In what appears to be a matter of first impression, the U.S. Bankruptcy Court for the Northern District of Illinois recently held that payments made to investors in a two tiered securitization structure commonly employed in commercial mortgage-backed securitization (“CMBS”) transactions are largely protected from fraudulent or preferential transfer claims by the securities contract safe harbor set forth in Bankruptcy Code section 546(e). Specifically, in Krol v.
When a debtor pays the market cost for goods and services provided to it by third-party vendors, these payments normally cannot be recovered as fraudulent transfers in the U.S. That is because the debtor receives reasonably equivalent value for the payments to its vendors and because the unsuspecting vendors can assert a good faith defense based on the value provided.
On March 12, 2015, the United States Court of Appeals for the Eleventh Circuit affirmed the authority of a bankruptcy court to issue non-consensual, non-debtor releases in connection with the confirmation of a plan of reorganization.1 With this decision, the Eleventh Circuit joined the majority view that such releases are permissible under certain circumstances.
Background
Recent legal and regulatory developments have raised issues for those considering a loan-to-own acquisition strategy, and have continued to impact both the structure of highly leveraged financings and the makeup of those willing to provide it.
In re RML -- Irrational Exuberance?
On January 21, 2015, the United States Court of Appeals for the Second Circuit entered an opinion holding that an authorized UCC-3 termination statement is effective, for purposes of Delaware’s Uniform Commercial Code (the “UCC”), to terminate the perfection of the underlying security interest even though the secured lender never intended to extinguish the security interest and mistakenly authorized the filing.1
Background
On October 17, 2014, the Delaware Supreme Court entered an opinion holding that a UCC-3 termination statement that is authorized by the secured party is effective to terminate the original UCC filing even though the secured party did not actually intend to extinguish the underlying security interest.1 Because the court determined that the relevant section of Delaware’s Uniform Commercial Code (the “UCC”) is unambiguous and
On October 16, 2014, the United States Court of Appeals for the Fifth Circuit entered an order requiring a real estate lender, First National Bank (the “Lender”), to refund certain mortgage payments it received from Protective Health Management (the “Debtor”), an affiliate of its borrower.1 Because the mortgage payments constituted actual fraudulent transfers, the Fifth Circuit held that the Lender could retain the payments only to the extent of the value of the Debtor’s continued use of the property.2&
Insider status in U.S. bankruptcy carries with it significant burdens. Insiders face a one year preference exposure rather than the 90 day period applicable to non-insiders; insiders are by definition disinterested persons and may not be retained to provide professional services and transactions among debtors and their insiders are subject to heightened scrutiny under the entire fairness doctrine.
Another bankruptcy court—this time in New York—has weighed in on the issue of whether “make whole” provisions are enforceable in bankruptcy. See In re MPM Silicones, LLC, et al. (a/k/a Momentive Performance Materials).
Several recent legal and regulatory developments in the U.S. will likely alter the makeup of the group of arrangers and financiers willing to arrange and provide financing for certain highly leveraged transactions, and also provide guidance to those considering a loan-to-own or related acquisition strategy, in order to help avoid potential pitfalls.
Revised Leveraged Lending Guidance