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The Magic of Mt. Gox: How Bitcoin Is Confounding Insolvency Law

Arthur C. Clarke famously observed: “Any sufficiently advanced technology is indistinguishable from magic.” Our regulatory, legislative, and judicial systems illustrate this principle whenever new technology exceeds the limits of our existing legal framework and collective legal imagination.  Cryptocurrency, such as bitcoin, has proven particularly “magical” in the existing framework of bankruptcy law, which has not yet determined quite what bitcoin is—a currency, an intangible asset, a commodity contract, or something else entirely.

The answer to that question matters, because capturing the value of highly-volatile cryptocurrency often determines winners and losers in bankruptcy cases where cryptocurrency is a significant asset.  The recently-publicized revelation that the bankruptcy trustee of failed bitcoin exchange Mt. Gox is holding more than $1.9 billion worth of previously lost or stolen bitcoins highlights the issue.

The Mt. Gox Case: Timing is Everything

In 2013, Mt. Gox[1] was the world’s largest bitcoin exchange.  By some

It’s Not Final, and That’s Final: The Ninth Circuit’s Gugliuzza Decision

appellate court concept with gavel. 3D rendering

As we have noted in another post, Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?, not all orders in bankruptcy cases are immediately appealable as a matter of right.  Only those orders deemed sufficiently “final” may be appealed without additional court authorization.  See 28 U.S.C. § 158(a)(3) (interlocutory order may be appealed only with leave of the court).  Appeals from “final” bankruptcy-court orders usually are first heard by a United States district court or a bankruptcy appellate panel (a “BAP”), which have jurisdiction “to hear appeals from final judgments, orders, and decrees” from bankruptcy courts.  Id. § 158(a)(1).

What happens when a district court or a BAP properly exercises appellate jurisdiction over a bankruptcy court’s order,

Handy List of Basic Issues to Consider for the Transactional Workout

While significant energy here at the Bankruptcy Cave is devoted to substantive bankruptcy matters, not all aspects of a general insolvency practice are always fun and litigation.  Oftentimes insolvency lawyers add the most value by helping clients avoid a bankruptcy filing, or by successfully resolving a case through a consensual transactional restructuring.  Below are a few key issues diligent counsel for creditors and debtors should think through in connection with a transactional restructuring.[1]

1. Notice and Demand After Default. As anyone reading this knows, a lender often sends a notice of default and maybe even a demand for payment after its borrower defaults.  However, simply sending a notice of default and demand for payment may not always be sufficient or have the intended effect.  Most loan documents provide a cure period before a breach becomes an actionable default.  Some loan documents will only permit a lender to accrue

Non-Final Finality: Does One Interlocutory Issue Resolved in a Bankruptcy Court Order Render All Issues Addressed in the Order Non-Appealable?

appellate court concept with gavel. 3D rendering

As the Supreme Court recently reminded us in Bullard v. Blue Hills Bank, not all orders in bankruptcy cases are immediately appealable as a matter of right.  Only those orders deemed sufficiently “final” may be appealed without leave under 28 U.S.C. § 158(a).  In light of the numerous parties and controversies involved in a typical bankruptcy case, determining whether an order is “final” can be complicated affair.  Thus, finality in bankruptcy is a “flexible standard” applied to discrete disputes that arise within the larger case. See generally 14 Wright, Miller & Cooper, Federal Practice and Procedure § 3926.2 (collecting examples of final and non-final orders).  That flexibility, however, has led to disparate results.

In In re Wolff, B.A.P. No. CO-16-016 (B.A.P. 10th Cir.

Are Those Taxes Owing On Your Late-Filed Tax Return Dischargeable? Maybe, But You Better Be In The Right Circuit

File Tax Return!

