions, and its dollar limits increase every three years as well. They increase on a different three-year cycle, though. They were last increased March 1, 2023, and are not set to increase again until 2026.
[1] Adjustment of Certain Dollar Amounts Applicable to Bankruptcy Cases, 90 FR 8941-01.
Weekly Bankruptcy Alert February 10, 2025 (For the Week Ending February 9, 2025)
Covering reported business bankruptcy filings in Massachusetts, Maine, New Hampshire, and Rhode Island, and Chapter 11 bankruptcy filings in New York and Delaware listing assets of more than $1 million.
Chapter 11
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
7 Wales Street, LLC(Dorchester, MA)
Not Disclosed
Boston(MA)
$500,001to$1 Million
$100,001to$500,000
2/3/25
SBF Ventures, LLC(Boston, MA)
Not Disclosed
Boston(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/3/25
Zmetra Land Holdings, LLC(Webster, MA)
Lessors of Real Estate
Worcester(MA)
$1,000,001to$10 Million
$1,000,001to$10 Million
2/4/25
MMK Subs, LLC(Westbrook, ME)
Not Disclosed
Portland(ME)
$50,001to$100,000
$500,001to$1 Million
2/4/25
MMK Family Investments, Inc.(Biddeford, ME)
Not Disclosed
Portland(ME)
$50,001to$100,000
$500,001to$1 Million
2/4/25
York Beach Surf Club LLC(York, ME)
Traveler Accommodation
Portland(ME)
$10,000,001to$50 Million
$10,000,001to$50 Million
2/6/25
Omega Therapeutics, Inc.(Cambridge, MA)
Pharmaceutical and Medicine Manufacturing
Wilmington(DE)
$100,000,001to$500 Million
$100,000,001to$500 Million
2/10/25
Orispel V LLC(New York, NY)
Not Disclosed
Manhattan(NY)
$10,000,001to$50 Million
$10,000,001to$50 Million
2/7/25
Xinergy Corp.2(Knoxville, TN)
Mining, Quarrying and Oil and Gas Extraction
Wilmington(DE)
$10,000,001to$50 Million
$50,000,001to$100 Million
2/7/25
Chapter 7
Debtor Name
BusinessType1
BankruptcyCourt
Assets
Liabilities
FilingDate
JPKS Management LLC(Manchester, NH)
Restaurants and Other Eating Places
Concord(NH)
$0to$50,000
$1,000,001to$10 Million
2/5/25
Bruneau Antiques Inc.,d/b/a Bruneau & Co Auctioneers(North Scituate, RI)
Retail Trade
Providence(RI)
$0to$50,000
$500,0001to$1 Million
2/6/25
1Business Type information is taken from Bankruptcy Court filings, which may include incorrect categorization by the debtor or others.
2Additional affiliate filings include: Brier Creek Coal Company, LLC, Bull Creek Processing Company, LLC, Raven Crest Contracting, LLC, Raven Crest Leasing, LLC, Raven Crest Minerals, LLC, Raven Crest Mining, LLC, Shenandoah Energy, LLC, South Fork Coal Company, LLC, White Forest Resources, Inc. and Xinergy of West Virginia Inc.
Michelle Pottle also contributed to this article.
Valuing Real Estate Assets in Bankruptcy: Ethical Considerations and Practical Insights
Real estate bankruptcies present intricate legal and ethical challenges, particularly concerning asset valuation. Accurate valuations are pivotal as they influence negotiations, creditor recoveries, and court proceedings. Ensuring that all parties—attorneys, lenders, property owners, and appraisers—adhere to ethical standards is crucial for maintaining transparency, fairness, and compliance within the bankruptcy process.
The Importance of Valuation in Real Estate Bankruptcy
David Levy, Managing Director for Keen-Summit Capital Partners and Summit Investment Management, notes that valuations play a pivotal role in bankruptcy cases, influencing everything from cash collateral motions to asset sales and plan confirmation. Whether dealing with declining or appreciating property values, parties must navigate competing interests and ethical obligations. Ethics in real estate bankruptcy encompasses adherence to professional obligations, legal requirements, and moral principles to ensure integrity in all dealings. Ethical lapses can lead to significant legal consequences, reputational damage, and financial losses.
Key Ethical Rules Relevant To Real Estate Bankruptcy
Robert Richards, chair of Dentons’ Global Restructuring, Insolvency and Bankruptcy practice group, emphasizes that attorneys and valuation professionals must adhere to the American Bar Association (ABA) Model Rules throughout the valuation process. Several ABA Model Rules are pertinent when navigating real estate bankruptcy cases, including:
Rule 1.3 (Diligence): Attorneys must act with reasonable diligence and promptness in representing their clients, ensuring that cases progress efficiently and clients’ interests are adequately pursued. This includes the proper investigation and verification of valuation reports.
Rule 3.3 (Candor Toward the Tribunal): Lawyers are required to ensure that all statements to the court are truthful and complete, avoiding material omissions that could mislead the tribunal. In bankruptcy valuations, attorneys are obligated to provide truthful information and avoid misrepresenting asset values.
Rule 3.4 (Fairness to Opposing Parties and Counsel): Attorneys must not unlawfully obstruct another party’s access to evidence or alter, destroy, or conceal material with potential evidentiary value. This requirement includes ensuring transparency and fairness when presenting valuation data in negotiations.
