DURING THE PAST YEAR, many investors in the distressed debt market have received postreorganization private equity1 either through a confirmed plan of reorganization or through participation in a rights offering. Unlike publicly traded equity, each new issuance of postreorganization equity leaves recipients, issuers, and agents potentially facing uncharted territory in terms of how the instrument is to trade and settle.
The United States Supreme Court recently submitted to Congress an amendment to Bankruptcy Rule 2019 dealing with disclosure by groups of hedge funds and other distressed investors in reorganization cases. Unless Congress blocks its passage, which is unlikely, the amendment will become effective on Dec. 1, 2011.1 As shown below, the new rule streamlines and clarifies what had become a frequently litigated disclosure process.
Background
The U.S. Court of Appeals for the Second Circuit, on Feb. 7, 2011, held that senior creditors could not “gift” part of their reorganization plan recovery to existing shareholders of the debtor.In re DBSD N. Am., Inc., __ F.3d __, 2011 WL 350480 (2d Cir. Feb. 7, 2011) (2-1) (Lynch, J.) (explainingIn re DBSD N. Am., Inc., 627 F.3d 496 (2d Cir. 2010) (summary opinion)). Its extensive 62-page opinion explained the court’s previous two-page summary ruling of Dec.
The current cycle of Chapter 11 corporate bankruptcies involves many cases where the debtor seeks to achieve a balance-sheet restructuring by converting debt into equity. When consensus cannot be achieved, junior stakeholders (i.e., second lien creditors, unsecured creditors and/or equity) will often contest plan confirmation on the grounds that the proposed plan provides more than 100% recovery to the senior creditors. Valuation plays the central role in these cases.
Break-up fees1 remain difficult for initial (or so-called “stalking horse”) bidders to obtain in the Third Circuit. In Kelson Channelview LLC v. Reliant Energy Channelview LP (In re Reliant Energy Channelview LP), No. 09-2074 (3d Cir. Jan.
In a Jan. 20, 2010, opinion, Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware held that a group of investors who had together proposed a plan of reorganization for the debtor did not have to comply with the disclosure requirements of Federal Rule of Bankruptcy Procedure 2019 (“Rule 2019”) In re Premier International Holdings, Inc., No. 09-12019 (Bankr. D. Del. Jan. 20, 2010) (Sontchi, J.) (“Six Flags”). In Six Flags, Judge Sontchi expressly disagreed with two prior decisions on the subject of Rule 2019 disclosure, one by Judge Mary K.
On April 16, 2009 and April 22, 2009, General Growth Properties, Inc. (“GGP”) and certain of its subsidiaries (the “Debtors”), including many subsidiaries structured as special purpose entities (the “SPE Debtors”), filed voluntary petitions for relief under Chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Southern District of New York (the “Court”).
The United States Bankruptcy Court for the Southern District of New York recently awarded an oversecured lender post-petition interest on the full amount of its secured claim at the default rate set forth in the lender’s contract (19%) plus compound (PIK) interest up to the aggregate rate of 25% (the maximum rate allowable under New York State usury laws). In re Urban Communicators PCS Limited Partnership, et al., 2007 Bankr. LEXIS 4062 (Bankr. S.D.N.Y. 12/11/07) (Gerber, B.J.).
The Court of Appeals for the First Circuit recently held that an oversecured lender holds at least an unsecured claim for contractual prepayment penalties against a solvent debtor. UPS Capital Business Credit v. Gencarelli (In re Gencarelli), 2007 BL 91656 (1st Cir., Aug. 30, 2007). As the court explained, "[t]his is a difficult question that has significant ramifications for the commercial lending industry." Id. at 16.
The U.S. Court of Appeals for the Eleventh Circuit held on July 26, 2007, that a bankruptcy court properly calculated an investment bank's advisory fee under a reasonableness standard. In re Citation Corp., ___ F.3d ___ 2007 WL 2128165 (July 26, 2007).