The Ninth Circuit’s Bankruptcy Appellate Panel (the “BAP”) held on July 18, 2008, that the Bankruptcy Code (“Code”) did not authorize a bankruptcy court’s approving the sale of a debtor’s property free and clear of a junior lien outside the reorganization plan context. In re PW, LLC __ B.R. __, 2008 WL 2840659 (B.A.P. 9th Cir. July 18, 2008). It directed the bankruptcy court to ascertain on remand whether state law permitted a court to compel the junior lienholder to release its lien in exchange for payment of less than the face value of its claim. Id., at *13-*16.

The U.S. Bankruptcy Court for the District of New Jersey recently held that a Cayman Islands collateralized-debt obligation issuer (“CDO”) could be a debtor under Chapter 11 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) and declined to dismiss an involuntary case commenced against the CDO by certain noteholders on the grounds that the notes held by such noteholders were “non-recourse” notes. Below is a discussion of the court’s decision and its potential implications. The decision is currently being appealed.

The U.S. Court of Appeals for the Fifth Circuit reversed a bankruptcy court’s equitable subordination order on June 20, 2008. Wooley v. Faulkner (In re SI Restructuring, Inc.), ____ F.3d __, 2008 WL2469406 (5th Cir. 2008). According to the court, subordination of the insiders’ secured claims was “inappropriate” because the bankruptcy trustee had failed to show that the defendant insiders’ “loans to the debtor harmed either the debtor or the general creditors.” Id., at *1. The court also rejected the trustee’s “deepening insolvency” argument on the facts and as a matter of law.

On June 28, 2011, the U.S. Court of Appeals for the Seventh Circuit held that secured creditors have a statutory right to credit bid1 their debt at an asset sale conducted under a "cramdown" plan. In re River Road Hotel Partners, LLC, ___ F.3d. ___, 2011 WL 2547615 (7th Cir. June 28, 2011).2 The Seventh Circuit's decision creates a split with recent decisions in the Third and Fifth Circuits regarding a lender's ability to credit bid its secured debt. See In re Philadelphia Newspapers, 599 F.3d 298 (3d Cir. 2010); In re Pacific Lumber, Co., 584 F.3d 229 (5th Cir.

The United States Bankruptcy Court for the Southern District of New York recently awarded an oversecured lender post-petition interest on the full amount of its secured claim at the default rate set forth in the lender’s contract (19%) plus compound (PIK) interest up to the aggregate rate of 25% (the maximum rate allowable under New York State usury laws). In re Urban Communicators PCS Limited Partnership, et al., 2007 Bankr. LEXIS 4062 (Bankr. S.D.N.Y. 12/11/07) (Gerber, B.J.).

The U.S. Court of Appeals for the Fifth Circuit, on Oct. 19, 2010, corrected a bankruptcy court’s calculation of a secured lender group’s superpriority administrative claim more than two years after consummation of the debtor’s Chapter 11 reorganization plan. In re SCOPAC et al., F.3d__, 2010 WL 4069525, at *2-3, *5-6 (5th Cir. Oct. 19, 2010) (Jones, Ch.J.) [“Pacific Lumber II”]; see alsoIn re Pacific Lumber Co., 584 F.3d 229, 242 (5th Cir. 2009) [“Pacific Lumber I”] (plan “substantially consummated within weeks of confirmation”).

SRZ's reorganization group recently helped a lender avoid a surcharge against its collateral for legal fees. U.S. Bankruptcy Judge Arthur N. Votolato of the District of Rhode Island handed the lender the important victory on July 5, 2007, after an earlier trial. In re California Webbing Industries, Inc., 2007 WL 1953018 (Bankr. D. R. I., 7/5/07). In a detailed 22-page opinion, Judge Votolato held that the lender never consented to the use of its collateral to pay the fees of counsel for a Chapter 11 debtor and the creditors' committee in its failed reorganization case.

A New York bankruptcy judge held on October 4, 2010, that second lien lenders could object to a debtor’s bid procedures approved by the first lien lenders despite the terms of an intercreditor agreement inIn re Boston Generating, LLC, No. 10-14419 (SCC) (Bankr. S.D.N.Y. Oct. 4, 2010).1 The intercreditor agreement provided the first lien lenders with the “exclusive right to…make determinations regarding the…sale” of the collateral. According to the court, however, the agreement did not expressly preclude the second lien lenders from objecting to bid procedures.

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

The U.S. Court of Appeals for the Third Circuit held, in a split decision, on March 22, 2010, that secured creditors do not have a statutory right to credit bid1 their debt at an asset sale conducted under a “cramdown” reorganization plan. In re Philadelphia Newspapers, LLC, et al., --- F.3d ----, 2010 WL 1006647 (3d Cir. March 22, 2010) (2-1).