Author Archives: Cooley

Third Circuit Decision in In re Towne Reaffirms Rule That It Is Not Easy To Surcharge A Secured Lender’s Collateral Under 506(c)

As a general rule, the costs and expenses of administering a bankruptcy proceeding must be borne out of the unencumbered assets of the estate, absent an agreement to the contrary.  One narrow exception to this rule arises from Section 506(c) of the Bankruptcy Code, which enables a debtor in possession to surcharge a secured lender’s collateral to pay reasonable and necessary administrative expenses that are incurred preserving or disposing such collateral.  Recently, in In re Towne, Inc., et al. 2013 BL 232068 (3d Cir. Aug. 29, 2013), the Third Circuit Court of Appeals upheld lower court decisions denying a motion by a debtor’s counsel to surcharge the proceeds of a secured lender’s collateral to pay its legal fees, reinforcing prior Third Circuit decisions on the issue and demonstrating the difficulties a debtor faces in seeking to surcharge a secured lender’s collateral.   Continue reading

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Delaware Court Puts the Brakes on Hybrid Tech’s Credit Bid for Bankrupt Fisker Automotive’s Assets

Last Friday, Judge Sleet of the U.S. District Court for the District of Delaware denied Hybrid Tech Holdings LLC’s appeal of the Delaware bankruptcy court’s decision in In re Fisker Automotive Holdings, Inc. et al,  to (i) cap Hybrid Tech’s credit bid for Fisker Automotive’s assets, and (ii) require that the assets be sold via a public auction rather than directly to Hybrid Tech in a private sale. The denial of the appeal gave the green light for the auction and sale hearing to proceed. The bankruptcy court’s decision to cap Hybrid Tech’s credit bid sheds light on when a bankruptcy court may limit a secured lender’s right to credit bid “for cause” under section 363(k) of the Bankruptcy Code.   Continue reading

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Key Decision Allows Massive Lyondell Shareholder Clawback Litigation to Move Forward

On January 14, 2014, Judge Robert E. Gerber of the United States Bankruptcy Court for the Southern District of New York issued a long-awaited decision denying in large part the motion to dismiss state law fraudulent conveyance claims brought on behalf of Lyondell creditors against thousands of shareholders who received proceeds from Lyondell’s ill-fated leveraged buyout.  Judge Gerber ruled that the “safe harbor” protections afforded to certain securities transactions under Section 546(e) of the Bankruptcy Code do not apply to shield the Lyondell shareholders from liability under state law fraudulent transfer causes of action. Continue reading

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Pennsylvania Court Bucks Third Circuit Trend In Ruling That Bankruptcy Courts Lack Authority to Issue Final Order in Fraudulent Transfer Lawsuits

In a departure from other bankruptcy courts in the Third Circuit and her own recent prior opinion, U.S. Bankruptcy Chief Judge Mary France of the Middle District of Pennsylvania broadly interpreted the U.S. Supreme Court’s ruling in Stern v. Marshall, 564 U.S. 2 (2011), and held that a bankruptcy court lacks the constitutional authority to issue a final judgment in any fraudulent transfer action where the defendant (i) has not filed a proof of claim and (ii) has not consented to the bankruptcy judge entering a final judgment on the matter.  Continue reading

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Fifth Circuit Rules That Debtor’s Plan Failed to Effectively Preserve Post-Confirmation Causes of Action

The Bankruptcy Code provides debtors in possession and other potential plan proponents with considerable flexibility to implement a plan under chapter 11. An important consideration is the preservation of potentially valuable causes of action held by the estate and the provision of a vehicle for post-confirmation prosecution of such claims. While section 1123(b)(3) of the Bankruptcy Code affords plan proponents the option to retain estate claims to be pursued by a debtor, a trustee or “a representative of the estate” after plan confirmation, the degree of specificity required in a plan’s identification of retained causes of action in order to ensure post-confirmation standing is frequently open to substantial challenge.  Courts typically address issues related to post-confirmation standing to pursue estate causes of action in connection with efforts to dismiss litigation brought by a reorganized debtor, a trustee of a post-confirmation liquidating trust, or as was the case in Wooley v. Haynes & Boone, LLP (In re SI Restructuring Inc.), 714 F.3d 860 (5th Cir. 2013), individual creditors.  The decision in SI Restructuring, which ultimately denied the creditors standing to pursue claims on behalf of the estate because the plan did not describe the causes of action to be retained with enough clarity to satisfy section 1123(b), highlights the importance of clear and unequivocal drafting of plan provisions designed to ensure the preservation of often valuable post-confirmation litigation claims. Continue reading

