Introduction

In a decision that was not surprising but nevertheless disappointing, the U.S. Court of Appeals for the Second Circuit recently affirmed the order of the U.S. Bankruptcy Court concluding that the “net equity” calculation for distributions back to Madoff victims should be based on the Net Investment Method, the total of actual deposits and withdrawals, and not the last statement amount listed on the final brokerage account statement. As a result, claw back law suits against the inaptly named “net winners” are sure to continue unabated.

Background

The U.S. Bankruptcy Court for the District of Delaware ruled that an affiliate that held an indirect ownership interest in, and was a lender to, an employer could be liable for severance payments under the Federal WARN Act. In order for liability to apply to the affiliate, the affiliate and employer need to be found to constitute a "single employer" for Federal WARN Act purposes.

Lenders and mortgage holders may be surprised to learn that a New York bankruptcy court voided the foreclosure sale of non-debtor property where the debtor filed for bankruptcy with no legitimate intent to reorganize. In a case of first impression, In re Ebadi1 addresses a common scenario: a foreclosure action against multiple parties, including a borrower not in bankruptcy and a guarantor in bankruptcy.

A Delaware bankruptcy judge recently held that a landlord's right of first refusal to purchase a debtor/tenant's liquor license (the "Option") was unenforceable since the debtor rejected the lease containing the Option1. Disagreeing with a ruling of the First Circuit Court of Appeals2, the Delaware court held that the Option provision was a non-severable part of an executory contract that was not subject to specific performance.

The Facts

Representing a mortgagee holding liens on 37 unsold condominium units, Herrick, Feinstein successfully blocked a debtor's effort to confirm a chapter 11 plan of reorganization via cramdown. The plan envisioned sales of 27 unsold units over five years, deferred payments to the mortgagee at the rate of 4.75%, and scheduled principal pay downs from the sale of units.

The Delaware Chancery Court has found the recapitalization of a media production company entirely fair. Faced with the possibility of bankruptcy and unable to service its debt, the company's board of directors (acting through its special committee) approved a revised recapitalization plan proposed by the company's majority stockholder and primary debt holder. The special committee retained independent legal counsel and a financial advisor. The special committee, after engaging in extensive due diligence, determined to negotiate the recapitalization proposal.

A New York bankruptcy judge has refused to permit a debtor to use rents generated by its real property because the rents absolutely assigned to the lender pre-petition were not property of the debtor's bankruptcy estate.2 Before the bankruptcy filing, the lender sent the borrower a default notice and terminated the borrower's license to collect rents. The lender also directed tenants to pay rents to it and not the borrower, commenced a foreclosure action, and sought appointment of a receiver.

Reversing the bankruptcy court, a Sixth Circuit Bankruptcy Appellate Panel held that a debtor in a single asset real estate case did not provide adequate protection to a creditor by providing replacement liens in the rents where there was no equity cushion.4 The notion that granting the lender a lien on future rents to replace the expenditure of prior months' rents was rejected. Accordingly, the appellate panel held that the debtor could not use rents collected post-petition to pay ordinary administrative expenses, such as fees of its professionals.

It is commonly known that a borrower's agreement with a third party not to file a bankruptcy case is unenforceable due to public policy considerations. Accordingly, lenders have searched for ways to make it difficult or painful for their borrowers to file for bankruptcy, such as imposing the requirement that prior authorization of an independent director or member be a prerequisite to a bankruptcy filing by the borrower, or requiring the borrower's principal to execute a non-recourse carve-out guaranty that would impose personal liability should the borrower file for bankruptcy.