bankruptcy/Ch11

a statutory injunction against the commencement or continuation of an action to collect, recover or offset a debt as a personal liability of the debtor.

• - In re PWS: [Brunos stores; changing venue to Alabama under 28 USC 1406] NEED HOLDING
• - In re Houghton Mifflin: [publishing debtor and Holdco (parent co and debtor) assert proper venue is NY] NEED HOLDING
• - In re Patriot Coal:[ transfer of venue in the interest of justice-28 USC 1412; SDNY vs. West Virginia]

• 1406
• 1412

whether a debtor can continue to use cash and other property to operate its business

• two questions:
• 1) cash collateral?
• 2) ordinary course of business?

transactions outside ordinary course of business require notice and hearing; however if no party in interest requests a hearing, no court order is required.

as long as it does not involve cash collteral, debtor may enter transaction in ordinary course of business without notice or hearing

policy: allows trustee or DIP flexibility to engage in ordinary transactions without uneccesary creditor and court oversight, but protects creditors by giving them opportunity to be heard when transactions are not ordinary

In re Roth American-

requirements for selling property free and clear of all liens

1. claims

2. free and clear sale

- In re General Motors: tort claims are interests in property "such that they are extinguished by a free and clear sale under 365(f)(5)"; New GM could purchase assets free and clear of liabilites for injuries or illnesses arising before sale

-  Clear Channel Outdoor Inc. v. Knupfer- a sale free and clear of junior creditor's lien disallowed because creditor did not consent and debtor failed to make an affirmative showing of a method by which creditor could be compelled to accept a money satisfaction of its lien

*Note other courts have contradicted this ruling i.e. if sale in good faith, jr. creditor's challenge would be moot*

• In re Lionel
• In re General Motors
• In re Braniff
• In re Trans World Airlines
• In re Chrysler

In re Trans World Airlines- not sub rosa: though coverted assets to cash and may not be enough to give all unsecured creditors a dividend, the sale did not dictate the terms of the CH 11 plan

In re Chrysler- not sub rosa: no attempt to allocate sale proceeds away from objectors; purchaser has ability to choose which contract it considers valuable

• In re General Motors: not sub rosa
• - assigning all executory contracts with direct suppliers is an element in almost every 363 sale
• - purchaser's decision for bondholders to only receive distribution of New GM's consideration while some trader creditors had contracts
• - just b/c purchaser assumed some but not all of debtor's liabilities or assumes some but not all contracts does not make it sub rosa
• - plan did not dictate or restructure the rights of the creditors of the estate

sale of assets that involves significant restructuring of creditors' rights, and cannot be authorized outside of a chapter 11 plan

• - don't want to short circuit the requirements of Ch. 11
• -some courts take too far and stop debtors from entering into significant sale or lease transactions even when creditors' distributional rights are not directly affected

• examples:
• -transaction the places restrictions on creditors' right to vote
• -sale itself seeks to allocate or dictate the distribution of sale proceeds among different classes of creditors

Lionel filed application under 363(b) seeking authorization to sell its largest asset, an 82% stake in Dale.

Court holds that there must be some articulated business justification other than the appeasement of major creditors for using, selling, or leasing property out of the ordinary course of business; Lionel didn't meet standard

Note: majority of courts have adopted Lionel approach but ignore 7 factors and ask only whether there is an articulated biz justification

• automatic stay
• -considered the greatest innovation in bankruptcy administration
• - underlying principle: the debtor should have a reasonable opportunity to determine whether it is reorganizable
• - automatically enjoins creditor activity against the debtor, the property of the debtor, and property in possession of the debtor

• 362(b)- limits to the stay
• 362(c)- duration of the stay
• 362(d)- relief from the automatic stay

(1) requires relief from stay "for cause" "including lack of adequate protection"

363(d)(2): requires relief from stay with regards to acts against against property if the debtor does not have any equity in the property and if it is not necessary to an effective reorganization

