Don't Pay Old Equity That Is Truly 'Under Water'!
August 15, 2003
As discussed last month, the law clearly shows that parties structuring cash-out mergers with distressed debtors must focus on two things: 1) timing the debt-for-equity exchange (and the resultant debt cancellation) so not to occur prior to the merger's effective time, and 2) demonstrating that the debtor was at 'the brink of bankruptcy' at the merger's effective time. A clear record should be built and maintained on these points, and the structure should accommodate the technical legal requirements.
Exceptions to Dischargeability
August 15, 2003
For many years, financial or securities executives knew that if they had not committed a fraud or had not been fined by the Securities and Exchange Commission (SEC), they could get a discharge in bankruptcy by filing for Chapter 7 or 11. Negligently committing a securities violation would not preclude a bankruptcy discharge for the civil liability flowing therefrom.
Standing on the Edge
August 15, 2003
The fact pattern is all too common: A company with an extremely over-leveraged balance sheet is hemorrhaging cash and may already be in disrepute with its trade creditors (of whom there may be thousands). The business is beyond repair. A bank group that has liens on nearly all of the company's assets wants to use Chapter 11 to liquidate those assets to recover as much as it can. The liquidation may be piecemeal (as is common with failed retailers) or it may be as a going concern (as is more common in the industrial sector), but either way the debtors are heading toward a Chapter 11 liquidation.
How to Defend Officers and Directors in a Management-Hostile Environment
August 14, 2003
As noted last month in Part One of this article, it is less common, but not unheard of, for the debtor itself to directly provide funds to defend and indemnify its D&Os, in addition to, or in lieu of, maintaining D&O insurance or to address a situation where the D&O has refused coverage (which is <i>not</i> that uncommon of an development).
FCC: Phone Companies Have Limited Protection
August 14, 2003
When companies like AT&T, MCI, WorldCom and Sprint provide long-distance services, they almost always use the telephone networks of local exchange carriers, or 'LECs' (<i>eg</i>, Verizon, BellSouth, Qwest, and SBC) to originate and terminate those calls. This use of local networks is a service generally referred to as exchange access, which is subject to regulation by the Federal Communications Commission (FCC).
NextWave Ruling Spells Victory and Defeat
August 14, 2003
When the government is a creditor, it cannot exercise self-help remedies that may be consistent with regulatory policies but are in violation of the specific provisions of the Bankruptcy Code, 11 U.S.C. '' 101 <i>et seq</i>. In <i>Federal Communications Comm'n v. NextWave Personal Communications, Inc.</i>, No. 01-653, 2003 U.S. LEXIS 1059, at *7-8, 71 U.S.L.W. 4085 (Jan. 27, 2003), the Supreme Court held that Bankruptcy Code Section 525, which prohibits a governmental unit from revoking a license to a debtor in bankruptcy, prevents the Federal Communications Commission (FCC) from revoking spectrum licenses that were bought on credit, but not paid for when due by NextWave Personal Communications, Inc.
Bankruptcy: What Happens to the Royalty Payments?
August 01, 2003
In a decision interpreting for the first time certain provisions in the Bankruptcy Code, the Third Circuit Court of Appeals concluded that royalty payments belonged to the estate of the bankrupt debtor/licensor rather than to the new owner by assignment of the underlying intellectual property covered by the licenses. <i>In re CellNet Data Systems, Inc.,</i> 327 F.3d 242 (3d Cir. 2003). The Third Circuit held that the debtor/licensor was permitted to sever the right to receive the remaining royalty payments due on the license from the transfer of the underlying intellectual property rights.
'Personal' Alter Ego Claims in Bankruptcy
August 01, 2003
<b><i>Part One of a Two-Part Article</i></b> With corporate fraud and bankruptcy filings on the rise, creditors are increasingly looking to related entities, corporate shareholders, directors and officers to pay their claims when the corporation goes belly-up. Unfortunately, bankruptcy courts have made it virtually impossible for creditors to maintain individual alter ego claims against the debtor's shareholders and affiliates. As a result, crafting an alter ego claim that will survive an attack by the bankruptcy trustee (or the bankruptcy court itself) requires finesse.
