Double Whammy: In a Sweeping New Opinion, the Ninth Circuit Creates a New Mechanism for Completely Wiping Out Unexpired Leases in Bankruptcy, and Also Undercuts a Critical Protection for Buyers in 363 Sales

In In re Spanish Peaks Holdings II, LLC, Case No. 15-35572 (9th Cir. Sept. 12, 2017), the Ninth Circuit Court of Appeals held that a bankruptcy trustee may use Section 363(f) of the Bankruptcy Code to sell real property free and clear of unexpired leases without affording the non-debtor lessees the right to retain possession of the property. In reaching its decision, the Ninth Circuit also rejected an argument made by the buyer that the appeal was moot under Section 363(m) of the Bankruptcy Code, holding that Section 363(m) only applies to the transfer itself, as opposed to the free and clear aspect of the sale. A copy of the opinion may be found here. Continue Reading

Second Circuit Holds that Contingent Equity-Based Compensation of Former Lehman Employees are Subordinate to Creditor Claims

In In re Lehman Bros. Holdings Inc. 855 F.3d 459 (2d Cir. 2017), the United States Court of Appeals for the Second Circuit affirmed a district court order subordinating the claims of former Lehman Bros. (“Lehman”) employees for undelivered equity-based compensation to those of the defunct bank’s general creditors. The Court determined the compensation benefits were securities that had been purchased by the former employees when they agreed to receive them in exchange for their labor and the asserted damages arose from those purchases, requiring the claims’ subordination under the Bankruptcy Code. The decision is important to employees and employers weighing the value of hybrid compensation packages and creditors seeking to safeguard their priority position among bankruptcy claimants.   Continue Reading

To Report or Not to Report – Is it Really A Question?

In a May 15, 2017 Bankruptcy Court decision (Gardens Decision) from California’s Central District (In re Gardens Regional Hospital and Medical Center, Inc. (Bankr. C.D.Cal., May 15, 2017, No. 1617463), Judge Ernest M. Robles wrote that the grant of oversight and approval authority given to California’s Attorney General over buy/sell and change-in-control transactions between nonprofit sellers of health facilities and for-profit buyers of health facilities (see, California Corporation Code Section 5914 (Section 5914)) is limited to those situations in which a nonprofit seller has an active California health facility license at the time of closing. As written by Judge Robles, the Gardens Decision concludes that transactions between nonprofit sellers and for-profit buyers fall outside the scope of Section 5914 if the assets at hand do not include an operating, California-licensed health facility. As a nonoperational, unlicensed health facility, the transaction at issue is not a health facility transaction subject to Section 5914 and, in turn, Attorney General oversight and approval. Continue Reading

The Structure of Dismissals – Supreme Court’s Jevic Decision Lays Out Ground Rules for Parties Seeking to Resolve Bankruptcies Through the Increasingly Popular Method of Structured Dismissals

On March 22, 2017, the Supreme Court in Czyzewski v. Jevic Holding Corp., 580 U.S. __ (2017) held that a bankruptcy court does not have the power to approve a structured dismissal of a bankruptcy case that violates the Bankruptcy Code’s priority scheme unless the affected parties consent.

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Third Circuit Upholds The Enforceability Of Make-Whole Premiums In Post-Bankruptcy Context

In a recent November 17, 2016 opinion, Delaware Trust Co. v. Energy Future Intermediate Holding Company LLC, Case No. 16-1351, the Third Circuit Court of Appeals reversed two lower court opinions by holding that make-whole premiums can be enforceable even if the debt was automatically accelerated by a voluntary bankruptcy filing.  The Third Circuit’s opinion is significant because it now puts borrowers on notice that under New York law, a debtor filing for bankruptcy may not necessarily be allowed to avoid redemption provisions and any related make-whole premiums similar to those involved in this case.  Instead, in specifically examining the intent and language of those provisions, courts may, as the Third Circuit did here, read such automatic acceleration provisions and optional redemption provisions in harmony.

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Will Madden v Midland Disrupt Loan Sales and Platform Lending?

Where do marketplace lenders and secondary loan market participants find themselves on the issue of preemption of state usury laws after the June 27 denial of the petition for a writ of certiorari in Madden v. Midland by the U.S. Supreme Court?

