Sandburg Financial Corp. v. American Rice, Inc. (In the Matter of American Rice, Inc.), No. 11-40301 (5th Cir., Sept. 22, 2011)
CASE SNAPSHOT
Rejection of a contract in bankruptcy may not always accomplish a debtor’s goal to shed ongoing contractual obligations and liabilities, especially when dealing with employee benefit plans. On October 13, 2011, the Fifth Circuit Court of Appeals highlighted this issue in its opinion in Evans v. Sterling Chemicals, Inc.1 regarding the treatment of a pre-bankruptcy asset purchase agreement which contained a provision addressing the debtor-acquiror’s post-closing ERISA retiree benefit plan obligations to its new employees resulting from the transaction.
On August 9, 2011, the United States Court of Appeals for the Fifth Circuit held that a non-insider's debt claim can be recharacterized as equity in Grossman v. Lothian Oil Inc. (In re Lothian Oil, Inc.).2 The Fifth Circuit, in reversing the district court, held that: (i) there is no per se rule limiting to insiders the recharacterization of debt claims as equity and (ii) non-insider debt claims may be recharacterized as equity under section 502(b) of the Bankruptcy Code.
The ability of a bankruptcy court to reorder the priority of claims or interests by means of equitable subordination or recharacterization of debt as equity is generally recognized. Even so, the Bankruptcy Code itself expressly authorizes only the former of these two remedies. Although common law uniformly acknowledges the power of a court to recast a claim asserted by a creditor as an equity interest in an appropriate case, the Bankruptcy Code is silent upon the availability of the remedy in a bankruptcy case.
Postconfirmation liquidation and litigation trusts have become an important mechanism in a chapter 11 bankruptcy estate’s arsenal, allowing for the resolution of claims and interests without needlessly delaying confirmation in the interim. The specter of postconfirmation litigation may seem unremarkable. Section 1123(b)(3)(B) of the Bankruptcy Code states that a plan may provide for retention or enforcement by the reorganized debtor, the trustee, or a representative of the estate of any claim or interest belonging to the estate.
In a victory for secured creditors, the Seventh Circuit Court of Appeals recently held inRiver Road Hotel Partners, LLC v. Amalgamated Bank (In re River Road Hotel Partners, LLC), 2011 WL 2547615 (7th Cir. June 28, 2011), that a dissenting class of secured lenders cannot be deprived of the right to credit-bid its claims under a chapter 11 plan that proposes an auction sale of the lenders’ collateral free and clear of liens.
On July 22, 2011, Bankruptcy Judge Craig A.
A secured creditor's option to credit bid its claim where its collateral is to be sold under a chapter 11 plan is an important protection to ensure that the creditor's collateral is not sold for less than its actual value. Rather than accepting the cash generated by a low bid, the creditor can submit its own bid, up to the amount of its secured claim, and recover its collateral instead. This traditionally recognized right was upset by two fairly recent circuit court decisions, one from the Fifth Circuit and one from the Third Circuit. In re Pacific Lumber Co., 584 F.3d 229 (5th Cir.
The U.S. Court of Appeals for the Seventh Circuit recently affirmed a bankruptcy court’s decision refusing to confirm debtors’ reorganization plan that included auction procedures that forbade secured creditors from “credit bidding” for the assets. Inre River Road Hotel Partners, LLC, No. 10-3597, 2011 WL 2547615 (7th Cir. June 28, 2011). In that case, the debtors (owners of various hotel properties) proposed a plan of reorganization that included auctioning certain properties encumbered by security interests.
The Seventh Circuit recently weighed in on the issue of whether a secured creditor has a right to credit bid at the sale of its collateral in connection with a chapter 11 plan of reorganization. In its decision in In re River Road Hotel Partners, LLC, Case Nos. 10-3597 & 10- 3598 (7th Cir. June 28, 2011), the Seventh Circuit split with decisions of the Third and Fifth Circuit Courts of Appeal holding that secured creditors have no such right to credit bid, raising the prospect that the issue may be ripe for review by the United States Supreme Court.