Strumpf had checking account with Citizens Bank and he owed them over $5k in a loan. Bank place administrative hold on his checking account. Strumpf argues this was a setoff and violated 362(a)(7)

Court finds that a bank did not permanently reduce Strumpf's account so not a setoff under 362(a)(7)

General deposit accounts are subject to setoff whereas "special purpose" funds are not; Court finds that the parties intended to create special purpose fund so BofA had no setoff right against Lehman and no relief from automatic stay

Lehman lent money to Palmdale to develop property; Palmdale filed Ch 11 and wanted to subordinate Lehman's lien. Lehman in its own Ch 11 proceedings, so argue that it had relief from Palmdale's stay. 

Court affirms for Lehman. Affirmative actions are stayed, defensive actions are not. Equitable subordination is an affirmative action to take control of Lehman's property and would violate Lehman's stay.

362(a)(1)- can extend to third parties if "unusual circumstances" ie. identity b/w debtor and third party defendant is such that a judgment against the third party in effect judgment against the debtor

362(a)(3)- stays any action to obtain possession or exercise control over property of the debtor


105(a)- proceeding related to Title 11 and failure to stay would adversely impact the debtor

equitable powers

• - either cash collateral or financing
• - company would be lucky to have cash collateral; but unusual because most debtors wait too long before filing and exhaust their cash
• - cash more attractive than DIP financing b/c 
•  1) do not need to pay interest 
•  2) does not come with same restrictions as DIP financing

• statutes on cash collateral: 
• 363(a) 
• 363(c)

364-Obtaining Credit

• a) unsecured credit in the ordinary course of business
• b) unsecured credit outside the ordinary course of business
• c) obtaining superpriority or secured credit; not subject to another lien OR securied by junior lien if encumbered
• d) obtaining credit secured by lien senior or equal in priority to existing liens that are encumbered  senior lien

364(c)

prepetition, MH undersecured Saybrook by $24 mil. After arrangement and before filing Ch 11 petition, MH received security interest in all of Saybrook's property. However, this meant MH would have to be paid in full before other creditors could be paid at all (Absolute priority rule) 

• Court finds that this cross-collateralization violates Bankruptcy code:
• 1) 364(c) and (d) only apply to future extensions of credit and do not authorize granting liens to secure prepetition loans 
• 2) 507 requires creditors w/in a given class to be treated equally

364 (d)

-DIP sought to approve DIP financing from Highbridge that granted Highbridge superpriority over all administrative expenses and was secured by all estate assets

• -in seeking approval, debtor must prove that
• 1) it is unable to obtain unsecured credit per 364(b)
• 2) the credit transaction is necessary to preserve the assets of the estate
• 3) the terms of the transaction are fair, reasonable, and adequate given the circumstances of the debtor-borrower and the proposed lender.

-Holding-Financing unauthorized: didn't attempt to obtain unsecured financing and more attractive loan

[other examples are unfinished real estate projects]

protects lender from reversal on appeal of an authorization to obtain credit

• -adequate protection serves to balance the playing field for secured creditors in cases involving 362, 363, or 364 
•   -purpose is to protect the secured creditor agains erosion of value of the collateral security
•   -usually oversecured creditors are protected by the equity cushion

requires lifting the automatic stay under 362(d)(1)

Timber's debt to U.S. was undersecured; U.S. argues their "interest in property" includes a right to immediate foreclosure

• Courts holds: naw son--
• a. undersecured creditors not allowed postpetition interest on their claims because Code doesn't include it
• b.

Swedeland sought 364(d) superpriority financing from Haylex that would have subordinate Carteret's liens to Haylex's

Carterer did not have adequate protection (appellate overturned BK court) (See outline for four factors overturned)

executory contracts: when debtor has exchanged promises with a third party --> both a liability and an asset

with certain exceptions and subject to the court's approval, the "trustee may assume or reject any executory contract or unexpired lease of the debtor.”