Rule 4.1 (Truthfulness in Statements to Others): In the course of representing a client, a lawyer shall not knowingly make a false statement of material fact or law to a third person.
Valuation Challenges in Bankruptcy Proceedings
Valuation plays a critical role in real estate bankruptcy cases, affecting negotiations, creditor recoveries, and court proceedings. A proper valuation framework helps determine whether secured creditors are adequately protected, ensures that distressed assets are sold at fair market value, and establishes creditor claims appropriately.
Common Valuation Methods
Several methods are used to determine real estate asset values in bankruptcy. Mark Silverman, a partner at Troutman Pepper Locke, highlights the two most common valuation approaches used in bankruptcy cases:
Appraisals: A professional opinion of value based on market trends, property conditions, and comparable sales.
Broker Opinion of Value (BOV): A more market-driven estimate from real estate brokers who understand local conditions.
Valuations should be supported by thorough documentation and clear methodologies to avoid challenges and ensure credibility.
Ethical Considerations in Valuation Practices
Real estate bankruptcies can present various ethical dilemmas related to valuation. Withholding material facts or misrepresenting valuations can lead to legal and reputational consequences. Overstating or understating property values to influence negotiations or court decisions can violate ethical guidelines and legal regulations. Professionals must also be cautious when representing multiple parties with potentially conflicting interests, ensuring that their duties remain aligned with ethical standards.
Transparency in Asset Valuation
Transparency is a fundamental principle in real estate bankruptcy proceedings. All stakeholders, including creditors, courts, and potential buyers, rely on accurate and complete information to make informed decisions. Ethical obligations require full disclosure of all material facts, including pending offers, financial conditions, and market trends. A lack of transparency can lead to mistrust, legal complications, and potential accusations of fraud.
Attorneys and financial advisors must ensure that their clients provide truthful and comprehensive disclosures. This includes being candid about property conditions, occupancy rates, and market comparables. Ethical rules such as ABA Model Rule 3.3 require attorneys to disclose any material information that may impact the court’s decision-making process. Failure to do so can result in sanctions and reputational damage.
Managing Conflicts of Interest
Avoiding conflicts of interest is a prevalent concern in real estate bankruptcy cases, particularly when professionals have relationships with multiple stakeholders. For example, an attorney representing a property owner may have financial ties to other business interests of the client, which could compromise their ability to provide objective advice.
Ethical guidelines emphasize the need for attorneys to avoid representing conflicting interests without full disclosure and informed consent. When conflicts arise, attorneys and financial advisors must take steps to address them appropriately. This may involve withdrawing from representation, seeking independent valuations, or ensuring that their recommendations align with the best interests of creditors and other stakeholders.
Manipulation of Valuation Data
Manipulating property valuation data is an ethical pitfall that can have severe legal and financial consequences. Stakeholders may be tempted to overstate property values to secure more favorable loan terms or misrepresent financial conditions to minimize creditor recoveries. Such practices violate ethical obligations and can lead to litigation or regulatory scrutiny.
Common tactics of valuation manipulation include using inappropriate comparables, omitting key expenses, and inflating projected income. Ethical compliance requires professionals to use reliable valuation methodologies, such as third-party appraisals, BOVs, and comparable sales analysis. ABA Model Rule 4.1 prohibits the making of false or misleading statements, emphasizing the need for honesty in all financial representations.
Regulatory Developments Impacting Valuation Practices
Recent regulatory developments have introduced additional considerations for ethical valuation practices:
Automated Valuation Models (AVMs): On June 24, 2024, six federal agencies finalized a rule to create safeguards for automated valuation models in the real estate industry. The rule requires companies that utilize AVMs to implement quality control standards to ensure data accuracy, protect against data manipulation, and prevent discriminatory impacts.
Addressing Discrimination in Appraisals: The Federal Financial Institutions Examination Council (FFIEC) has emphasized the importance of mitigating risks arising from potential discrimination or bias in real estate appraisals. Examiners are encouraged to evaluate appraisal practices to ensure compliance with consumer protection laws and promote credible valuations.
Best Practices for Ethical Compliance in Bankruptcy Valuation
Matt Christensen of Johnson May notes that adhering to best practices can ensure ethical and effective valuation processes. To navigate valuation challenges effectively, professionals involved in real estate bankruptcies should adhere to the following best practices:
Maintain Transparency: Ensure all stakeholders, including creditors and the court, have access to accurate and complete information.
Engage Independent Valuations: Avoid conflicts of interest by using reputable third-party appraisers or brokers.
Document Communications: Keep records of all discussions and disclosures to prevent disputes over what was shared.
Adhere to Fiduciary Responsibilities: Focus on acting in the best interests of creditors when insolvency is a factor.
Understand the Legal Implications: Legal counsel should stay updated on ethical obligations and ensure compliance with jurisdiction-specific rules.
Conclusion
Ethical considerations in real estate bankruptcy, particularly regarding asset valuation, are critical to fair and effective resolution processes. Whether representing borrowers, lenders, or stakeholders, professionals must ensure they act with integrity, transparency, and adherence to established legal and ethical guidelines.
To learn more about this topic view Valuing Real Estate Assets. The quoted remarks referenced in this article were made either during this webinar or shortly thereafter during post-webinar interviews with the panelists. Readers may also be interested to read other articles about real estate-focused bankruptcy cases.
This article was originally published on DailyDAC.
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