Introduction
The New Law Aims at Protecting Entities against the Negative Effects of Insolvency by their Majority Owners
A Western District of New York bankruptcy court has held that the safe harbor provisions of section 546(e) of the Bankruptcy Code apply to leveraged buy-outs of privately held securities. See Cyganowski v. Lapides (In re Batavia Nursing Home, LLC), No. 12-1145 (Bankr. W.D.N.Y. July 29, 2013).
On November 7, 2012, Judge Lewis A. Kaplan for the United States District Court of the Southern District of New York held that payments made in connection with a leveraged buyout to holders of privately held securities were safe harbored under section 546(e) of the Bankruptcy Code notwithstanding the fact that the payments passed directly from the purchaser to the seller without the use of any financial intermediary. AP Services LLP v. Silva, et al., Case No. 11-03005 (S.D.N.Y. Nov. 7, 2012).
Manufacturers, distributors and other merchants of goods who sell their products on credit terms routinely accept a high level of risk of defaulted payment from their customers. In good times, credit-related losses are relatively predictable as a percentage of sales and can be offset by variations in pricing and volume across a seller’s sales transactions. Unfortunately, we are far removed from the good times. The prolonged economic slump has resulted in increased payment defaults and a 150 percent rise in business bankruptcies since the summer of 2007.
In a recent decision, the United States Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) granted protection over the U.S. assets of a Cayman Islands exempted company in liquidation. See Revised Order Recognizing Foreign Proceeding (the “Order”), In re Saad Investments Finance Company (No.5) Limited (“SIFCO5”), Case No. 09-13985 (KG) (Bankr. D. Del. Dec. 17, 2009) (Docket No. 47). The company, SIFCO5, is subject to official liquidation proceedings in the Cayman Islands, which the Bankruptcy Court found was eligible for relief under chapter 15 of the U.S.
Elaborating on its Resorts decision of ten years ago concerning payments to shareholders in a public leveraged buyout,1 the Court of Appeals for the Third Circuit recently ruled in In re Plassein Int’l, Corp.2 that the “settlement payment” exemption of section 546(e) of the Bankruptcy Code also insulates selling shareholders in a private LBO from fraudulent transfer liability.
363 Asset Sales: The Latest Restructuring Tool
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.
In a decision with potentially broad implications, the U.S. Court of Appeals for the Sixth Circuit recently determined that payments made to former shareholders of a privately held company in a leveraged buyout transaction are protected as "settlement payments" pursuant to section 546(e) of the Bankruptcy Code.
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.