Second Circuit Affirms Enforceability of Swaps’ Flip Provisions

By Shmuel Vasser (Dechert)

Shmuel Vasser

Swaps, like other financial contracts (repurchase agreements, securities contracts, commodities contracts, forward agreements and master netting agreements), receive special treatment under the Bankruptcy Code.  Their acceleration, liquidation and termination is not prohibited as an ipso facto clause and the exercise of setoff rights is not subject to the automatic stay.  Transfers made in connection with these contracts are also exempt from avoidance as preferences and constructive fraudulent transfers as well as actual fraudulent transfer under state law.  But their scope is not always free from doubt.  Are provisions that modify the debtor’s priority of payment upon bankruptcy protected as well?  Are provisions that the swap incorporates by reference protected?  Must the swap counterparty itself exercise the right to liquidate, terminate and accelerate the swap?  The Second Circuit just answered these questions.

The full article is available here.

Will Bankruptcy Preference Lawsuits Decline due to Statutory Changes?

Lisa P. Sumner
Lisa P. Sumner

By Lisa P. Sumner (Nexsen Pruet)

Two recent amendments to the U.S. Bankruptcy Code impose new hurdles for debtors and trustees to clear before filing an action against a creditor to recover the value of preferential transfers that the debtor made to the creditor prior to filing a bankruptcy petition. One amendment requires debtors and trustees to conduct a due diligence review of the circumstances surrounding a particular transfer and probable affirmative defenses before filing suit. The other amendment increases the amount that debtors and trustees must seek to recover in a preference action if they want to file the action in the court where the bankruptcy case is pending rather than in the court where the creditor is located. These creditor-friendly amendments will take effect in early 2020, and may discourage debtors and trustees from filing some preference actions.

The full article is available here.

Optimal Deterrence and the Preference Gap

By Brook Gotberg (University of Missouri School of Law)

It is generally understood that the way to discourage particular behavior in individuals is to punish that behavior, on the theory that rational individuals seek to avoid punishment. Laws aimed at deterring behavior operate on the assumption that increasing the likelihood of punishment, the severity of punishment, or both, will decrease the behavior. The success of these laws is also evaluated by how much the targeted behavior decreases. The law of preferential transfers, which effectively punishes creditors who have been paid prior to the bankruptcy has been defended on the grounds that it deters a race to collect from a struggling debtor. However, deterrence theory suggests that the low likelihood of punishment and the cap on punishment associated with preference law make it a very poor deterrence. Further, statements pulled from interviews with affected creditors, debtors, and attorneys demonstrate that in practice, preference law does little or nothing to deter targeted behavior, and in the process imposes significant costs. The weaknesses of preference law call for its significant revision to place a greater focus on specific categories of creditors to be punished on account of their pre-bankruptcy activities.

The full article is available here.