Introduction

The Bankruptcy Code provides that a Chapter 11 plan of reorganization may be confirmed over the opposition of a class of secured creditors whose secured claims are not being paid in full only if it provides one of the following1--

Investors who hold both debt and equity in a financially distressed company may be confronted with efforts to have their debt investments recharacterized as equity. Recharacterization is an equitable remedy that bankruptcy courts have used as a basis to look past the form and characterization of an obligation as debt and find the subject obligation to be equity. In his recent decision in Official Comm. of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners, LLC (In re Radnor Holdings Corp.), Adv. Proc. No. 06-50909 (Bankr. D. Del.

An appeals court in Kentucky has issued a reminder to secured lenders of the importance of drawing up control agreements that establish a lender’s interest in a debtor’s assets contained in depository accounts.

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

CentsAbility: Creditors' Rights Law Update

The U.S. Bankruptcy Court for the Eastern District of North Carolina in InRe Reuben Samuel Royal, Case No, 14-07134-DMW (May 2, 2016) recently concluded that the Chapter 13 debtors cannot surrender a vehicle back to the lender after confirmation of a Chapter 13 plan even though the vehicle was depreciating or declining in value.

In In re Zair, 2016 U.S. Dist. LEXIS 49032 (E.D.N.Y. Apr. 12, 2016), the U.S. District Court for the Eastern District of New York became the latest to take sides on the emerging issue of “forced vesting” through a chapter 13 plan. After analyzing Bankruptcy Code §§ 1322(b)(9) and 1325(a)(5), the court concluded that a chapter 13 debtor could not, through a chapter 13 plan, force a mortgagee to take title to the mortgage collateral.

Background

It always starts so easy. Borrower comes in and wants to borrow money. Lenders want some form of collateral to secure (potentially) a loan and the Borrower happily agrees to provide, or pledge, collateral to secure a loan. Common examples are the Borrower pledging inventory, equipment or receivables (assuming of course there is no real estate to lien with a mortgage). Lender, either internally, or with outside counsel, prepares the necessary security agreement to document the pledge of collateral. This is generally the description of a secured transaction.

A.BACKGROUND

The term “bad boy” guaranty is used in certain circumstances to describe a guaranty to be provided – usually by an individual, not an entity – in connection with, most often, real estate financing.

The original intent of “bad boy” guarantys was to influence the post-closing behavior of a principal of the borrower, in order to discourage bad conduct that would harm the lender’s position and collateral. Traditionally, the triggers for recourse to the borrower and/or guarantor liability were events such as:

On March 11, 2016, Judge Christopher Sontchi of the U.S. Bankruptcy Court for the District of Delaware issued an opinion in the Energy Future Holdings bankruptcy that resolved an intercreditor dispute over $90 million in proceeds to be distributed under the plan of reorganization.