Recent news reports have focused on the problems of the financial markets on the one hand and consumer mortgage problems on the other. While Congress may yet grant authority to bankruptcy judges to modify home loans, modification of business loan facilities of all sizes remains available as a powerful and fundamental tool to be used in a business financial restructuring.

W.R. Grace agreed to pay $250 million to the federal government for costs related to the investigation and remediation of asbestos contamination in Libby, Montana. W.R. Grace, a global supplier of specialty chemicals, owned and operated a vermiculite mine and vermiculite processing facilities in Libby from 1963 to 1990. The company and 61 affiliated companies filed for bankruptcy in April 2001. The settlement resolves a bankruptcy claim filed by the federal government to recover funds necessary to cleanup contaminated schools, homes, and businesses in Libby.

Owners of bank loan participations take on two kinds of credit risk: (i) the borrower’s failure to pay the underlying bank loan, and (ii) the loan participation grantor’s bankruptcy. The first risk is well understood and carefully analyzed in each transaction. This memorandum focuses on the second kind of credit risk assumed by a participant -- grantor insolvency.

The U.S. Court of Appeals for the Eighth Circuit recently held that insiders who control the operations of a debtor owe a duty, as fiduciaries, to refrain from self-dealing. In re Brook Valley VII, Joint Venture (Lange v. Schropp), 496 F.3d 892 (8th Cir. 2007). The controlling insiders of two Chapter 11 debtors had thus breached their fiduciary duties to the debtors when they caused the debtors to consent to a foreclosure sale of estate properties and then secretly purchased the properties for themselves at the sale.

The United States Bankruptcy Court for the Western District of Pennsylvania has ruled that a defendant in a declaratory judgment coverage action waived all of his discovery objections, including objections based upon the Fifth Amendment, for failing timely to assert them. Federal Ins. Co. v. Le-Nature's, Inc., 380 B.R. 747 (Bankr. W.D. Pa. 2008). Wiley Rein LLP represented the insurer.

The auto parts supply industry has been beset by financial problems for several decades. Original equipment manufacturers ("OEMs") typically have the right to immediately seize their tooling, which the supplier holds in order to make parts. This allows OEMs to quickly move the tooling to another supplier and avoid an assembly line shutdown if the supplier fails. The right to immediately reclaim tooling, however, may be restricted if the supplier files for bankruptcy.

Can market capitalization be used to evidence the solvency of bankrupt debtors? A recent bankruptcy case out of the District of Delaware suggests that it can.1

Part I: Spotting a Financially Troubled Franchisee in Time to Do Something about It

We have written in the past about the risks to investors in troubled companies from trustees in bankruptcy seeking recoveries for the estate on theories such as insider trading, breaches of duty and conflicts of interest. While those risks remain real, a recent decision from the Seventh Circuit Court of Appeals should provide some restraint on bankruptcy trustees.

One of the significant changes brought about by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA") was the treatment of loans secured by automobiles in Chapter 13 cases. Prior to BAPCPA, debtors were permitted to "cram down" the secured portions of automobile loans to the fair market value of the collateral. This often resulted in significant reductions to claims secured by automobiles.