This chapter is taken from Lexology GTDT’s Practice Guide to Franchise, examining key themes topical to cross border franchising.

Introduction

Amendment to Bankruptcy Rule 3002

Certain amendments to the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) will become effective in all cases commencing after December 1, 2017.1

The amendment to Bankruptcy Rule 3002 is significant. As explained in detail below, the amendment does the following:

Creditors lacking liens to secure their claim can fare poorly in a bankruptcy case. The “absolute priority rule” is a bedrock principle of bankruptcy law and provides that a creditor at a particular rung of the claim priority hierarchy must be paid in full before any money flows down to junior creditors. Secured creditors reside near the top of the hierarchy, followed by administrative expense claimants, priority claimants and general unsecured creditors.

A recent decision by the Ninth Circuit Court of Appeals has fanned the smoldering dispute among courts regarding the scope of asset sales in bankruptcy. In the In re Spanish Peaks Holdings II, LLC decision, the Ninth Circuit affirmed a lower court’s holding that sale of commercial real estate can, in certain circumstances, be free and clear of all liens, claims, encumbrances, and interests, including a leasehold interest. In other words, a tenant of a bankrupt landlord could find itself with no interest in the property following the sale.

It's time to make offshore operations great again

In an opinion with serious implications for the treatment of overriding royalty interests ("ORRIs"), a Southern District of Texas Bankruptcy Court ruled that under Louisiana law, an ORRI could be recharacterized as debt rather than a royalty interest, even if the conveyance was facially consistent with an ORRI. An ORRI that is treated as debt would likely have a much lower priority for payment in bankruptcy than an ORRI treated as a royalty interest.

Oil and gas producers in Texas and a handful of other states have had the comfort of believing that they held purchase money security interests against the production in the hands of first purchasers and proceeds of that production. Now, the law supporting that belief has come under fire.