Avoidance and Recovery
|The South Bay Law Firm Law Blog highlights developing trends in bankruptcy law and practice. Our aim is to provide general commentary on this evolving practice specialty.|
Avoidance and Recovery
Avoidance and Recovery
Legislation and Rules
Avoidance and Recovery
Proofs of Claim
Avoidance and Recovery
Executory Contracts, IP, and Licensing
Avoidance and Recovery Actions
Subordination and Recharacterization
Conversion and Dismissal
Second Circuit Holds That a Sale by a Chapter 15 Debtor in a Foreign Main Proceeding of a Claim Against an Obligor Located in the U.S. Must Be Reviewed by the U.S. Bankruptcy Court Under Section 363 of the Bankruptcy Code
Bankruptcy and Insolvency News and Analysis – Week of June 16 – 20, 2014:
SecuredÂ Lending and Claims:
Executory Contracts and Intellectual Property:
Jurisdiction andÂ Bellingham Analysis:
And Still More:
A very recent decision out of California’s Central District Bankruptcy Court highlights the boundaries of “commercial reason” and “diligence” where distressed asset sales are concerned.
In re 1617 Westcliff, LLC (Case No. 8:12-bk-19326-MW) involved the court-approved sale of the debtor’s real property under a purchase agreement in which the debtor and the purchaser agreed to use their “commercially reasonable and diligent efforts” to obtain the approval of the debtor’s mortgage lender for the assumption of the mortgage debt by the buyer. Â If the approval was not obtainable, the buyer had the right to terminate the transaction. Â The buyer also had the right to terminate the deal if the assumption required payment of more than a 1% assumption fee.
As is sometimes the case where due diligence remains while a deal is approved, things didn’t quite work out as planned. Â Unfortunately, the bank proved less cooperative than the parties had anticipated. Â More importantly, however, the buyer notified the debtor-seller 4 days prior to closing that it would not proceed with the transaction as structured, but might be willing to proceed if the transaction was framed as a tax deferred exchange.
The debtor was, understandably, somewhat less than receptive to restructuring the deal at the 11th hour. Â It insisted that the buyer proceed with the transaction as originally agreed and as approved by the court. Â In response, the buyer effectively walked away. Â The parties then made competing demands on the escrow company regarding the buyer’s $200,000 deposit, and filed cross-motions with Bankruptcy Judge Mark Wallace to enforce them.
In a brief, 11-page decision, Judge Wallace found that the buyer’s renunciation of the deal 4 days before closing was a material breach of the buyer’s obligation to use “commercially reasonable and diligent efforts” to obtain assumption consent:
The Purchase Agreement required [the buyer] to keep working in good faith for an assumption until the close of business on May 10, 2013, not to throw up its hands and to propose â€“ at the eleventh hour â€“ a wholesale restructuring of the purchase transaction in a manner completely foreign to the Purchase Agreement. Â On [the date of the proposal] there were still four days left to reach agreement with the Bank, but [the buyer] chose (five months into the deal) to abandon the assumption. Â It was not commercially reasonable nor was it diligent for [the buyer] to cease negotiations with the Bank relating to the assumption of the loan under these circumstances.
The 1617 Westcliff decision (the unpublished slip copy is available here) serves as a reminder to buyer’s counsel of the unique nature of distressed asset purchases. Â The Bankruptcy Court which originally approved the purchase remains available and prepared to resolve any issues which may arise prior to closing, often at a fraction of what it would cost to get a Superior Court involved in connection with an unraveled private sale. Â And conditions and contingencies to the sale must be carefully drafted and observed. Â This applies even to common asset-purchase “boilerplate” such as “commercial reasonableness” and “diligence.”
In a 23-page memorandum decision issued yesterday, New York Bankruptcy Judge Stewart Bernstein ruled that the debtor and a third party were parties to a master agreement that allowed the debtor to issue purchase orders that the counter-party was required to fill. Â Judge Bernstein held that the debtor could assume the master agreement but could reject individual purchase orders. Â The purchase orders were divisible from the master agreement.
The decision (available here) provides a thorough analysis of when – and under what circumstances – an executory agreement may be “divisible” into separate, individual agreements . . . which can then be selectively assumed or rejected by a debtor or trustee.