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Seventh Circuit Upholds Validity of Cross-Collateralized Real Estate Lien

Commercial real estate transactions frequently involve several tranches of secured financing.  Where a borrower owns multiple properties, cross-collateralization — a practice in which a lender’s construction loan for one property is secured by liens on one or more of the borrower’s other properties — is often used as a means to enhance the lender’s security.  In such transactions, junior lienholders must be especially diligent in their underwriting process to ensure the priority of their liens and identify all senior debt secured by the subject property.  This is particularly true where a senior lienholder’s deed of trust contains a cross-collateralization clause – also known as a “dragnet” clause. The Seventh Circuit’s recent decision in Peoples National Bank, N.A. v. Banterra Bank, 719 F.3d, 608 (7th Cir. 2013) demonstrates the consequences facing a junior lender who fails to undertake a sufficiently robust inquiry before providing financing to a borrower.   Continue reading

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Court Determines That DIP Lender’s Superpriority Administrative Claim Takes Priority Over Claims of a Chapter 7 Trustee

The Bankruptcy Court for the Southern District of Florida recently issued an important decision for administrative creditors in chapter 11 cases and chapter 7 cases alike.  In In re National Litho, LLC, 2013 WL 2303786 (Bankr. S.D. Fla. May 24, 2013), the court considered the effect, if any, of the conversion of a bankruptcy case from a chapter 11 case to a chapter 7 case on the primacy of the “superpriority” administrative expense claim granted to a chapter 11 debtor in possession (DIP) lender in connection with a postpetition financing facility.  In holding that these claims take priority over the administrative claims incurred by a chapter 7 trustee after the conversion of the case, the court handed an important victory to DIP lenders and underscored the continuing enforceability of orders approving DIP financing even after the debtor’s ability to borrow funds has terminated. Continue reading

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Second Circuit Reaffirms Broad View of Section 546(e)’s “Safe Harbor”

Section 546(e) of the Bankruptcy Code provides a “safe harbor” for certain transfers involving the purchase and sale of securities and protects those transfers from avoidance in bankruptcy proceedings as preferences or constructively fraudulent conveyances.  Specifically, section 546(e) insulates transfers that are “settlement payments” used in the securities trade, as well as other transfers made to or from certain parties, including financial institutions, financial participants and stockbrokers, in connection with a securities contract.  Section 741(8) of the Bankruptcy Code defines “settlement payment” somewhat cryptically, as a “preliminary settlement payment, a partial settlement payment, an interim settlement payment, a settlement payment on account, a final settlement payment or any other similar payment commonly used in the securities trade.”     Continue reading

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Ninth Circuit Overturns Longstanding Precedent in Ruling that Bankruptcy Courts Have Power to Recharacterize Debt Claims To Equity

In a recent decision, the Court of Appeals for the Ninth Circuit shocked observers by holding that bankruptcy courts have the power to recharacterize claims on account of unpaid debts as equity infusions that cannot be repaid until all creditor claims have been satisfied.  In In re Fitness Holdings Int’l, Inc., 714 F.3d 1141 (9th Cir. 2013), the court recognized recharacterization as a viable cause of action, and joined the Third, Fourth, Fifth, Sixth and Tenth Circuits and the countless lower courts that have long held that bankruptcy courts possess this considerable power. Continue reading

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Court Rules That Indirect Benefits from Subchapter S Election Can Be Reasonably Equivalent Value in Fraudulent Transfer Case

Section 548 of the Bankruptcy Code provides that a transfer made within two years of a bankruptcy filing is fraudulent if the debtor received less than “reasonably equivalent value” in exchange for the transfer and (i) the transfer rendered the debtor insolvent or was made at a time that the debtor was already insolvent or; (ii) the debtor had an unreasonably small amount of capital; or (iii) the debtor intended to incur, or believed that it would incur, debts that it would be unable to pay as they matured.  The fraudulent transfer laws of most states, made applicable in bankruptcy proceedings by section 544 of the Bankruptcy Code, contain substantially similar provisions. Continue reading

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