Authored by:
John R. Bonn
(978) 594-0170
Pursuant to applicable Treasury Regulations, we notify you that the information in the foregoing flyer does not constitute legal or tax advice, cannot be used for the purpose of avoiding any tax penalties that may be imposed on any person, and may not be used or referred to in promoting, marketing or recommending a partnership or other entity, investment plan or arrangement to any person. No limitation is hereby imposed on disclosure of tax treatment or structure of any transaction.
]]>Authored by:
John R. Bonn
(978) 594-0170
jbonn@sheppardmullin.com
When the chapter 11 debtor is the tenant:
When the chapter 11 debtor is the landlord:
Timeframe. In 2005, Congress reduced the time in which a tenant-debtor may assume, assume and assign, or reject an unexpired lease of non-residential real property to 120 days of the bankruptcy filing. The debtor may be granted one 90-day extension of this 120-day period, however, if the tenant-debtor wishes to seek further extensions thereafter, it must first attain written approval of the non-debtor landlord. If assumption has not occurred within the required time period, the unexpired lease is deemed rejected.
This 210 day cap has significant implications for retail debtors. Prior to this change the time to make a decision for assumption or rejection was often virtually unlimited (and remains virtually unlimited for landlord-debtors), allowing a retailer to evaluate sales at a particular store for one, if not two, holiday seasons. Now, the decision must be made within seven months.
Assignment of Leases. Many leases have provisions purporting to restrict or prohibit assignment (as well as provisions which state that the lease will terminate upon bankruptcy). There are, however, specific Bankruptcy Code sections which render such provisions generally unenforceable in the bankruptcy context.
The ability to assign a non-residential real property lease can provide a significant opportunity to retail debtors who hold leases below market rates and are able to find third-party buyers to purchase the rights under, and thereby take over, these leases. This not only provides proposed assignees with an opportunity to step into the shoes of the debtor on below-market unexpired commercial leases, but also provides the retail tenant-debtors with additional capital with which to administer their estates. Note that with respect to shopping center leases, limitations such as radius, location, use, or exclusivity will continue to be enforceable, even in the bankruptcy context.
If the Debtor is a Sublandlord. If you are a tenant under a sublease and the sublandlord files for bankruptcy, your right to occupy the property will likely be terminated if the sublandlord rejects the master lease (the lease between the ultimate landlord and your sublandlord). You may retain your rights to possess the property, however, if you have a non-disturbance agreement with the ultimate landlord or if you are a third party beneficiary of a non-disturbance clause in the master lease.
Get prompt legal advice. Whether the debtor is a tenant or a landlord, commercial leases will be affected by any bankruptcy proceeding. The above discussion provides only a brief snapshot of the complexities involved when a business holding commercial leases as either a landlord or debtor files for bankruptcy. In order to protect your rights, get prompt legal advice any time bankruptcy proceedings are involved.
Authored by:
Richard Brunette
(213) 617-4174
rbrunette@sheppardmullin.com
and
Kristy E. Young
(415) 774-3153
kyoung@sheppardmullin.com
Without obtaining bankruptcy court approval, in November of 2002, the Tippetts sold their home to Seitu Coleman for $225,000. This sale resulted in the receipt by the Tippetts of over $75,000 after payment of all liens on the property. To purchase the property, Coleman signed purchase money notes in favor of two mortgage companies. These notes were secured by deeds of trust that were duly recorded. It was undisputed that Coleman was a bona fide purchaser of the property.
The Trustee filed an adversary proceeding against the Tippetts, Coleman, and the lenders seeking to recover the sale proceeds under 11 U.S.C. § 542, avoid the lenders' liens, and quiet title to Coleman. The bankruptcy court, however, ruled in favor of the Trustee, and held that the Tippetts' grant deed and the lenders' liens were void ab initio as violations of the automatic stay under 11 U.S.C. § 362. On appeal, the Bankruptcy Appellate Panel reversed and entered judgment in favor of Coleman, concluding that the Tippetts' unauthorized transfer of the residence to Coleman did not violate the automatic stay.
