The current liquidity drought is pushing more businesses toward some form of financial reorganization. As the restructurings become more frequent, two different trends–one in bankruptcy and the other in private equity–will intersect. The result may surprise dealmakers searching the detritus for investment opportunities.

The Ninth Circuit Bankruptcy Appellate Panel has issued a pair of rulings in a case involving high-stakes litigation—with a claim in excess of $230 million, including $3 million in postpetition attorneys’ fees and costs. Beyond the high stakes, the court’s conclusions in Centre Ins. Co. v. SNTL Corp. (In re SNTL Corp.), 380 B.R. 204 (9th Cir. BAP 2007) have far-reaching implications; they are likely to affect a multitude of financing transactions that become entangled in bankruptcy.

The United States Bankruptcy Court for the Eastern District of Michigan has held that postpetition financing did not receive automatic status as an administrative expense claim under section 346(b) of the Bankruptcy Code. Therefore, the creditor could not object to confirmation of the Debtor’s plan on the grounds that all administrative expense claims would not be paid in full. In re Mayco Plastics, Inc., 379 B.R. 691 (Bankr. E.D. Mich. 2008).

A federal bankruptcy court in Florida has addressed an issue of first impression in its district regarding the degree of error necessary to render a financing statement “seriously misleading” under UCC 9-506.

Previously, we have discussed the risks involved in failing to name the debtor correctly on a financing statement. See CRaB Alert, February 2007, p. 14, “Calling Borrower ‘Mike’ Leads To Failure To Perfect.”

A federal district court in Michigan has affirmed a bankruptcy court’s refusal to accept a higher bid for various estate assets because the bid was made after the close of the auction, albeit prior to the hearing to confirm the auction results. Evangelista v. Opperman (In re Sebert), No. 07-15509 (E.D. Mich. Mar. 11, 2008).

Early this morning, Lehman Brothers Holdings, Inc. filed a notice, concerning the possible assumption and assignment of executory contracts to Barclays Capital as part of its purchase of the core assets of Lehman Brothers' U.S. broker-dealer business.

In the current economic climate, businesses are likely to take a keen interest in the ability of their suppliers and customers to meet their obligations. This can extend beyond purely financial obligations to include the protection of critical links in the supply chain. A manufacturer may, for instance, be very dependent on one of its suppliers for a specialist part that cannot readily be obtained elsewhere, or a supplier may rely heavily on an intermediary to reach ultimate consumers.

Attention holiday shoppers. Not sure what to buy Aunt Matilda or cousin George? A gift card allows them to buy whatever they like? Maybe. Large retailers such as Sharper Image, Bombay Company and Linens ‘N Things have filed for bankruptcy or gone out of business, leaving behind millions of dollars in unused gift cards. In bankruptcy, money left on a gift card is treated as a debt, which the bankruptcy court can decide if it is to be repaid, and how. If the retailer stays in business, the court may allow it to continue to honor its cards, but even then consumers may not get the full value.

The U.S. Court of Appeals for the Second Circuit has determined that a bankruptcy court may withdraw the derivative standing conferred on a statutory committee without that committee’s consent. Official Comm. of Equity Sec. Holders of Adelphia Communications Corp. v. Official Comm. of Unsecured Creditors of Adelphia Communications Corp. (In re Adelphia Communications Corp.), 544 F.3d 429 (2d Cir. 2008).  

The United States Court of Appeals for the Third Circuit has issued a decision that provides an important summary concerning the circumstances under which state law causes of action asserted between nondebtor parties are sufficiently interconnected with claims brought against a debtor to be considered “core proceedings,” which may be determined as part of a bankruptcy case. In re Exide Technologies, 544 F.3d 196 (3d. Cir. 2008).