Our May 11th memo entitled “General Growth Properties Bankruptcy Court Defers Final Ruling on Cash Collateral, Cash Management and DIP Financing Issues” concluded that the ultimate impact of the bankruptcy filings of General Growth Properties, Inc. and its affiliates would depend in large part on how the cash collateral and DIP Loan issues were resolved. On May 13th, Judge Allan L. Gropper, the U.S. Bankruptcy Judge before whom these bankruptcies are pending, entered final orders on the pending cash collateral, cash management and debtor-in-possession financing motions.

The next time you negotiate a settlement payment with a financially troubled party, you may want to keep in mind an ancient term related to livestock herding: earmarking. The concept may be somewhat antiquated, but the Second Circuit has recently confirmed that it is still viable – and can help you keep the settlement payment if the other party later files for bankruptcy.

Following several weeks of speculation about how pending cash collateral, cash management, and debtor-in-possession financing motions might affect basic principles of structured finance, the bankruptcy court deferred a final ruling on the motions and extended the interim cash collateral order. In so doing, Judge Allan L. Gropper of the United States Bankruptcy Court for the Southern District of New York suggested that CMBS lenders organize themselves so that common issues can be identified and resolution expedited.

In UPS Capital Business Credit v. Gencarelli (In re Gencarelli),1 the First Circuit Court of Appeals addressed the issue of whether a secured creditor is entitled to collect a prepayment penalty from a solvent debtor. The Court found that the secured creditor could collect the penalty, whether or not it is reasonable, so long as the penalty is enforceable under state law. The Court reasoned that any other holding would leave open the possibility that an unsecured creditor could recover more from a solvent estate than a secured creditor.

Background

Introduction

In a recent decision, the United States Bankruptcy Court for the Southern District of New York (the “U.S. Court”) exercised its abstention powers and dismissed an involuntary chapter 11 petition filed against an Argentine company, Compania de Alimentos Fargo, SA (“Fargo”).1 Fargo, a debtor in an insolvency proceeding in Argentina, had moved to dismiss the involuntary petition principally because its Argentine bankruptcy case was still pending.

In In re Entringer Bakeries, Inc.,1 the United States Court of Appeals for the Fifth Circuit affirmed the viability of the “earmarking doctrine” as a judicially-created defense to a preference action under section 547(b) of the Bankruptcy Code.

Creditors have recently made some headway in collecting the full amount to which they are contractually entitled pursuant to various debt instruments. In In re Calpine Corp.,1 reported in our summer 2007 newsletter, the Bankruptcy Court for the Southern District of New York permitted a secured creditor to collect damages (albeit in the form of an unsecured claim) caused by dashed expectations due to the early repayment of its debt.

In two recent decisions in the General Growth Properties, Inc., et al. chapter 11 cases, the United States Bankruptcy Court for the Southern District of New York upheld certain loan provisions which provided for an automatic event of default and imposition of a default rate of interest upon the commencement of a bankruptcy case, and held that certain creditors were entitled to receive postpetition interest at the contractual default rate.  General Growth Properties, Inc. and its affiliated debtors own, develop, and operate regional shopping malls across the United States.

Introduction