Amendment to Bankruptcy Rule 3002

Certain amendments to the Federal Rules of Bankruptcy Procedure (the “Bankruptcy Rules”) will become effective in all cases commencing after December 1, 2017.1

The amendment to Bankruptcy Rule 3002 is significant. As explained in detail below, the amendment does the following:

The Bankruptcy Code gives secured creditors certain rights and protections. For secured creditors whose collateral is worth more than the creditor’s claim, these rights may include payment of attorney’s fees and post-petition interest at a rate agreed to in the debtor’s and creditor’s prepetition agreement. A chapter 11 bankruptcy plan, however, may have provisions in it that expressly takes away a secured creditor’s right to post-petition interest.

Just about every year amendments are made to the rules that govern how bankruptcy cases are managed — the Federal Rules of Bankruptcy Procedure. The amendments address issues identified by an Advisory Committee made up of federal judges, bankruptcy attorneys, and others. As the photo above reminds us, the rule amendments are ultimately adopted by the U.S. Supreme Court (and technically subject to Congressional disapproval).

Creditors lacking liens to secure their claim can fare poorly in a bankruptcy case. The “absolute priority rule” is a bedrock principle of bankruptcy law and provides that a creditor at a particular rung of the claim priority hierarchy must be paid in full before any money flows down to junior creditors. Secured creditors reside near the top of the hierarchy, followed by administrative expense claimants, priority claimants and general unsecured creditors.

A recent decision by the Ninth Circuit Court of Appeals has fanned the smoldering dispute among courts regarding the scope of asset sales in bankruptcy. In the In re Spanish Peaks Holdings II, LLC decision, the Ninth Circuit affirmed a lower court’s holding that sale of commercial real estate can, in certain circumstances, be free and clear of all liens, claims, encumbrances, and interests, including a leasehold interest. In other words, a tenant of a bankrupt landlord could find itself with no interest in the property following the sale.

On June 25, 2017, Takata’s US arm, TK Holdings Inc.

The Supreme Court recently agreed to review the applicability of the safe harbor provision in section 546(e) of the Bankruptcy Code after differing interpretations of the statute created a split among the circuit courts. The ultimate outcome on the issue currently before the Supreme Court will undoubtedly impact how parties choose to structure their debt and asset transactions going forward.

Predictions that retailers would increasingly find themselves filing bankruptcy, whether for the first or second time, are proving true mid-year. See January 2017 Alix Partners Survey at p. 2.

In a significant ruling impacting commercial real estate lenders in Michigan, the Sixth Circuit Court of Appeals has ruled that an absolute assignment of rents that had been fully perfected (by demanding payment from tenants to the lender and related recording) precludes a debtor from asserting that such rents can be used as cash collateral in bankruptcy. The reasoning is that these rents do not constitute property of the bankruptcy estate. As such, the debtor could not proceed with its Chapter 11 case.

Background

The U.S. Supreme Court’s decision today in Midland Funding, LLC v. Johnson, 581 U.S. ___, No. 16-348, draws attention in passing to a peculiar feature of Wisconsin law on the effect of statutes of limitations.