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      Insolvency News and Analysis - Week Ending August 29, 2014
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    Posts Tagged ‘Chapter 11 Title 11 United States Code’

    Insolvency News and Analysis – Week Ending August 15, 2014

    Friday, August 15th, 2014
    (en) World Map (pt) Mapa Mundo (de) Weltkarte ...

    (en) World Map (pt) Mapa Mundo (de) Weltkarte (sv) Världskarta (Photo credit: Wikipedia)

     

     

     

     

     

     

     

     

     

     

     

    Statutory Construction

    Our “Must-Cite” Bankruptcy Cases

    Jurisdiction

    Still Trying To Close The Stern V. Marshall Can Of Worms

    The Ninth Circuit Waits for No One

    Cross-Border

    A Bird’s-Eye View of Chapter 15

    Chapter 15 Comes of Age

    Managing parallel proceedings – USA & Cayman Islands

    Sales

    Bankruptcy Sales and Leases: “Free And Clear” May Not Be So “Free And Clear”

    Sale of Assets Free and Clear Insulates Employee Claims Against Purchaser . . . Almost

    Section 363(f) Retires ERISA-Based Successor Liability Claims

    Avoidance and Recovery

    Trust Beneficiary Checkmated By Bankruptcy Code 548(e) In Castellano

    Property of the Estate

    Peering Through the Muck Again: Another Court Analyzes Whether LLC Operating Agreements are Property Interests or Executory Contracts

     

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    Paid in Full

    Sunday, August 10th, 2014
    American National Bank AD

    American National Bank AD (Photo credit: Wikipedia)

    One of the fundamental functions of any bankruptcy proceeding is the establishment of an amount and priority for each creditor’s claim against the debtor. A short, 5-page decision issued late last month by the Nebraska Bankruptcy Court in two related Chapter 11 cases (Biovance and Julien) serves as a reminder that although creditors are not permitted a “double recovery” on their claims, they are nevertheless permitted to assert the full value of their claims until those claims are paid in full.

     
    In the US, it is common for creditors to mitigate credit risk through two primary means: Taking a security interest in the debtor’s collateral, and/or securing a guaranty of payment from a [non-debtor] third party. Further, and in the event of a payment default, courts frequently recognize a creditor’s right to pursue simultaneous collection activity for the entirety of the debt against the debtor, the collateral, and the guarantor. In a recent decision involving two related Chapter 11 debtors, a Nebraska Bankruptcy Court was asked by the debtors to limit the amounts claimed by a creditor as the creditor had already received a portion of the payments owed to it.

     
    In this case, a business debtor (Biovance) had leased equipment from American National Bank (ANB), collateralizing one of the leases with a certificate of deposit held by that debtor.  The other lease was protected by a guarantee issued by the individual debtor (Julien) to ANB.  ANB had obtained permission to collect its collateral with respect to the first lease, and to liquidate its claims in Nebraska state court with respect to the second (which claims were subsequently settled).  The debtors argued, among other things, that as the confirmed bankruptcy plan provided for payment in full of all claims, the creditor was therefore obligated to immediately credit the amounts it had received.  ANB argued that a proof of claim filed under 11 U.S.C. § 502 need not be reduced by amounts recovered from a third party unless it stood the chance of a double recovery.

     
    The Bankruptcy Court of Nebraska agreed with ANB, noting that the confirmed plan is neither a recovery nor payment in full. It is only a promise to pay. The Court went on to hold that until such time as ANB had actually received its payment in full, it was entitled to assert the balance due against all concerned parties – including the debtors.

     
    Establishing the amount and priority for each creditor’s claim against the debtor fixes the limit of recoveries available to a creditor from the debtor’s estate. Such claims are, in the aggregate, an important factor in the creditors’ assessment of the feasibility of a debtor’s proposed reorganization – and in determining whether liquidation offers them a preferable recovery.

     
    The Biovance decision, though not surprising, nevertheless reminds creditors and their counsel to preserve all of the value of their claims, even if paid partially, until the claims are paid in full.

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    Recent Insolvency and Bankruptcy Headlines – June 6, 2014

    Friday, June 6th, 2014

    Some of the week’s top bankruptcy and restructuring headlines:

    English: Part of Title 11 of the United States...

    English: Part of Title 11 of the United States Code (the Bankruptcy Code) on a shelf at a law library in San Francisco. (Photo credit: Wikipedia)

     

    Trends

     

    - Business Bankruptcy Filings Off 21% Year-Over-Year

     

    - Less Than 1M Filings This Year?

