Not-for-profit entities are not immune from the business cycles, risk of lawsuits and other threats to solvency. Managing the collapse of an organization has always required diligence, but recent IRS enforcement initiatives and a recent District Court decision have made these situations even more troublesome. During the wind-down of a failed organization, there has generally been no personal liability for managers who have chosen to pay some vendors over others (except for certain limited statutory exceptions such as trust fund taxes).

An opinion issued in connection with the bankruptcy cases of Lyondell Chemical Company and its affiliates may have significant implications for shareholders who receive payments in connection with a leveraged buyout when the underlying company subsequently files for bankruptcy. 

The United States Bankruptcy Court for the District of Delaware recently limited the ability of a secured creditor to credit bid for substantially all of the debtors’ assets because (i) the credit bid would chill, or even freeze, the bidding process, (ii) the proposed expedited private sale pursuant to a credit bid would be inconsistent with notions of fairness in the bankruptcy process, and (iii) the amount of the secured claim was uncertain. In re Fisker Automotive Holdings, Inc., Case No. 13-13087 (Bankr. D. Del. Jan. 17, 2014).

On Jan. 10, 2014, the United States Bankruptcy Court for the District of Delaware (the “Court”) in In re Fisker Automotive Holdings, Inc., et al., capped a secured creditor’s right to credit bid its $168 million claim at only $25 million (the amount it paid to purchase the claim). The decision is on appeal. While the Court stated that its decision is non-precedential, it serves as a cautionary tale for secured lenders who also are potential acquirers of a debtor’s assets in bankruptcy sales.

Facts

Loan to Fisker

Northern District of Oklahoma Chief Bankruptcy Judge Terrence L. Michael’s introduction to the opinion in In re Harrison (2013 WL 6859303) serves as a good introduction to this post:

Filings are Down

Section 1111(b) of the United States Bankruptcy Code (the “Code”) is one of its least understood provisions, primarily due to its somewhat opaque language. This Code subsection is divided into two distinct but related parts. The first part, section 1111(b)(1), provides that a nonrecourse secured claim in a Chapter 11 case will be treated “as if such holder had recourse against the debtor on account of such claim, whether or not such holder has such recourse” subject to two exceptions.

As we predicted when it was filed, Judge Rhodes of the U.S. Bankruptcy Court for the Eastern District of Michigan denied today several creditors’ motion to appoint an independent commission to appraise the collection of the Detroit Institute of Arts (owned by the city of Detroit) as part of the city’s ongoing bankruptcy. 

The good news is that public works construction projects for municipalities are projected to remain a major sector of construction activity for the foreseeable future. The not-so-good news is that municipal bankruptcy filings are on the rise, and they are likely to increase. The issues facing parties under contract with a municipality when it files for bankruptcy protection are playing out nationally in places like Stockton, California, and Detroit, Michigan.

A New York bankruptcy court has ruled that certain victims of Bernard Madoff’s highly publicized Ponzi scheme are not entitled to adjust their claims to account for inflation or interest. Securities Investor Protection Corporation v. Bernard L. Madoff Investment Securities LLC, 496 B.R. 744 (Bankr. S.D.N.Y. 2013). The Madoff Liquidation Trustee brought the motion asking the court to determine that Madoff customers’ “net equity” claims did not include “time-based damages” such as interest and inflation under the Securities Investor Protection Act (“SIPA”).