On October 2, the official committee of unsecured creditors in the chapter 11 cases of Lyondell Chemical Co. filed a motion for the appointment of an examiner in the U.S. Bankruptcy Court for the Southern District of New York. The committee asserts that an examiner is needed to investigate allegations of a conflicted rights offering sponsor, the debtors’ refusal to refinance the debtor-in-possession credit facility, and the debtors’ refusal to formulate a plan of reorganization with an appropriate reserve for unsecured creditors pending resolution of the committee’s adversary proceeding.

latest Distressed Assets Opportunities lists prepared by our colleagues in the Business Reorganization and Bankruptcy Group and the Real Estate Group. The lists can be accessed by clicking the hyperlinks.

Introduction

The dearth of credit available for companies in financial distress means an asset sale may be the only way to save the business and jobs. It also presents unusually attractive investment opportunities for public and private companies, private equity and hedge funds, and other investors with capital and an ability to move expeditiously.

Credit agreements typically provide that any amendment permitting the release of “all or substantially all” of the collateral requires the unanimous consent of the lenders. Many market participants expect that this provision provides protection against the agent and other lenders from consenting to the sale of the collateral and releasing the corresponding liens without the consent of all lenders.

The recent steady drumbeat of Chapter 11 bankruptcy filings is producing an equally persistent corollary: creditors receiving new securities issued by the reorganizing debtor or a related party in full or partial satisfaction of the creditors’ claims. Some of these creditors-cum-investors never planned to receive securities. The paradigmatic example is a creditor that enters into a normal business transaction resulting in an obligation that the debtor company hasn’t yet satisfied when it files for reorganization.

Nothing is certain in today's financial crisis - except that the legal system will be sorting out the rights and obligations of financial market participants for years to come. This is especially true for participants in the over-the-counter derivatives markets.

This memorandum provides an overview of the practical issues facing a sub-participant under a Loan Market Association ("LMA") English-law governed sub-participation agreement as the creditworthiness of grantor deteriorates.

Boards of directors of troubled companies must balance their fiduciary obligations to shareholders and creditors. Insolvent companies owe duties to creditors and not solely to shareholders and, under evolving case law, companies acting in the "zone of insolvency" owe a duty to creditors as well as to shareholders.

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.

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.