In In re Falcon Products, Inc., 381 B.R. 543 (8th Cir. BAP, 2008), the bankruptcy appellate panel (BAP) for the Eighth Circuit reversed a decision by the bankruptcy court for the District of Missouri, and held that when applying the hypothetical liquidation test to determine whether a secured creditor received potentially preferential payments, the collateral must be valued as of the petition date and not as of the payment transfer date.

The Ninth Circuit’s Bankruptcy Appellate Panel (the “BAP”) held on July 18, 2008, that the Bankruptcy Code (“Code”) did not authorize a bankruptcy court’s approving the sale of a debtor’s property free and clear of a junior lien outside the reorganization plan context. In re PW, LLC __ B.R. __, 2008 WL 2840659 (B.A.P. 9th Cir. July 18, 2008). It directed the bankruptcy court to ascertain on remand whether state law permitted a court to compel the junior lienholder to release its lien in exchange for payment of less than the face value of its claim. Id., at *13-*16.

In Clear Channel Outdoor, Inc. v.Knupfer (In re PW, LLC),1 the United States Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) addressed the issue of whether a secured creditor had purchased estate property free and clear of liens, claims and encumbrances outside of a plan of reorganization.

Creditors often consider filing an involuntary bankruptcy petition against their financially distressed debtors. Before using this extraordinary remedy, a creditor should evaluate whether it will achieve a valid business objective. Additionally, each creditor should evaluate whether there is a valid basis to support the filing. When the debtor's bankruptcy is appropriate, it can be a valuable step in maximizing a creditor's recovery. But the stakes are high.

As a result of the meltdown of the financial markets, lenders are severely constricting new credit facilities and refusing to renew expiring facilities. The Bankruptcy Code's chapter 11 provides a powerful mechanism for an otherwise viable business to restructure and extend its outstanding debt and in many cases, reduce interest rates on loan facilities.

Last year, the Ninth Circuit BAP determined that the Bankruptcy Code does not permit a secured creditor to credit bid its debt, and purchase estate property free and clear of non-consenting junior liens, outside a plan of reorganization. Uncertainty resulting from the decision in Clear Channel Outdoor, Inc. v. Nancy Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. B.A.P. 2008) may chill bidding and asset sales in the Ninth Circuit.

As the economy worsens and the value of corporate assets declines, unsecured creditors are finding that very little, if anything, is left for them at the bankruptcy table after the secured creditors have taken as much as they can from a debtor’s assets. Now, after a period of having copious credit available on attractive terms, debtors are going into bankruptcy without sufficient assets to pay even their secured creditors in full. In such circumstances, prospects for unsecured creditors are bleak indeed.  

The Sixth Circuit recently held that section 2-702(3) of the Uniform Commercial Code (the "UCC"), which permits good faith purchasers to defeat a valid right to reclaim, does not allow a secured creditor to defeat that right.[1] The Sixth Circuit found that the security interest held by a DIP lender could not be used to defeat the right of a reclaiming creditor under the UCC or pre-BAPCPA section 546(c) of the Bankruptcy Code. This decision may impact the way bankruptcy courts consider reclamation claims under revised section 546(c) of the Bankruptcy Code.

There is a sense of inevitability that Congress will pass legislation allowing a Chapter 13 bankruptcy plan (also referred to as a wage-earner’s plan) to "cram-down" the value of a mortgage on a consumer's principal residence to its market value and/or reset debtor interest rate and monthly payments to an amount that permits them to remain in their homes. This alert summarizes the latest version of H.R.

In the March 2008 issue, we discussed a decision from the In re Urban Communicators PCS, Ltd. Partnership1 case. In that decision, the United States Bankruptcy Court for the Southern District of New York held that under section 506(b) of the Bankruptcy Code, the Bankruptcy Court could limit the rate of postpetition interest to be paid to an over-secured creditor to an amount less than the contract interest rate.