Years ago, second lien lenders adhered to the truism about children -- they were seen but not heard. As our children have grown more vocal in recent years, so too have second lien lenders. A spate of recent bankruptcy cases demonstrate that second lien lenders have been both seen and heard at many critical junctures in the chapter 11 timeline -- at the sale of the debtor’s assets under section 363 of the Bankruptcy Code,1 in seeking the appointment of an examiner,2 when voting on a chapter 11 plan,3 and in connection with the confirmation hearing.4

The U.S. Bankruptcy Code provides for the appointment of a bankruptcy examiner to investigate the debtor with respect to allegations of fraud, dishonesty, incompetence, misconduct or mismanagement. The right examiner, with a clearly defined mission, will have a major influence on the bankruptcy process. The difference between a successful financial restructuring or liquidation-resulting in substantial recoveries for the key constituencies-and a time-consuming (and asset-consuming) meltdown, can depend on the approach of the examiner and the examiner's support team.

In the well-publicized opinion of In re Philadelphia Newspapers, LLC et al., 599 F. 3d 298 (3rd Cir. 2010), the U.S. Court of Appeals for the Third Circuit, agreeing with the U.S. Court of Appeals for the Fifth Circuit,1 held that Section 1129(b)(2)(A) of the Bankruptcy Code (the Code)2 is unambiguous and is to be read in the disjunctive, thus allowing a proponent of a Chapter 11 plan of reorganization to use the "cram down" power under subsection (iii) of that Section without allowing a secured creditor to credit bid on a sale proposed as part of the plan.

In re SJT Ventures, LLC, 2010 WL 3342206 (Bankr. N.D. Texas 2010)

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Deutsche Bank National Trust Co. v. Tucker, No. 09-5867 (6th Cir. 2010)

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In resolving a conflict within the Sixth Circuit, the Court of Appeals has held that chapter 13 debtors who propose in their plan of reorganization to cure the arrearage on their mortgage loan are required to pay all fees and costs required by the mortgage and non-bankruptcy law, even if the mortgage lender is undersecured. Put another way, mortgage lenders may include such fees and costs in their proofs of claim.

FACTUAL BACKGROUND

Paloian v LaSalle Bank, NA, 619 F.3d 688 (7th Cir. 2010)

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In the Matter of TCI 2 Holdings, LLC, 428 B.R. 117 (Bankr. D.N.J. 2010)

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Cooper v Centar Investments LTD, et al. (In re Trigem America Corporation), 431 B.R. 855 (C.D. Cal. 2010)

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We are seeing more and more challenges by borrowers to swaps. No big surprise since, with falling interest rates over the past few years, the borrowers are on the wrong end of the transactions. Although swaps are considered independent of the loans, they are often secured by the same collateral and are usually crossdefaulted with the loans, so the obligations that arise from early termination (which can be significant) become part of the collection process and are being fought vigorously by borrowers.

In re Leslie Controls, Inc., (Bankr. D. Del., Case No. 10-12199, 2010)

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