In re Vitro, S.A.B. de C.V., No. 11-33335-HDH-15 (Bankr. N.D. Tex. June 13, 2012)

The ability of a trustee or chapter 11 debtor in possession (“DIP”) to sell bankruptcy estate assets “free and clear” of competing interests in the property has long been recognized as one of the most important advantages of a bankruptcy filing as a vehicle for restructuring a debtor’s balance sheet and generating value. Still, section 363(f) of the Bankruptcy Code, which delineates the circumstances under which an asset can be sold free and clear of “any interest in such property,” has generated a fair amount of controversy.

In re Creekside Senior Apartments, LP, 477 B.R. 40 (6th Cir. B.A.P. 2012) –

In valuing a bank claim secured by a low-income housing project for purposes of a plan of reorganization, should the remaining federal low‑income housing tax credits allocated to the project be taken into consideration?  In Creekside the bankruptcy court said yes, and the bankruptcy appellate panel agreed.

Pension issues in the American Airlines (AMR) bankruptcy¹ have resulted in the Internal Revenue Service (IRS) issuing new final regulations, effective November 8, 2012 (Final Regulations), which broadly impact all debtors facing underfunded pension plan obligations. The Final Regulations provide chapter 11 bankruptcy debtors facing distress terminations of their tax-qualified defined benefit pension plans with the additional option of amending the plans to eliminate accelerated payment options.

The effects of the recent fi nancial crisis and the ensuing recession continue to take their toll on municipalities in the United States, which are struggling with reduced revenues at the same time their residents have an increased need for government services.

In a corporate system based in part on the separation of ownership and control, the relationship between principals and agents is riddled with agency problems: Among them are potential conflicts of interest where agents may abuse their fiduciary position for their own benefit as opposed to the benefit of the principals to whom they are obligated. Delineating the agents' fiduciary duties is thus a central focus of corporate law, and the dereliction of those duties often comes under scrutiny in the bankruptcy context.

In a widely followed dispute, the Fifth Circuit Court of Appeals will soon render a decision on the appeal of a Texas Bankruptcy Court’s refusal to recognize non-debtor third party releases in the Mexican reorganization proceeding (concurso mercantil) of Mexican glass manufacturer Vitro SAB de CV. Wall Street and the capital markets will be watching this appeal closely as a reversal of the Bankruptcy Court would likely make lenders and bondholders extremely nervous about extending future credit to Mexican corporations.

The US Bankruptcy Court in Massachusetts says default rates must be justified as a reasonable measure of damages at the time of the making of the loan and that a floating default rate that can exceed 5% will not be allowed as part of a creditors claim in the borrower's bankruptcy.    The loan was made in 2006 with a contract rate equal to prime at a time when the prime rate was below 13 percent.

Under Internal Revenue Code (“Code”) section 436, unless a defined benefit pension plan sponsored by a debtor in bankruptcy is fully funded, the plan may not make “prohibited payments” (i.e., lump sum payments or payments in any other form that exceed the monthly amount under a single life annuity). Moreover, the anti-cutback rule in Code section 411(d)(6) prohibits a plan from being amended to eliminate an optional form of benefit.

One of the most powerful tools a chapter 11 debtor has is the ability to assume or reject executory contracts under section 365 of the Bankruptcy Code.  In bankruptcy parlance, when a debtor “rejects” an executory contract, it is considered as though the debtor breached the agreement as of the date it filed for bankruptcy and sheds the debtor’s obligation to perform under the rejected contract.  The non-debtor party receives a claim for damages arising from the debtor’s breach; however, in many cases, it will be worth only pennies on the dollar.  The converse of rejection is