On Monday, May 29, 2014, the United States Bankruptcy Court for the Southern District of New York approved Sbarro LLC’s plan of reorganization, paving the way for the pizza restaurant chain to exit bankruptcy.  Sbarro filed for chapter 11 protection earlier this year with a prepackaged plan that allowed its prepetition secured lenders to swap over $148 million in debt for control of the reorganized business if higher or otherwise better purchasers for Sbarro’s business did not overbid.  When no alternative purchasers materialized, Sbarro moved forward with its debt-for-equity swap

The U.S. District Court for the Southern District of New York, on April 27, 2014, issued a decision directing the bankruptcy court to dismiss fraudulent transfer complaints brought by the Madoff Securities Investor Protection Act of 1970 (“SIPA”) trustee against investment funds, their customers and individuals when the trustee failed “plausibly [to] allege that defendant[s] did not act in good faith.” SIPC v. Bernard L. Madoff Inv. Sec. LLC, 2014 WL 1651952, at *5 (S.D.N.Y. April 27, 2014).

Why it matters

The inclusion of pre-bankruptcy waivers in “standard issue” credit documents has generated a host of litigation in bankruptcy cases about the enforceability of such provisions.

Although Section 506(b) of the Bankruptcy Code explicitly allows payment of post-petition interest to holders of oversecured claims (i.e., where the value of the collateral exceeds the amount of the claim), the Bankruptcy Code does not describe how to calculate it. No bright line rules exist dictating how to determine oversecured status, the timing of the valuation, and the rate and type of interest to be paid to oversecured creditors. Computation of post-petition interest is a frequent topic of debate among the courts.

It has not taken long for another bankruptcy court to question the propriety of allowing secured creditors to credit bid their loans. You may recall that in the case of Fisker Automotive Holdings, Inc., et al. a Delaware bankruptcy court limited a creditor’s ability to credit bid based on self-serving testimony from a competing bidder that it would not participate in an auction absent the court capping the secured creditor’s credit bid.

Earlier this year, we reported on a decision limiting a secured creditor's right to credit bid purchased debt (capping the credit bid at the discounted price paid for the debt) to facilitate an auction in Fisker Automotive Holdings' chapter 11 case.¹ In the weeks that followed, the debtor held a competitive (nineteen-round) auction and ultimately selected Wanxiang America Corporation, rather than the secured creditor, as the w

In a novel decision, the United States Court of Appeals for the Third Circuit held, in its ruling In re Emoral, Inc., 740 F.3d 875 (3d Cir. 2014), that personal injury claims of individuals allegedly harmed by a bankrupt debtor’s products cannot be asserted against a pre-petition purchaser of the debtor’s assets, as they are “generalized claims” which belong to the debtor’s bankruptcy estate rather than to the individuals who suffered the harm.

Background

A recent decision from an Oregon bankruptcy court provides a cautionary tale for lenders attempting to “bankruptcy proof” their borrowers. 

The US District Court for the Western District of Washington (the "District Court") recently affirmed a bankruptcy court decision that prohibited a transferee of a secured lender's interest in a loan from voting on a debtor's plan of reorganization on the grounds that such transferee, a distressed debt investor, was not an Eligible Assignee under the applicable loan agreement.Meridian Sunrise Village, LLC v. NB Distressed Debt Investment Fund Ltd., et al., No. 13-5503 (W.D. Wash. March 6, 2014) (In re Meridian Sunrise Village, LLC).

Background