Essentially all securitization structures utilize a bankruptcy remote entity, a/k/a special purpose entity (“SPE”), to reduce the lenders’ or investors’ exposure to a bankruptcy of the sponsor. A standard feature of SPEs is the appointment of an independent person (director, member, manager) to the body managing the SPEs. That independent person’s consent is required for “major decisions,” one of which is the filing of, or consenting to a bankruptcy of the SPE (hence the court’s reference to them as “blocking directors”).

On Sunday, May 1st, Energy Future Holdings Corp. (“EFH”) filed a new joint chapter 11 plan of reorganization and disclosure statement (the “New Plan”) after plans to fund EFH’s exit from bankruptcy by selling its Oncor power distribution business failed.

BACKGROUND

You know, there’s never a dull moment when one reports on the regulatory states’ endless and so often fruitless and wrong-headed tinkering with the global economy. So now… let’s talk bail-in.

A recent decision by the U.S. Court of Appeals for the Second Circuit, In re Tribune Company Fraudulent Conveyance Litigation,¹ represents a significant victory for shareholders who may get cashed out in connection with a leveraged transaction that precedes a company bankruptcy.

SEC and FDIC Propose Dodd-Frank Broker-Dealer Resolution Rules

Two recent court decisions may affect an equity sponsor’s options when deciding whether and how to put money into - or take money out of - a portfolio company. The first may expand the scope of “inequitable conduct” that, in certain Chapter 11 settings, could lead a court to equitably subordinate a loan made by a sponsor to its portfolio company, placing the loan behind all of the company’s other debt in the payment queue. The second decision muddies the waters of precedent under the U.S. Bankruptcy Code on the issue of the avoidability of non-U.S.

An overvalued property may now have a bigger impact on a secured creditor’s bottom-line during bankruptcy.  Splitting with the Seventh Circuit, the Fifth Circuit in Southwest Securities, FSB v.

Two recent court decisions may result in a broadening of the range of options available to an equity sponsor in respect of an insolvent portfolio company. The first decision may provide increased flexibility in structuring asset sales in certain chapter 11 settings, by utilizing escrows and other techniques to potentially avoid the need to apply asset-sale proceeds strictly in accordance with creditor priorities under the U.S. Bankruptcy Code.

In the high-profile bankruptcy case of Energy Future Holdings Corp. (“EFH”) a Delaware bankruptcy court recently called into question reliance on structural subordination as a way to protect a borrower’s assets from satisfying claims against an affiliated company. In the EFH bankruptcy case, holders of unsecured PIK notes issued by EFH subsidiary Energy Future Intermediate Holdings Company LLC (“EFIH”) sought to collect post-petition interest at the rate stated in the notes issued by EFIH.

It is a basic feature of sales under section 363 of the U.S. Bankruptcy Code, that the purchaser takes free and clear of all claims and interests, such claims and interests attach to the proceeds of the sale in accordance with their priorities.