Under the Bankruptcy Code, a reorganization plan may be approved if (1) proposed in “good faith” under  § 1129(a)(3), and (2) accepted by at least one class of creditors whose interests are impaired by the plan, see 11 U.S.C. § 1129(a)(10). In Village Green I, GP v. Fed.

When can a bank be at risk of unknowingly receiving a fraudulent transfer? How much information does a bank need to have before it is on “inquiry notice”? A recent decision from the Seventh Circuit Court of Appeals highlights the risks that a bank takes when it ignores red flags and fails to investigate. This decision should be required reading for all lenders since, in the matter before the Seventh Circuit, the banks’ failure to investigate their borrower’s questionable activity caused the banks to lose their security and have their secured loans reduced to unsecured claims.

For the past several years, creditors in the Ninth Circuit were confounded by an interpretation of the bankruptcy code that permitted individual chapter 11 debtors to retain a significant portion of their assets without creditor consent.  The problem was particularly vexing in the context of high net worth individuals, some of whom held multiple ownership interests in entities that held valuable assets or generated significant income.  That loophole was finally closed on January 28, 2016 when the Ninth Circuit Court of Appeals determined that the “absolute priority rule” applies i

The U.S. Court of Appeals for the Seventh Circuit recently held that a lender that is on inquiry notice that its security interest in the collateral had been fraudulently conveyed may lose its secured status.

However, the Court also held that the lender's negligence here did not amount to "purposeful avoidance of the truth" sufficient to justify application of the doctrine of equitable subordination, which allows a bankruptcy court to reduce the priority of a claim in bankruptcy.

(6th Cir. Jan. 27, 2016)

The Sixth Circuit affirms the district court’s finding that the Chapter 11 plan was proposed in bad faith. The plan proposed to pay small claims in full but over a 60-day period. This class of claims was technically impaired due to the delayed payment and it voted to accept the plan. The principle secured lender appealed. The Court finds that the plan was not proposed in good faith, as required by 11 U.S.C. § 1129(a)(3), because it was designed to circumvent  § 1129(a)(10)’s requirement for an accepting impaired class of claims. Opinion below.

Yesterday’s post discussed the recent appellate ruling in Sentinel’s bankruptcy, Grede v. Bank of New York Mellon Corp.

“The panic appears to be over. Now is the time to get worried.”
William Keegan (1938–), British author and journalist

A signed and recorded joint operating agreement (JOA) is often the first line of defense for an operator dealing with distressed partners.  For example, a JOA generally grants an operator a lien upon the oil and gas rights of a non-operator in default and may establish certain penalties that can be assessed against a party who does not pay their share of development.  But what happens when there is no JOA?

For secured lenders, the single most dangerous provision of the U.S. Bankruptcy Code is section 506(c). This section permits the bankruptcy court to collect from the lender’s collateral the bankruptcy estate’s necessary expenses of preserving and disposing of the collateral, "to the extent of any benefit" to the lender.

Last week, the United States Court of Appeals for the Sixth Circuit issued a decision in the case of Cyber Solutions International LLC v. Pro Marketing Sales, Inc. Although the decision blazes no new legal territory, the facts of the case and rulings offer important lessons for both lenders and licensees.

The Seventh Circuit Court of Appeals recently held that a lender is obligated to conduct a diligent investigation when it becomes aware of suspicious facts relating to the legitimacy of a loan transaction. In Sentinel Management Group, Inc., 2016 WL 98601 (7th Cir. January 8, 2016), the Seventh Circuit found that a bank officer’s puzzlement was enough to place the bank on inquiry notice, which required the bank to investigate the collateral the borrower was using to secure the loan.