Introduction
The U.S. Bankruptcy Court for the Middle District of Florida recently overruled a debtor's objection to a mortgagee's secured claim and denied the debtor's motion to determine secured status, holding that the issues should have been brought by adversary proceeding, and in any event neither Florida's statute of limitations nor its statute of repose barred enforcement of the note and mortgage. A copy of the opinion is attached.
Debt-for-debt exchanges are not new, but are worth revisiting given the current economic climate. Furthermore, the recently enacted "Stimulus Act"1 provides some temporary relief to debtors from potentially harsh tax consequences of restructuring. The following discussion is relevant to issuers (also referred to as debtors) or holders (also referred to as creditors) of debt who are "US persons" (as defined in the US Internal Revenue Code).2
In order to illustrate some of the key US federal income tax consequences of a debt-for-debt exchange, consider the following example:
Several recent cases in the United States District Court for the Southern District of New York have created ambiguity about when distressed exchange offers violate Section 316(b) of the 1939 Trust Indenture Act (the “TIA”). It appears that plaintiffs’ lawyers are using this ambiguity to challenge distressed exchange offers. The threat of litigation may give minority bondholders a powerful tool to hinder less than fully consensual out-of-court restructurings and provide them with increased leverage in negotiations.
The Third Circuit recently affirmed that a debtor in Chapter 11 can use a tender offer to settle claims without running afoul of the Bankruptcy Code. Although In re Energy Future Holdings Corp.is limited to its particular facts and circumstances, the decision could lead to increased use of tender offers prior to confirmation of a bankruptcy plan.
Market participants involved in distressed exchange offers have become accustomed to grappling with the implications of Trust Indenture Act Section 316(b) in the context of potential exit consents, i.e., are the contemplated amendments to the indenture governing the securities subject to the exchange significant enough to impair or affect the right of a holder to receive payment of principal and interest on or after the due dates of the relevant note?
The Bottom Line:
The Bottom Line:
Survival
Debt maturity profile Companies should ensure that they have a very clear understanding of the timing of their cash needs and in particular of the maturity profile of their debt – when does debt fall due and when will refinancing be required?
Metropolitan Insurance Company has joined ING Clarion Capital Loan Services, Inc., Wells Fargo Bank, N.A., and FRM Funding Company, Inc in requesting the Bankruptcy Court to dismiss as bad faith filings the bankruptcy cases of twenty-one property level CMBS borrower subsidiaries of General Growth Properties, Inc. ING filed the first motion on May 4th with respect to eight debtors, and a hearing was set for May 27th. That hearing was subsequently adjourned to June 17th. Creditors having similar motions to be heard on June 17th were required to file their motions to dismiss by May 29th .