In Madden v. Midland, the US Court of Appeals for the Second Circuit refused to follow the “valid-when-made” rule when considering the scope of federal preemption of state usury laws under the National Bank Act.  The court held that the NBA did not bar the application of state usury laws to a national bank’s assignee.  In considering the applicability of the National Bank Act to a loan in the hands of a non-bank assignee, the Second Circuit considered a number of cases upholding preemption of state usury laws under the National Bank Act but invoked a seemingly new rule for applying section 85 of the National Bank Act (permitting a national bank to charge interest at the rate permitted by its home state).  The Second Circuit concluded that preemption is only applicable where the application of state law to the action in question would significantly interfere with a national bank’s ability to exercise its power under the National Bank Act.  The court reasoned further that where a national bank retained a “substantial interest” in the loan, the application of the state usury law would conflict with the bank’s power authorized by the National Bank Act.

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Lenders Cannot Prevent Borrowers From Filing Bankruptcy By Owning Minority Equity With Veto Power Over Borrower’s Decision To File Bankruptcy

In a recent decision, the U.S. Bankruptcy Court for the District of Delaware refused to enforce a provision in the debtor’s LLC operating agreement requiring a unanimous vote of the debtor’s members to authorize the debtor to file for bankruptcy.  In re Intervention Energy Holdings, LLC, et al., 2016 Bankr. LEXIS 2241 (Bankr. D. Del. June 3, 2016).  The provision at issue required the consent of all the debtor’s LLC members to file for bankruptcy, including the consent of a member that was a secured creditor holding one unit of ownership in the debtor’s LLC which it bargained for and received pursuant to a forbearance agreement.  In refusing to dismiss the debtor’s bankruptcy case, the Court concluded that such an arrangement giving the secured lender a so-called “golden share” was “tantamount to an absolute waiver” of the debtor’s right to seek bankruptcy protection and therefore void as a matter of federal public policy.

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Supreme Court Holds That “Actual Fraud” Under Section 523(a)(2)(A) of the Bankruptcy Code May Include Fraudulent Transfers That Occur Without False Representations

On May 16, 2016, the United States Supreme Court in Husky International Electronics v. Ritz held that the phrase “actual fraud” under section 523(a)(2)(A) of the Bankruptcy Code may include fraudulent transfer schemes that were effectuated without a false representation.  Section 523(a)(2)(A) provides that an individual debtor will not be discharged from certain debts to the extent that those debts were obtained by false pretenses, false representations or actual fraud.  The Court’s decision in Husky resolved a conflict in the interpretation of actual fraud under section 523(a)(2)(A) between the Fifth and Seventh Circuits.

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In Wake of Panama Papers Scandal Obama Calls for Stricter Bank Regulations, Tax Rules

In a news conference today President Obama addressed rules and proposed regulations announced Thursday intended to help the U.S. fight tax evasion and other crimes connected to anonymous offshore companies and accounts.  The announcements come after a month of intense review by the administration following the first release of the so-called Panama Papers, millions of documents stolen or leaked from Panamanian law firm Mossack, Fonseca.  The papers have revealed a who’s who of international politicians, business leaders, sports figures and celebrities involved with financial transactions accomplished through anonymous shell corporations.

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Ninth Circuit Rulings on Equitable Mootness in Transwest and Sunnyslope Impact Third Party Investors

The doctrine of equitable mootness provides that Chapter 11 reorganization plans will be deemed moot, and therefore not subject to appellate review, if a plan has been substantially consummated and granting appellate relief would impair the rights of innocent third parties relying on the confirmation order.  Since the development of the court-created mootness doctrine nearly a quarter century ago, courts have grappled with applying it in such a way as to strike an adequate balance between the need for finality, and the need to exercise the court’s jurisdiction and preserve the right to appellate review.  The standard interpretation in bankruptcy was that once the debtor took definitive steps to put the Chapter 11 plan in place (i.e., “substantial consummation”), and the objecting creditor neglected to gain a stay of the plan confirmation order pending appeal, then any appeal was presumed to be “equitably moot” and therefore subject to dismissal by the appellate court.

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