The scenario has become all too familiar in recent years: a borrower defaults on a loan and, when the lender pursues the loan collateral through foreclosure or other proceedings, the borrower files for bankruptcy protection. More often than not, when the lender appears in bankruptcy court to pursue its interest in the collateral, the borrower counterattacks with a host of state law lender liability claims.

On June 28, 2011, the United States Court of Appeals for the Seventh Circuit became the latest circuit to weigh in on the hotly contested question of whether a debtor can deny a secured creditor the right to credit bid as part of a Chapter 11 plan providing for the sale of assets encumbered by the secured creditor’s liens. InIn re River Road Hotel Partners, LLC,1 the Seventh Circuit upheld the right of secured creditors to credit bid, a decision that runs directly contrary to recent opinions in the Third and Fifth Circuits.

Reversing a controversial decision and judgment of the bankruptcy court, the United States District Court for the Southern District of Florida has held that a group of lenders who received payment in settlement of their defaulted debt from the proceeds of new loans secured by the assets of certain subsidiaries of TOUSA, Inc. which were not themselves liable on that debt, did not receive fraudulent transfers.

On May 5, the judge overseeing the bankruptcy case of Lehman Brothers Holdings Inc issued an opinion refusing Swedbank AB's request to keep several million dollars in post-bankruptcy Lehman deposits as a setoff against pre-bankruptcy swap termination claims.

On March 22, the United States Court of Appeals for the Third Circuit issued a decision that could significantly impact the rights of secured creditors to credit bid in connection with Chapter 11 asset sales under a plan of reorganization.

Lehman Brothers Holdings Inc. (LBHI) and its affiliated U.S. chapter 11 debtors (the “Debtors”) filed a joint plan with the Bankruptcy Court on March 15, the last day on which the Debtors who filed petitions on September 15, 2008, had the exclusive right to file a plan. As a result of the filing, the Debtors have an additional 60 days during which no other party may file a plan.

Introduction

The U.S. Bankruptcy Court for the Southern District of Texas issued a stern warning to professional services providers regarding “tail fees,” establishing a presumption of unreasonableness against contract terms requiring fees not attached to tangible, identifiable and material benefits to the debtor’s estate.

In a decision of significance to the distressed claims trading community, the US Court of Appeals for the Third Circuit in In re KB Toys Inc.[1] recently held that any risk or “cloud” of disallowance under the Bankruptcy Code resulting from a creditor’s receipt of an avoidable transfer cannot be separated from a claim, even when such claim is in the possession of a subsequent transferee.

On August 11, the Honorable Allan L. Gropper issued an opinion of the U.S. Bankruptcy Court for the Southern District of New York denying five motions to dismiss certain Chapter 11 bankruptcy cases of several property-specific special purpose subsidiaries (SPE Debtors), including a number of issuers of commercial mortgage-backed securities (CMBS), that are owned by mall operator General Growth Properties, Inc.