On May 4, 2012, the Delaware bankruptcy court inIn re KB Toys, Inc., et al. (KB Toys), handed down a thoughtful decision addressing the issue of whether impairments attach to a claim or remain with its seller. The KB Toys court held that “a claim in the hands of a transferee has the same rights and disabilities as the claim had in the hands of the original claimant. Disabilities attach to and travel with the claim.”
On May 15, 2012, the Eleventh Circuit Court of Appeals (the “Circuit Court”) issued an opinion in In re TOUSA, Inc.,1 in which it affirmed the original decision of the bankruptcy court and reversed the appellate decision of the district court. After a 13-day trial, the bankruptcy court had found that liens granted by certain TOUSA subsidiaries (the “Conveying Subsidiaries”) to secure new loans (the “New Term Loans”) incurred to pay off preexisting indebtedness to certain lenders (the “Transeastern Lenders”) were avoidable fraudulent transfers.
IN RE: USA BABY, INC. (March 28, 2012)
Scott Wallis owned 5% of USA Baby, Inc., a children's furniture franchisor. After its creditors forced it into reorganization, the bankruptcy trustee moved to convert the case to a liquidation. The bankruptcy judge agreed. Wallis moved twice for reconsideration. He alleged first that the trustee and franchisees committed fraud. He later argued that reorganization was possible if the franchisees paid fees that were due. The court denied his requests. Judge Lefkow (N.D. Ill.) affirmed. Wallis appeals.
In October 2009, the court overseeing the TOUSA, Inc. bankruptcy cases in the Southern District of Florida (Bankruptcy Court) set off considerable alarm bells throughout the lending community when it unraveled a refinancing transaction as a fraudulent conveyance based upon, in primary part, the fact that certain subsidiaries of TOUSA, Inc. pledged their assets as collateral for a new loan that was used to repay prior debt on which the subsidiaries were not liable, and that was not secured by those subsidiaries’ assets.
On May 15, 2012, the United States Court of Appeals for the Eleventh Circuit issued an important opinion1 in the ongoing fraudulent conveyance litigation brought by the unsecured creditors’ committee in the bankruptcy of homebuilder TOUSA, Inc. (“TOUSA”).
In Mothershead v. Delphi Corp., ARB No. 10-120, ALJ No. 2007-SOX-084, (ARB Apr. 26, 2012), the Administrative Review Board (“ARB”) held that the bankruptcy discharge of an individually owned company’s claim also barred the individuals owner’s whistleblower complaint.
The Delaware Bankruptcy Court has approved procedures for a sale of AFA Investment, Inc. and its affiliates’ assets. As approved, the procedures are largely as reported here on April 20, 2012, with some changes:
- AFA has until June 11, 2012 to identify a stalking horse bidder. If one isn’t identified, AFA must file its own proposed form of asset purchase agreement on that date.
- Qualifying bids are due by June 19, 2012 at 4:00 p.m.
- If an auction is held, it will be on June 21, 2012 at 10:00 a.m.
On May 8, 2012, the U.S. Bankruptcy Court for the District of Delaware (the “Court”) entered its Order (the “Order”) Establishing Procedures to Assert Claims Arising under Section 503(b)(9) of the Bankruptcy Code (“503(b)(9) Claims”) in the chapter 11 cases of AFA Investment, Inc. and its affiliated debtors (collectively, the “Debtors”) (Bankr. D. Del. 12-11127 (MFW)).
On May 10th, FDIC Acting Chairman Martin J. Gruenberg discussed the FDIC's authority to resolve failing systemically important financial institutions ("SIFIs"). Gruenberg outlined how the FDIC would implement its resolution authority, noting that it would place the institution in receivership, creating a bridge holding company for the SIFI's assets and investments. Shareholders and subordinated and unsecured creditors would be left in receivership, although some of the SIFI's debt would be converted into equity.
Indentures often contain make-whole premiums payable upon early redemption of the debt, and term B loan agreements often include "soft call" protection in the form of prepayment premiums during the early life of the loan. If the debt issuer becomes subject to a chapter 11 proceeding after the debt issuance, the question then arises as to how this payment obligation is to be treated: Does the make-whole or prepayment premium constitute unmatured interest due as a result of the debt acceleration, which would be disallowed, or is it liquidated damages?