     

    LBO Defaults Set to Reach A High This Year, Fitch Says

     

    - The Changing Nature of Chapter 11

     

    Cross-Border

     

    - Cross-Border Issues: Misconduct No Grounds for Termination of Chapter 15

     

    Liquidators urge speedy action on Hong Kong corporate rescue bill

     

    Financing

     

    - DIP Dimensions: Energy Future Intermediate Holding Co. LLC”s Financing Fracas

     

    Avoidance Actions

     

    - Avoidance Actions: Subsequent New Value Defense, Good Faith Defense, and Section 546(e) Safe-Harbor

     

    - Ponzi Schemes:  11th Circuit Opines on “Property of the Debtor”

     

    Thelen Ruling Highlights Evidentiary Issues in Fraudulent Transfer Case

     

    Bankruptcy Sales

     

    - Limits On Credit Bidding and Section 363(k):  Another Court Follows Fisker

     

    Successful Bidder Must Pay Damages (In Addition to Forfeiting Deposit) After Backing Out of Sale – At Least in Certain Circumstances

     

    Upsetting a Bankruptcy Auction: Money Talks

     

    - Never Do This: A Lesson On What Not To Do In a Section 363 Auction

     

    Confirmation

     

    - Plan Confirmation:  The Tax Man Cometh . . . And Getteth Impaired

     

    Claims

     

    - Debt Recharacterization: In re Alternate Fuels: Tenth Circuit BAP Holds Recent Supreme Court Decisions Do Not Limit Power to Recharacterize Debt to Equity

     

    . . . And More Debt Recharacterization: In re Optim Energy: Court Denies Creditor Derivative Standing to Seek Recharacterization of Equity Sponsors’ Debt Claims

     

     

     

    And Still More:

     

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    The Squeaky Wheel Gets the Grease

    Tuesday, May 6th, 2014

    Squeaky WheelAn old and well-known proverb warns:  “It is better to remain silent and be thought a fool than to speak and remove all doubt.”  Over against this timeless advice, however, a very recent Second Circuit offers more specific guidance for creditors of a bankrupt debtor:

    The squeaky wheel gets the grease.

    In Adelphia Recovery Trust v. Goldman, Sachs & Co., et al., a creditors’ trust established to recover transfers under Adelphia Communications’ confirmed Chapter 11 plan of reorganization sought unsuccessfully to recover “margin call” payments made to Goldman, Sachs & Co.  The Second Circuit Court of Appeals agreed with the lower courts in determining that the commingled funds used to make the payments had been taken from a “concentration account” scheduled as property of one of Adelphia Communications’ subsidiaries; consequently the funds were not Adelphia Communications’ to recover, and the trust could not belatedly be re-characterized them as such.  A copy of the decision is available here.

    In 2002, Adelphia Communications Corporation and related subsidiaries entered Chapter 11 bankruptcy following the disclosure of fraudulently concealed, off-balance sheet debt on Adelphia Communications’ books.  The companies were ultimately liquidated and their secured creditors paid in full.  In addition, all of the unsecured debt of Adelphia Communications’ subsidiaries was paid in full, with interest, and Adelphia Communications’ general creditors were paid in part.  Under Adelphia Communications’ Chapter 11 Plan (confirmed in early 2007 – about 2½ years after the company entered bankruptcy), those same unsecured creditors were to receive the proceeds of the Adelphia Recovery Trust.  The Trust was charged with recovery of, among other things, fraudulent transfers made by Adelphia Communications prior to the commencement of the Adelphia cases.

    It was not until 2009 that the Trust identified as funds belonging to Adelphia Communications certain commingled funds held in a “concentration account” of one of Adelphia Communications’ subsidiaries.  Those funds, it was alleged, were used to cover “margin calls” made by Goldman Sachs & Co. in connection with margin loans previously made to Adelphia Communications’ founders and primary stockholders and collateralized by Adelphia Communications stock.  Goldman Sachs had issued the margin calls as the value of Adelphia Commutations stock declined amidst revelations of Adelphia Communications’ off-balance sheet debt.

    Goldman Sachs sought, and obtained, summary judgment in the District Court on the basis that the funds in question had been paid by Adelphia Communications’ subsidiary – and not by Adelphia Communications.  The Recovery Trust appealed, arguing that the funds in question were, in fact, owned by Adelphia Communications.  The Second Circuit Court of Appeals disagreed and affirmed the District Court’s ruling.

