Yes, Gathering Agreements Can Be Rejected as Executory Contracts (At Least Under One Court’s Interpretation of Texas Law)

So you are chugging along with a foreclosure action (either on real and/or personal property) only to be stopped in your tracks by the borrower filing a voluntary Chapter 7 bankruptcy petition. The usual, immediate thought is – “better contact our bankruptcy counsel to obtain relief from the automatic stay.” Well, perhaps, or perhaps you might want to contact the Chapter 7 Trustee first (either directly or through your bankruptcy counsel). Why? Maybe the Chapter 7 Trustee would be interested in liquidating that collateral for you though the bankruptcy system.

Introduction

In a recent split decision, a 2-1 majority for the United States Court of Appeals for the Third Circuit ruled that a debtor’s plan of reorganization that proposes a sale of assets free and clear of liens is not necessarily required to allow creditors whose loans are secured by those assets to credit bid at the sale. The majority decision in In re Philadelphia Newspapers, LLC, Nos. 09-4266, 09-4349, 2010 WL 1006647 (3d Cir. Mar. 22, 2010), which follows a similar decision from the United States Court of Appeals for the Fifth Circuit (see Bank of N.Y. Trust Co., NA v.

Despite the prevalence of first-lien/secondlien structures in the loan market over the course of the recently-ended leveraged transaction cycle, fully-litigated cases interpreting the provisions of first-lien/second-lien intercreditor agreements remain something of a rarity. As a result, cases providing guidance on the extent to which customary waivers included in such intercreditor agreements would be enforced are always welcomed by finance practitioners. It comes as no surprise then, that the decision of Judge Peck of the U.S.

The Third Circuit Court of Appeals dealt a blow to secured creditors in its recent decision holding that a debtor may prohibit a lender from credit bidding on its collateral in connection with a sale of assets under a plan of reorganization. In the case of In re Philadelphia Newspapers, LLC, No. 09-4266 (3d Cir. Mar. 22, 2010), the court, in a 2-1 decision, determined that a plan that provides secured lenders with the “indubitable equivalent” of their secured interest in an asset is not required to permit credit bidding when that asset is sold.

The Eleventh Circuit recently affirmed the avoidance of nearly $2 million in postpetition payments made by debtor Delco Oil, Inc. (the "Debtor") to its petroleum supplier Marathon Petroleum Company, LLC ("Marathon").[1] The Eleventh Circuit held that funds received by Marathon from the Debtor constituted cash collateral that the Debtor had spent without the permission of either its secured lender, CapitalSource Finance ("CapitalSource"), or the bankruptcy court and, therefore, could be avoided under sections 549(a) and 363(c)(2) of the Bankruptcy Code.

Companies that plan to sell goods or services to a debtor in bankruptcy should be aware of a recent case decided by the Court of Appeals for the Eleventh Circuit, holding that a trustee may avoid a debtor’s post-petition transfers of cash collateral if such transfers were made without the consent of the secured party or court order.1

The Bankruptcy Appellate Panel for the Sixth Circuit has issued an opinion protecting and preserving a bank’s security interest in funds in the debtor’s bank account notwithstanding the fact that the bank released those funds to the trustee. In re Cumberland Molded Products, LLC, No. 09-8049 (6th Cir. B.A.P. June 23, 2010).

When a bankruptcy court calculates the "projected disposable income" in a repayment plan proposed by an above-median-income chapter 13 debtor, the court may "account for changes in the debtor's income or expenses that are known or virtually certain at the time of confirmation," the U.S. Supreme Court held in Hamilton v. Lanning on June 7. Writing for the 8-1 majority, Justice Samuel A.