Order in the Court: Limits on the Court's Preservation of Debtor Assets
August 31, 2004
Telecom companies invest substantial amounts to acquire their assets, such as underground cables or fiber optic networks. As a consequence of building or acquiring this capital-intensive infrastructure, telecom companies often pay millions of dollars in annual property tax assessments. When telecom asset values drop (as has most recently been the case), telecom companies generally focus on keeping their businesses afloat, rather than on their property taxes.
'Necessity' Revisited: Wishing Won't Make It So
July 29, 2004
The April and May issues of <i>The Bankruptcy Strategist</i> featured a scholarly, interesting, and informative article by Michael L. Cook and William R. Fabrizio on the recent Seventh Circuit <i>Kmart</i> Opinion (<i>In Re Kmart Corporation</i>, 359 F. 3d 866 (7 Cir. 2004)) in which the Circuit Court affirmed the District Court's reversal (<i>Capital Factors, Inc. v. Kmart Corporation</i>, 291 B. R. 818 (ND Ill. 2003)) of four "critical vendor" orders entered by the Bankruptcy Judge. In all respects but one, Cook and Fabrizio concisely and accurately analyzed the Opinion as well as the history and basic flaws of the so-called "Necessity" Doctrine. Moreover, we agree not only with their conclusion that "the [Necessity] Doctrine ... lacks explicit Code authorization," but also with their flat rejection of such erroneous (and insulting) comments as that of the unnamed practitioner who was quoted by Reuters as stating that the District Court Opinion was "[A] tremendous blow to the efforts of the Chicago bench and bar to fashion their bankruptcy court system in the mold of Delaware and New York." <i>The Bankruptcy Strategist</i>, April 2004, p. 2. Unfortunately when they come to the Opinion of the Court of Appeals, Cook and Fabrizio overstate the case.
Unique Settlement Ruling in Smart World Case
July 29, 2004
It is the uncommon occasion when creditors seek the Bankruptcy Court's assistance to impose a settlement that compromises the debtor's asserted rights to recovery against third parties. While settlements are typically preferable to the debtor's engagement in contested and costly litigation, it is a challenge to convince a court to compromise a debtor's asserted claims. In a recent case in the United States Bankruptcy Court for the Southern District of New York, a settlement was negotiated and ultimately approved by the Bankruptcy Court over the vigorous objection of the debtors-in-possession (the "Debtors"), resolving a hotly contested adversary proceeding and third party claims.
'Megabankruptcies': Changes On the Way?
July 29, 2004
Across the nation, readers of this publication are plagued daily with myriad problems associated with "megabankruptcies" and complex reorganization cases, and sometimes with Chapter 11s that are just large enough to be cumbersome and unwieldy, but too important and/or lucrative to pass up. Notwithstanding what is generally the statutory clarity of the Bankruptcy Code, many of the solutions to these nettlesome issues have evolved on an ad hoc basis, and are often the creatures of local customs and practice, if not the rules and procedures of individual judges. Putting aside the natural peaks and valleys of Chapter 11 filings, these issues persist, no matter the economic climate.
Strategies for Lenders
June 25, 2004
It has become conventional wisdom that bankruptcy -- even Chapter 11 -- is now largely a process controlled by secured lenders. Whatever the merits of this view, the undersecured lender is still in an unenviable position as a result of the Supreme Court's holding in <i>Timbers</i> that undersecured creditors who are stayed from foreclosing on their collateral during bankruptcy are not entitled to accrue or collect interest on their claims during the bankruptcy case or otherwise be compensated for their loss.
Circuit Court Win Sets Up Conflict over Bankruptcy Code
June 25, 2004
A recent circuit court decision regarding the interpretation of section 365 of the Bankruptcy Code has set up a conflict between two circuits. On March 15, 2004, the Court of Appeals for the First Circuit issued an opinion regarding whether bankruptcy debtors are required to cure non-monetary defaults prior to assuming unexpired leases under section 365 of the Bankruptcy Code, 11 U.S.C. ' 365. The First Circuit found -- expressly contrary to a holding of the Ninth Circuit Court of Appeals -- that debtors are not required to cure such defaults, resulting in a split in the circuits over a very widely used section of the code.
Supreme Court Disappoints Secured Lenders
June 25, 2004
The U.S. Supreme Court's recent <i>Till</i> decision on the proper cramdown interest rate will disappoint secured lenders. <i>Till v. SCC Credit Corp.</i>, 124 S. Ct. 1951 (2004). As we show below, Till should be limited to its narrow fact pattern, but is still bad news for lenders. They now will be forced to fight an uphill battle to prove that a higher risk premium should be added to the prime rate applicable to their crammed down secured claim. In Till, the plurality accepted a risk adjustment premium in the range of 1% to 3% (Justice Thomas, concurring, could accept no premium at all). Commercial lenders will thus have to overcome Till by showing that they are entitled to a truly "market" interest rate.
