(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· CSFB should have withdrawn the fairness opinion, or issued a new one, after the market price for dot-com stocks began to decline.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
]]>Under the lease, the successful party in litigation between the landlord and the tenant was entitled to recover attorneys' fees from the losing party. The trial court concluded that both the tenant and the Assignee were liable for the landlord's attorneys' fees under the lease since the Assignee did not succeed in suing for return of the security deposit.
Concluding that the Assignee as part of the ABC did not assume the tenant's liabilities under the lease, the appellate court held that the Assignee was not liable for the landlord's attorneys' fees. "The procedure of an assignment for the benefit of creditors would be eviscerated if an assignee were required to assume the underlying liabilities of the assignor's insolvent business."
In considering an ABC as an alternative insolvency proceeding to Chapter 11, this case is good for assignees, insolvent companies, and potential purchasers. Together with Credit Managers and Haberbush, Sherwood II gives assignees comfort in accepting ABCs, which in many situations can be the most efficient and economical way to effectuate a sale of a distressed company.
Landlords and other non-assignor parties with attorneys' fees provisions in their contracts may feel differently. After all, the Assignee sued the landlord, lost the lawsuit, and was not obligated to pay the landlord's attorneys' fees. All hope for the landlord, however, might not be lost. The landlord still would have a claim against the ABC estate (as opposed to the Assignee personally) for the attorneys' fees. In Sherwood II, the Assignee did not appeal the trial court's award of attorneys' fees to the landlord against the assignor. While that claim typically would be worth only cents on the dollar if treated as an unsecured claim, the landlord might have an argument that the claim is entitled to administrative priority, which could make the claim more valuable. Sherwood II did not address the priority of the landlord's claim for attorneys' fees against the ABC estate. In any case, in Sherwood II, the California state courts have again shown approval for ABCs in California.
Authored by:
Theodore A. Cohen(213) 617-4237
]]>The Debtor's plan of reorganization, which did not contain a provision assuming or rejecting all executory contracts, provided for the Debtor to retain property of the estate and maintain its legal form. The January 2003 order confirming the plan provided for 100% payment to creditors through the Debtor's future operations. A few months after the closure of the Debtor's chapter 11 case in April 2003, the license became nonexclusive. Because no agreement had been reached to purchase the technology, the Debtor sued Diamond Z in October 2004 in state court seeking declaratory judgment that the license agreement was still in effect and that Diamond Z manufactured grinders in breach of the agreement.
The bankruptcy court reopened the case to hear the Debtor's motion for an order confirming the ride through of the licensing agreement. Diamond Z argued that the Debtor lacked standing to sue in the state court and, in any event, should be judicially estopped from enforcing the license agreement since it failed to disclose it in bankruptcy. Of note, the bankruptcy court held that: (1) the Debtor had standing to bring the state court action for breach of the undisclosed license agreement; and (2) the license agreement "rode through" the bankruptcy despite the lack of disclosure. On appeal, the Bankruptcy Appellate Panel for the Ninth Circuit ("Ninth Circuit BAP") affirmed.
As to the failure to disclose the license agreement, the Ninth Circuit BAP was not persuaded by the Debtor's argument that it was not required to disclose the agreement because the law is unsettled regarding whether an executory contract becomes property of the estate. The court stated that a "debtor who lists only those items that the debtor believes are property of the estate improperly truncates the creditor/trustee review process and usurps the role of the court." A Debtor is required to list all contracts, executory or otherwise, on its schedules. Nonetheless, the Ninth Circuit BAP found that when creditors were paid in full in the Debtor's chapter 11 case it was difficult to identify a party that suffered harm as a result of the Debtor's omission. Furthermore, the party making the argument, Diamond Z, also failed to disclose the license to the bankruptcy court, and thus, did not have the "clean hands" necessary to make such an argument.
As to the issue of standing, the Ninth Circuit BAP held that the Debtor had standing to sue for breach of the unscheduled license agreement in state court because the Debtor was revested with all scheduled and unscheduled property of the estate upon plan confirmation pursuant to Bankruptcy Code section 1141(b). The Ninth Circuit BAP held that this ruling is consistent with Bankruptcy Code section 554(d), which states that all unscheduled property of the estate remains property of the estate even after the case is closed. Once a chapter 11 plan is confirmed, Section 1141(b) vests all estate property in the debtor, which includes any unscheduled property. Thus, the Debtor in Diamond Z Trailer had standing to sue on for breach of the license agreement because it controlled all property of the estate after its chapter 11 case closed.
