Investors who hold both debt and equity in a financially distressed company may be confronted with efforts to have their debt investments recharacterized as equity. Recharacterization is an equitable remedy that bankruptcy courts have used as a basis to look past the form and characterization of an obligation as debt and find the subject obligation to be equity. In his recent decision in Official Comm. of Unsecured Creditors of Radnor Holdings Corp. v. Tennenbaum Capital Partners, LLC (In re Radnor Holdings Corp.), Adv. Proc. No. 06-50909 (Bankr. D. Del.

The implementation of restrictions on stock and/or claims trading has become almost routine in large chapter 11 cases involving public companies on the basis that such restrictions are vital to prevent forfeiture of favorable tax attributes that can be triggered by a change in control. Continued reliance on stock trading injunctions as a means of preserving net operating loss carry forwards, however, may be problematic, after the controversial ruling handed down in 2005 by the Seventh Circuit Court of Appeals in In re UAL Corp.

On Wednesday, it appeared that Adelphia Communications’s tortured four-and-a-half year journey through the bankruptcy process was finally near its end, as U.S. Bankruptcy Court Judge Robert Gerber handed down a massive 267-page opinion confirming court approval of Adelphia’s Chapter 11 plan. Adelphia, which had ranked as the fifth largest cable operator in the U.S., was forced into bankruptcy in 2002 after it was discovered that Adelphia’s founder, John Rigas, and members of his family had siphoned millions of dollars from the company for personal use.

October 17, 2006 marked the one year anniversary of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (the "Reform Act"). The Reform Act has provided some much needed relief to commercial landlords, and the reported decisions of bankruptcy courts during the first year of the Reform Act confirm the effectiveness of the new landlord-friendly provisions.

Delaware companies take note: a state court has ruled that companies in apparent good financial health may not use the bankruptcy process to avoid shareholder approval of an asset sale—even in situations in which a shareholder vote may be difficult to obtain.

A business consultant who contracted to receive a percentage of a company’s shares in exchange for helping the company go public—but never actually received those shares and obtained a money judgment against the company instead—was not a holder of equity for purposes of subordination under the Bankruptcy Code, the U.S. Court of Appeals for the Ninth Circuit has determined.

The Bankruptcy Appellate Panel of the Ninth Circuit has ruled that assignments of equipment lease payment streams were not automatically perfected. Because the debtor failed to perfect the assignees’ interests in the payment streams, the bankruptcy trustee could bring an action to avoid those interests.

Utility Services—Darby v. Time Warner Cable, Inc. (In re Darby), No. 05-20931 (5th Cir., Nov. 14, 2006)

The U.S. Court of Appeals for the Fifth Circuit has held, in an issue of first impression in the circuit, that a cable service provider was not a utility under section 366 of the Bankruptcy Code. Therefore, the cable company was not obligated to provide services to a bankrupt debtor, even though the debtor offered assurances of future payment. The ruling affirmed the holdings of two lower courts.

In a case of first impression, the U.S. Court of Appeals for the Second Circuit has held that a claim for damages based on a chapter 11 debtor’s failure to issue shares of its common stock in exchange for a claimant’s stock in another company pursuant to a termination agreement is subject to mandatory subordination.

In Rombro v. Dufrayne (In re Med Diversified, Inc.), 461 F.3d 251 (2d Cir. 2006), the court held that the claim “arose from” the purchase of the debtor’s stock within the meaning and purpose of the Bankruptcy Code’s subordination provision.

Lender Had Duty To Investigate Claim to Promissory Note

In a harsh decision for the lender, the U.S. Court of Appeals for the Tenth Circuit has determined that a debtor’s loan may be discharged in chapter 7 bankruptcy— despite the borrower’s admission that his personal financial statement contained materially false representations about his financial condition.