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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      Insolvency News and Analysis - Week Ending October 17, 2014
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    Posts Tagged ‘Chapter 11 Title 11 United States Code’

    Insolvency News and Analysis – Week Ending September 19, 2014

    Friday, September 19th, 2014

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

     

    Claims

    Court Denies Administrative Priority Status to Seller Whose Goods Were Not Received by the Debtor

    Auction Design for Claims Trading

    Sales

    Purchasers at Bankruptcy Sales — They can’t be bad and expect to be protected as “good”

    Secured Claims and Credit

    Perfection and the New Jurisdiction-Hopping Corporations

    Mysteries Of The Uniform Commercial Code: Leases Of Goods That Become Installed In, Affixed To, Or Mixed With Other Goods

    Credit Bid: Loan-to-Own Strikes Out

    Credit Bid (Round 2): What Does It Take to Show “Cause”?

    A Refresher on Lender Liability

    Sales

    Weathering the Storm: Eleventh Circuit Vacates Four-Year-Old 363 Sale Order Based on Bad Faith Filing of an Involuntary Bankruptcy Case

    Confirmation

    The Role of Profit in Valuing Chapter 11 Cramdown Paper

    Momentous Decision in Momentive Performance Materials Part IV: Make-Wholes and Third Party Releases

    Intellectual Property

    The Messy Problem of IP Licensing During Bankruptcy

    Cross-Border

    PUSHING THE BORDERS OF CHAPTER 15: WHEN A FOREIGN REPRESENTATIVE “FLOUTS” THE PURPOSES OF CROSS-BORDER INSOLVENCY

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    Insolvency News and Analysis – Week Ending September 5, 2014

    Friday, September 5th, 2014
    Delaware license plate from personal collection

    Delaware license plate from personal collection (Photo credit: Wikipedia)

     

     

     

     

     

     

     

    Trends

    [Bankruptcy Filings and] High Yield Debt

    Bankruptcies down in Delaware, US

    Corporate Governance

    LLC Managers Beware: Get Involved With Member Distributions By an Insolvent LLC and You May Be Personally Liable

    Financial Markets

    Rolling Back the Repo Safe Harbors

    Sales

    Eleventh Circuit Directs Bankruptcy Court to Vacate Sale Order Based on New Evidence that Involuntary Bankruptcy Case Was  Filed In Bad Faith

    Secured Claims

    The (Il)Legitimacy of Bankruptcies for the Benefit of Secured Creditors

    Avoidance and Recovery

    Caveat Debtor: Liens Preserved Pursuant to Section 551 Subject to Defects Under State Law

    The Uniform Voidable Transactions Act – New Section 11 and Series LLCs

    Fraudulent Transfer: A Case Where Strong Arm Powers Were “An Inch Too Short”

    Fifth Circuit Provides Valuable Guidance on Jurisdiction and Authority Post-Stern

    Confirmation

    S.D.N.Y. Bankruptcy Court Denies Claim for Make-Whole Premium and Allows Cram Down of Debtors’ Chapter 11 Plan Paying Secured Creditors Below-Market Interest Rates on Replacement Notes

     

    Bankruptcy Court Holds That Secured Creditors Can Be “Crammed Down” With Below-Market Rate Replacement Notes

    The Fourth Circuit Weighs in on Third-Party Releases in Plans of Reorganization

    Analysis Regarding Third-Party Releases in Bankruptcy

    Third Circuit Rules that Failure to Disclose Third-Party Release Proves Fatal

    Cross-Border

    Significant Changes To [Vietnamese] Bankruptcy Procedures

     

     

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    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...

    Image via Wikipedia

     

    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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