On January 14, 2021, the U.S. Supreme Court held in City of Chicago v. Fulton, 592 U.S. __ (2021), that a creditor in possession of a debtor's property does not violate the automatic stay, specifically section 362(a)(3) of the Bankruptcy Code, by retaining the property after the filing of a bankruptcy petition. The Court's decision provides important guidance to bankruptcy courts, practitioners, and parties on the scope of the automatic stay's requirements.
In the latest chapter of more than a decade of litigation involving efforts to recover fictitious profits paid to certain customers of Bernard Madoff's defunct brokerage firm as part of the largest Ponzi scheme in history, the U.S. Court of Appeals for the Second Circuit held in In re Bernard L. Madoff Investment Securities LLC, 976 F.3d 184 (2d Cir.
In Short
The Situation: Circuit courts were split on whether mere retention by a creditor of estate property violates the Bankruptcy Code's automatic stay, under 11 U.S.C. § 362(a)(3). The U.S. Supreme Court considered the question inCity of Chicago v. Fulton, in which the City of Chicago had refused to return debtors' vehicles after they filed Chapter 13 bankruptcy petitions.
The ability of a bankruptcy trustee to avoid certain transfers of a debtor's property and to recover the property or its value from the transferees is an essential tool in maximizing the value of a bankruptcy estate for the benefit of all stakeholders. However, a ruling recently handed down by the U.S. Court of Appeals for the Tenth Circuit could, if followed by other courts, curtail a trustee's avoidance and recovery powers. In Rajala v. Spencer Fane LLP (In re Generation Resources Holding Co.), 964 F.3d 958 (10th Cir. 2020), reh'g denied, No.
Introduction
Derivative Standing
Dura Automotive
The Bankruptcy Court's Ruling
The McClatchy Company
Outlook
The practice of conferring "derivative standing" on official creditors' committees to assert claims on behalf of a bankruptcy estate in cases where the debtor or a bankruptcy trustee is unwilling or unable to do so is a well-established means of generating value for the estate from litigation recoveries. However, in a series of recent decisions, the Delaware bankruptcy courts have limited the practice in cases where applicable non-bankruptcy state law provides that creditors do not have standing to bring claims on behalf of certain entities.
Parts I and II in this series discussed certain of the statutory predicates of credit bidding and some considerations for structuring such a bid. Here in Part III, we will address some additional issues that a lender must take into account when deciding to credit bid its debt and some documentary considerations. As its name implies, the predominant form of consideration in a credit bid is often the lender’s debt. Lenders, however, cannot ignore another component of consideration often needed to consummate a transaction, cash.
In Part I of this three part series we noted the likelihood that credit bidding will be more prevalent in today’s unpredictable economic environment and discussed some of the statutory backdrop. Here, in Part II, we will discuss certain mechanics that are associated with making, and later consummating, a credit bid.
For many secured lenders, the concept of credit bidding in bankruptcy is generally understood yet infrequently explored in practice. In today’s extremely uncertain economic environment, third-party alternatives may not present themselves as M&A activity and acquisition financing have slowed significantly with the spread of COVID-19. As a result, credit bidding could gain momentum as lenders look for self-help alternatives to maximize their recoveries.
The Situation: In the past few weeks, due to the severe impact of the COVID-19 crisis on non-essential businesses forced to close and terminate employees after filing for chapter 11 protection, bankruptcy courts have been confronted with requests by debtors to temporarily suspend their bankruptcy cases using the courts' equitable powers and a seldom-used provision of the Bankruptcy Code: 11 U.S.C. § 305(a).