Handling the Non-Profit Workout/Bankruptcy
July 27, 2005
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
July 27, 2005
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.
Assignee's Preference Avoidance Power
July 27, 2005
In <i>Sherwood Partners, Inc., Assignee for the Benefit of Creditors of International Thinklink Corporation v. Lycos, Inc.</i>, 394 F.3d 1198 (9th Cir. 2005), the Ninth Circuit Court of Appeals, by a divided court, recently 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.
Divorce and the New Bankruptcy Law
June 27, 2005
Among the more arduous tasks for an attorney handling a matrimonial case is the negotiation of the financial aspects, primarily support and maintenance and the division and distribution of marital property. In many cases, exhaustive financial disclosure is necessary; evaluations of property are obtained and challenged, and months of negotiations and legal services result, finally, in a resolution of the financial issues.
Retention of Restructuring Professionals
June 27, 2005
Restructuring professionals must be acutely aware of potential conflicts of interest. Indeed, federal courts on occasion have disqualified a professional or ordered the disgorgement of the professional's fees in situations where that professional failed to properly disclose a conflict of interest. The importance of conflicts of interest is especially evident in today's global economy, in which restructuring matters routinely involve many of the same parties.
You Just Can't Give it Away
June 27, 2005
Companies in Chapter 11 may have capital structures consisting of multiple tiers of debt and equity that have competing priorities of payment vis-'-vis the company and its assets. The claims and interests of these competing stakeholders may be resolved in a Chapter 11 plan. To emerge from Chapter 11, the company must obtain approval of a plan that deals with all creditor claims and equity interests in accordance with the (sometimes complicated) rules contained in the Bankruptcy Code. In an effort to achieve an agreed-upon Chapter 11 plan, some creditors may give up (or gift) a portion of the recovery to which they would otherwise be entitled to another class of creditors or equity holders.
Key Creditors' Rights Decision
June 27, 2005
The Second Circuit handed down a key creditors' rights decision on April 1 in <i>Sharp Int'l Corp. v. State Street Bank & Trust Co. (In re Sharp Int'l Corp. & Sharp Sales Corp.)</i>, 2005 U.S. App. LEXIS 5241(2d Cir. Apr. 1, 2005). The court affirmed the lower courts' finding that a secured lender was not liable for aiding and abetting management's breach of fiduciary duty, and not liable for receiving a $12.25 million loan repayment from a closely held borrower it correctly suspected of engaging in massive fraud. The decision limits the scope of a lender's duties to its borrower and other creditors. Absent the lender's participation in its borrower's fraud, the lender should have no liability on a fraudulent transfer theory or on any other basis, at least in New York, where Sharp arose.
What Happens to Chapter 11 Cases?
May 24, 2005
This Special Edition of <i>The Bankruptcy Strategist</i> is devoted entirely to the recently enacted "Bankruptcy Abuse Prevention and Consumer Protection Act of 2005," which makes the most sweeping changes to the Bankruptcy Code seen in the last 20 years (although the law does nothing to address some significant issues that have been much debated, such as asbestos, forum shopping, and pension liability). The legislation primarily takes aim at perceived consumer bankruptcy abuses, but will also affect numerous aspects of business bankruptcy practice. This article analyzes key changes to the Bankruptcy Code that will be important to most business bankruptcy participants. Other articles in this issue address in detail the changes related to cross-border insolvencies, executory contracts, financial contracts, investment bankers, and plan exclusivity. Neither we nor the other contributors to this edition have attempted to address the substantial changes affecting only individuals who file for Chapter 11 relief, or changes to the special provisions for "small business" and "single asset real estate" debtors, as those terms are defined in the Code.
