A recent decision of the United States Bankruptcy Court for the Southern District of New York underscores the risk to junior creditors of not understanding fully the scope of consent given to a senior creditor to modify its senior lending arrangements with a debtor under the terms of an intercreditor agreement. In Buena Vista Home Entertainment, Inc. v.

The United States Court of Appeals for the Second Circuit has ruled that the Johns-Manville bankruptcy court did not have jurisdiction to enjoin direct action claims asserted against Travelers entities that are predicted on an independent duty owed by Travelers, that do not claim against the res of the Manville estate, and that seek damages unrelated to and in excess of Manville's insurance proceeds. Johns-Manville Corp. v. Chubb Indemnity Ins. Co., --- F.3d ---, 2008 WL 399010 (2d Cir. Feb. 15, 2008).

In previous Alerts, we have addressed the complexities of claims in bankruptcy. Likewise, trading in claims and securities can present challenges. Difficulties have arisen in large Chapter 11 reorganizations as constituencies engaged in the Chapter 11 process, who are major players in the case, seek to trade in securities relating to that case. This Alert explores the impact that some trading activities may have on potential recoveries in the bankruptcy and the help (and impact) of the Internal Revenue Code.

Must a foreign debtor's insolvency representative obtain permission from a United States bankruptcy court before exercising the debtor's rights as shareholder to remove and replace directors and officers of a US corporation? The Bankruptcy Appellate Panel (BAP) of the Ninth Circuit recently held not, provided that the representative does not require judicial assistance to exercise these rights.1

In the January 2008 issue, we reported on In re Solutia, Inc.,1 decided by the United States Bankruptcy Court for the Southern District of New York. The Solutia court demonstrated how contractual entitlements of debt instruments may be altered in bankruptcy. There, the original issue discount of certain secured notes was found to be interest, rather than principal, causing a significant portion of the noteholders’ claims to be disallowed. In In re Urban Communicators PCS, Ltd.

In a recent adversary proceeding brought by a chapter 7 trustee to recharacterize a creditor’s claim from a debt claim to an equity interest, the United States Bankruptcy Court for the District of South Carolina denied a creditor’s motion to dismiss for failure to state a claim where the trustee had alleged that the lender assumed control over the corporation after the date of the credit agreement.

In In re SNTL Corp.,1 the United States Bankruptcy Appellate Panel of the Ninth Circuit recently decided that if a creditor is required in another proceeding to disgorge as a preference a payment that had been guaranteed by the debtor, the debtor’s liability as guarantor may be revived, provided that the agreement releasing the debtor from its guarantee obligation to the creditor explicitly permits such revival.

Background

Recent news reports have focused on the problems of the financial markets on the one hand and consumer mortgage problems on the other. While Congress may yet grant authority to bankruptcy judges to modify home loans, modification of business loan facilities of all sizes remains available as a powerful and fundamental tool to be used in a business financial restructuring.

Owners of bank loan participations take on two kinds of credit risk: (i) the borrower’s failure to pay the underlying bank loan, and (ii) the loan participation grantor’s bankruptcy. The first risk is well understood and carefully analyzed in each transaction. This memorandum focuses on the second kind of credit risk assumed by a participant -- grantor insolvency.

The United States Bankruptcy Court for the Western District of Pennsylvania has ruled that a defendant in a declaratory judgment coverage action waived all of his discovery objections, including objections based upon the Fifth Amendment, for failing timely to assert them. Federal Ins. Co. v. Le-Nature's, Inc., 380 B.R. 747 (Bankr. W.D. Pa. 2008). Wiley Rein LLP represented the insurer.