Burtch v. Detroit Forming, Inc. (In re Archway Cookies), 435 B.R. 234 (Bankr. D. Del. 2010)

CASE SNAPSHOT

The year 2009 set a record for defaults and restructurings. Ownership of companies changed rapidly and, given the freeze up in capital markets, most of the new capital structures were significantly deleveraged, leaving little role for pre-existing sponsors and other equity holders of troubled companies. Halfway through 2010, even though actual bankruptcies have declined, restructuring continues through an amendment and forbearance process that is driven by the potential consequences to stakeholders in a court supervised restructuring.

Pursuant to § 1104 of the United States Bankruptcy Code, the court may appoint a bankruptcy examiner to investigate the debtor with respect to allegations of fraud, dishonesty, incompetence, misconduct or mismanagement. A qualified examiner, with a clearly defined mission, can drastically affect the outcome of the bankruptcy case and directly impact the return to creditors. The difference between a successful financial restructure or liquidation and an investigation yielding little value to the creditors often depends on the approach taken by the examiner and his professionals.

In November of 2010, the trustee for the Circuit City Stores, Inc., liquidating trust filed more than 500 adversary proceedings against creditors seeking the recovery of alleged preferential payments. The extent of the trustee's success in recovering these payments will impact the overall distribution to creditors. Creditors in bankruptcy cases should be aware that preference litigation allows a trustee or debtor-in-possession to recover payments received by a creditor during the period immediately preceding the bankruptcy filing.

The Second Circuit Court of Appeals issued a summary order this week upholding the aggressively unfavorable treatment of a senior secured creditor under the reorganization plan (the “Plan”) of DBSD North America, f/k/a ICO North America (“DBSD”).

At a time when billions of dollars of assets are under the supervision of federal receivers and bankruptcy trustees, the Court of Appeals for the Seventh Circuit recently ruled in favor of an equity receiver and held that in proposing her plan of distribution to investors, she was not bound by the requirements of state law when establishing priorities for and making distributions to investors.

The U.S. Court of Appeals for the Second Circuit, on Dec. 6, 2010, summarily affirmed a bankruptcy court’s designation of a secured lender’s vote on a reorganization plan in a two-page order, effectively enabling the debtor to cram down the lender’s claim. In re DBSD North America, Inc., __ F.3d__, 2010 WL 4925878 (2d Cir. Dec. 6, 2010).1 As a result, the lender who bought all of the debtor’s senior first-lien secured debt at par will be paid only interest over a period of four years before its loan matures. SeeIn re DBSD North America, Inc., 419 B.R. 179, 207-08 (Bankr.

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.

Introduction

In In re Rodriguez, No. 09-2724 (3rd Cir. Dec 23, 2010), a three-judge panel for the Third Circuit considered whether an automatic stay under the Bankruptcy Code prevented a mortgage servicer from accounting for a pre-petition shortage on a mortgage escrow account in its post-petition calculation of the bankrupt debtors’ future monthly escrow payments. The majority held that the bankruptcy stay did prohibit such conduct by the loan servicer.