The Ninth Circuit affirmed the BAP decision and held that the Bankruptcy Code does not preempt California's bona fide purchaser status as it applied to the foregoing transaction. Additionally, the Court held it was "adher[ing] to the established proposition that the automatic stay triggered by a debtor's bankruptcy petition does not void transfers of estate property initiated by the debtor."
Preemption
The Ninth Circuit found that California's Bona Fide Purchaser Statute was not preempted by the Bankruptcy Code. In making this determination, the Court found that Chapter 7 of the Code embodies two ideals: 1) giving a debtors a fresh start, and 2) equitably distributing a debtor's assets among competing creditors. The Court found that California's bona fide purchaser statute was "wholly consistent" with the second goal, and thus there was no federal preemption.
The Trustee also contended that the automatic stay rendered the transfer of the real property to Coleman a nullity pursuant to 11 U.S.C. § 362. This argument would appear to persuasive as the Ninth Circuit has consistently stated that violations of the automatic stay are void, not merely voidable. However, the Court in In re Tippett concluded otherwise.
The Court's rationale was as follows: section 549 of the Bankruptcy Code, allows (but does not mandate) a trustee to avoid a transfer of property of the estate that occurs post-petition and without authorization. According to the Bankruptcy Court, the expansive definition of "transfer" in section 549 means that sections 362 and 549 of the Bankruptcy Code, at times, govern the same transactions. In addition, section 549 of the Bankruptcy Code implies that some transactions will be valid unless challenged by a trustee. Thus, the Court noted that some have argued section 362 of the Bankruptcy Code cannot be interpreted to void these overlapping transactions, for doing so would render section 549 of the Bankruptcy Code moot.
The Court also found that there was a key difference between section 549 and section 362: section 362 protects the debtor, not creditors, while section 549 is designed to protect creditors against unauthorized transfers by the debtor. Moreover, the Court cited Schwartz v. United States (In re Schwartz), 954 F.2d 569, 574 (9th Cir. 1992), for the proposition that in most circumstances, section 549 applies to transfers in which the debtor is a willing participant; in contrast, the automatic stay under section 362 does not apply to sales or transfers of property initiated by the debtor. As a result, the transfer from the Tippetts to Coleman was not rendered void by the automatic stay.
Unfortunately, the Court does not provide any analysis as to why section 362 does not apply to sales or transfers of property initiated by the debtor. Rather, the Court found itself bound by the principles of stare decisis, and concluded that "there is no question that the analysis and conclusion in Schwartz that the automatic stay did not apply to transfers by debtors was an important and focused part of the panel’s reasoning." The "analysis" in Schwartz, however, is non-existent, and Schwartz fails to include a single case in support of this proposition.
As a result, the few short paragraphs in the opinion that discuss the automatic stay add a further wrinkle to the well established Ninth Circuit authority that renders actions taken in violation of the automatic stay as "void," at least when the debtor is the one initiating the action. Although it is clear from reading the opinion that the automatic stay does not apply to transfers by debtors, at least under certain circumstances, the rationale for this proclamation is uncertain. As a result, it is unclear how future cases will apply section 362 if it involves transfers by the debtor.
If In re Tippett is held to its facts, the potential impact on the Ninth Circuit's interpretation of the automatic stay may be quite limited. However, the possibility that In re Tippett could be extended beyond its particular facts is one that creditor and debtor attorneys should be aware of.
Authored by:
(213) 617-4177
]]>The case arose from the bankruptcy of Piccadilly Cafeterias, Inc. At one time among the nation's most successful cafeteria chains, Piccadilly had fallen on hard financial times. In 2003, Piccadilly filed for Chapter 11 bankruptcy protection in the Southern District of Florida. As the centerpiece of its reorganization efforts, Piccadilly sought court authorization to sell virtually all of its assets in a § 363(b)(1) sale pursuant to a settlement agreement reached with creditors. The bankruptcy court granted this authority. In authorizing the sale, the bankruptcy court further ruled Piccadilly's transfer of assets would be "exempt from stamp taxes under § 1146(a)." (Maj. Slip Op. at 2.) Piccadilly closed its sale on March 16, 2004.
