Debtor-in-Possession Financing
There has been much discussion among bankruptcy practitioners and scholars as to whether the courts have abdicated their responsibility to enforce the Bankruptcy Code and whether debtors and creditors committees are too easily pressured by lenders such that control of bankruptcy cases has been effectively ceded to secured creditors. One of the areas where many would say this is most prevalent is with post-petition lending.
When Bankruptcy Goes Public
Bankruptcy filings make headlines, regardless of whether the debtor is a large public company, a small private business, a national icon or a local not-for-profit. And media coverage -- and the public and political scrutiny it invites - can influence, for better or worse, the course of the case. It can even affect the very future of the organization. As the legal, operational and financial strategies associated with the bankruptcy process are put in place, communications must be an integral component.
Third Circuit Cuts Substantive Consolidation Risk
Lenders won a victory on Aug. 15 when the Third Circuit limited the equitable remedy of substantive consolidation in the Owens Corning reorganization case. <i>In re Owens Corning</i>, ____ F.3d ___, 2005 U.S. App. LEXIS 17150*1 (3d Cir. 2005), amended by 2005 U.S. App. LEXIS 18043 (3d Cir. Aug. 23, 2005); further amended Sept. 2, 2005, <i>petitions for reh'g en banc filed</i> Aug. 29, 2005. Reversing the district court, the court held that "affiliated [debtor and non-debtor] entities" could not be "substantively" consolidated on the facts of the case before it. According to the court, the debtor and its allies sought substantive consolidation, a "last-resort remedy," in order to "deprive one group of creditors [ie, the unsecured lenders] of their rights while providing a windfall to other creditors." Id. at *5-*6. The future claimants' representative and a creditors' committee filed petitions for rehearing <i>en banc</i> on Aug. 29. Answers to those petitions were due to be filed by Sept. 12.
Handling the Non-Profit Workout/Bankruptcy
Last month, we discussed how to handle the non-profit workout/bankruptcy with an analysis of one of the largest not-for-profit bankruptcy cases even filed -- <i>In re: the National Benevolent Association of the Christian Church (Disciples of Christ) et al.</i>, (Bankr. W.D. Texas), Case No. 04-50948 (RBK). As we explained, the National Benevolent Association of the Christian Church (Disciples of Christ) (NBA) was founded in 1887 as a Missouri-based nonprofit corporation. Its mission was to provide services to disadvantaged families and others. Prior to bankruptcy, the NBA was the parent company of approximately 25 affiliated nonprofit entities that owned and operated 11 senior care facilities, four children's care centers, and three special care facilities in 12 states, among other things. We presented a great deal of analytical background on the nonprofit corporation and its path toward bankruptcy. This month, we discuss the bankruptcy case itself.
Ninth Circuit Ruling on Preference Avoidance Power
Last month, we discussed <i>Sherwood Partners, Inc., Assignee for the Benefit of Creditors of International Thinklink Corporation v. Lycos, Inc.</i>, 394 Fed11198 (9th Cir. 2005). In that case, the Ninth Circuit Court of Appeals, by a divided court, held that a state statute authorizing an assignee for the benefit of creditors to void a preferential transfer is preempted by the federal Bankruptcy Code. This month, we discuss the ruling in depth.
Collecting D&O Insurance Proceeds
In the race between a debtor and a third party to recover the proceeds of a directors' and officers' insurance policy (a "D&O Policy"), it is critical that the debtor employ the correct strategy for the applicable jurisdiction in order to enjoin its competitor from reaching the proceeds first. Choosing the wrong strategy could mean the difference between collecting tens of millions of dollars and obtaining a judgment not worth the paper upon which it is written. Indeed, the proceeds of the D&O Policy ("D&O Proceeds") may be the largest asset of the estate. As a result, a successful reorganization could depend upon filing in the right jurisdiction and implementing the correct litigation strategy.
Handling the Non-Profit Workout/Bankruptcy
On April 15, 2005, one of the largest not-for-profit bankruptcy cases ever filed, <i>In re: The National Benevolent Association of the Christian Church (Disciples of Christ) et al.</i>, (Bankr. W.D. Texas), Case No. 04-50948 (RBK), came to an extraordinary conclusion when the joint plan of reorganization of the Debtors and the Unsecured Creditors' Committee became effective. Under the Plan, all of the Debtors' creditors were paid the full amount of their pre-petition principal and interest, plus a stipulated amount of post-petition interest, together with reimbursement of the full amount of their pre- and post-petition legal fees. After paying their creditors in full on the effective date, the Debtors, a separately constituted arm of the Disciples of Christ Church, retained certain of their assets and will continue their charitable mission. This unusual outcome, in which creditors were paid in full and the Debtors continued certain of their operations, marked the end of a process that began with the Debtors' unsuccessful attempts to negotiate a substantial write-down of their debts outside bankruptcy, was followed by a year-long bankruptcy case in which the Debtors argued that their charitable status and mission should take priority over their bankruptcy law duty to maximize creditor recovery, and was finally resolved when the Debtors were compelled to sell the bulk of their real estate assets in order to fund full payment to creditors.
You Just Can't Give It Away
Last month, we explained that the proposition that a creditor can do whatever it wants with its recovery from a Chapter 11 debtor may seem to be a fundamental right -- but that in the context of confirmation of a Chapter 11 plan, that right may not be unqualified. It may, in fact, violate well-established bankruptcy principles. We went on to explain that one such principle that applies only in the context of non-consensual confirmation of a Chapter 11 plan, or "cramdown," is commonly referred to as the "absolute priority rule," a pre-Bankruptcy Code maxim that established a strict hierarchy of payment among claims of differing priorities.
