A draft of the U.S. Treasury’s proposed debt restructuring legislation began circulating earlier today.  The draft legislation would give Puerto Rico, as well as other U.S. territories, and their municipalities access to U.S. bankruptcy court under a new chapter of the U.S. Bankruptcy Code (so-called “Super Chapter 9”) as well as making Puerto Rico’s instrumentalities (but not Puerto Rico itself) potentially eligible to file for bankruptcy under existing Chapter 9.

Lending credence to the old adage “if it’s too good to be true, then it probably is,” the Seventh Circuit Court of Appeals recently held that a secured lender was on inquiry notice of possible fraud by its borrower in impermissibly pledging customers’ assets to secure loans. And the penalty was steep—the Court determined the pledge to be a fraudulent transfer to the lender and the lender’s failure to act upon inquiry notice destroyed the lender’s good faith defense. As a result, the lender’s $300 million secured claim was reduced to a near-worthless general unsecured claim. 

In SGK Ventures, LLC, the Bankruptcy Court for the Northern District of Illinois ordered that the secured claims of two entities controlled by insiders of the debtor be equitably subordinated to the claims of unsecured creditors.

Last week, the Working Group for the Fiscal and Economic Recovery of Puerto Rico gave the broadest hint yet of the next tactic in Puerto Rico’s ongoing quest to deleverage itself.  Although the details have not yet been articulated, Puerto Rico apparently proposes to blend into a single pot several types of distinct taxes currently earmarked to pay or support different types of bonds issued by a number of its legally separate municipal bond issuers, with the hope that the resulting concoction will meet the tastes of a sufficient number of its differing bond creditors to induce them to

The secured lender industry experienced a collective sigh of relief on May 29 after the Supreme Court ruled in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank that credit bidding remains a viable option to protect collateral in a cramdown bankruptcy plan. Expressly inscribed in Sections 363(k) and 1129(b)(2)(A) of the Bankruptcy Code, credit bidding has long been understood as a fairly uncontroversial right; until recently.

Leading the Past Week

Leading the Past Week

Voyager Digital Assets Inc., along with two of its affiliates, filed bankruptcy petitions in the Southern District of New York on July 5, 2022. The filing is significant—it followed months of an extreme downturn in the cryptocurrency sector which led to the collapse of Three Arrows Capital, a Singaporean cryptocurrency hedge fund (that borrowed $350 million and 15,250 Bitcoins from Voyager).

Tolstoy warned that “if you look for perfection, you’ll never be content”; but Tolstoy wasn’t a bankruptcy lawyer. In the world of secured lending, perfection is paramount. A secured lender that has not properly perfected its lien can lose its collateral and end up with unsecured status if its borrower files bankruptcy.

A recent Ninth Circuit Court of Appeals decision provides insight into “bad faith” claims-buying activity; specifically whether a creditor’s purchase of claims for the express purpose of blocking plan confirmation is permissible. In In re Fagerdala USA-Lompoc, Inc., the Court found it was—the secured creditor did not act in bad faith when it purchased a subset of all general unsecured claims and voted those claims against confirmation because it was acting to further its own economic interest as a creditor, without some extrinsic ulterior motive.