Leading the Past Week

In a decision that may have implications for holders of community development district bonds and other similar “dirt bonds,” a Florida bankruptcy court has ruled that holders of community development district bonds do not always have plan voting rights when the underlying developer — as opposed to the development district itself — is the bankruptcy debtor.

Businesses in a wide range of industries may now be forced to consider bankruptcy given the unprecedented economic challenges caused by the COVID-19 pandemic. This advisory is designed to provide a high-level view of issues to be considered by human resources when considering filing for Chapter 11 bankruptcy. Please note that this advisory focuses specifically on a Chapter 11 bankruptcy (pursuant to which a business will be reorganized) rather than Chapter 7 bankruptcy (pursuant to which a business will be liquidated).

Tolstoy warned that “if you look for perfection, you’ll never be content”; but Tolstoy wasn’t a bankruptcy lawyer. In the world of secured lending, perfection is paramount. A secured lender that has not properly perfected its lien can lose its collateral and end up with unsecured status if its borrower files bankruptcy.

In 2015, Distressing Matters reported on the Third Circuit’s decision in In re Jevic Holding Corp., wherein that panel ruled that, in rare circumstances, bankruptcy courts may approve the distribution of settlement proceeds in a manner that violates the Bankruptcy Code’s statutory priority scheme.

In the Ultimate Escapes bankruptcy case, the U.S. District Court for the District of Delaware recently held that the “business judgment rule” may protect fiduciaries who negotiate and enter into unconventional financing agreements in an attempt to save the company. In short, a failed business strategy by itself does not lead to liability for breach of fiduciary duty.

On August 11, Franklin Funds and Oppenheimer Rochester Funds filed a second amended complaint, opposition to motion to dismiss and cross-motion for summary judgment in the litigation they previously filed in the United States District Court for Puerto Rico challenging the constitutionality and validity of Puerto Rico’s so-called Recovery Act.  The second amended complaint reiterates that a PREPA filing under the Recovery Act, which establishes debt adjustment procedures for most of Puerto Rico’s public corporations, is both “probable and imminent.”  The summary judgment motion see

In Chapter 11 bankruptcy cases, the absolute priority rule requires a debtor’s creditors be paid in full before equity investors receive any value. However, existing equity investors occasionally seek to invest new money in the plan of reorganization process and argue that such investment justifies retention of equity in the reorganized company; equity which otherwise would pass to impaired creditors.

It has long been understood by buyers of assets of distressed companies that once a sale is authorized pursuant to Section 363 of the Bankruptcy Code, the buyer is absolved of any liabilities which may have encumbered the assets of the previous owner, including causes of actions against them. However, a recent decision from the influential United States District Court for the Southern District of New York saddles buyers with the burden of unknown potential future claims.

Following California-based solar manufacturer Solyndra’s announcement August 31 that it intends to file for bankruptcy, House Energy and Commerce Committee Chairman Fred Upton (R-MI) and Oversight Subcommittee Chairman Cliff Stearns (R-TX) requested more documents from the White House regarding the Department of Energy’s $535 million loan guarantee to the company, the first to be awarded in September 2009. The bankruptcy is likely to intensify congressional criticism of the agency’s loan guarantee program and other renewable energy subsidies.