The United States Court of Appeals for the Second Circuit recently vacated a decision by the District Court for the Southern District of New York, which had declined to enforce the contractual allocation of claim impairment risk between a bankruptcy claim buyer and its seller.[1] Relying on the plain language of the documents, the Second Circuit held in Longacre Master Fund, Ltd. v. ATS Automation Tooling Systems Inc. (Longacre)that the debtors’ objection to the claims had triggered the seller’s repurchase obligation.

The Bankruptcy Court for the Southern District of New York recently considered the enforceability of claims for "make-whole" amounts and damages for breach of a "no-call" provision. In re Chemtura Corp., No. 09-11233 (Bankr. S.D.N.Y. Oct. 21, 2010) ("Chemtura"). These provisions are generally enforceable outside of bankruptcy, but enforceability in the context of a bankruptcy case is still unclear. In Chemtura, the court did not actually rule on enforceability but approved a settlement that allocated value to creditors on account of a make-whole clause and a no-call provision.

The U.S. Court of Appeals for the Third Circuit held on Feb. 3, 2009, that a debtor’s “strategic partnership” vendor was liable as a non-statutory insider for preferential payments it received approximately four months prior to the debtor’s bankruptcy. In re Winstar Communications, Inc., ___F.3d ___, 2009 U.S. App. LEXIS 1953, at *1 (3d Cir. 2/3/09). The court affirmed the bankruptcy court’s judgment (an 88-page decision with detailed fact findings), rendered after a 21-day bench trial that included 1,400 exhibits and 39 witnesses.

Members of the ad hoc shareholders’ committee in the Northwest Airlines reorganization case lost their attempt on March 9 to seal “the amounts of claims or interest [they] owned …, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof.” So held Judge Allan L. Gropper of the United States Bankruptcy Court for the Southern District of New York in In re Northwest Airlines Corp., following his earlier ordering of the disclosure of trading details.

A Chapter 11 debtor’s financial advisers were entitled to a “Success Fee” based on a percentage of a $50-million “debt-to-equity conversion,” held a split U.S. Court of Appeals for the Fifth Circuit on May 4, 2016. In re Valence Technology, Inc., 2016 WL 2587109, *1 (5th Cir. May 4, 2016) (2-1). Key to the opinion was the parties’ concession that the “debt-to-equity conversion qualified as a Private Placement under [their] engagement agreements.” Id., at n.1.

Chapter 11 creditors’ committees and debtors continue to challenge lenders’ prepayment premiums, commitment fees and post-bankruptcy interest claims in reorganization cases. Nevertheless, courts regularly reject these challenges in well-reasoned decisions.

The current cycle of Chapter 11 corporate bankruptcies involves many cases where the debtor seeks to achieve a balance-sheet restructuring by converting debt into equity. When consensus cannot be achieved, junior stakeholders (i.e., second lien creditors, unsecured creditors and/or equity) will often contest plan confirmation on the grounds that the proposed plan provides more than 100% recovery to the senior creditors. Valuation plays the central role in these cases.

The United States Bankruptcy Court for the Southern District of New York overseeing the Lehman Brothers (“LBI“) case under the Securities Investor Protection Act (“SIPA“) entered an order on Nov. 7, 2008 (the “Claims Bar Date Order“) establishing the following deadlines for the filing of claims against LBI:

A court-approved pre-plan settlement that would have resolved a dispute between a Chapter 11 creditors’ committee and the debtor’s secured lenders over the lenders’ liens was vacated by the U.S. Court of Appeals for the Second Circuit on March 5. Motorola, Inc. v. Official Committee of Unsecured Creditors and J.P. Morgan Chase Bank, N.A. (In re Iridium Operating LLC). The settlement also would have funded massive litigation against the debtor’s former parent, Motorola Inc.

Motorola’s Successful Argument

A bankruptcy court’s asset sale order limiting specific pre-bankruptcy product liability claims required prior “actual or direct mail notice” to claimants when the debtor “knew or reasonably should have known about the claims,” held the U.S. Court of Appeals for the Second Circuit on July 13, 2016. In re Motors Liquidation Co., 2016 U.S. App. LEXIS 12848, *46-47 (2d Cir. July 13, 2016).