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By Michael M. Lauter 

On May 29, 2012, the Supreme Court ruled 8-0 that a debtor could not confirm a plan over a secured creditor’s objection if the plan provided for the sale of the secured creditor’s collateral free and clear of liens, but did not provide the secured creditor with the option of credit-bidding at the sale. RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2012 U.S. LEXIS 3944 (U.S. May 29, 2012). Such a plan, the Supreme Court held, does not meet the statutory requirements for “fair and equitable” treatment of an objecting secured class in 11 U.S.C. § 1129(b)(2)(A).…

Continue Reading Canonized Credit-Bidding: The Supreme Court Unanimously Affirms Secured Creditor’s Right to Credit-Bid at Free and Clear Sale in Plan

Effective as of January 1, 2011, the language prescribed for all notices of default recorded pursuant to Section 2924 et seq. of the California Civil Code has changed. Despite the fact that this change became effective as of the beginning of this year, some foreclosure trustees are still using old forms that do not comply with current California law. Accordingly, lenders should be diligent in reviewing their foreclosure notices to ensure compliance with current requirements.…

Continue Reading New Change To Required Language For Foreclosure Notices Under California Civil Code § 2924c

The House Judiciary Committee recently held a hearing to consider an amendment to the venue provisions of the Bankruptcy Code proposed by the Committee’s Chairman that would require corporations to file voluntary chapter 11 petitions in the district where they maintain their principal place of business or have their principal assets. Under the current bankruptcy venue provisions of the U.S. Code, a debtor corporation can file its bankruptcy case in the state where it is incorporated, where it has its principal assets, or where it is headquartered. A corporation can also file a chapter 11 case in a venue where its corporate affiliate’s case is already pending. Utilizing these rules, many large chapter 11 cases are commenced in Delaware and New York, despite the fact that the corporate debtor has little ties to those states. For example, Enron – a Texas-based company – filed a bankruptcy for a small New York subsidiary in the Southern District of New York. Shortly thereafter, Enron commenced the bankruptcy case for the main company, and used the venue provisions to bootstrap this case with its New York case, which allowed it to heard along with the subsidiary’s case in New York. A more recent example is the Fremont, CA-based Solyndra LLC, which filed a voluntary chapter 11 petition in Delaware, the state of its incorporation.…

Continue Reading A Chapter 11 Diaspora? House Judiciary Committee Considers Chapter 11 Venue Reform

In a recent ruling, the Fifth Circuit Court of Appeals rejected a per se rule that only corporate insiders can have their debt claims recharacterized as equity. Instead, in In re Lothian Oil Inc., 2011 WL 3473354 (5th Cir. Aug. 9, 2011), the Court of Appeals held that "recharacterization extends beyond insiders and is part of the bankruptcy courts’ authority to allow and disallow claims under 11 U.S.C. § 502." Thus, all creditors, regardless of their insider status, are susceptible to having their claims recharacterized as equity.…

Continue Reading Fifth Circuit Rejects Per Se Rule That Recharacterization Applies Only To Insiders

On Thursday, the Supreme Court in a 5-4 decision ruled in Stern v. Marshall[1] that the congressional grant of jurisdiction to bankruptcy courts to issue final judgments on counterclaims to proofs of claim was unconstitutional. For the litigants, this decision brought an end to an expensive and drawn out litigation between the estates of former Playboy model Anna Nicole Smith and the son of her late husband, Pierce Marshall, which Justice Roberts writing for the majority analogized to the fictional litigation in Charles Dickens’ Bleak House. For bankruptcy practitioners, it is yet another chapter in an even more epic saga – that of the back-and-forth between Congress and the Supreme Court over the jurisdictional limits of the nation’s bankruptcy courts. Instead of offering finality, the decision only raises more questions about how far the Court’s reasoning will extend, and what the implications will be for practice under the Bankruptcy Code.…

Continue Reading A Shock to the Core: The Supreme Court Pries Jurisdiction Away from the Bankruptcy Courts on Counterclaims to Proofs of Claim, and Possibly More

