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.

NHB Assignments, LLC v. General Atlantic, LLC and Braden Kelly (In re PMTS Liquidating Corp., et al.) Case No. 08-11551 (BLS) (Bankr. D. Del. July 1, 2011)  

CASE SNAPSHOT

Delaware companies take note: a state court has ruled that companies in apparent good financial health may not use the bankruptcy process to avoid shareholder approval of an asset sale—even in situations in which a shareholder vote may be difficult to obtain.

A business consultant who contracted to receive a percentage of a company’s shares in exchange for helping the company go public—but never actually received those shares and obtained a money judgment against the company instead—was not a holder of equity for purposes of subordination under the Bankruptcy Code, the U.S. Court of Appeals for the Ninth Circuit has determined.

The Bankruptcy Appellate Panel of the Ninth Circuit has ruled that assignments of equipment lease payment streams were not automatically perfected. Because the debtor failed to perfect the assignees’ interests in the payment streams, the bankruptcy trustee could bring an action to avoid those interests.

The U.S. Court of Appeals for the Sixth Circuit has held that as the assignee of a debtors’ mortgage loan, a bank’s security interest was superior to the Chapter 13 Trustee’s interest as a judicial lien creditor. The ruling in Rogan v. Bank One, National Association (In re Cook), 457 F.3d 561 (6th Cir. 2006) affirmed the holdings of two lower courts. In December 2000, the debtors entered into a loan transaction with NCS Mortgage Lending Company (“NCS”), which was secured by a properly recorded mortgage.

Utility Services—Darby v. Time Warner Cable, Inc. (In re Darby), No. 05-20931 (5th Cir., Nov. 14, 2006)

The U.S. Court of Appeals for the Fifth Circuit has held, in an issue of first impression in the circuit, that a cable service provider was not a utility under section 366 of the Bankruptcy Code. Therefore, the cable company was not obligated to provide services to a bankrupt debtor, even though the debtor offered assurances of future payment. The ruling affirmed the holdings of two lower courts.

In a case of first impression, the U.S. Court of Appeals for the Second Circuit has held that a claim for damages based on a chapter 11 debtor’s failure to issue shares of its common stock in exchange for a claimant’s stock in another company pursuant to a termination agreement is subject to mandatory subordination.

In Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251 (2d Cir. 2006), the court held that the claim “arose from” the purchase of the debtor’s stock within the meaning and purpose of the Bankruptcy Code’s subordination provision.

Lender Had Duty To Investigate Claim to Promissory Note

In a harsh decision for the lender, the U.S. Court of Appeals for the Tenth Circuit has determined that a debtor’s loan may be discharged in chapter 7 bankruptcy— despite the borrower’s admission that his personal financial statement contained materially false representations about his financial condition.

An appeals court in Kentucky has issued a reminder to secured lenders of the importance of drawing up control agreements that establish a lender’s interest in a debtor’s assets contained in depository accounts.