While investors and lenders brace for the next wave of chapter 11 filings, those who are parties to intercreditor agreements need to take stock on how their relationship with their fellow creditors and the borrower may be impacted by a bankruptcy filing by the borrower. If the borrower is in financial extremes, the primary lender who is secured by all the business assets may be unwilling or unable to extend additional credit to the troubled borrower.
More than a year and a half has passed since the Bankruptcy Code was significantly revised pursuant to the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) which became effective (with some exceptions) on October 17, 2005. While the full impact of BAPCPA will not be fully realized for years to come, it is already apparent that trade creditors stand to benefit significantly as a result of these amendments.
Expanded Administrative Expense and Reclamation Rights
How to Keep Follow-On Investments from Getting Squeezed
SRZ's reorganization group recently helped a lender avoid a surcharge against its collateral for legal fees. U.S. Bankruptcy Judge Arthur N. Votolato of the District of Rhode Island handed the lender the important victory on July 5, 2007, after an earlier trial. In re California Webbing Industries, Inc., 2007 WL 1953018 (Bankr. D. R. I., 7/5/07). In a detailed 22-page opinion, Judge Votolato held that the lender never consented to the use of its collateral to pay the fees of counsel for a Chapter 11 debtor and the creditors' committee in its failed reorganization case.
The strategic importance of classifying claims and interests under a chapter 11 plan is sometimes an invitation for creative machinations designed to muster adequate support for confirmation of the plan. Although the Bankruptcy Code unequivocally states that only “substantially similar” claims or interests can be classified together, it neither defines “substantial similarity” nor requires that all claims or interests fitting the description be classified together.
The ability to sell assets during the course of a chapter 11 case without incurring transfer taxes customarily levied on such transactions outside of bankruptcy often figures prominently in a potential debtor’s strategic bankruptcy planning. However, the circumstances under which a sale and related transactions (e.g., recording of mortgages) qualify for the tax exemption have been a focal point of dispute for many courts, including no less than four circuit courts of appeal.
The U.S. Court of Appeals for the Third Circuit has issued a recent decision that is instructive as to what creditors should not do when a customer is having a hard time paying its bills.
Assignee creditors are protected by the provision of the Bankruptcy Code that prevents debtors from obtaining a discharge for debts obtained through fraud, the Bankruptcy Appellate Panel for the U.S. Court of Appeals for the Ninth Circuit has held.
A recent decision from the Bankruptcy Court of the Southern District of New York has rendered the enforcement of reclamation claims that arose 20 days prior to the bankruptcy filing almost impossible in cases in which there is a prepetition lien on inventory.
In In re Dana Corp., 2007 WL 1199221 (Bankr. S.D.N.Y. Apr. 19, 2007) there was $300 million in reclamation claims asserted, but the debtor estimated that valid reclamation claims totaled only approximately $3 million.
Though the shareholders of a corporation did not sign a corporate sale agreement, they were considered to be the sellers of the corporation, and therefore were entitled to avail themselves of the indemnification provisions under the agreement, ruled the Bankruptcy Court for the Eastern District of Pennsylvania. See In re NuNet, Inc., 348 B.R. 300 (Bankr. E.D. Pa. 2006).