Business Restructuring Review Vol. 18 No. 6 | November–December 2019

In This Issue:

Section 363 Does Not Apply to Chapter 11 Plan Sales

In In re Ditech Holding Corp., 2019 WL 4073378 (Bankr. S.D.N.Y. Aug. 28, 2019), the U.S. Bankruptcy Court for the Southern District of New York addressed several objections to confirmation of a chapter 11 plan that proposed to sell home mortgage loans "free and clear" of the claims and defenses of the homeowner creditors. This is contrary to a provision of the Bankruptcy Code—section 363(o)—that was enacted in 2005 to prevent free and clear sales of consumer credit agreements in most bankruptcy cases. The court ultimately ruled that section 363 of the Bankruptcy Code does not apply to sales in a chapter 11 plan and that the debtors proposed their plan in good faith. [read more … ]

Mixed Signals on Enforcement of Provisions Precluding Bankruptcy Filing Absent Lender's Consent

A pair of recent decisions examine whether provisions in a borrower's organizational documents designed to prevent the borrower from filing for bankruptcy are enforceable. In In re Franchise Services of North America, Inc., 891 F.3d 198 (5th Cir. 2018), the U.S. Court of Appeals for the Fifth Circuit affirmed a bankruptcy court order dismissing a chapter 11 case filed by a corporation without obtaining—as required by its corporate charter—the consent of a preferred shareholder that was also controlled by a creditor of the corporation. The Fifth Circuit ruled that federal law does not strip a bona fide equity holder of its preemptive voting rights merely because it is also a creditor. More recently, in In re Insight Terminal Solutions, LLC, 2019 WL 4640773 (Bankr. W.D. Ky. Sept. 23, 2019), the U.S. Bankruptcy Court for the Western District of Kentucky denied a motion to dismiss the chapter 11 cases of two affiliated limited liability companies that, at the behest of their secured lender, amended their organizational documents to provide that the companies could not file for bankruptcy without the consent of all holders of one of the company's membership units, which had been pledged to secure the loan. According to the court, this attempt by the lender to circumvent the bankruptcy laws and federal public policy was ineffective. [read more …]

The Role of Self-Interest in Allowance of Substantial Contribution Claims in Bankruptcy

In In re DeVal Corp., 601 B.R. 725 (E.D. Pa. 2019), the U.S. District Court for the Eastern District of Pennsylvania addressed the requirements for conferring administrative-expense priority on a claim for expenses incurred by a creditor in making a "substantial contribution" to a chapter 11 case. Even applying the Third Circuit's relatively stringent standard for substantial contribution claims, the court affirmed a bankruptcy court's decision to award administrative expense claims to a secured creditor that acted "to save [the debtor] from a total implosion and becoming administratively insolvent … [and] forced the debtor to wake up and try to save the company from its own inaction." [read more …]

Legislative and Regulatory Update

A discussion of proposed U.S. Treasury and Internal Revenue Service regulations limiting the use of net operating losses, proposed U.S. legislation that would change the bankruptcy venue rules governing large business restructuring cases, and amendments to Canada's Bankruptcy and Insolvency Act and Canada's Companies' Creditors Arrangement Act. [read more …]

Chapter 15 Gap Period Relief Subject to Preliminary Injunction Standard But No Adversary Proceeding Required

Courts disagree as to the standard that should govern the issuance of provisional relief during the "gap period" between the filing of a chapter 15 petition and the court's issuance of an order recognizing a foreign bankruptcy proceeding. The U.S. Bankruptcy Court for the Southern District of New York recently weighed in on this issue. In In re Beechwood Re, 2019 WL 3025283 (Bankr. S.D.N.Y. July 10, 2019), the court ruled that "the standards for issuance of a preliminary injunction" apply to determine whether provisional relief should be granted under section 1509(a). The court also held that such relief need not necessarily be sought in an adversary proceeding. [read more …]

Cross-Border Restructuring Update

A discussion of proposed amendments to chapter 15 of the Bankruptcy Code and the landmark cross-border restructuring of syncreon Group Holdings B.V. and its subsidiaries. [read more …]

Claims to Dividends Originating From Stock Trust Subordinated Under Section 510(b) of the Bankruptcy Code

In In re Linn Energy, 936 F.3d 334 (5th Cir. 2019), the U.S. Court of Appeals for the Fifth Circuit recently examined the broad reach of section 510(b) of the Bankruptcy Code, which subordinates most types of claims asserted against a debtor by equity holders. The court ruled that even though the beneficiary of a stock trust did "not fit perfectly in the investor box," his claims should be subordinated under section 510(b) because his entitlement to "deemed dividends" originally arising from the trust "was certainly more like an investor's interest than a creditor's interest." [read more …]

First Impressions: Ninth Circuit Rules that Notice of Proposed Substantive Consolidation Must Be Given to Creditors of Non-Debtor

In Leslie v. Mihranian (In re Mihranian), 937 F.3d 1214 (9th Cir. 2019), the U.S. Court of Appeals for the Ninth Circuit considered whether the creditors of a non-debtor must be given advance notice of a motion to substantively consolidate the non-debtor with the bankruptcy estate of a debtor. In an apparent matter of first impression among the circuits, the Ninth Circuit ruled that such notice is required. [read more …]