    The Second Circuit explained that the commencement of a bankruptcy case triggers a number of requirements for a debtor.  Among these is the mandatory requirement that the debtor must submit a schedule of all its interests in any property, wherever situated.  Ultimately, the debtor must propose a plan which distributes this property within a defined priority scheme, and in the manner most advantageous for the greatest number of creditors.

    The plan must also designate classes of claims and classes of interests and specify how the debtor will attend to these classes.  Once the relevant parties, including the creditors, approve the debtor’s plan, the court confirms the plan and binds all parties.  It is therefore crucial that all claims and interests must be settled before the plan is finalized and within the time frame allotted by the Bankruptcy Code.

    The Second Circuit found that the commingled funds sought by the Adelphia Recovery Trust were claimed by one of Adelphia Communications’ subsidiaries during the bankruptcy proceeding.  Those claims were asserted without objection from Adelphia Communications’ creditors.  The Trust’s subsequent claim to those assets in a subsequent proceeding was therefore inconsistent with creditors’ earlier stance.  Under the doctrine of judicial estoppel, parties (and their successors) cannot be allowed to change their positions at their convenience.  Consistent with this doctrine, disturbing claims and distributions at such an advanced stage of the proceedings to address the creditors’ changed position would undermine the administration of Adelphia Communications’ and its subsidiaries’ related cases.  It would also threaten the integrity and stability of the bankruptcy process by encouraging parties to alter their positions at their whim, as and whenever convenient.

    Adelphia Recovery Trust highlights three important realities of bankruptcy practice:

    First, the filing of a debtor’s bankruptcy schedules is more than a merely a perfunctory act.  It is a preliminary statement, made to the best of the debtor’s belief and under penalty of perjury, of the debtor’s assets (including all of its ownership interests in any property, anywhere) and its liabilities.  Ultimately, creditors and other interested parties – and the court itself – rely upon those schedules in determining the debtor’s compliance with the reorganization requirements of Bankruptcy Code section 1129.

    - Second, related debtors are commonly related in much more than name or ownership.  In addition to inter-company transfers and claims between debtors, it is common for such enterprises to separate functional asset ownership from legal asset ownership.  This distinction may be an important one for various groups of creditors seeking additional sources of recovery.

    - Third (and finally), creditors – and the professionals who represent them – should thoroughly investigate any and all “control,” commingling, and other aspects of the relationships between related debtors which may give rise to indirect ownership of assets.  Where doubt or conflicting claims exist as to specific assets, it is important for parties with competing claims to reserve their rights early and clearly – thereby making themselves the “squeaky wheel” in the event of any future “grease.”

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    Central District of California’s Judicial Practices Survey

    Thursday, February 9th, 2012

    For those practitioners practicing locally here in SoCal – or for those who need to appear pro hac in one of the many Chapter 11′s pending in the nation’s largest bankruptcy district – the Central District has very recently collaborated with the local bankruptcy bar to produce a detailed list of individual judicial preferences.

    In a District with nearly 30 sitting bankruptcy judges scattered over five divisions, a “score-card” like this one is essential reading.  A copy of the survey is available here.

    Other Posts of Interest:

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    The Year in Bankruptcy – 2011

    Monday, January 30th, 2012

    JonesDay’s comprehensive and always-readable summary of notable bankruptcies, decisions, legislation, and economic events was released just over a week ago.  A copy is available here.

    As 2012 gets off to an uncertain start, some more recent headlines are accessible immediately below.

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    River Road Hotel Partners

    Sunday, July 10th, 2011

    One of the time-honored attractions of US bankruptcy practice is the set of tools provided for the purchase and sale of distressed firms, assets and real estate.  In recent years, the so-called “363 sale” has been a favorite mechanism for such transactions – its popularity owing primarily to the speed with which they can be accomplished, as well as to the comparatively limited liability which follows the assets through such sales.

    But “363 sales” have their limits:  In such a sale, a secured creditor is permitted to “credit bid” against the assets securing its lien – often permitting that creditor to obtain a “blocking” position with respect to sale of the assets.

    Seal of the United States Court of Appeals for...

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    Until very recently, many practitioners believed these “credit bid” protections also applied whenever assets were being sold through a Chapter 11 plan.  In 2009 and again in 2010, however, the Fifth and Third Circuit Courts of Appeal held, respectively, that a sale through a Chapter 11 Plan didn’t require credit bidding and could be approved over the objection of a secured lender, so long as the lienholder received the “indubitable equivalent” of its interest in the assets (for more on the meaning of “indubitable equivalence,” see this recent post).

