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.
 





 
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    Archive for December, 2008

    When is a “trade creditor” a “trade creditor?” And when is it something else?

    Friday, December 26th, 2008

    Restructuring Concepts, LLC’s Randall Reese flagged a recent Delaware bankruptcy decision that addressed this issue in the liquidating Chapter 11 case of Nutritional Sourcing Corporation.

    As summarized in Reese’s post:

    Nutritional Sourcing and its affiliates operated a chain of supermarkets, as well as a chain of movie and game rental outlets, located in Puerto Rico and the U.S. Virgin Islands.  Nutritional Sourcing (but not its affiliated debtors Pueblo International, LLC and FLBN, LLC) previously filed for bankruptcy and the disputes regarding the terms of the Plan largely revolve around the terms of certain financing facilities entered into upon emergence from that prior bankruptcy case.  Specifically, certain debt obligations of Nutritional Sourcing (a holding company) were subordinated to obligations owed to trade creditors of its operating subsidiaries.  However, the term “trade creditor” was never defined.   The Plan distinguished between unsecured claims owed to certain creditors that were defined as trade creditors and the unsecured claims owed to all other creditors, with a significant difference in the proposed recoveries (100% for “trade” claims vs. 13.2% for all other claims).

    In a 48-page decision issued Tuesday (12/23), U.S. Bankruptcy Judge Judge Peter Walsh sustained objections from a number of “other” (i.e., “non-trade”) creditors and denied confirmation of the Plan.  Citing the “non-discriminatory” and “fair and equitable” confirmation standards of Bankruptcy Code Section 1129(b), Judge Walsh then went on to consider whether or not Plan’s treatment of “trade” and “other” creditors met the classification and treatment standards of Section 1122 and 1123(a)(4).

    Critical to this analysis was a construction of the term “trade creditor” arising both under applicable case law and under confirmation-related testimony.  The Debtors and the Committee (who also supported the Plan) argued that the term “trade creditor” ought to be construed according to its understood “trade usage” within the grocery industry, and offered evidence to support its proffered construction of the term.  Objecting “non-trade” creditors argued that a broader “plain meaning” construction ought to apply to the contract – or, alternatively, that expert testimony must be taken on the understood trade usage.

    Judge Walsh’s analysis of the term “trade creditor” is interesting.  Despite an acknowledgment that New York law (which controlled the underlying debt obligations at issue) construes unambiguous terms in an agreement within the four corners of the document and without reference to extrinsic evidence, and despite the further observation that “[The term] ‘[t]rade creditors’ [is] not defined [within the debt obligations] most likely because the term ‘trade creditor’ has a commonplace, unambiguous meaning, in New York case law and elsewhere,” Judge Walsh then did exactly the opposite: He employed extrinsic case law and parol evidence to define the term “trade creditor” in this case.

    Hmm.  Was the term “trade creditor” truly unambiguous to begin with?  Or had the Debtors introduced ambiguity by attempting, through the Plan, to retroactively impose a post hoc, “negotiated” definition onto an otherwise commonplace term?  Finding that the Plan artificially restricted the term to constitute a “sub-set” of those creditors otherwise commonly understood to be “trade creditors,” Judge Walsh concluded:

    The Plan Proponents [have not] convinced me that their proffered trade usage definition of “trade creditor” is widely used in the grocery industry.  Rather, I think the term “trade creditor” assumed its commonplace, unambiguous meaning as established by New York and other case law. Accordingly, the . . . in the Plan altered the definition of “trade creditor” as intended by the parties to the [underlying loan obligations], likely to the surprise of many trade creditors.

    Judge Walsh then turned to the Debtors’ request for approval of their revised definition as part of a larger settlement.  Finding that the term was, indeed, a negotiated one, and that the litigation of such claims would be complex, Judge Walsh nevertheless noted that the financial stakes – an anticipated distribution to general unsecured creditors of $60.8 million – far outweighed the cost of even lengthy, difficult litigation.  Moreover, where the negotiating parties all had motivation to restrict the term “trade creditor” beyond that commonly understood in the underlying loan obligations, the compromise’s negative impact on “non-trade” creditors who were not at the negotiating table rendered the “settlement” inequitable – and the Plan unconfirmable.

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    Supremes to Hear Case on Viability of Johns-Manville Channeling Injunction

    Friday, December 19th, 2008

    Hat Tip to M. Jonathan Hayes at Bankruptcy Prof Blog for posting this “heads up” on Supreme Court arguments to be heard in 2009 on two related bankruptcy cases.  For a more complete write-up, follow the link from Jonathan’s blog – or link from here to see the discussion on Akin Gump’s SCOTUSBlog.  The petition for certiorari and accompanying briefs are available after the jump here.

    Supreme Court Accepts New Bankruptcy case

    It’s actually a pair of cases: Travelers Indemnity Co. v. Bailey and Common Law Settlement Counsel v. Bailey. The cases arise out of the Johns-Manville asbestos cases. The issue is whether new lawsuits being filed by claimants directly against insurers are barred by the Plan of Reorganization and a subsequent settlement between the insurers and claimants. Some claimants did not agree to the settlement but the bankruptcy court and a federal District Court made clear that the lawsuit ban in the 1986 reorganization plan did apply to such lawsuits – present and future – against Travelers. Those rulings were reversed by the circuit court of appeals saying that the bankruptcy court did not have jurisdiction in 1986 to stop the lawsuits directly against the insurers.