Thanks to an active lobby in Congress, commercial landlords have historically enjoyed a number of lease protections under the Bankruptcy Code.Â Even so, those same landlords nevertheless face limits on the damages they can assert whenever a tenant elects to reject a commercial lease.
Section 502(b)(6) limits landlordsâ€™ lease rejection claims pursuant to a statutory formula, calculated as â€śthe [non-accelerated] rent reserved by [the] lease . . . for the greater of one year, or 15 percent, not to exceed three years, of the remaining term of such lease . . . .â€ť
This complicated and somewhat ambiguous language leaves some question as to whether or not the phrase â€śrent reserved for . . . 15 percent . . . of the remaining term of such leaseâ€ť is a reference to time or to money:Â That is, does the specified 15 percent refer to the â€śrent reserved?â€ťÂ Or to the â€śremaining term?â€ť
Many courts apply the formula with respect to the â€śrent reserved.â€ťÂ Â See. e.g., In re USinternetworking, Inc., 291 B.R. 378, 380 (Bankr.D.Md.2003) (citing In re Today’s Woman of Florida, Inc., 195 B.R. 506 (Bankr.M.D.Fl.1996); In re Gantos, 176 B.R. 793 (Bankr.W.D.Mich.1995); In re Financial News Network, Inc., 149 B.R. 348 (Bankr.S.D.N.Y.1993); In re Communicall Cent., Inc., 106 B.R. 540 (Bankr.N.D.Ill.1989); In re McLean Enter., Inc., 105 B.R. 928 (Bank.W.D.Mo.1989)).Â These courts calculate the amount of rent due over the remaining term of the lease and multiply that amount times 15%.
Other courts calculate lease rejection damages based on 15% of the â€śremaining termâ€ť of the lease.Â See, e.g., In re Ironâ€“Oak Supply Corp., 169 B.R. 414, 419 n. 8 (Bankr.E.D.Cal.1994); In re Allegheny Intern., Inc., 145 B.R. 823 (W.D.Pa.1992); In re PPI Enterprises, Inc., 324 F.3d 197, 207 (3rd Cir.2003).
For more mathematically-minded readers, the differently-applied formulas appear as follows:
Earlier this month, a Colorado bankruptcy judge, addressing the issue for the first time in that state, sided with those courts who read the statutory 15% in terms of time:
â€śIn practice, by reading the 15% limitation consistently with the remainder of Â§ 502(b)(6)(A) as a reference to a period of time, any lease with a remaining term of 80 months or less is subject to a cap of one year of rent [i.e.,15% of 80 months equals 12 months] and any lease with a remaining term of 240 months or more will be subject to a cap of three years rent [i.e., 15% of 240 months equals 36 months].Â Those in between are capped at the rent due for 15% of the remaining lease term.â€ť
In re Shane Co., 2012 WL 12700 (Bkrtcy. D.Colo., January 4, 2012).
The decision also addresses a related question:Â To what â€śrentâ€ť should the formula apply â€“ the contractual rent applicable for the term?Â Or the unpaid rent remaining after the landlord has mitigated its damages?Â Under the statute, â€śrents reservedâ€ť refers to contractual rents, and not to those remaining unpaid after the landlord has found a new tenant or otherwise mitigated.
Colorado Bankruptcy Judge Tallmanâ€™s decision, which cites a number of earlier cases on both sides of the formula, is available here.
Outside of bankruptcy, a creditor whose loan is secured by collateral typically has the right to payment in full when that collateral is sold – or, if the collateral is sold at an auction, to “credit bid” the face amount of the debt against the auction price of the collateral.
Inside bankruptcy, however, the right to “credit bid” is not always guaranteed.
In July, this blog predicted Supreme Court review of a Seventh Circuit case addressing the question of whether a bankruptcy court may confirm a plan of reorganization that proposes to sell substantially all of the debtorâ€™s assets without permitting secured creditors to bid with credit.Â The courts of appeals are divided two to one over the question, with the Third and Fifth Circuits holding that creditors are not entitled to credit bid and the Seventh Circuit holding to the contrary (for a review of the more recent, Seventh Circuit decision, click here).
The question is one of great significance for commercial restructuring practice, with several bankruptcy law scholars suggesting the answer “holds billions of dollars in the balance.”
Apparently, the Supreme Court agrees.Â Last week, the justices granted review of the Seventh Circuit decision.Â For the petitioners’ brief, respondent’s opposition, and amicus briefs, click here.