On September 12, 2013, the U.S. Court of Appeals for the Second Circuit (the Second Circuit) affirmed the rulings of the U.S. Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) in the bankruptcy cases of American Airlines and related debtors (the Debtors) holding that the Debtors do not have to pay a make-whole premium when repaying certain of their outstanding financings (the Indentures).
A ruling handed down by the Third Circuit Court of Appeals on November 15, 2013, adds yet another chapter to the ongoing controversy concerning whether sold or assigned claims can be subject to disallowance under section 502(d) of the Bankruptcy Code on the basis of the seller’s receipt of a voidable transfer. The decision—In re KB Toys Inc., 2013 WL 6038248 (3d Cir. Nov. 15, 2013)—is an unwelcome missive for claims traders. For the first time since the enactment of the Bankruptcy Code in 1978, a circuit court of appeals has concluded that:
The Bankruptcy Court for the Southern District of New York overseeing the Residential Capital (“ResCap”) cases issued an opinion on November 15, 2013 (the “Opinion”)2 allowing the unamortized interest associated with original issue discount (“OID”) that was generated in a fair market value exchange and claimed by ResCap’s junior secured noteholders (the “Holders”). While the OID ruling is only one component of the Opinion,3 it may have far reaching implications, as already evidenced in the pricing of other OID notes that were the product of fair market value exchanges.
On November 15, 2013, Judge Martin Glenn of the Bankruptcy Court for the Southern District of New York held that original issue discount (“OID”) created in a prepetition “fair market value” debt exchange is not disallowable in bankruptcy.1 This noteworthy ruling provides important and long-awaited guidance for the investing community on the question left open by the Second Circuit’s 1992 ruling in LTV Corp. v. Valley Fidelity Bank & Trust Co. (In re Chateaugay Corp.).2
BACKGROUND
What you need to know:
The Bottom Line:
The United States Court of Appeals for the Second Circuit (the “Second Circuit”) recently followed the emerging trend of affording the safe harbor protections of section 546(e) of the Bankruptcy Code (the “Code”) to intermediary financial institutions acting as only conduits in otherwise voidable transactions.
The Seventh Circuit has explicitly adopted the Second Circuit’s broad interpretation of the terms “transfer” and “settlement payment” in the Bankruptcy Code’s safe harbor provisions. See Peterson v. Somers Dublin Ltd., No. 12-2463, --- F.3d ----, 2013 WL 4767495 (7th Cir. Sept.
On September 12, 2013, in the American Airlines case, the US Court of Appeals for the Second Circuit affirmed an order of the United States Bankruptcy Court for the Southern District of New York (a) authorizing the debtor to use proceeds of postpetition financing to repay prepetition debt without payment of amake-whole amount, and (b) denying a creditor’s request for relief fromthe automatic stay.
Background Facts
On Sept. 12, 2013, the United States Court of Appeals for the Second Circuit affirmed the bankruptcy court’s decision to deny payment of a make-whole premium (the “Make-Whole Amount”) to bondholders under three separate indentures (the “Indentures”) based on the plain language of those agreements. U.S. Bank Trust Nat’l Ass’n v. AMR Corp. et al. (In re AMR Corp.), __ F.3d __, 2013 WL 4840474 (2d Cir. Sept. 12, 2013) (“In re AMR Corp. II”).