On May 14, 2012, the United States Court of Appeals for the Third Circuit upheld a ruling by the Bankruptcy Court for the District of New Jersey that the fair market value of a creditor’s collateral as of the plan’s confirmation date is the proper method of valuing a secured creditor’s claim pursuant to section 506(a) of the Bankruptcy Code. The Third Circuit also adopted a “burden-shifting framework,” finding that a secured creditor will bear the ultimate burden of proving the extent to which its claims are secured pursuant to section 506(a).
Background
Today, the Supreme Court of the United States issued its much awaited decision in RadLAX Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. ______ (2012). The noteworthy decision resolves any uncertainty surrounding a secured creditor’s right to credit bid in a sale under a chapter 11 plan which arose after cases like Philadelphia Newspapers 599 F.3d 298 (3d Cir. 2010) curtailed the right.
Nearly a year has passed since the Supreme Court held, in Stern v. Marshall,1 that bankruptcy courts may not determine a potentially broad range of “private rights” disputes arising in bankruptcy proceedings. Lower courts have grappled with the practical implications of Stern, but it is not yet clear whether the decision will ultimately result in a significant curtailment of bankruptcy court power or prove narrower in application.
The outcome of the TOUSA appeal has been much anticipated and closely watched by the lending community, their counsel and advisors, and legal scholars. On May 15, 2012, the Eleventh Circuit Court of Appeals issued its opinion (found here), reversing the District Court for the Southern District of Florida and affirming the Bankruptcy Court for the Southern District of Florida, at least insofar as to the bankruptcy court’s factual findings, but not remedies.
A purchaser of assets from a debtor in bankruptcy may not be able to rely entirely on bankruptcy court approval of the sale to bar a claim arising long after the sale and based on a claimed defect in a product sold by the debtor years prior to its bankruptcy.
Although bankruptcy court sale orders routinely shield asset purchasers from successor liability claims, that protection is not unlimited, particularly where a claimant did not and could not have received notice of the sale.
On May 15, 2012, the United States Court of Appeals for the Eleventh Circuit issued an opinion in the TOUSA, Inc.
On May 15, 2012, the Eleventh Circuit Court of Appeals upheld a ruling by the U.S. Bankruptcy Court for the Southern District of Florida, which required certain lenders to return $403 million in prepetition payments they had received from TOUSA, Inc.
The United States Court of Appeals for the Eleventh Circuit, on May 15, 2012, reversed a district court's February 2011 decision that lenders were not liable on a fraudulent transfer claim. In re TOUSA, Inc., ___ F.3d ___, 2012 U.S. App. LEXIS 9796 (11th Cir. 5/15/12).[1] It rejected the district court's finding that corporate subsidiaries had received "reasonably equivalent value" when they encumbered their assets to secure a loan made to them and their corporate parent.
Sleep better at night knowing that the loan you made to your borrower is supported by collateral from the borrower’s subsidiaries? You may want to keep one eye open. On May 15, 2012, the U.S. Court of Appeals for the Eleventh Circuit upheld a bankruptcy court opinion that reinforces lender liability for fraudulent transfers in subsidiary-supported loans. The Eleventh Circuit upheld the opinion of the U.S. Bankruptcy Court for the Southern District of Florida in In re TOUSA, Inc., and overruled a contrary opinion by the U.S. District Court.
On May 15, 2012, the Court of Appeals for the Eleventh Circuit affirmed two key rulings made by a Florida Bankruptcy Court in the long-running bankruptcy case of TOUSA, Inc., once one of the largest homebuilders in the country. The Bankruptcy Court had avoided—as fraudulent transfers—the liens granted by TOUSA’s subsidiaries (the Subsidiaries) to new lenders (the New Lenders) that provided $500 million in financing for TOUSA to payoff debt that was owed by TOUSA, but not the Subsidiaries, to then existing lenders (the Old Lenders).