Individual debtors with old tax debts relating to late-filed tax returns may be surprised to find that those tax debts may not be dischargeable under section 523(a) of the Bankruptcy Code due to the lateness of the tax filing.  There is a current Circuit split regarding whether a late tax filing constitutes a “return” at all, which is critical to the dischargeability inquiry.  The Ninth Circuit weighed in last week in In re Smith, 2016 WL 3749156 (9th Cir. July 13, 2016), further cementing the split.  Individuals considering whether to file bankruptcy to obtain a discharge of old tax debts would be well-advised to assess the current legal landscape and plan accordingly.

Section 523(a)(1)(B)(i) Exemption From Discharge For Tax Debts

Section 523(a)(1)(B)(i) of the Bankruptcy Code exempts from discharge any debt

Bitcoin after Brexit: Safe Haven or Harbinger of Future Distress?

Currency icons consept : Businessman touching the screen about currency icons

What a difference a week makes! On June 17, 2016, bitcoin was trading at more than $750. Five days later, as polls showed the Brexit vote leaning heavily to “remain,” bitcoin dropped as low as $585. After the vote to leave the European Union became final, the British Pound, the Euro, the Chinese Yuan, and global stocks dropped precipitously. Bitcoin, on the other hand, spiked to more than $676, and was trading in the $660s on Friday. Could this mean bitcoin is being perceived as a new safe-haven asset?

A Brief Background on Bitcoin Generally

Bitcoin often is described as a “digital currency.” On a more technical level, bitcoin is a digital asset within a peer-to-peer computer network payment system created in 2008

Click To Appeal: Recent Second Circuit Decision A Cautionary Tale Regarding Electronically Filed Notices Of Appeal

mouse click

A recent Second Circuit Court of Appeals decision, Franklin v. McHugh, 2015 WL 6602023 (2d Cir. 2015), illustrates the dire consequences of failing to comply fully with all electronic filing requirements for a notice of appeal. Although appellant’s counsel in that case attempted to file a timely notice of appeal, properly initiated the electronic filing process, paid the filing fee, and received payment confirmation, the Second Circuit dismissed the appeal for lack of appellate jurisdiction due to the technical failure of appellant’s counsel to “click all the buttons” required to complete the filing. In jurisdictions that require electronic filing, counsel must be mindful not only of the applicable procedural rules but also of the electronic filing requirements.

The Applicable Rules Minefield

Appeals

Earth to Creditors: Triangular Payment Arrangements May Constitute “Reasonably Equivalent Value”

Satellite Orbiting Earth.

The Eleventh Circuit Court of Appeals recently clarified the meaning of “reasonably equivalent value” in a complex fraudulent transfer case.  Its decision in In re PSN USA, Inc., Case No. 14-15352 (11th Cir. Sept. 4, 2015), provides particular insight on fraudulent transfers in the context of parent-subsidiary and other triangular payment arrangements.  The Eleventh Circuit held that even though the debtor, a cable television channel, was not a party to the underlying satellite services contract at issue, payments made from the debtor to the satellite services company pursuant to its parent company’s contracts constituted “reasonably equivalent value” and could not be avoided as constructive fraudulent transfers.

PSN USA, Inc. (the “Debtor”) operated the PSN Channel, a cable television station that broadcasted live and recorded sporting events throughout Latin America.  Pan

Ninth Circuit Holds Twombly / Iqbal “Plausibility” Standard Does Not Apply To Denials

In a seminal pair of decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the United States Supreme Court clarified that the pleading standard under Federal Rule of Civil Procedure 8(a) requires that a complaint contain sufficient factual allegations to state a claim to relief “that is plausible on its face.” Neither Twombly nor Iqbal addressed, however, whether this “plausibility” standard also applies to denials under Federal Rule of Civil Procedure 8(b). In its recent decision in In re Mortgages Ltd., 771 F.3d 623 (9th Cir. 2014), the Ninth Circuit Court of Appeals weighed in and held that the “plausibility” standard does not apply to denials.

The debtor in this case, Mortgages Ltd., was a private lender that made loans secured by real estate located in Arizona. Mortgages Ltd. funded its lending operations, in part, by selling fractional interests in its

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