When an FCC licensee goes bankrupt, the question of how to treat the interests of secured lenders is the one that, from time to time, comes up for debate. Two recent cases deal with this issue – one appearing to be an aberration that would make lending to a broadcast licensee difficult if not impossible, while the second providing a more lender-friendly interpretation after a detailed analysis of the history of FCC and court precedent on this issue, affirming what most in the broadcast community have assumed, for most of the last two decades, is settled law. We

The Bottom Line:

The Bankruptcy Code provides that a Chapter 11 plan of reorganization may be confirmed over the opposition of a class of secured creditors whose secured claims are not being paid in full only if it provides one of the following1--

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.

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.

In In re Zair, 2016 U.S. Dist. LEXIS 49032 (E.D.N.Y. Apr. 12, 2016), the U.S. District Court for the Eastern District of New York became the latest to take sides on the emerging issue of “forced vesting” through a chapter 13 plan. After analyzing Bankruptcy Code §§ 1322(b)(9) and 1325(a)(5), the court concluded that a chapter 13 debtor could not, through a chapter 13 plan, force a mortgagee to take title to the mortgage collateral.

Background

Cases decided recently in Florida and Illinois call into question one legal rule that some might have thought well-settled: a first-perfected security interest in collateral beats a later-perfected lien creditor's interest in that same collateral. Seems simple enough. Except this rule might not be followed in every State.

An overvalued property may now have a bigger impact on a secured creditor’s bottom-line during bankruptcy.  Splitting with the Seventh Circuit, the Fifth Circuit in Southwest Securities, FSB v.

In the case of Domistyle, Inc., 14-41463 (5th Cir. Dec. 29, 2015), the United States Court of Appeal for the Fifth Circuit affirmed an order of the bankruptcy court requiring a secured creditor to reimburse the trustee for expenses paid to preserve real property subject to the creditor’s lien until the debtor’s eventual surrender of the property to the creditor.

Lenders and secured creditors often require that debtor-customers direct all receivable collections into a lockbox, hoping to wrangle any available proceeds to apply to their debtors’ outstanding debt. In requiring a debtor or its customer to remit payments to a lockbox, however, creditors may be overlooking a potential source of significant liability. A creditor using a lockbox may unwittingly expose itself to greater risk and liability than just a debtor’s default if it receives funds that were collected as sales tax on a debtor’s goods or services.