This article was published in slightly different format in the January 2008 issue of Credit Magazine.

1. Introduction

On 25 August 2010, the German government published a draft of an Act for the Restructuring and Orderly Liquidation of Credit Institutions, for the Establishment of Restructuring Fund for Credit Institutions and for the Extension of the Limitation Period of Corporate Law Management Liability (Restrukturierungsgesetz, the “German Restructuring Act”). It is anticipated that the German Restructuring Act will soon be introduced to the German parliament and be passed quickly.  

Many participants in the multibillion-dollar distressed-debt trading markets were hoping that Federal District Court Judge Shira A. Scheindlin would permit expedited review of her ruling immunizing a purchaser of a claim against a debtor in bankruptcy from objections to the claim based upon the conduct of a prior holder of the claim.

In light of recent reports released to the market, a lender in the leveraged loan market would be forgiven for indulging in some cautious optimism. New-issuance in July aggregated to €9.5 billion - a 13-month high. The year-to-date leveraged buy-out volume of €10 billion (38 deals) compares favourably with the €2.2 billion of volume (13 deals) for the same period in 2009. Against this backdrop, however, lenders should consider the recently released statistics from the Insolvency Service, and other economic data, which suggest that the economic outlook remains uncertain.

In National Energy & Gas Transmission, Inc. v. Liberty Electric Power, LLC (In re National Energy & Gas Transmission, Inc.),1 the Fourth Circuit held that, where an unsecured creditor receives payment from a non-debtor guarantor in partial satisfaction of a claim against the debtor, for purposes of the creditor's claim against the debtor, the creditor may not choose to allocate such payment to post-petition interest.

Not necessarily so, according to the recent rulings of Southern District of New York Bankruptcy Judge Allan Gropper in the US$27 billion General Growth Properties Chapter 11 bankruptcy—at least with respect to the issue of substantive consolidation.

In a recent decision, Marrama v. Citizens Bank of Massachusetts1, the United States Supreme Court considered whether a debtor has an absolute right under Section 706(a) of the Bankruptcy Code to convert a case to Chapter 13, clarifying a growing split among circuits as to whether the debtor’s bad faith conduct prior to his proposed conversion results in the forfeiture of the debtor’s right to convert.

The recent ruling by the Bankruptcy Court for the District of Montana in the Chapter 11 case of In re Yellowstone Mountain Club LLC 1 (“Yellowstone”), which found that a senior secured lender had engaged in “overreaching and predatory lending practices”, suggests an application of lender liability theory from today’s perspective to a transaction that took place before the credit crisis.  

In Official Committee of Unsecured Creditors v. Whalen (In re Enron Corp.), the Bankruptcy Court for the Southern District of New York considered whether the debtor’s pre-bankruptcy payment of an employment bonus one day before it became due was “for or on account of an antecedent debt owed by the debtor before such transfer was made” for purposes of determining whether section 547(b) of the Bankruptcy Code made the payment avoidable as a preferential transfer.

On May 14, 2009, Judge Allan Gropper of the US Bankruptcy Court, Southern District of New York, approved a US$400 million DIP financing package in the US$27 billion General Growth Properties, Inc. (“GGP”) Chapter 11 case. Judge Gropper’s ruling also included approval of GGP’s proposal to use cash flow generated by shopping centers, structured by GGP as bankruptcy remote, special purpose entities, to fund GGP’s ongoing central operations while in bankruptcy.