On March 26, 2008, the United States Supreme Court heard oral argument in the case of State of Florida Department of Revenue v. Piccadilly Cafeterias, Inc. to consider the United States Court of Appeals for the Eleventh Circuit's ruling that a bankruptcy court may exempt certain state and local taxes in a sale approved prior to confirmation of a chapter 11 plan under § 1146(c) of the Bankruptcy Code.
Introduction
Section 1146(a) (formerly, and for the purposes of this case § 1146(c)) of the Bankruptcy Code provides:
Bankruptcy Judge Judith Fitzgerald ruled last week that a debtor's insurance policies are assets of the estate and, therefore, can be properly transferred to a § 524(g) trust notwithstanding any applicable anti-assignment clauses. In re Federal-Mogul Global Inc., 01-10578 (Bankr. D. Del. March 19, 2008).
Recent news reports have focused on the problems of the financial markets on the one hand and consumer mortgage problems on the other. While Congress may yet grant authority to bankruptcy judges to modify home loans, modification of business loan facilities of all sizes remains available as a powerful and fundamental tool to be used in a business financial restructuring.
Owners of bank loan participations take on two kinds of credit risk: (i) the borrower’s failure to pay the underlying bank loan, and (ii) the loan participation grantor’s bankruptcy. The first risk is well understood and carefully analyzed in each transaction. This memorandum focuses on the second kind of credit risk assumed by a participant -- grantor insolvency.
The United States Bankruptcy Court for the Western District of Pennsylvania has ruled that a defendant in a declaratory judgment coverage action waived all of his discovery objections, including objections based upon the Fifth Amendment, for failing timely to assert them. Federal Ins. Co. v. Le-Nature's, Inc., 380 B.R. 747 (Bankr. W.D. Pa. 2008). Wiley Rein LLP represented the insurer.
The United States Court of Appeals for the Second Circuit has ruled that the Johns-Manville bankruptcy court did not have jurisdiction to enjoin direct action claims asserted against Travelers entities that are predicted on an independent duty owed by Travelers, that do not claim against the res of the Manville estate, and that seek damages unrelated to and in excess of Manville's insurance proceeds. Johns-Manville Corp. v. Chubb Indemnity Ins. Co., --- F.3d ---, 2008 WL 399010 (2d Cir. Feb. 15, 2008).
Recently, a number of high profile cases have emerged involving the application of material adverse change ("MAC") provisions, primarily in the context of leveraged buyouts.2 This week, the application of MAC clauses to a financing commitment arose in the context of the Solutia Inc. ("Solutia") bankruptcy proceeding. On February 6, 2008, Solutia filed an adversary proceeding against certain lenders (the "Lenders")3 seeking to enforce a commitment to provide $2 billion in exit financing.
Following a recent ruling in the Delphi Corporation bankruptcy case approving cure notices and cure claims procedures, purchasers of unsecured trade claims originating out of executory contracts or unexpired leases should take special precautions to protect their rights or risk impairment or loss of such claims to the extent they become cure claims.
The Bankruptcy Code facilitates asset sales in chapter 11 by offering incentives to buyers and flexibility in structuring and timing the sale. A buyer can acquire assets free and clear of liens and is permitted to "cherry-pick" the debtor's contracts and leases to select only those it wants to keep. The assets and sale process can be structured in many ways, including auctions, private sales, lot or bulk sales, and going concern transactions.
The Key Parties
The United States District Court for the District of New Jersey has abstained from hearing a dispute between a primary and an excess professional liability insurer related to a bankruptcy settlement based on the mandatory abstention doctrine. Royal Indemn. Co. v. Admiral Ins. Co., Inc., 2007 WL 4171649 (D.N.J. Nov. 19, 2007). After the insured corporation declared bankruptcy, the bankruptcy trustee settled claims with the insured's primary professional liability insurer.