]]> Months after the successful sale, Piccadilly filed a plan of reorganization. On July 31, 2004, Piccadilly filed its second amended (and final) plan of reorganization. The plan duly called for a transfer of assets "in a manner consistent with" the sale that had closed in March.The Florida Department of Revenue objected to the plan. Seeking payment of $39,200 in stamp taxes it had assessed against some of Piccadilly's transferred assets, Florida argued the transfer had not been "under a plan confirmed." 11 U.S.C. § 1146(a). Florida's argument was simple. The statutory term "confirmed," because it is a past participle, refers exclusively to something that has already happened. But at the time of the transfer, plan confirmation had not yet occurred. Therefore, the transfer had not been "under a plan confirmed" and thus fell outside the scope of the § 1146(a) tax exemption. Piccadilly countered that "under a plan confirmed" imposed no such temporal requirement. According to Piccadilly, the most natural reading of the statute extended the exemption to all transfers that complied with the terms of a plan, regardless of whether that plan's confirmation happened before, or after, the transfer.
On cross-motions for summary judgment, the bankruptcy court ruled in favor of Piccadilly. The District Court for the Southern District of Florida affirmed. The Court of Appeals for the Eleventh Circuit also affirmed in a per curiam opinion. Noting a circuit split, the Supreme Court granted certiorari.
In a vote of 7-2, with Thomas, J., speaking for the majority and Breyer, J., writing in dissent, the Court reversed and remanded:
The most natural reading of § 1146(a)'s text, the provision's placement in the Code, and applicable substantive canons of all lead to the same conclusion: Section 1146(a) affords a stamp-tax exemption only to transfers made pursuant to a Chapter 11 plan that has been confirmed. Because Piccadilly transferred its assets before its Chapter 11 plan was confirmed by the Bankruptcy Court, it may not rely on § 1146(a) to avoid Florida's stamp taxes.
(Maj. Slip Op. at 19.) To reach its conclusion, the Court relied principally on the text. Section 1146(a) provides, in its entirety:
The issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.
11 U.S.C. § 1146(a). Acknowledging the variability of the term "under," the Court nevertheless found the statute's meaning was plain. "Confirmed," the Court observed, is a past participle. As such, it is most naturally interpreted as referring to something that has already occurred. Therefore, the plain terms of § 1146(a) extends the stamp tax exemption only to transfers made under a plan that has already been confirmed.
The Court then continued on to hold that even if § 1146(a)'s text was ambiguous, nothing suggested the Court should resolve that ambiguity in favor of Piccadilly. Indeed, the Court held that in the event of ambiguity, the interpretive "canon" of California State Bd. of Equalization v. Sierra Summit, Inc., 490 U.S. 844 (1989), required it to construe the provision narrowly in favor of state taxing authorities.
Writing in dissent, Breyer and Stevens, JJ., set forth a three-step critique. First, the dissent argued, the notoriously variable term "under"—past participles notwithstanding—rendered the statute ambiguous. Second, the dissent doubted the applicability of the Sierra Summit canon. Specifically, the dissent wondered how this so-called canon could logically apply to a provision "the express point of which is to exempt some category of state taxation?" (Dissent Slip Op. at 3.) Third, the dissent concluded that because the statute was ambiguous, and because Sierra Summit should not apply, the Court should construe the statute in light of Chapter 11's basic objectives: (1) preserving going concerns and (2) maximizing property available to satisfy creditors.
These objectives, the dissent urged, militate in favor of the exemption. For one thing, the Chapter 11 plan confirmation process "takes time" (Dissent Slip Op. at 5), whereas asset sales are sometimes most successful when the debtor closes them relatively early. Among other things, restricting the tax exemption to only those debtors who close a sale after confirmation would potentially reduce the incentive to engage in a timely sale process and may have a chilling effect on the ability of a debtor to market its assets and maximize their value, thus subverting the purposes of Chapter 11 to the detriment of the bankruptcy estate and creditors.
]]>(2) The real property securing the mortgage loan is owner-occupied.
