Introduction

Several recent bankruptcy decisions rendered in the Third Circuit address whether the disclosure requirements of Rule 2019 of the Federal Rules of Bankruptcy Procedure apply to informal or “ad hoc” committees.1 Although these courts base their reasoning on the “plain meaning” of Rule 2019, their ultimate holdings are inconsistent and have generated renewed interest in this topic among lenders and the investing community. This article provides a brief summary of these recent decisions and examines their inconsistencies.

A creditor’s ability to vote on a plan of reorganization is one of its most fundamental rights in a chapter 11 bankruptcy. For strategic investors in distressed debt, the power to vote—and potentially control a voting class (or obtain a blocking position in that class)— can be a critical tool in maximizing value and return on investment. Investors should be aware, however, that a recent decision by Judge Robert E.

On April 1, 2010, Judge Kevin J. Carey , Chief Judge of the United States Bankruptcy Court for the District of Delaware issued an opinion (the "Opinion") in the Spansion bankruptcy rejecting the Debtor's proposed plan of reorganization.

In Ogle v. Fidelity & Deposit Co. of Maryland, 586 F.3d 143 (2d Cir. 2009), the Second Circuit has now become the second circuit court of appeals to recently conclude that general unsecured creditors may include postpetition attorneys’ fees as part of their claim when attorneys’ fees are permitted by contract or applicable state law.11

In 1999 the Third Circuit Court of Appeals rendered its decision in Calpine Corp. v. O’Brien Environmental Energy, Inc. (In re O’Brien Environmental Energy, Inc.), 181 F.2d 527, denying Calpine Corporation’s request for the payment of a break-up fee after Calpine lost its effort to acquire the assets of O’Brien Environmental Energy out of bankruptcy.

The United States Bankruptcy Court for the Southern District of New York issued an important ruling on March 1, 2010 in the Securities Investor Protection Act (SIPA) liquidation of Bernard L. Madoff Investment Securities LLC (Madoff Securities), adopting the trustee’s method of determining “net equity” for purposes of distributing “customer property” and Securities Investor Protection Corporation (SIPC) funds under SIPA.3

Securities Investor Protection Act

Seeking to have an independent examiner investigate a debtor or its management can be a powerful tool available to creditors and other interested parties in a bankruptcy case. Typically, a party might request that an examiner be appointed if the debtor or its management is suspected of fraud or other misconduct. The low cost associated with making the request, together with recent positive outcomes for requesting creditors, may help to increasingly popularize the use of examiner requests by parties seeking leverage in bankruptcy plan negotiations.

The Third Circuit Court of Appeals dealt a blow to secured creditors in its recent decision holding that a debtor may prohibit a lender from credit bidding on its collateral in connection with a sale of assets under a plan of reorganization. In the case of In re Philadelphia Newspapers, LLC, No. 09-4266 (3d Cir. Mar. 22, 2010), the court, in a 2-1 decision, determined that a plan that provides secured lenders with the “indubitable equivalent” of their secured interest in an asset is not required to permit credit bidding when that asset is sold.

What should be the remedy when a bankruptcy court holds that a security interest is avoidable as a preferential transfer, but the value of the security interest is not readily ascertainable? The Ninth Circuit recently addressed this issue in USAA Federal Savings Bank v. Thacker (In re: Taylors), 2010 U.S. App. LEXIS 5793 (9th Cir. 2010). The Court held that, since the value of the security interest was not readily ascertainable, the only available remedy is for the bankruptcy court to return the security interest itself, not its value, to the bankruptcy estate.

The recent financial collapse has provided a strategic opportunity for healthy financial institutions, and non-traditional investors, to capitalize on the misfortune of failing banks. The FDIC is accelerating this process by revamping its loss share program. This program gives prospective buyers of failing institutions billions of dollars in government guarantees for risking the purchase of a failing bank, inclusive of all “toxic” assets.