- if contract or lease accepted under 365(a) the estate assumes both the rights and obligations of the contract -- the obligations become an administrative priority

unexpired leases.

requires that the trustee make the decision to assume or reject leases of nonresidential real property within 120 days, subject to a single extension of 90 days. Further extension requires the lessor's consent

debtor as a lessor.

If debtor/lessor rejects a lease, the lessee can accept the rejection and can vacate the property, or it can remain in the property and continue to pay rent, but the debtor/lessor not required to provide any services

assumption and rejection of IP licenses

if the obligations of both the bankrupt and the other party to the contract are so far underperformed that the failure of either to complete performance would constitute a material breach excusing performance of the other

-most widely used definition

- if contract has been fully performed by debtor, DIP should not be permitted to reject the contract and throw away the benefit of the return performance the debtor has earned

- if nondebtor party has already fully performed, DIP would earn nothing by finishing its performance, and so should not be able to assume the contract and put a burden on the estate.

- 365 (e)(i) limitation on ipso facto clauses- provisions that would allow a nondebtor party to modify or cancel contract or lease due to the debtor's financial position or bankruptcy filing.

- DIP exempt from penalty provisions when it assumes a contract or lease, (i.e. 20% increase in rent if defaults, debtor does not have to pay that penalty rate to cure the default and assume the lease)

• -use limitations (some courts). not enforceable
• unless the landlord shows that a lack of enforcement would jeopardize the economic position of the landlord and/or the landlord's other tenants. 
• -

places restrictions on assumption and assignment

if applicable law excuses a party from accepting or delivering performance to anyone other than the debtor, the debtor may not assume or assign the contract if the nondebtor party does not consent (see Perlman v. Catapult Ent re. IP law)

provisions that prohibit, restrict, or condition assignment

• see In re Fleming (grocery distributions' incompatible billing systems) invoking  365(f)(2)(B): trustee may assign an executory contract or unexpired lease of the debtor only if "adequate assurance of future performance by the assignee of such contract or lease is provided"
• --whether term requires adequate assurance depends on whether it is intergral to the bargain (material) and whether performance of that term gives a party the full benefit of its bargain (economically significant)

relieves debtor of liability if assignee breaches after the assignment

Rights and obligations pending assumption or rejection

curing defaults in executory contracts and unexpired leases

standards for court approval and the effect of the decision on executory contracts

• -BK court may not decide a disputed factual issue when determining whether DIP should be able to assume a contract
• - Court should only evaluate circumstances and use its best "business judgment" to determine if it would be beneficial or burdensome to the estate to assume the contract

Plan may allow debtor, trustee, or by a representative of the estate appointed for such a purpose, to pursue, inter alia, avoidance actions

trustee has power to avoid fraudulent transfers made on or within 2 years before filing for Ch. 11

- if performed transaction over 2 years ago but wasn't perfected until 1.5 year ago, it's subject to 548. (i.e. transfered real estate 28 months before filing Ch. 11 but wasn't recorded until 21 months before filing Ch 11)

preferences

when a trustee may avoid any transfer just cause (Code wants to discourage creditors from racing to dismember debtor and facilitate equality of distribution among creditors of the debtor)

Ps argue its debtor, Cybergenics had a fiduciary duty to pursue fraudulent transfer claims relating to LBO of D. Brought derivate action to avoid the transfers to a third party. 

creditors may have standing to pursue an avoidance action

544(a) DIP

claim.

a "right to payment..."

• 1. a claim against the estate
• 2. either be an administrative expense or a claim against the debtor's postbankruptcy estate.

