The Restructuring Report

After the Eighth Circuit ruled that Chapter 5 avoidance actions could be sold by a trustee or debtor in possession, many commentators raised the question of whether the debtor could grant a pre-petition security interest in those causes of action to a lender. A recent decision by the United States District Court for the Northern District of Iowa, on appeal from the bankruptcy court, provides one answer to that question. 

Recent decisions in the Third Circuit, Fourth Circuit and Indiana bankruptcy court appear to implement an insolvency prerequisite for a debtor to commence a case under the Bankruptcy Code. What is the basis of the insolvency prerequisite and how will courts implement this prerequisite in the future?

When drafting a pleading, it is important to remember the applicable burden of proof and which party bears that burden. This is even more important in bankruptcy proceedings, as multiple provisions of the Bankruptcy Rules and Bankruptcy Code shift the burden of proof between parties.