In re Innkeepers USA Trust, et al., -- B.R. --, 2011 WL 1206173 (Bankr. S.D.N.Y. 2011)
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A senior creditor can obtain significant leverage over a chapter 11 debtor if it is able to vote not only its claim but the claims of junior creditors in connection with the solicitation of a plan of reorganization. Obtaining such leverage, however, has proven problematic in the past. Among other things, courts have been reluctant to enforce pre-bankruptcy assignments or waivers of voting rights contained in intercreditor agreements, holding that such assignments or waivers may violate the Bankruptcy Code and rules. In Avondale Gateway Center Entitlement, LLC v.
A New York bankruptcy judge has refused to permit a debtor to use rents generated by its real property because the rents absolutely assigned to the lender pre-petition were not property of the debtor's bankruptcy estate.2 Before the bankruptcy filing, the lender sent the borrower a default notice and terminated the borrower's license to collect rents. The lender also directed tenants to pay rents to it and not the borrower, commenced a foreclosure action, and sought appointment of a receiver.
Reversing the bankruptcy court, a Sixth Circuit Bankruptcy Appellate Panel held that a debtor in a single asset real estate case did not provide adequate protection to a creditor by providing replacement liens in the rents where there was no equity cushion.4 The notion that granting the lender a lien on future rents to replace the expenditure of prior months' rents was rejected. Accordingly, the appellate panel held that the debtor could not use rents collected post-petition to pay ordinary administrative expenses, such as fees of its professionals.
It is commonly known that a borrower's agreement with a third party not to file a bankruptcy case is unenforceable due to public policy considerations. Accordingly, lenders have searched for ways to make it difficult or painful for their borrowers to file for bankruptcy, such as imposing the requirement that prior authorization of an independent director or member be a prerequisite to a bankruptcy filing by the borrower, or requiring the borrower's principal to execute a non-recourse carve-out guaranty that would impose personal liability should the borrower file for bankruptcy.
Representing a mortgagee holding liens on 37 unsold condominium units, Herrick, Feinstein successfully blocked a debtor's effort to confirm a chapter 11 plan of reorganization via cramdown. The plan envisioned sales of 27 unsold units over five years, deferred payments to the mortgagee at the rate of 4.75%, and scheduled principal pay downs from the sale of units.
In a decision released on March 29, 2011, CDX Liquidating Trust v. Venrock Assocs., et al., 2011 U.S. App. LEXIS 6390 (7th Cir. March 29, 2011), the United States Court of Appeals for the Seventh Circuit, reversing the district court’s ruling, held that a director’s disclosure of a conflict, in and of itself, is insufficient to protect that director from liability for breach of fiduciary duty or disloyalty arising from that conflict.
In what appears to be a matter of first impression, Bankruptcy Judge Robert D. Drain, United States Bankruptcy Court for the Southern District of New York, has held that a statutory safe harbor against constructive fraudulent conveyance actions under the Bankruptcy Code involving securities transfers does not apply to the private sale of securities, even when there are no allegations of illegal conduct or fraud involved in the underlying transaction.