• -administrative expenses
• -postpetition debt
• - performance due by the estate under an executory contract

put into a trust . want to provide compensation for victims while permitting the rehabilitation of the debtor. 

the debtor is discharged from liability. an issue though is if trust will provide enough money for the victims since size of the fund is estimated. unclear if future victims who have not proved claims should be bound by the discharge 

524 g deals with it some but only with asbestos..what about other mass claims?

the act giving rise to liability takes place

the creditor's formal submission of a claim against the estate

• discharged
• lien survives the discharge.

specific property of the estate

502.

• 502(a) claims are deemed allowed unless a party in interest [debtor, creditors, trustee, etc] objects
• 502(c). if a claim is disputed, resolution can be either by a determination on the merits or, if that would cause undue delay, by estimation of the amount (see Bittner v. Borne, where value of claim estimated at $0 is okay)

after confirmation of the plan, and continue over time as provided for in the plan but payments could be made earlier if appropriate. i.e. administrative expenses are often paid for when incurred, and payments to a secured party may be needed to ensure adequate protection

the collateral or its proceeds. IF there is more than one lien on a pice of property, the secured claims are ranked in accordance with prioirty prescribed by non-bankruptcy law.

paid in full unless holders of the claims agree to the contrary. A plan *cannot* be confirmed f it odes not propose to pay priority claimants in full (in the absence of an agreement otherwise).

when the value of collateral that secures a debt becomes lower than the debt owed; so if a creditor wanted to foreclose on the collateral, he would not be getting the full debt 

- the court may determine the value of the collateral at some time before foreclosure

from the general fund of the estate

• 1secured debt
• 2administrative expenses
• 3 gap admin expenses
• 4 salary and wages unpaid at the time of bankruptcy
• 5 contributions to employee benefit plans
• 8 taxes
• .
• .
• general unsecured claims--usu get no payment at all since bankrupt estates are usually insolvent

as much as they would have been paid if the company was liquidated. If priority claims would have consumed all or a significant portion of the fund, the payment required for unsecured claims would have been correspondingly lessened. **But usually nothing in bankruptcy cases since firms usually don't have the money and it gets used up on priority claims**

• United States v. Ron Pair Enterprises-
• Matter of Terry Limited Partnership-
• Premier Entertainment Biloxi -

• 503(a)- seek payment
• 503 (b)- allowance

• 1. Did the claim arise prepetition?
• ---1141(d)(1)(A) discharges debts from claims that arose before the date of confirmation; courts have had difficulty articulating standard for when claims arise

2. Was the incurring of liability on the claim necessary to preserve the estate?

• Hartford Underwriters Ins. Co
• In re Ames
• U.S. v. Noland

most common basis to subordinate a higher priority claim below a lower priority claim is inequitable or dishonest conduct by the claimant that results in unfair advantage or prejudice to other creditors. must have:

• -wrongful conduct AND
• - prejudice

• Benjamin v. Diamond
• In re SI Restructuring

In re Washington Mutual

claims may be acquired, sold for different reasons (acquire- profit from subsequent sale of claim, etc; sell- let go of claim that may deteriorate in value)

- securities laws are most relevant

• Rule 3001(e)- transferred claims
• In re Revere Copper and Brass, Inc

• some code provisions apply indirectly:
• 1145(b)(1)(A)
• 502(j)
• 1126(e)

• 11 USC 1121(a): who may file a plan
• 1121 (b) debtor may file a plan at any time
• 1121 (c)- parties other than the debtor cannot file a plan unless:- a trustee is appointed OR- debtor failed to file plan within 120 days after the order for relief OR- debtor failed to obtain acceptances of its plan from all impaired classes w/in 180 days after the order for relief

1121 (d)- Exceptions:120, 180 day "exclusivity periods" can be reduced or extended by court "for cause" 

• 1123(a)(5) a plan must have adequate means of implementation
• 1129- confirmation of plan
• 1129(c) Once relevant periods expire, anyone can file plan (confirmation multiple plans)