(3) If a REMIC holds the mortgage loan, then as of either the startup day or the end of the 3-month period beginning on the startup day, no more than 10% of the stated principal of the total assets of the REMIC was represented by loans the payments on which were then overdue by 30 days or more; and if an investment trust holds the mortgage loan, then as of all dates when assets were contributed to the trust, no more than 10% of the stated principal of all the debt instruments then held by the trust was represented by instruments the payments on which were then overdue by 30 days or more.
(4) The holder or servicer reasonably believes that there is a significant risk of foreclosure of the original loan based on guidelines developed as part of a foreclosure prevention program similar to that described in the Revenue Procedure or may be based on any other credible systematic determination.
(5) The terms of the modified loan are less favorable to the holder than were the unmodified terms of the original mortgage loan.
(6) The holder or servicer reasonably believes that the modified loan presents a substantially reduced risk of foreclosure, as compared with the original loan.
The Revenue Procedure applies generally to loan modifications that are effected on or before December 31, 2010.
Authored by:
(213) 617-4222
]]>The proxy solicitation sent to shareholders for approval of the stock acquisition included CSFB's fairness opinion, and investors approved the transaction, which then closed in May 2000. Shortly after the transaction closed, HALO fell into financial distress as a result of the cash drain from the acquisition and Starbelly's continuing losses. HALO filed bankruptcy in July 2001, and a liquidating trust was appointed.
Under CSFB's engagement letter with HALO, CSFB is liable only for bad faith or gross negligence. The liquidating trust sued CSFB for gross negligence based on CSFB's issuance of the fairness opinion. The arguments of the parties and Court's conclusion were as follows:
The Trust's Arguments Why CSFB Was Grossly Negligent:
· CSFB should have relied on Ernst's conclusion, rather than HALO's projections.
· CSFB should have withdrawn the fairness opinion, or issued a new one, after the market price for dot-com stocks began to decline.
· After CSFB issued the fairness opinion, but before the transaction closed, "any fool" could have seen that the purchase price should have been much lower.
CSFB's Arguments Why It was Not Grossly Negligent:
· CSFB could not predict what would happen in the market. In fact, in mid-March 2000, two months after CSFB issued the fairness opinion, the market peaked.
· If "any fool" could have seen that prices should be much lower, then no one could have possibly relied on the fairness opinion.
· When the transaction closed, the market was at the same level as when the deal between HALO and Starbelly had been negotiated.
· HALO and CSFB had agreed that CSFB would issue one fairness opinion, as of a certain date, not multiple or revised opinions. Moreover, CSFB could not distinguish between short-term and long-term reverses in the market. Carrying the Trust's argument to its logical conclusion, CSFB would have been required to issue a new opinion every time the market shifted.
· In April 2000, a major HALO shareholder asked HALO management to seek a new valuation of Starbelly and an update of the fairness opinion. HALO management chose not to do so.
· The engagement letter between CSFB and HALO required CSFB to use the information provided by HALO. This was consistent with the industry norm.
· CSFB told HALO to hire someone to check the numbers.
· It was HALO that chose to go forward undaunted after receiving Ernst's conclusion. HALO cannot blame that on CSFB just because CSFB is a deep pocket.
The Seventh Circuit, adopting CSFB's arguments, ruled in favor of CSFB, concluding that CSFB had not acted grossly negligent.
The Seventh Circuit's opinion did not indicate if and when CSFB learned about Ernst's opinion, which arguably is a significant fact. While the court was probably correct that it makes sense to have different entities verify the numbers (Ernst) and crunch the numbers (CSFB) because specialists should "do what they are best at", it probably also makes sense to have those entities communicate with each other so that everyone has full information. If CSFB learned of Ernst's conclusion before CSFB issued its fairness opinion, such fact might warrant a different outcome. While CSFB might not have been required to verify the numbers, it seems that if CSFB knew the numbers were suspect, it should not be able to ignore that fact. On the other hand, the HA2003 opinion implies that anyone deciding to invest in or approve the transaction should have known that HALO's projections were speculative, suggesting that Ernst's conclusion may not have provided information that people could not figure out for themselves. In other words, anyone investing in or voting to approve such a transaction inherently must assume the business risks associated with that transaction.
