The Bankruptcy Code prohibits a chapter 13 debtor from modifying a mortgage lien on the debtor's principal residence. Even in situations in which a secured creditor fails to file a proof of claim or otherwise participate in the bankruptcy proceeding, the Bankruptcy Code allows a secured creditor's lien on a primary residence to pass through the bankruptcy unaffected. However, a recent decision from a bankruptcy court in Texas illustrates the risks to secured creditors of blind reliance on these statutory protections.

Last week, in Assured Guaranty Corp. v. Fin. Oversight and Mgmt. Bd. for Puerto Rico, No. 17-1831, 2017 U.S. App. LEXIS 18387 (1st Cir., Sept. 22, 2017), the U.S. Court of Appeals for the First Circuit issued a noteworthy decision in the Puerto Rico quasi-bankruptcy proceedings. Overturning the district court’s ruling, the Court of Appeals held that the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”), 48 U.S.C.

The Bottom Line

In In re Short Bark Industries Inc., 17-11502 (Bankr. D. Del. Sept. 11, 2017), Judge Kevin Gross of the United States Bankruptcy Court for the District of Delaware read the Supreme Court’s holding in Jevic narrowly in connection with a settlement of a dispute on DIP financing.

On August 10, 2017, the U.S. Supreme Court rescinded the grant of certiorari in PEM Entities LLC v. Levin on the grounds that review had been “improvidently granted.” The case seemingly provided a perfect vehicle to resolve the circuit split on whether federal or state law governs debt recharacterization in bankruptcy, and less than two months after the Court first agreed to hear the case, its dismissal came as a surprise.

In recent years, courts have become increasingly critical of the doctrine of equitable mootness, a judicially created abstention doctrine that allows appellate courts to dismiss appeals from a bankruptcy court’s confirmation order in certain circumstances. Although the doctrine is meant to be applied only sparingly, to avoid unscrambling complex reorganizations on appeal, it has been invoked in noncomplex cases or where limited relief is practicable. As a result, some circuit courts have urged a more limited application of the doctrine.

Traditional thinking in the private placement noteholder community has been the “model form” approach to make-whole amounts created an enforceable liquidated damages claim in the event of voluntary or involuntary acceleration by the note issuer, including upon a bankruptcy filing. That thinking has been tested in the market as a result of a number of recent decisions involving public notes where courts have interpreted the specific indenture language to deny a make-whole claim.

The court awarded OpCo Noteholders in excess of $320 million in Make-Whole Amount and post-petition interest, confirming that make-whole is an enforceable liquidated damage claim.

(Bankr. E.D. Ky. Sep. 15, 2017)

The bankruptcy court denies the lender’s motion to dismiss the Chapter 11 bankruptcy. The lender argued that the party signing the debtor’s petition did not have the requisite authority to commence a bankruptcy case for the debtor. The bankruptcy court finds that amendments to the debtor’s operating agreement were made for the sole purpose of eliminating the debtor’s ability to file for bankruptcy without the lender’s consent. The court finds this violates Federal public policy and the provisions are unenforceable. Opinion below.

Judge: Schaaf