• In re Express One
• 1. size and complexity of the case
• 2. necessity of sufficient time to permit the debtor to negotiate a plan of reorganization and prepare adequate information
• 3. the existence of good faith progress toward reorganization
• 4. the fact that the debtor is paying its bills as they become due
• 5. whether the debtor has demonstrated reasonable prospects for filing a viable plan
• 6. whether the debtor has made progress in negotiations with its creditors
• 7. the amount of time which has elapsed in the case
• 8. whether the debtor is seeking an extension of exclusivity in order to pressure creditors to submit to the debtor's reorganization demands
• 9. whether an unresolved contingency exists

[Dow Corning notes that 7th and 2nd factor essentially the same]

Filing Chapter 11 plan-extensions as per 11 USC 1121

Two secured creditors objected to debtor's motion  to extend period it could file its Ch 11 plan. Party seeking a change bears burden of proving requisite cause exists. No cause exists when the "size, nature, and complexity" of a case do not call for an extension.  

Note: if debtors do not use period of exclusivity well, undersecured creditors likely to be successful in obtaining relief from the automatic stay under 362(d)(2)

• In re Lehman
• All Seasons- (boat building biz) party seeking change bears burden of proving requisite cause. no cause exists when the "size, nature and complexity" of a case do not call for an extension
• Express One- (airline) 9 factor test for extensions
• Asarco LLC- 1129(c) four factor test when multiple plans confirmable

Even the possibility of creditors forming alternate plans puts pressure on debtor to finalize and file a plan; it doesn't want a plan that would be less favorable to its interests and this affects its negotiations with creditors to file something that creditors would confirm

• 1. type of plan
• 2. treatment of creditors and equity (i.e. equity owners can retain equity, creditors can be fully paid) 
• 3. feasibility (i.e. legal commitments of support from parent's parent company upon confirmation, presence of collective bargaining agreements) 
• 4. preferences of creditors and equity holders

1125 requires the proponent of the plan to craft a disclosure statement containing adequate information that court must approve. It is then distributed to all creditors and equity holders

Prohibits the postpetition solicitation of acceptance or rejections of a plan prior to the dissemination of the plan and the court-approved disclosure statement


adequate information is defined loosely to give court discretion in evaluating disclosure statement

allows the court, on request of a party in interest, to exclude from the vote any entity whose acceptance or rejection was not in good faith

• - a class that is unimpaired- it is conclusively deemed as having accepted the plan (1126(f))
• - a class that will receive or retain no property under the plan is deemed as having rejected the plan

Classification has significant impact on voting rights of parties, so debtor's discretion in establishing classes is controlled to prevent unfair discrimination

1123(a)(1)-- plan must designate classes of claims and interests

1122- claims and interests in a class must be substantially similar (i.e. of same priority and quality so no unsecured and secured claims in same class)

In order to vote on the plan, parties with claims and interests must be divided into classes. A class of claims accepts the plan if at least 2/3 in amount and more than half in number of the voting creditors with allowed claims in that class have accepted the plan.

• debtor controls how the claims and interests are classified
• --if most general unsecured creditors support plan, debtor may draft plan so that all general unsecured claims are in one class--> plan supporters can outvote plan opponents so that class accepts plan
• --if too many general unsecured creditors oppose the plan, a single class made up of all general unsecured claims would reject the plan --> debtor will want to create at least one impaired class that will accept the plan

- debtor can use power to create classes to gain support from creditors because allows debtor to give creditors types of payments they'd want or be okay with

- 1122b- one group of dissimilar may be together but only if court approves--> based on if classification is necessary for administrative convenience

- can have similar claims in different classes, but based on reasonable basis (can't gerrymander just to dilute votes of creditors)

- claims or interests in the same class must be treated equally (1123(a)(4))

Teamsters v. US Truck-debtor attempted approval via cramdown. Teamsters objected; court argues the employees represent by Teamsters have a unique interst in the ongoing biz of the debtor and substantially different interest; court affirms classification but holds there must be a legit biz reason to put substantially similar claims in different classes

Phoenix Mutual- anticipating Greystone (creditor) would reject plan, Phoenix classified them separately from trade creditors so Greystone wouldn't control the class's vote (Greystone was owed much more money than trade creditors);

-Holding: may put substantially similar claims in different classes, but must be for motive independent of gerrymander

Charter sought to reinstate senior credit facility (keep the same loan they had before filing for bankruptcy). JP represented senior lender and objected saying there were 3 provisions in agreement with debtor that were incurable.

