In the last several months, there have been some significant legal developments that could impact acquisition finance. This article will survey some of the more notable ones.

In a case with implications for buyers of assets in a bankruptcy court-ordered sale under section 363(b) of the Bankruptcy Code, the Bankruptcy Court for the Southern District of New York recently issued a decision limiting the ability of manufacturers that are debtors in a bankruptcy case to sell assets free and clear of future liabilities.

Senior lenders often insist that subordinate lenders assign to them, under subordination and intercreditor agreements, their right to vote on a plan of reorganization proposed for the borrower should it end up in chapter 11.  The intention of such assignments is to prevent junior lenders from facilitating or preventing confirmation of bankruptcy plans contrary to the desires of senior lenders.  Lenders should be aware, however, that courts disagree whether such plan voting rights assignments are enforceable.  In fact, the United States Bankruptcy Court for the District of Mas

One of the concerns for creditors dealing with a distressed company is the possibility of bankruptcy, and the risk that payments to the creditor on account of previously incurred debt will be avoided as a "preference" in the debtor's bankruptcy proceeding. Generally speaking, a "preference" is a transfer of the debtor's property on the eve of bankruptcy to satisfy an old debt. The Bankruptcy Code allows a bankrupt company to reach back 90 days and avoid any transfers made to creditors during that time, subject to certain defenses.

Unless you are a specialized lender who makes loans to debtors-in-possession, you do not make a loan with the expectation that your borrower is going to file bankruptcy. Although the number of bankruptcy filings in California and nationally is trending slightly lower, filings remain at higher than normal levels. Nearly every lender has received the notice of a bankruptcy filing that was unexpected and then faced decisions as to what to do next.

In re Lehman Brothers Inc., Bankr. Case No. 08-01420 (JMP) (SIPA), 2011 WL 4553015 (Bankr. S.D.N.Y. Oct. 4, 2011)  

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Effective December 1, 2011, a number of the Federal Rules of Bankruptcy Procedure were amended. Two of the amendments specifically address the information required on Proof of Claim forms.

The amendment to Rule 3001 (Proof of Claim) is expanded to require that additional supporting information be filed with proofs of claim in individual debtor cases. The amendment authorizes a court to impose sanctions against a creditor that fails to provide the required information.  

The U.S. Supreme Court has agreed to settle the dispute as to whether secured creditors can credit bid in connection with asset sales done pursuant to liquidating plans. The Third Circuit in the Philadelphia Newspapers case and the Fifth Circuit in the Pacific Lumber case held that secured creditors do not have a statutory right to credit bid their debt at a sale conducted under a plan of reorganization pursuant to which the debtor elects to provide the secured creditors with the “indubitable equivalent” of their secured claim.

In re SUD Properties, Inc., Case No. 11-03833-8-RDD (Bankr. E.D.N.C. Aug. 23, 2011)  

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In the Matter of Richard Louis Alexander (7th Cir., 2011) U.S. App. LEXIS 17110, (August 16, 2011)

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Whittle Development, Inc. v. Branch Banking & Trust Co. et al. (In re Whittle Development Inc.) 2011 WL 3268398 (Bankr. N.D. Tex., July 27, 2011)  

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