Commercial Restructuring & Bankruptcy Alert

CR&B Alert Commercial Restructuring & Bankruptcy News JUNE 2012, ISSUE 2 In This Issue: • Construction Lenders Beware—Page 2 • Supreme Court Upholds Secured Creditor’s Right to Credit Bid in a Bankruptcy Case—Page 2 • Jointly Administered Plans Must Obtain Impaired Class Approval ‘Per Debtor’ Rather Than ‘Per Plan’—Page 3 • Court Rejects ‘Whole Enterprise’ Argument of Jointly Administered Debtors; Holds Each Debtor is a SARE—Page 4 • Court Analyzes Objective Factors to Find Chapter 11 Petition Filed in Bad Faith—Page 6 • Rental Payments and Administration Expenses Back in the Spotlight: Luminar Decision Clarifies Circumstances in Which Rental Liabilities Qualify as Administration Expenses—Page 8 • Creditor’s Proposed Plan Violated Absolute Priority Rule – Court Dismissed Bankruptcy Case—Page 9 • Dividend Paid in LBO/Recapitalization Not Protected by 546(e) Safe Harbor —Page 10 • Asset Purchasers May Be Subject to Seller’s Liabilities, De Facto Merger Doctrine Expanded in Pennsylvania—Page 11 • Ending Forbearance is Not Equivalent to Economic Duress—Page 13 • Statute of Frauds Bars Claims, Except for Interference with Prospective Contractual Relations—Page 14 • Illinois Mortgagees Beware – Mortgages Lacking Interest Rate and Maturity Date Avoidable By Bankruptcy Trustee—Page 15 • Split Continues – Individual Chapter 11 Debtors Not Subject to Absolute Priority Rule—Page 15 • Court Relies on its Own Logic to Value Mortgage Servicing Rights—Page 16 • SARE Creditor’s Right to Pre-Petition Interest Governed by State Law—Page 17 • CMBS Certificateholder is Not a ‘Party in Interest’ in Chapter 11 Case—Page 18 • Court Allows Pro Se Claimant to Withdraw Claim to Preserve Right to Jury Trial—Page 18 • Indenture No-Action Clause Bars Suit Against Issuer, Directors and Officers —Page 19 • Ipso Facto Clause Results in Master Lease Termination, Nullifies Sublessee’s Right to Possession—Page 20 • Second Creditor Out of Luck in Debtor’s Fraudulent Transfer Scheme—Page 21 • Secured Party Must Turn Over Repossessed Collateral if the Debtor’s Rights to the Collateral Were Not Terminated Pre-Petition—Page 24 • Counsel’s Corner: News From Reed Smith—Page 24 CONSTRUCTION LENDERS BEWARE Under the Pennsylvania Mechanics’ Lien Law, the Superior Court of Pennsylvania ruled that a construction lender’s mortgage a mechanic’s lien with respect to erection or will have priority over a mechanic’s lien only if all of the advances are used to pay construction of an improvement takes effect all or part of the costs to complete erection, construction, alteration, or repairs of and has priority “as of the date of the visible the property. If any of the advances under the open-end mortgage were made to commencement upon the ground of the work of pay soft costs, taxes, closing costs, interest reserve, satisfaction of an existing erecting or constructing [an] improvement.” Under mortgage, or the like, the priority is lost as to all advances. As a result, as things the same law, a mechanic’s lien is subordinate to now stand, if any mortgage advances are to be used for items other than the an open-end mortgage “the proceeds of which are cost of completing erection, construction, alteration, or repair of the property, the used to pay all or part of the cost of completing lender will need to assure itself that no work on the property commenced prior to Peter S. Clark, II erection, construction, alteration, or repair of the the recording of the mortgage. This case is already impacting how title companies Firmwide Practice mortgaged premises secured by the open-end are willing to insure construction mortgages in Pennsylvania and, as a result, Group Leader mortgage.” So, until last month, construction construction lenders in Pennsylvania should reconsider their closing and loan Philadelphia lenders and title companies proceeded under the administration requirements for construction loans in Pennsylvania where there is assumption that a construction lender’s mortgage, where the proceeds were used the possibility that work on the project has commenced or will commence prior to in part to pay the costs of construction, will take priority over a prior mechanic’s recordation of the mortgage. lien. However, in Commerce Bank v. Kessler, 2012 WL 1610139 (Pa. Super. 2012), SUPREME COURT UPHOLDS SECURED CREDITOR’S RIGHT TO CREDIT BID IN A BANKRUPTCY CASE The United States Supreme Court emphatically The Court applied a well-established canon of statutory interpretation to the upheld a secured creditor’s right to credit bid in cram-down provisions of the Bankruptcy Code: the specific governs the general. bankruptcy cases. In RadLAX Gateway Hotel, et The Court stated: al., v. Amalgamated Bank, 566 U.S.