The recent case of Mervyn’s LLC v Lubert-Adler Group IV, LLC, et al. (In re Mervyn’s Holdings, LLC),1 serves as a warning to sellers and equity firms participating in leveraged buyouts to be wary of the effect such buyouts will have on creditors of the target company.
Overview
In a recent split decision, a 2-1 majority for the United States Court of Appeals for the Third Circuit ruled that a debtor’s plan of reorganization that proposes a sale of assets free and clear of liens is not necessarily required to allow creditors whose loans are secured by those assets to credit bid at the sale. The majority decision in In re Philadelphia Newspapers, LLC, Nos. 09-4266, 09-4349, 2010 WL 1006647 (3d Cir. Mar. 22, 2010), which follows a similar decision from the United States Court of Appeals for the Fifth Circuit (see Bank of N.Y. Trust Co., NA v.
Welcome to the latest issue of the Section 337 Update. This newsletter is designed to provide you with practical updates and developments on Section 337 proceedings before the US International Trade Commission.
The Collision of Section 337 and the US Bankruptcy Laws
Introduction
Several recent bankruptcy decisions rendered in the Third Circuit address whether the disclosure requirements of Rule 2019 of the Federal Rules of Bankruptcy Procedure apply to informal or “ad hoc” committees.1 Although these courts base their reasoning on the “plain meaning” of Rule 2019, their ultimate holdings are inconsistent and have generated renewed interest in this topic among lenders and the investing community. This article provides a brief summary of these recent decisions and examines their inconsistencies.
In 1999 the Third Circuit Court of Appeals rendered its decision in Calpine Corp. v. O’Brien Environmental Energy, Inc. (In re O’Brien Environmental Energy, Inc.), 181 F.2d 527, denying Calpine Corporation’s request for the payment of a break-up fee after Calpine lost its effort to acquire the assets of O’Brien Environmental Energy out of bankruptcy.
The Third Circuit Court of Appeals dealt a blow to secured creditors in its recent decision holding that a debtor may prohibit a lender from credit bidding on its collateral in connection with a sale of assets under a plan of reorganization. In the case of In re Philadelphia Newspapers, LLC, No. 09-4266 (3d Cir. Mar. 22, 2010), the court, in a 2-1 decision, determined that a plan that provides secured lenders with the “indubitable equivalent” of their secured interest in an asset is not required to permit credit bidding when that asset is sold.
Credit bidding has become a really hot issue recently. For those of us who don't normally work on bankruptcy matters, the right to credit bid is an important right that secured lenders usually have in a bankruptcy proceeding. If you're the senior secured lender and you want to buy the company's assets in a bankruptcy sale, you can show up at the auction and, instead of bidding cash, you can place credit bids.
The Third Circuit recently held that a bankruptcy court may confirm a Chapter 11 plan that includes a sale of assets in which secured creditors are not permitted to “credit bid” for the assets. In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010). In that case, the debtors in possession, companies that own and operate the Philadelphia Inquirer and Philadelphia Daily News, moved the bankruptcy court to approve bid procedures for an auction of the debtors’ assets. Id. at 302.
INTRODUCTION