The rapid growth in derivatives as hedging instruments, particularly through equity swaps, credit default swaps ("CDS") and loan credit default swaps ("LCDS"), has challenged fundamental assumptions underlying corporate governance law, federal shareholder disclosure requirements and bankruptcy law. Corporate law has long relied on a "one share one vote" model, which presumes that a shareholder's economic interests in a corporation are inextricably linked to their voting power.

In a recent decision,1 Judge Sweet of the United States District Court for the Southern District of New York affirmed a bankruptcy court decision and refused to recognize under chapter 15 of the Bankruptcy Code either as “foreign main proceedings” or as “foreign nonmain proceedings” the well-publicized liquidations brought in the Grand Court of the Cayman Islands by two Bear Stearns hedge funds (the “Funds”).

If you thought, like many, that the Delaware Supreme Court’s decision in Trenwick Am. Litig. Trust v. Billet, 2007 Del. LEXIS 357 (Del. 2007), put the theory of “deepening insolvency” to rest, once and for all, well, think again. A recent decision, George L. Miller v. McCown De Leeuw & Co. (In re The Brown Schools), 2008 Bankr. LEXIS 1226 (Bankr. D. Del. April 24, 2008), from the United States Bankruptcy Court for the District of Delaware shows that “deepening insolvency” endures, albeit in reduced form.

We have written in the past about the risks to investors in troubled companies from trustees in bankruptcy seeking recoveries for the estate on theories such as insider trading, breaches of duty and conflicts of interest. While those risks remain real, a recent decision from the Seventh Circuit Court of Appeals should provide some restraint on bankruptcy trustees.

A recent ruling in the Delphi Corporation, et al. ("Delphi") bankruptcy case calls into question the effectiveness of power of attorney provisions found in many claim purchase agreements. Specifically, on February 26, 2008, United States Bankruptcy Judge Robert D. Drain, presiding over the Delphi bankruptcy proceeding, held that claims purchasers could not submit cure notices in reliance on powers of attorney.

Delphi Sent Cure Notices Only to Contract Counterparties

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.

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.

In a recent decision1 in a claims objection proceeding in the Solutia chapter 11 case, the Bankruptcy Court for the Southern District of New York set clear limits on the allowance of secured claims.

In a closely watched case against Motorola, Inc. arising out of the Iridium chapter 11 case, Judge James M. Peck of the Bankruptcy Court for the Southern District of New York has adopted a market approach to determining prepetition solvency, finding “insufficient cause to set aside the verdict of solvency and capital adequacy already given to Iridium by the public markets.” In his 111-page opinion1 Judge Peck agreed with the Third Circuit’s approach in VFB LLC v.