As a general rule, absent an express agreement to the contrary, expenses associated with administering the bankruptcy estate, including pledged assets, are not chargeable to a secured creditor’s collateral or claim but must be paid out of the estate’s unencumbered assets. Recognizing, however, that the bankruptcy estate may be called upon to bear significant expense in connection with preserving or disposing of encumbered assets as part of an overall reorganization (or liquidation) strategy, U.S.

Participants in the multibillion-dollar market for distressed claims and securities had ample reason to keep a watchful eye on developments in the bankruptcy courts during each of the last three years. Controversial rulings handed down in 2005 and 2006 by the bankruptcy court overseeing the chapter 11 cases of failed energy broker Enron Corporation and its affiliates had traders scrambling for cover due to the potential that acquired claims/debt could be equitably subordinated or even disallowed, based upon the seller’s misconduct.

In Go West Entertainment, Inc. v. New York Liquor Authority (In re Go West Entertainment, Inc.),1 the United States Bankruptcy Court for the Southern District of New York refused to extend the automatic stay or to utilize its other injunctive powers to prevent state regulatory authorities from revoking a debtor’s liquor license.

U.S. v. Henry, Case No. 08-003 (W.D. Va. July 1, 2008)

The Ninth Circuit’s Bankruptcy Appellate Panel (the “BAP”) held on July 18, 2008, that the Bankruptcy Code (“Code”) did not authorize a bankruptcy court’s approving the sale of a debtor’s property free and clear of a junior lien outside the reorganization plan context. In re PW, LLC __ B.R. __, 2008 WL 2840659 (B.A.P. 9th Cir. July 18, 2008). It directed the bankruptcy court to ascertain on remand whether state law permitted a court to compel the junior lienholder to release its lien in exchange for payment of less than the face value of its claim. Id., at *13-*16.

The revisions to Ohio’s exemption law set forth in O.R.C. §2329.66 become effective on September 25, 2008 by Senate Bill 281 that was signed by Governor Strickland on June 27, 2008. The purpose of the changes to Ohio’s exemption law is to increase the exemptions for property that a debtor may hold exempt from execution, garnishment or sale for the satisfaction of a judgment. Ohio’s current exemptions have not been revised since 1979, and the current exemptions do not reflect the costs of living in 2008.

Earlier today (September 15, 2008), Lehman Brothers Holdings Inc. (Holdings), the corporate parent of the fourth largest investment bank in the United States, filed for Chapter 11 protection in the United States Bankruptcy Court for the Southern District of New York. As of writing, neither Holdings’ broker-dealer subsidiaries (including Lehman Brothers, Inc. [Lehman NY]) nor other subsidiaries (including Neuberger Berman Holdings, LLC, its asset management subsidiary) have commenced insolvency proceedings in the United States.

On September 7, the U.S. Treasury Department and the Federal Housing Finance Authority (FHFA) placed Fannie Mae and Freddie Mac into conservatorship, and announced (i) Treasury’s entry into a Senior Preferred Stock Purchase Agreement with each Government Sponsored Entity (GSE), (ii) the creation of a Government Sponsored Entity Credit Facility (GSECF), and (iii) the adoption of a GSE Mortgage Backed Securities (MBS) Purchase Program.

On July 28, 2008, the FDIC published a Notice of Proposed Rulemaking in the Federal Register seeking to establish recordkeeping requirements for qualified financial contracts (“QFCs”) held by banks in “troubled” condition. The purpose of the Proposed Rule is to enable the FDIC, upon receivership, to make expeditious and well-informed decisions with respect to the management of a failed bank’s QFC portfolio.

In In re Falcon Products, Inc., 381 B.R. 543 (8th Cir. BAP, 2008), the bankruptcy appellate panel (BAP) for the Eighth Circuit reversed a decision by the bankruptcy court for the District of Missouri, and held that when applying the hypothetical liquidation test to determine whether a secured creditor received potentially preferential payments, the collateral must be valued as of the petition date and not as of the payment transfer date.