    Lenders, understandably concerned about the implications of this rule for their bargaining positions vis a vis their collateral in bankruptcy, were relieved when, about 10 days ago, the Seventh Circuit Court of Appeals respectfully disagreed – and held that “credit bidding” protections still apply whenever a sale is proposed through a Chapter 11 Plan.

    The Circuit’s decision in In re River Road Hotel Partners (available here) sets up a split in the circuits – and the possibility of Supreme Court review.  In the meanwhile, lenders may rest a little easier, at least in the Seventh Circuit.

    Or can they?

    It has been observed that the Seventh Circuit’s River Road Hotel Partners decision and the Third Circuit’s earlier decision both involved competitive auctions – i.e., bidding – in which the only “bid” not permitted was the lender’s credit bid.  The Fifth Circuit’s earlier decision, however, involved a sale following a judicial valuation of the collateral at issue.

    Is it possible to accomplish a sale without credit bidding – even in the Seventh Circuit – so long as the sale does not involve an auction, and is instead preceded by a judicial valuation?

    Stay tuned.

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    Valuing Companies in Chapter 11 – Courts Weigh In On Supportability Of Assumptions

    Wednesday, July 6th, 2011

    Guest-blogger Ray Clark of Valcor (whose prior posts appear here, here, and here) has recently completed a succinct but helpful piece on the valuation of firms in Chapter 11.

    Ray’s piece focuses on the supportability of assumptions underlying valuations.  As he notes:

    Over the last year, there have been a rash of bankruptcy cases and related lawsuits involving challenges to both debtor and creditor financial experts, wherein opposing parties successfully attacked the relevance and reliability of valuation evidence. In a number of cases, even traditional methodologies were disqualified for lack of supportable assumptions, which severely impacted recoveries for various stakeholders.

    The piece is here.

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    When Shari’a Law Meets Chapter 11

    Monday, June 20th, 2011

    A prior post on this blog featured an article highlighting some of the basic principles from Shari’a law which apply to insolvent individuals and businesses.

    Countries with Sharia rule.

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    Another, more recent article explores the intriguing question of what happens when an investment structured according to Shari’a law needs to be restructured in a non-Shari’a forum – such as a United States Bankruptcy Court.  The University of Pennsylvania’s Michael J.T. McMillen uses the recent Chapter 11 filing of In re East Cameron Partners, LP as a case study to highlight some of the issues.

    According to McMillen:

    The issues to be considered [in connection with efforts to introduce Shariah principles into secular bankruptcy and insolvency regimes throughout the world] are legion. Starting at the level of fundamental principle, will the contemplated regime provide for reorganization along the lines of Chapter 11 systems, or will liquidation be the essential thrust of the system?  If, in line with international trends, the system will incorporate reorganization concepts and principles, what is the Sharīʿah basis for this regime?  Even the fundamental questions are daunting.  For example, consideration will need to be given to debt rescheduling concepts, debt forgiveness concepts, delayed debt payment concepts, equity conversion concepts, asset sale concepts, and differential equity conceptions.  There will have to be consideration of whether voluntary bankruptcies can and will be permissible.  And after agreement is reached on the basic nature and parameters of the system, the long road of discovery and elucidation of specific Sharīʿah principles will have to be addressed.  That undertaking will wind through a great deal of new territory, from the Sharīʿah perspective, and will entail a comparative laws analyses, and a systemic comparison, unlike any in history.

    The article is available here.

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    A Lesson In Vocabulary: “Indubitable Equivalence”

    Tuesday, June 7th, 2011

    Chapter 11 practice – like so many other professional service specialties – is regrettably jargon-laden.  Businesses that need to get their financial affairs in order “enter restructuring.”  Those that must re-negotiate their debt obligations attempt to “de-leverage.”  And those facing resistance in doing so seek the aid of Bankruptcy Courts in “cramming down” their plans over creditor opposition.

    Likewise, the Bankruptcy Code – and, consequently, Bankruptcy Courts – employ what can seem an entirely separate vocabulary for describing the means by which a successful “cram-down” is achieved.  One such means involves providing the secured creditor with something which equals the value of its secured claim: If the secured creditor holds a security interest in the debtor’s apple, for example, the debtor may simply give the creditor the apple – or may even attempt to replace the creditor’s interest in the apple with a similar interest in the debtor’s orange (provided, of course, that the orange is worth as much as the original apple).