Authored by:
(213) 617-4237
]]>Dunmore California, a California corporation which was wholly owned by Sidney Dunmore, a California resident, and predecessor to the Debtor, was in the business of, among other things, land development and construction of single family homes throughout Northern and Central California. The financial condition of Dunmore California began to deteriorate in September 2005, and by August 1, 2007, Dunmore California and its subsidiaries had halted nearly all home construction, land development operations and sales. Shortly thereafter, Dunmore California sold all of its assets to the Debtor. As part of that transaction, the Debtor also assumed virtually all of the liabilities of Dunmore California. Fifty-nine days after the sale, on November 8, 2007, the newly formed Debtor, Dunmore Homes filed for bankruptcy relief under chapter 11 in the Southern District of New York.
The Debtor, a New York corporation, is wholly owned by Michael Kane, a California resident, and has no offices, employees or bank accounts in New York. All of its subsidiaries (none of which has filed for protection under the Bankruptcy Code) are located in California. The Debtor's only connection to New York was its incorporation in New York fifty-nine days before the bankruptcy filing.
Among other debts, the Debtor had significant indirect liabilities resulting from its assumed obligations as guarantor or co-borrower on the secured debt of its various California subsidiaries, which totaled approximately $195 million as of the date of filing. The security for this debt is California real property owned at the subsidiary level. Moreover, twenty-four of the Debtor's top thirty creditors are located in California, seven of whom joined the Motion and represent approximately $23,578,998.46 of the Debtor's debt. The two bank creditors who opposed the Motion represent about $56,700,000 of the Debtor's debt. It was undisputed that the vast majority of creditors below the top thirty are trade creditors located in California.
Motion for Change of Venue
The motion for change of venue sought transfer based on consideration of the interests of justice under 28 U.S.C. § 1412, and not that venue was improper under 28 U.S.C. § 1408, which entitles the Debtor to file its petition in the Southern District of New York because it is "domiciled" in New York. Since the issue of whether venue was proper under 28 U.S.C. § 1408 was only raised in a reply brief by one of the movants, the Court would not consider the issue and assumed venue was proper under 28 U.S.C. § 1408. Under section 1412, the Court has discretionary power to transfer a case if the transfer would be in the best interest of justice or for the convenience of the parties.
In considering whether the case should be transferred in the interest of justice, the court considers whether (i) transfer would promote economic and efficient administration of the bankruptcy estate, (ii) the interests of judicial economy would be served by the transfer, (iii) the parties would be able to receive a fair trial in each of the possible venues, (iv) either forum has an interest in having the controversy decided within its borders, (v) the enforceability of any judgment would be affected by the transfer and (vi) the debtor's original choice of forum should be disturbed. In considering the convenience of the parties, the court looks at six factors: (i) proximity of creditors of every kind to the court, (ii) proximity of the debtor, (iii) proximity of witnesses necessary to the administration of the estate, (iv) location of the assets, (v) economic administration of the estate and (vi) necessity for ancillary administration if liquidation should result.
After a careful analysis of all of those factors, the Court found that a transfer of venue was appropriate because, among other things, "the thin nexus of the Debtor to the Southern District of New York, and the overwhelming contacts between the Debtor and Eastern District of California, combined with no overriding factors making it substantially more likely that the Debtor's prospects for a successful reorganization would be enhanced if this Court were to retain jurisdiction, raise serious questions whether the Court would abuse its discretion if it denied the motion to transfer venue in the interests of justice." In re Dunmore Homes, Inc., No. 07-13533 (MG), slip op. at 20 (S.D. N.Y. Jan. 14, 2008).
The Court found that where the Debtor's connections, including the majority of a Debtor's creditors and contacts, were in California, which could create, among other things, geographical hardships on the parties involved, the Court would exercise its discretion to grant the Motion and transfer the bankruptcy case to California.
Authored by:
(212) 332-3525
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