The United States Bankruptcy Court for the Southern District of New York granted preliminary injunctions ordering a directors and officers liability insurer to advance defense costs, despite the fact that the insurer had denied coverage, and without adjudicating the coverage defense. Axis Reinsurance Co. v. Bennett et al., Adv. No. 07-01712 (S.D.N.Y. Bankr. Aug. 31, 2007); Grant v. Axis Reinsurance Co., Adv. No. 07-2005 (S.D.N.Y. Bankr. Sep. 11, 2007). The bankruptcy court applied New York law and relied heavily on the case In re WorldCom, Inc.
Thinking about investing in a distressed company? If the company declares bankruptcy, your investment may be subject to equitable subordination, whereby your claim is subordinated to the claims of other creditors. One of the most crucial factors in determining whether your claim is equitably subordinated is whether you are deemed an insider as an insider’s actions undergo significantly more scrutiny than those of non-insiders. Of course, when investing in a distressed company, the more control over the entity’s, the better, right?
Editor’s note: Success in the restructuring and insolvency arena requires more than an understanding of the law—it requires the ability to address issues specific to a debtor’s industry and business. Below, two Reed Smith partners with extensive experience representing health care institutions and creditors discuss issues unique to hospitals facing financial distress.
The U.S. Court of Appeals for the Seventh Circuit has held that a dragnet clause within a master security agreement was effective, even though a subsequent loan agreement remained silent as to whether pre-existing collateral secured the new advance. Universal Guaranty Life Ins. Co. v. Coughlin, 481 F.3d 458 (7th Cir., March 14, 2007).
Part I: Spotting a Financially Troubled Franchisee in Time to Do Something about It
In the last issue of Franchise Alert, we discussed how to spot signs of franchisee financial distress at an early stage. Here, we present some steps franchisors can take to deal with financially distressed franchisees.
Update Files
Do officers of a public corporation have an affirmative obligation to monitor corporate affairs? Yes, according to Judge Walsh in his recently issued memorandum opinion in Miller v. McDonald (In re World Health Alternatives, Inc.).1 Although "Caremark" oversight liability had previously generally only been imposed on directors of public corporations, the Bankruptcy Court for the District of Delaware determined that officers are not immune from such liability as a matter of law.
In Aalfs v. Wirum (In re Straightline Investments, Inc.),1 the United States Court of Appeals for the Ninth Circuit considered whether a post-petition factoring of accounts receivable by the debtor was an avoidable transfer under section 549 of the Bankruptcy Code. The Court of Appeals affirmed the Bankruptcy Court, finding that the post-petition transfer had been properly avoided and that the lower court was justified in allowing the trustee both to recover the accounts receivable and their proceeds and to retain the consideration paid by the transferee.
While the current outlook may be grim for the economy at large, the prospects of individual companies vary significantly, and some companies will continue to perform well despite the larger trends. For example, the designer retailer’s loss may become Walmart’s gain as consumers shop more closely for bargains. As the car manufacturers frequently say, “your mileage may vary.”
Sellers should be proactive in taking steps to protect themselves from a distressed buyer’s non-payment.
In the current economic downturn, sellers are dealing with many formerly good customers whose financial health is deteriorating. To protect their interests, sellers should assess their rights under applicable contracts and law and develop a strategy to minimize their exposure.
Step 1 – Assess the Parties’ Contractual Rights