In In re Young Broadcasting, Inc., et al., 430 B.R. 99 (Bankr. S.D.N.Y. 2010), a bankruptcy court strictly construed the change-in-control provisions of a pre-petition credit agreement and refused to confirm an unsecured creditors’ committee’s plan of reorganization, which had been premised on the reinstatement of the debtors’ accelerated secured debt under Section 1124(2) of the Bankruptcy Code.…

Continue Reading Reinstatement of Debt: A Bankruptcy Court’s Strict Interpretation and Application of Change-in-Control Provisions to Protect Senior Secured Lenders

On February 11, 2011, the Hon. Alan Gold of the United States District Court for the Southern District of Florida issued a 113 page opinion and order quashing the bankruptcy court’s order requiring the lenders involved in TOUSA, Inc.’s Transeastern joint venture to disgorge, as fraudulent transfers under Section 548 of the Bankruptcy Code, settlement monies that they had received on July 31, 2007 in repayment of their existing debt and to pay prejudgment interest on such monies, for a total disgorgement in excess of $480 million.…

Continue Reading In Re TOUSA: District Court Reverses Bankruptcy Court’s Order Requiring Lenders To Disgorge $480 Million As Fraudulent Transfer

A decision out of the District Court for the Middle District of North Carolina (the “District Court”), now being appealed to the Fourth Circuit Court of Appeals, highlights just how critical it is for lenders to strictly comply with local recording requirements when recording their liens. In SunTrust Bank N.A. v. Northen, 433 B.R. 532 (M.D.N.C. Aug. 6, 2010), the District Court affirmed the Bankruptcy Court’s decision to grant summary judgment in favor of the chapter 7 trustee (the "Trustee") seeking to avoid the deed of trust of lender SunTrust Bank N.A. (“SunTrust”), which had been properly recorded pre-petition by SunTrust’s predecessor-in-interest in one indexing system, but improperly in another. In finding that the Trustee’s actual or constructive knowledge of the lien was irrelevant to its avoiding power and that only the official real property index was relevant in determining whether a deed is properly recorded, the District Court has sent a telling message to lenders – strictly comply with local recording requirements or face avoidance of your security interest in your borrower’s property in bankruptcy.…

Continue Reading Court to Lenders: Strict Compliance with Local Recording Requirements Necessary

On October 21, 2010, the Ninth Circuit overruled what many thought to be well-settled law, and held that a bankruptcy trustee does not have standing to pursue alter ego claims, at least in cases governed by California law. The court first held that California state law does not recognize a general alter-ego cause of action that allows an entity and its equity holders to be treated as alter egos for purposes of all of the entity’s debts. As a result, the court found that bankruptcy trustees (or debtors-in-possession) do not have standing to bring such a claim on behalf of a bankruptcy estate, even if the claim affects all of the bankrupt entity’s creditors.…

Continue Reading Altered Ego: New Ninth Circuit Opinion Overrules Previously Well-Settled Law Regarding Exclusive Standing Of Bankruptcy Trustees To Pursue General Claims On Behalf Of The Estate

In a partial reversal of a decision from Bayou Group LLC’s bankruptcy case, the U.S. District Court for the Southern District of New York reconsidered a controversial ruling that sent shivers down the spines of institutional investors in 2008.  See In re Bayou Group , LLC, No. 09 Civ. 02577 (S.D.N.Y. Sept. 17, 2010).  Specifically, the District Court found the Bankruptcy Court’s legal reasoning faulty in deciding that, as a matter of law, all money paid out to redeeming investors within the reachback period could be avoided as a fraudulent conveyance, even though many of these investors had been defrauded themselves. The District Court’s recent ruling may do little, however, to help clarify a murky area for institutional investors, leaving them confused as to how they can not only guard against investment risk in unforeseen fraudulent endeavors, but protect themselves from disgorgement of any return they may have innocently received therefrom once a bankruptcy is filed.…

Continue Reading Reversal Of Decision In Bayou Group Bankruptcy Offers Little Guidance For The Institutional Investor Wishing To Redeem From A Fraudulent Ponzi Scheme