The FDIC voted to extend the safe harbor provided under 12 C.F.R. § 360.6 until September 30, 2010, from the FDIC’s ability, as conservator or receiver, to recover assets securitized or participated out by an insured depository institution. When the safe harbor was initially adopted in 2000, the FDIC provided important protections for securitizations and participations by confirming that, in the event of a bank failure, the FDIC would not try to reclaim loans transferred into such transactions so long as an accounting sale had occurred.

The US Federal Deposit Insurance Corporation (FDIC) estimates that by the end of 2010, more than 300 banks will have failed, and that the cost of resolving these failures may reach $100 billion over the next four years.1

Creation of the Bankruptcy Estate  

There have been a number of stories about how Ambac filed for Chapter 11 on November 8. However, there’s Ambac and then there’s Ambac and then there’s Ambac. If that all sounds the same to you, we are actually referring to three different Ambacs and the purpose of this blog is to help clear up the market confusion. First there is the Ambac that filed for Chapter 11 on November 8, which is Ambac Financial Group Inc. (AFG). This must mean that the bankruptcy trigger events in the contracts of all of Ambac’s insured counterparties were triggered by the bankruptcy filing, right?

In In re Rodriguez, No. 09-2724 (3rd Cir. Dec 23, 2010), a three-judge panel for the Third Circuit considered whether an automatic stay under the Bankruptcy Code prevented a mortgage servicer from accounting for a pre-petition shortage on a mortgage escrow account in its post-petition calculation of the bankrupt debtors’ future monthly escrow payments. The majority held that the bankruptcy stay did prohibit such conduct by the loan servicer.

On November 10 we posted to Basis Points a blog concerning a Delaware Bankruptcy Court decision (In re Universal Building Products) that fired a warning shot across the bows of professionals who solicit Creditors’ Committee proxies from non-clients of their firms (here is the blog).

On December 23rd, the Third Circuit addressed whether the automatic stay provisions of the Bankruptcy Code prevents a home mortgage lender from accounting for the pre-petition escrow shortage in its post-petition calculation of future monthly escrow payments. The Court concluded that when the terms of the loan allow the lender to escrow taxes and insurance payments, the lender has a pre-petition claim. In re Francisco Rodriguez.  

In general, substantive consolidation allows for the assets and liabilities of affiliated debtor entities to be consolidated and disbursed as if the assets were held and the liabilities were owed by a single legal entity. Unlike joint administration, which promotes procedural convenience and efficiency without affecting the substantive rights of creditors, substantive consolidation can force creditors of a solvent debtor to share in the debtors’ aggregate asset pool in parity with creditors of less solvent debtors.

A federal judge sitting in New York but applying Maryland law recently held that a Directors and Officers (D&O) insurer is not required to provide insurance coverage because the policyholder breached the policy’s consent-to-settle provision when it settled a securities class action without obtaining the carrier’s prior approval. Federal Ins. Co. v. SafeNet, Inc., 2011 WL 4005353 (S.D.N.Y. Sept. 9, 2011).

The first day hearings in the Chapter 11 cases of MF Global Holdings Ltd and MF Global Finance USA Inc (together the "Debtors") were held on 1 November 2011 before Judge Martin Glenn in the U.S. Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court").