On April 9, 2013, Ambac Financial Group, Inc. (“Ambac”) submitted a proposed settlement with the United States to the U.S. Bankruptcy Court for the Southern District of New York. If approved, the proposed settlement would resolve more than two years of litigation concerning the tax treatment of losses sustained by Ambac in connection with credit default swap contracts entered into during the 2008 financial crisis. The settlement would result in a payment by Ambac to the Government of $101.9 million, as well as possible future additional payments of up to $14.9 million.

An important decision by Judge Kevin Carey of the United States Bankruptcy Court for the District of Delaware recently focused the distressed debt market (and financial creditors in general) on the proper legal characterization of a common financing provision — the “make-whole premium.”¹ Judge Carey allowed a lender’s claim in bankruptcy for the full amount of a large make-whole premium, after denying a motion by the Unsecured Creditors’ Committee to disallow the claim.

 WHY DOES THIS DECISION MATTER?

In another recent private letter ruling,¹⁹ the IRS ruled that an ownership change pursuant to a bankruptcy reorganization plan qualified for an exception to the general rule limiting net operating loss ("NOL") carryforwards under Section 382(a).

The U.S. bankruptcy claims trading market has grown in recent years, from one with a few specialized firms investing in small vendor trade claims into a multibillion dollar industry. Major investment banks and hedge funds now regularly buy and sell claims arising from a variety of transactions, including swap terminations, litigation judgments, debt issuances and rejected real estate and equipment leases. With individual claim amounts frequently in the millions (and sometimes billions) of dollars, the volume of claims bought and sold has increased significantly.

The ISDA Master Agreement¹ serves as the basis for the vast majority of overthe- counter derivatives transactions. Two fundamental principles of the ISDA Master Agreement are: (1) upon the default of one party to a swap, the nondefaulting counterparty may terminate the swap, calculate its loss and claim damages; and (2) the obligation of each party to a swap to make payments to the other is subject to the satisfaction of the conditions precedent that no default has occurred with respect to the other party.

On May 29, 2012, the United States Supreme Court resolved a split among the federal courts of appeals on an important bankruptcy issue, agreeing with arguments Morrison & Foerster advanced on behalf of Amalgamated Bank. In a unanimous opinion in RadLAX Gateway Hotel, LLC v. Amalgamated Bank,¹ the Court held that a Chapter 11 plan of reorganization that provides for a sale of a secured creditor’s collateral free and clear of liens must afford that secured creditor the right to credit bid.

According to a recent Delaware bankruptcy court decision, avoidance and disallowance risk travel with a distressed claim. This decision highlights the importance of diligence and the benefits provided by purchasing distressed debt on “distressed” documents.

The debt of a troubled company is trading in the secondary market at a significant discount because the company is highly levered and is at risk of default.

T he LBIE Client Money Judgment on the appeal from the Court of Appeal has been eagerly awaited by creditors and secondary claims trading market participants in order to give clarity to the funds available for the client money pool and to determine which clients will have the benefit of those funds.

The decision has implications for creditors of MF Global UK Limited and all clients of UK financial firms.

BACKGROUND

Greece is proceeding with the largest sovereign debt restructuring in history after its bondholders accepted a significant debt reduction in the face of mounting evidence that a Greek default was inevitable without such relief. In a related market development garnering only slightly less attention than the debt restructuring itself, the International Swaps and Derivatives Association, Inc.

T he recent—and unexpected—rejection by a U.S. Bankruptcy Court of the modified plan of reorganization of Washington Mutual, Inc. (“WaMu”)² on the ground of a “colorable claim” of insider trading has raised questions about the standards of conduct for members of ad hoc creditors committees during corporate reorganizations.³ In WaMu, Judge Mary F.