Bankruptcy Judge Steven Rhodes ruled from the bench on December 3, 2013 (followed by a written opinion on December 5, 2013) that Detroit is eligible for bankruptcy protection, allowing the city to attempt to restructure $18.5 billion of debt. Thus begins the largest American municipal bankruptcy case. After nine days of trial, the judge ruled that although the city did not negotiate in good faith prior to bankruptcy, it was impossible for the city to do so.

Good news for lenders. Judge Carey of the Bankruptcy Court for the District of Delaware enforced a make-whole premium equal to 37 percent of the outstanding principal balance on a loan. He determined that, under New York state law, the calculation was not "plainly disproportionate" to the lender’s possible loss and was negotiated at arm’s length between sophisticated parties. In addition, Judge Carey held that a make-whole claim was not equivalent to "unmatured interest," which is unauthorized under Section 502 of the Bankruptcy Code, but instead was a claim for liquidated damages.

A new troubling case from California allows borrowers to present evidence of prior oral statements of a lender which contradict the terms of the written agreement between the parties with a standard integration clause. Marsha Houston of our Los Angeles office writes more about the case below.

The U.S. Supreme Court has agreed to settle the dispute as to whether secured creditors can credit bid in connection with asset sales done pursuant to liquidating plans. The Third Circuit in the Philadelphia Newspapers case and the Fifth Circuit in the Pacific Lumber case held that secured creditors do not have a statutory right to credit bid their debt at a sale conducted under a plan of reorganization pursuant to which the debtor elects to provide the secured creditors with the “indubitable equivalent” of their secured claim.

We all know that many large commercial real estate loan transactions include “bad boy” guaranties from the principals of the borrower which spring into action upon the occurrence of certain events, like the filing of a bankruptcy petition. Some borrowers do not take these guaranties seriously since they think that they are in violation of public policy and/or constitute an unenforceable penalty.

Under the proposed new insolvency regime created by Dodd-Frank, the FDIC may be appointed as receiver of a financial company if it is determined that the financial company is in default or in danger of default, and the failure of the financial company would have serious adverse effects on financial stability in the United States.The receiver is required to liquidate the failing financial company in a manner that imposes all losses on the company’s creditors and shareholders (rather than on taxpayers).

For over 30 years, most bankruptcy courts have approved plans where the secured lender “gifts” a distribution to a junior class in order to obtain a consensual plan. These courts note that the distribution is from the secured lender’s property (not estate property) and the secured lender can do what it wants with its own property.

We are seeing more and more challenges by borrowers to swaps. No big surprise since, with falling interest rates over the past few years, the borrowers are on the wrong end of the transactions. Although swaps are considered independent of the loans, they are often secured by the same collateral and are usually crossdefaulted with the loans, so the obligations that arise from early termination (which can be significant) become part of the collection process and are being fought vigorously by borrowers.