(Excerpted from “Retail Bankruptcies – Protections for Landlords,” Practical Law Journal, May 2018, by Lars Fuller)
Due to increasing competition from online sellers, recent years have seen a dramatic uptick in Chapter 11 bankruptcy filings by multistate brick-and-mortar retailers – some that have dozens, or even hundreds, of storefronts. These bankruptcies create challenges for the commercial landlords that own the shopping centers, malls and other establishments that those retailers rented.
In a case decided on March 28, 2018, the Ninth Circuit Court of Appeals held that a maritime lien on a vessel for the "maintenance and cure" of an injured seaman was not subject to the "automatic stay" that generally arises as the result of a bankruptcy filing by the owner of the vessel. In the case entitled Barnes v. Sea Hawaii Rafting, LLC, 886 F.3d 758, the Ninth Circuit Court of Appeals considered whether the special rules invoked by maritime law trumped the rules and equitable principles set out in the Bankruptcy Code, or whether bankruptcy law triumphed.
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The Supreme Court’s opinion is significant because it will encourage creditors to rely on written, rather than oral, statements of debtors as to both their assets and overall financial status, which are better evidence in a nondischargeability case.
In the recent case of Garcia v. Garcia, the guarantor of a loan (Morris) is sued by the bank to honor his guarantee obligation of about $1.5 million. The debtor was not able to pay under the guarantee, so the bank obtained a charging order against the debtor member’s 50% LLC interest. The bank wanted access to the funds in that LLC, but the third-party manager of the LLC refused to pay any distribution to the debtor member. As a result, the debtor member filed Chapter 7 bankruptcy.
The June 20, 2018 decision by the Delaware Bankruptcy Court in Woodbridge Group of Companies, LLC should prompt those involved in claims trading to reassess transactions where the underlying documents have anti-assignment provisions. Parties to loan transactions outside of a bankruptcy will also benefit from the court’s guidance on when assignments constitute a breach of the operative agreements, rather than being outright void. The lesson for all is that the treatment of an anti-assignment provision under Delaware law turns on the language of the operative document.
Leveraged transactions, such as leveraged buyouts (LBO) and leveraged recapitalizations, carry the risk of being unwound in a later bankruptcy of the party that transferred assets (including granting liens) or incurred obligations in the transaction. The risk that such transactions may be upset in bankruptcy extends, of course, to selling shareholders in an LBO and to shareholders who receive purchase price funds or dividends in a leveraged recap.
Here’s an aggregation of some of my Twitter posts from May 25-31, 2018, with links to important cases, articles, and news briefs that restructuring professionals will find of interest. Don’t hesitate to reach out and contact me to discuss any posts. Thanks for reading!
BK RELATED CASES:
Should a Massachusetts homeowner be allowed to claim a homestead exemption in a principal residence that is also used for business or other commercial purposes? Answering this question several years ago as a matter of first impression, the U.S.
The appellate courts are usually the last stop for parties in business bankruptcy cases. The courts issued at least three provocative, if not questionable, decisions in the past six months. Their decisions have not only created uncertainty, but will also generate further litigation over reorganization plan manipulation, arbitration of routine bankruptcy disputes and the treatment of trademark licenses in reorganization cases. Each decision apparently disposes of routine issues in business cases. A closer look at each case, though, reveals the sad truth: they are anything but routine.