___ (May A Chapter 11 plan confirmed over the objection of a “class of secured claims” must 29, 2012), the Court found the case an “easy” meet one of the three requirements in order to be deemed “fair and equitable” with one to resolve: when a secured creditor is denied respect to the non-consenting creditor’s claim. The plan must provide: the right to credit bid its debt in the sale of its collateral as a part of a bankruptcy plan, it will ‘(i)(I) that the holders of such claims retain the liens securing such claims, not receive the “indubitable equivalent” of its whether the property subject to such liens is retained by the debtor or Robert P. Simons secured claim in the form of cash generated from transferred to another entity, to the extent of the allowed amount of such Partner, Pittsburgh the sale. The Court’s unanimous decision should claims; and (II) that each holder of a claim of such class receive on account restore certainty in credit markets. of such claim deferred cash payments totaling at least the allowed amount of such claim, of a value, as of the effective date of the plan, of at least the The Debtors purchased a hotel and real estate for development but ran out of value of such holder’s interest in the estate’s interest in such property; funds. The Debtors commenced chapter 11 bankruptcy cases and proposed a bankruptcy plan to sell substantially all assets pursuant to a related motion to (ii) for the sale, subject to section 363(k) of this title, of any property that is establish bidding procedures. The bidding procedures did not permit the lender subject to the liens securing such claims, free and clear of such liens, with to credit bid and forced the lender to bid cash. In addition, the bankruptcy plan such liens to attach to the proceeds of such sale, and the treatment of such provided that the secured claim would receive the cash generated from the sale liens on proceeds under clause (i) or (iii) of this subparagraph; or and the plan would be “crammed down” over the secured creditors’ objection. (iii) for the realization by such holders of the indubitable equivalent of such The bankruptcy court denied the sale procedures motion, certified the ruling for claims.” 11 U.S.C. §1129(b)(2)(A).’ direct appeal to the Seventh Circuit (which affirmed), and the Supreme Court granted certiorari. Under clause (i), the secured creditor retains its lien on the property and receives deferred cash payments. Under clause (ii), the property is sold free and clear The Supreme Court heard the appeal to resolve a split among the Circuits. The of the lien, “subject to section 363(k),” and the creditor receives a lien on the Third Circuit, in In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), proceeds of the sale. Section 363(k), in turn, provides that “unless the court for and the Fifth Circuit, in In re Pacific Lumber Co., 584 F.3d 229 (5th. Cir. 2009), cause orders otherwise the holder of such claim may bid at such sale, and, if the had ruled that debtors could hold auctions for properties without allowing secured holder of such claim purchases such property, such holder may offset such claim creditors to credit bid and deem payment of the cash generated by the sale as fair against the purchase price of such property” – i.e., the creditor may credit-bid at and equitable treatment of the secured claim. This allowed plans to be “crammed the sale, up to the amount of its claim. Finally, under clause (iii), the plan provides down” over a secured creditor’s objection. the secured creditor with the “indubitable equivalent” of its claim. CONTINUED ON PAGE 7 Commercial Restructuring & Bankruptcy Newsletter – June 2012 2 JOINTLY ADMINISTERED PLANS MUST OBTAIN IMPAIRED CLASS APPROVAL ‘PER DEBTOR’ RATHER THAN ‘PER PLAN’ In re Tribune Company, et al., 464 B.R. 126 COURT ANALYSIS (Bankr. D. Del. 2011) Various objections to the Debtor Plan included: (i) whether the settlement of certain LBO-related causes of action were reasonable; (ii) whether the Debtor CASE SNAPSHOT Plan granted improper third-party releases; (iii) whether the assignment of certain The Tribune Company and certain of its state law claims under the Debtor Plan was fair and equitable; and (iv) whether subsidiaries filed chapter 11 petitions. The cases the Debtor Plan complied with section 1129(a)(10) by receiving acceptance by at were jointly administered but not substantively least one impaired class. consolidated. Two different constituencies filed The court disposed of most objections raised by the parties, either overruling competing plans of reorganization. The court Jared S. Roach them, imposing conditions that effectively overruled objections, or analyzing held a confirmation hearing and applied the Associate, Pittsburgh objections in such a way as to present solutions to the issue. Specifically, the standards set forth in section 1129 regarding court found that the settlement of certain LBO-related causes of action “(i) falls plan confirmation to the competing plans.

Load more