    The concept of replacing something of value belonging to a secured creditor with something else of equivalent value is known in “bankruptcy-ese” as providing the creditor with the “indubitable equivalent” of its claim – and it is a concept employed perhaps most frequently in cases involving real estate assets (though “indubitable equivalence” is not limited to interests in real estate).  For this reason, plans employing this concept in the real estate context are sometimes referred to as “dirt for debt” plans.

    A recent bankruptcy decision out of Georgia’s Northern District issued earlier this year illustrates the challenges of “dirt for debt” reorganizations based on the concept of “indubitable equivalence.”

    Map of USA with Georgia highlighted

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    Green Hobson Riddle, Jr., a Georgia businessman, farmer, and real estate investor, sought protection in Chapter 11 after economic difficulties left him embroiled in litigation and unable to service his obligations.

    Mr. Riddle’s proposed plan of reorganization, initially opposed by a number of his creditors, went through five iterations until only one objecting creditor – Northside Bank – remained.  Northside Bank held a first-priority secured claim worth approximately $907,000 secured by approximately 36 acres of real property generally referred to as the “Highway 411/Dodd Blvd Property,” and a second-priority claim secured by a condominium unit generally referred to as the “Heritage Square Property.”  It also held a judgment lien recorded against Mr. Riddle in Floyd County, Georgia.

    A key feature of Mr. Riddle’s plan involved freeing up the Heritage Square Property in order refinance one of his companies, thereby generating additional payments for his creditors.  To do this, Mr. Riddle proposed to give Northside Bank his Highway 411/Dodd Blvd Property as the “indubitable equivalent,” and in satisfaction, of all of Northside’s claims.

    Northside Bank objected to this treatment, respectfully disagreeing with Mr. Riddle’s idea of “indubitable equivalence.”  Bankruptcy Judge Paul Bonapfel took evidence on the issue and – in a brief, 9-page decision – found that Mr. Riddle had the better end of the argument.

    Judge Bonapfel’s decision highlights several key features of “indubitable equivalent” plans:

    -         The importance of valuation.  The real challenge of an “indubitable equivalence” plan is not its vocabulary.  It is valuing the property which will be given to the creditor so as to demonstrate that value is “too evident to be doubted.”  As anyone familiar with valuation work is aware, this is far more easily said than done.  Valuation becomes especially important where the debtor is proposing to give the creditor something less than all of the collateral securing the creditor’s claim, as Mr. Riddle did in his case.  In such circumstances, the valuation must be very conservative – a consideration Judge Bonapfel and other courts recognized.

    -       The importance of evidentiary standards.  Closely related to the idea of being “too evident to be doubted” is the question of what evidentiary standards apply to the valuation.  Some courts have held that because the property’s value must be “too evident to be doubted,” the evidence of value must be “clear and convincing” (the civil equivalent of “beyond a reasonable doubt”).  More recent cases, however, weigh the “preponderance of evidence” (i.e., does the evidence indicate something more than a 50% probability that the property is worth what it’s claimed to be?).  As one court (confusingly) put it: “The level of proof to show ‘indubitably’ is not raised merely by the use of the word ‘indubitable.’”  Rather than require more or better evidence, many courts seem to focus instead on the conservative nature of the valuation and its assumptions.

    -       The importance of a legitimate reorganization purpose.  Again, where a creditor is receiving something less than the entirety of its collateral as the “indubitable equivalent” of its claim, it is up to the debtor to show that such treatment is for the good of all the creditors – and not merely to disadvantage the creditor in question.  Judge Bonapfel put this issue front and center when he noted, in Mr. Riddle’s case:

    [I]t is important to recognize that § 1129(b), the “cram-down” subsection, “provides only a minimum requirement for confirmation … so a court may decide that a plan is not fair and equitable even if it is in technical compliance with the Code’s requirements.” E.g., Atlanta Southern Business Park, 173 B.R. at 448. In this regard, it could be inequitable to conclude that a plan provision such as the one under consideration here is “fair and equitable,” if the provision serves no reorganization purpose. See Freymiller Trucking, 190 B.R. at 916. But in this case, the evidence shows that elimination of the Bank’s lien on other collateral is necessary for the reorganization of the Debtor and his ability to deal with all of the claims of other creditors who have accepted the Plan. No evidence demonstrates that the Plan is inequitable or unfair

    In re Riddle, 444 B.R. 681, 686 (Bankr. N.D. Ga. 2011).

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