Challenging Insolvency through a Recharacterization Claim

An interesting decision from the Bankruptcy Court in the Eastern District of Tennessee shows how a defendant tried to defeat a preference claim by recharacterizing debt on the debtor’s balance sheet as a capital or equity contribution.  In Paris v. SSAB Enterprises, LLC (In re SIAG Aerisyn, LLC), the defendant tried to render the debtor balance sheet solvent by recharacterizing a significant portion (approximately $9.9 million) of the debtor’s debts as equity contributions.  By rendering the debtor solvent, the defendant could, in turn, defeat the preference claim. Continue Reading

Welcome to the Restructuring Debt Review

Welcome to the Restructuring Debt Review (the “RDR”).  The RDR blog is devoted to covering legal developments in the areas of troubled businesses, distressed debt and insolvency law.  Many of the posts will discuss recent developments under the federal Bankruptcy Code as it applies to local, regional, national and international situations.  We intend all of our posts to report on these developments from a client’s perspective, whether the client is a lender, borrower, business or individual; creditor or debt trader; or counterparty to an insolvent entity.  This area of the law punishes those who sit back and wait.  So, please, read on.

Valuing Assets in Chapter 11 – A Moving Target

A recent decision out of the First Circuit Court of Appeals illustrates the importance of the value of the collateral of creditors with fulcrum security, as that value relates to creditors’ rights to pendency interest.

In re SW Boston Hotel Venture, LLC, et al. involved a failed construction project by SW Boston Hotel Venture, LLC to develop a mixed-used property that would become the W Hotel and Residences in Boston’s theater district.  The senior secured lender (“Prudential”) provided up to $192.2 million in financing pursuant to a construction loan agreement.  As security for the loan, Prudential took a mortgage and first priority blanket security interest in SW Boston’s real and personal property.  Prudential also took a security interest in the real estate and property of certain affiliates of SW Boston, and received a $17.3 million letter of credit issued by Sovereign Bank.

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The Muddy Waters of Claim Classification

The chapter 11 case of In re Hyatt out of the Bankruptcy Court for the District of New Mexico illuminates a debtor’s use of claim classification to allocate creditors different recoveries under a liquidating plan.  While this debtor was ultimately successful in getting its Disclosure Statement approved by the Bankruptcy Court, this strategy ultimately hinges on the specific facts of the case and the jurisdiction in which the debtor finds itself.

In Hyatt, the debtor proposed a liquidating chapter 11 plan in which the plan separately classified and subordinated the punitive damages portion of a claim held by creditor Cornelius Dooley (the “Dooley Claim”) behind the general unsecured claims.  The plan also separately classified the unsecured claim of Farm Credit of New Mexico, ACA (the “Farm Credit Claim”) from the unsecured claims of other creditors.  The Farm Credit Claim was an unsecured claim based on the debtor’s guarantee of third-party debt.

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In re Alameda Investments, LLC: The Liquidating Trustee Has More Than an Economic Interest

The Ninth Circuit B.A.P. has affirmed in In re Alameda Investments, LLC that transfer restrictions in a limited liability company operating agreement to which the debtor was a party do not prohibit transfer of the debtor’s entire membership interest (including voting rights) to a liquidating trust established pursuant to the debtor’s chapter 11 plan.

In this case, the debtor was a member of a two-member limited liability company, West Lakeside, LLC (the “Joint Venture”).  Absent consent from a majority of other members, the Joint Venture’s operating agreement prohibited transfers of all components of a member’s interest, including voting rights.  The debtor’s plan established a liquidating trust to liquidate the debtor’s remaining assets, including its interest in the Joint Venture.  For well over a year, the Joint Venture permitted the liquidating trustee to participate in the management of the Joint Venture.  However, the non-debtor member of the Joint Venture eventually questioned whether the liquidating trust had full membership rights (including voting rights) to the Joint Venture or whether it had only an economic interest in the Joint Venture.

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The Intrusion of Section 506(b) in Foreclosure Proceedings

On June 23, 2014, the Fifth Circuit Court of Appeals weighed in on the applicability of section 506(b) to an oversecured creditor’s entitlement to payment for interest, fees and expenses in a case in which the secured creditor obtained relief from the automatic stay and executed a sale of its collateral under state law.  The case, Wells Fargo Bank, N.A. v. 804 Congress, LLC (In re 804 Congress, LLC), involved a single asset office building in Austin, Texas.  Wells Fargo Bank, N.A. (“Wells Fargo”) had financed the purchase of the building and held a real estate lien note (the “Note”) and a deed of trust that granted Wells Fargo a first-priority lien on the building.   Wells Fargo was owed $3,296,915, which included $87,000 in attorneys’ fees.

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Credit Bidding in Bankruptcy – Not So Sacrosanct

In devising loan-to-own lending strategies, the Delaware Bankruptcy Court’s decision in In re Fisker Auto. Holdings, Inc. serves as a warning shot to secured lenders that private sales on an  expedited basis are hard sells to a bankruptcy judge.

Fisker Automotive Holdings (“Fisker”) produced hybrid electric cars but ran into financial distress due to operating difficulties.  When the company’s senior secured loan from the U.S. Department of Energy in the amount of $168 million was purchased by Hybrid Tech Holdings, LLC (“Hybrid”) for $25 million, the company entered into negotiations over the terms of its sale to Hybrid.  With Hybrid’s support, Fisker filed a chapter 11 petition with the intent to sell substantially all of its assets to Hybrid.  Hybrid’s purchase offer was a credit bid of $75 million of the $168 million loan that it purchased just prior to the bankruptcy petition date.  Fisker planned to propose a liquidating chapter 11 plan after the sale closed.

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