1) default=debtor couldn't pay debts as they became due. Court argues that this provision relates to actual inability to pay  debts that become due not the anticipation that they will default--> not  impaired

2) no other "group" may hold a greater voting percentage than PAul Allen. Court: bondholder's committe, though greater voting percentage, not a "group" under the sec law b//c an ad hoc commttee brought together by circumstances of bankruptcy

3) JP: cross default provision not an ipso facto provision (outlawed by Code) because referred to holding co. not charter ; Court: it is. charter is linked with its affiliates and lender had long linked them together

1124

a claim or interest is not impaired under the plan if the legal, equitable, and contractual rights of the holder are left unaltered.

generally, almost every deviation from the nonbankruptcy rights results in an impairment

conn. gen. life ins

1129

two methods: 

1129(a)- prereqs for confirmation when plan accepted by all impaired classes

1129(b) confirmation when no universal acceptance=cramdown 

• for a AND b
• plan must:
• - be lawful and in good faith
• - give distribution to a dissenter of a value that is at least equal to what she would receive if debtor liquidated
• - apply absolute priority rules in paying creditors and pay them in full
• - have a reasonable prospect of success

if not all classes accept plan, 1129(b)- cramdown

1129(b)

court will still confirm, but plan:

• - must satisfy all of 1129(a) except a(8)
• - must not discriminate unfairly against any impaired class that has not accepted the plan
• - must be fair equitable

if discrimination has some reasonable basis, it is not motivated by bad faith, and it is necessary to the success of the reorganization it likely is not unfair

-liens must be preserved to the full allowed amount of their secured claims and claimants receive deferred cash payments 

OR

sell the property free and clear of all liens so claimant can bid on it

OR 

claimant receives the indubitable equivalent of the claim

- each holder of a claim in the class receives property of value--based on present value

OR

- any junior class retains nothing if the senior dissenting class is not paid in full (absolute priority) and equity wiped out.

--equity can only retain if they contribute new capital to the debtor that is equal to or greater than the value of their interest (new value exception) must be money or money's worth--BUT not all courts follow

creditor has secured claim only to the extent of the collateral's value, so 1111(b) gives the creditor a deficiency claim

if creditors elect for 1111(b) protection, will lose distribution as unsecured creditors and right to vote under that class, but their claims will be fully secured and will be paid the greater of the face value of the allowed secured claim or the present value of the collateral.

-gives the court broad powers to issue any judgment that it believes is necessary to carry out provisions of the code

A.H. Robins- tort victims of debtor who filed Ch.11 (manufactured contraceptive devices) sought to proceed against Robins' co-defendants including debtor's products liability insurance company; Court extends stay against tort victims since, if successful, would reduce  the debtor's property to the detriment of its creditors.

• In re Kmart- Kmart sought to pay some critical vendors in full above others; Court holds that availability of 105(a) does not override priority rules and the equal treatment of classes
• -105(a) implements, not overrides
• - if wanted to treat differently, have to prove:
• 1) but for immediate full payment, vendors would cease dealing and
• 2) the business would gain enough from continued transactions with the favored vendors to provide some residual benefit to the remaining, disfavored creditors.

Lyondell- debtor sought preliminary injunction against guarantee creditors from pursuing remedies against debtor's nondebtor parent; court holds automatic stay doesn't apply to parent using 105(a). applies modified preliminary injunction test (see outline)

It must be "essential for an effective reorganization that is in prospect"