The Delaware bankruptcy court in the KB Toys, Inc. cases recently held that a claims purchaser takes a claim subject to certain disabilities of the claim as held by the seller, regardless of whether the claim transfer is deemed a “sale” or an “assignment.” SeeIn re KB Toys, Inc., Case No. 04-10120 (KJC) (Bankr. Del. May 4, 2012). In so ruling, the Delaware court’s decision is somewhat at odds with the decision issued by the District Court for the Southern District of New York in the Enron bankruptcy cases. See Enron Corp. v.
After several years of unusually few corporate defaults, there has recently been an uptick in corporations failing to satisfy their bond and loan obligations. In a number of cases, the debts in question are part of multiple-lien or multi-tranche financing structures that incorporate complex subordination packages. The agreements at issue often go beyond merely subordinating rights to payments.
It is common for lenders to require borrowers to agree to pay a higher interest rate, known as the default rate, following an event of default under a loan. Some loan agreements also require the borrower to pay a fee in the event of a late payment. If the borrower files for bankruptcy protection, the Bankruptcy Code affords special protection to secured creditors with respect to collecting interest.
It is common knowledge that the Bankruptcy Code provides a debtor with a “fresh start” by allowing it to discharge prepetition claims. Similarly, section 363 of the Bankruptcy Code allows a trustee or debtor in possession to sell property of the estate “free and clear” of prior claims. These two concepts, while relatively straightforward, raise a fundamental question — when does a creditor hold a “claim” for purposes of the Bankruptcy Code?
In the 2010 decision of In re Philadelphia Newspapers, 599 F.3d 298 (3d. Cir. 2010), the Third Circuit Court of Appeals concluded that a plan proponent could deny a secured creditor the right to credit bid on its collateral when the sale was made pursuant to a plan of reorganization. That holding was a surprise to many given that secured creditors were specifically authorized to credit bid in stand-alone sales under section 363 of the Bankruptcy Code. A year or so later, another circuit court, the Seventh Circuit Court of Appeals, came to the opposite conclusion.
The First Chamber of the Supreme Court recently handed down a decision dealing with the constitutionality of one of the timeframes set by the Bankruptcy Law for filing a proof of claim in bankruptcy proceedings.
On May 29, 2012, the United States Supreme Court issued its decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. ___ (2012), which affirmed that secured creditors have the right to use their claims to credit bid in auctions of their collateral conducted under bankruptcy reorganization plans. The decision is a victory for secured lenders because these credit bid rights ensure that, in the context of a collateral sale, secured lenders will be able to use their claims to purchase their collateral if they are not being repaid in full.
Litigation arising from the Tousa, Inc. fraudulent transfer claims has been working its way through the legal system since 2009, and the recent decision issued by the 11th Circuit Court of Appeals (the “11th Circuit”), has significant ramifications for any party holding debt, whether that debt is secured, unsecured, original issue or purchased on the secondary market. Regardless of the type of debt, or its source, Tousa illustrates that lenders must heighten their due diligence efforts to protect themselves from the risk of a lawsuit alleging fraudulent transfer liability.
Asbestos settlement trusts are a major source of payment of asbestos claims in the United States, with over fifty such trusts instituted as of March, 2011.1 While insurance recoveries are a principal source of funding for these trusts, courts generally have not allowed insurers to challenge chapter 11 plans where they are found to be “insurance neutral.” A plan is insurance neutral where the plan does not increase an insurer’s pre-petition liabilities or impair an insurer’s contractual rights under its insurance policies.
A New York trial court recently held that affiliates and subsidiaries of a bankrupt Mexican holding company were liable as guarantors on indentures issued by the corporation, despite ongoing Mexican bankruptcy proceedings that could potentially discharge their liability under Mexican law. Wilmington Trust, National Assoc. v. Vitro Automotriz, S.A. De C.V., et al., No. 652303/11 (N.Y. Sup. Ct. 2011).