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    Post-Petition Financing – Keepin’ the Deal Under Seal

    Friday, December 19th, 2008

    It is no secret to Chapter 11 practitioners that this bankruptcy cycle differs from the last in a number of respects – not the least of which is the comparative scarcity of DIP financing for operating Chapter 11 debtors seeking to execute a “stand-alone” reorganization.  Bob Eisenbach of Cooley Godward’s San Francisco office recently flagged and commented on an October 2008 Reuters article addressing this issue and its impact on the economics and feasibility of reorganization.  In a nutshell, what DIP financing capacity remains in this market has become much more expensive, making acquisition “bridge financing” more attractive and possibly increasing the trend toward Chapter 11 bankruptcy sales.

    The post-petition lending environment is complicated further by the disclosure requirements of the Federal Rules of Bankruptcy Procedure and the Local Bankruptcy Rules of many jurisdictions.  Rule 4001(c) of the Federal Rules of Bankruptcy Procedure require a debtor to disclose a summary of the essential terms of any proposed use of cash collateral and/or financing.  The Bankruptcy Local Rules of many jurisdictions follow suit.  In the Central District of California, for example, the Bankruptcy Local Rules require that “Every motion requesting the approval of a stipulation providing for the use of cash collateral (11 U.S.C. § 363(c)), or postpetition financing (11 U.S.C. § 364(c)), or both, shall be accompanied by court-approved form F 4001-2, ‘Statement Pursuant to Local Bankruptcy Rule 4001-2′ . . . .”  The Statement in question requires the identification and disclosure of specific terms pertinent to such financing arrangements.

    In the present lending landscape, how much additional disclosure, if any, may be required?  The Delaware Bankruptcy Court recently reviewed and granted a “first-day” request, by Barclays Bank – DIP lender for The Tribune Company (parent for the Chicago Tribune and the Los Angeles Times) and its affiliates – seeking authorization for Barclays to submit the details of its DIP fee structure under seal.  Papers filed by counsel for the debtors and Barclays acknowledged the general disclosure requirements of Bankruptcy Rule 4001(c), but argued that “[i]t has become essential to Barclays’ ability to provide [DIP financing], in these times . . . that the highly-sophisticated and proprietary methodology for calculating such fees remain strictly confidential.”  Explaining further that “Barclays’ methodology is unique and proprietary intellectual property the disclosure of which would put Barclays at a competitive disadvantage,” Barclays and the debtor requested that fee letters ancillary to the DIP lending arrangements be filed under seal with the Court, and disclosed only to the US Trustee’s Office.  For a summary of the transaction from the lender’s perspective, check out the post at Mondaq.

    Finding that such terms satisfied the “confidential commercial information” requirement of Section 107(b) of the Bankruptcy Code, the Court approved this arrangement.

    In addition to higher pricing, it now appears that DIP lenders may have another possible incentive to reenter the DIP lending space.  Where courts are disinclined to permit such confidentiality – or where the cash-strapped debtor proves an otherwise attractive acquisition target – will strategic buyers willing to offer “bridge loans” to a debtor in connection with a proposed acquisition have another leg up on increasingly pricey DIP loans?

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    . . . and Durango Gains Recognition

    Friday, December 12th, 2008

    Corporation Durango S.A.B. de C.V. gained recognition for its Mexican concurso proceeding in a ruling issued yesterday (11 December) by Judge Robert Drain of New York’s Southern District.  The concurso, which is the paper goods manufacturer’s second, was initiated in part by spiking energy prices earlier in the year.  The ancillary proceeding was commenced to prevent litigation by the company’s US-based noteholders.  Papers filed before Judge Drain the day prior to issuance of the recognition order indicate that the noteholders are presently in discussions with Durango and, therefore, acquiesce in the terms of the recognition order with a reservation of rights to seek further relief.  A copy of the recognition order is available here.

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    Landsbanki Joins Glitnir, Kaupthing in Chapter 15 . . .

    Friday, December 12th, 2008

    On Tuesday (9 December) Iceland’s Landsbanki hf joined that country’s two other major banks – Glitnir Bank hf and Kaupthing Bank hf – in seeking ancillary protection in New York under Chapter 15 of the US Bankruptcy Code.  A copy of the declaration in support of recognition is available here.  The supporting memorandum of law is available here.  Judge Robert Drain has been assigned to the case, now pending in New York’s Southern District.

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    In re KAUPTHING BANK hf. – Provisional Relief Granted

    Thursday, December 4th, 2008

    A New York Bankruptcy Judge on Monday granted provisional relief to the administrator of Iceland’s KAUPTHING BANK hf., seized recently by regulatory authorities in that country as Iceland’s financial crisis worsened.  A copy of the Order granting relief is attached here.

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