What Happened?

The Bottom Line

One feature commonly seen in commercial lending transactions is a waiver of the borrower’s authority to file for bankruptcy without the consent of the lender. While such “blocking” provisions are generally upheld where the equity interest holders are the parties with such rights, they are generally unenforceable as a matter of public policy when such protection is given to a creditor with no meaningful ownership interest in the corporate debtor.

Overview

When enacting the Bankruptcy Code, Congress sought to strike a balance amid the confluence of different — and often competing — interests held by debtors, secured creditors and various unsecured creditor constituencies (including landlords) through a framework of statutory protections. This has – at times – led to litigation over differing statutory interpretations as well as circuit splits as courts attempt to reconcile underlying policy goals with the less-than-clear language in various of the Code’s provisions.

One difficulty encountered by creditors and trustees in bankruptcy is the use of one or more aliases by a bankrupt. Whether it is an innocent use of a nickname or an attempt to conceal one's identity, the use of an alias can often create problems for creditors seeking to pursue debts and for trustees seeking to recover assets held by a bankrupt.

How does it happen?

Real estate lenders and borrowers everywhere are trying to figure out what to do with properties that are either sitting vacant or underperforming pre-pandemic expectations. In New York, a number of mezzanine foreclosures have been pursued with varying degrees of success when challenged in court. Some lenders have been shopping their loans, mostly at discounts to par that are not large enough to create substantial deal flow in the marketplace.

As concerns about illegal phoenix activity continue to mount, it is worth remembering that the Corporations Act gives liquidators and provisional liquidators a powerful remedy to search and seize property or books of the company if it appears to the Court that the conduct of the liquidation is being prevented or delayed.

When a person is declared a bankrupt, certain liberties are taken away from that person. One restriction includes a prohibition against travelling overseas unless the approval has been given by the bankrupt's trustee in bankruptcy. This issue was recently considered by the Federal Court in Moltoni v Macks as Trustee of the Bankrupt Estate of Moltoni (No 2) [2020] FCA 792, which involved the Federal Court's review of the trustee's initial refusal of an application by a bankrupt, Mr Moltoni, to travel to and reside in the United Kingdom.

Historically, the interests of landlords whose commercial real estate is occupied by debtors in Chapter 11 proceedings have been generally well protected. Indeed, Section 365(d)(3) of the Bankruptcy Code requires the debtor to timely perform all of its post-petition obligations under its nonresidential leases of real property — most important among those, rent.

On March 27, the president signed into law Phase 3 of the federal stimulus program, called the Coronavirus Aid, Relief, and Economic Security Act, or CARES Act. Title I of the act, titled the Keeping American Workers Paid and Employed Act (KAWPEA), directs, among other amounts, $349 billion to small businesses as part of an expansion of the U.S. Small Business Administration’s (SBA) Section 7(a) loan program under a new paycheck protection loan program (PPP) as well as $10 billion through an expansion to the SBA’s Section 7(b) economic injury disaster loan (EIDL) program.

The question is not if but how deeply the global coronavirus (COVID-19) pandemic will disrupt businesses and impact future operations. That answer differs based upon each company’s industry, access to cash and other capital, debt structure, ability to manage expenses, lost revenues, and operational interruption. Certain industries, such as airlines and airline service companies, hotels, restaurants, sports and entertainment, media, and retailers, among others, are suffering immediate adverse effects. Our healthcare resources are being stretched thin.