The vesting rule of Section 1141(b) does not give unlimited control over unscheduled assets to a debtor, however. The Ninth Circuit BAP held that Ninth Circuit Court of Appeal decisions Cusano v. Klein, 264 F.3d 936 (9th Cir. 2001) and Hay v. First Interstate Bank of Kalispell, N.A., 978 F.2d 555 (9th Cir. 1992) impose equitable constraints on the Debtor's entitlement to unscheduled property. Neither case held that undisclosed assets did not vest in the debtor pursuant to Section 1141(b). Yet, in both Cusano and Hay, judicial estoppel was imposed on a debtor in the same chapter 11 unscheduled property situation (i.e., the debtor was not permitted to file an action for its own advantage as to property that was not disclosed to creditors in bankruptcy). In sum, the Ninth Circuit BAP reasoned that property of the estate vested in the debtor by virtue of Section 1141(b) may, in appropriate circumstances, be subjected to equitable constraints with respect to such property. Each situation must be evaluated on its own facts with remedies fashioned based on the particular situation. In Diamond Z, the Court determined that equitable constraints were not required because no creditors were harmed, having been paid in full pursuant to the Debtor's plan, and Diamond Z also failed to disclose the license agreement to the bankruptcy court, and thus, did not have the clean hands necessary to seek an equitable remedy.
As to the effectiveness of the license agreement, the Ninth Circuit BAP held that the "ride through" doctrine developed under the Bankruptcy Act of 1898 survives and applies to executory contracts that are neither assumed nor rejected under Section 365(a) during the course of a chapter 11 case in which a plan is confirmed. Based on an analysis of Bankruptcy Code sections 365(a), 365(d)(1), 365(d)(2) and 1123(b)(2), the Ninth Circuit BAP held that in a chapter 11 there are three alternatives with respect to executory contracts: assumption, rejection or no action. Assumption and rejection under Section 365(a) and 365(d)(2) is permissive. Similarly, assumption and rejection of an executory contract through a chapter 11 plan are permissive. 11 U.S.C. 1123(b)(2). The fact that these actions are permissive means that neither action must occur, and that a different option exists. The alternative to assumption or rejection is that the contract rides through the bankruptcy and remains effective between the parties. Shedding further light on this issue, Section 365(d)(1) states that if the trustee does not assume an executory contract in a chapter 7 case, it is deemed rejected. The Ninth Circuit BAP noted that chapters 9, 11, 12 and 13 are expressly left out of this provision, presumably to provide flexibility to deal with executory contracts in these cases and permitting ride through as an option.
According to the Ninth Circuit BAP, the ride through doctrine was well established in the Bankruptcy Act. As a corollary to the general ability to assume and assign all contracts under the Bankruptcy Act, the debtor's failure to assume a contract did not result in rejection, allowing the contract to "ride through" the bankruptcy and remain in effect. The question is whether this "ride through" doctrine survives in the Bankruptcy Code. The Ninth Circuit BAP held that as a matter of statutory construction, the ride through doctrine did survive and was carried forward into the 1878 Bankruptcy Code at Section 365. A key rule of construction of the 1978 Bankruptcy Code is that doctrines under the Act continue unless Congress expressed a contrary intent. Nothing in the Bankruptcy Code or its legislative history suggests that Congress intended to alter the basic approach of assumption, rejection and ride through as alternatives. The First, Second and Fifth circuits have all recognized the ride through alternative. The Ninth Circuit BAP also noted that the absence of a bright-line rule regarding executory and non-executory contracts creates a "zone of uncertainty" that would be a trap for the unwary if the ride through doctrine did not exist. Accordingly, the Ninth Circuit BAP determined that the ride through doctrine does in fact exist under the Bankruptcy Code, and based on that doctrine, the Debtor's licensing agreement rode through bankruptcy and remained effective between the parties.
While Diamond Z Trailer is an example of the Ninth Circuit BAP's acknowledgement of the ride-through doctrine, the facts are relatively narrow. The Ninth Circuit BAP focuses heavily on the Debtor's failure to schedule the license agreement, and whether equitable concerns require a result other than ride through. Assuming the case has broader applicability, Diamond Z Trailer does not specifically address whether a contract may ride through the bankruptcy in the face of objections by parties in interest. However, the Ninth Circuit BAP clearly states that assumption or rejection of an executory contract is permissive under Bankruptcy Code sections 365(a) and 1123(b)(2). Moreover, the court notes that, in all chapters except chapter 7, where assumption or rejection may occur at any time before plan confirmation, a court is not required to grant a non-debtor's request to fix an earlier date for determination under Bankruptcy Code section 365(d)(2). According to the Ninth Circuit BAP, these provisions highlight the "flexibility preserved for chapters 9, 11, 12 and 13." The court further states that that a debtor's general ability to assume and assign contracts without a counterparty's permission facilitates reorganizations and was carried into the Bankruptcy Code at Section 365. Thus, while the court does not address the issue, the Diamond Z Trailer opinion certainly leaves open the possibility that a court may permit ride through of an executory contract notwithstanding objections.
In a similar vein, the case does not appear to foreclose ride through as a viable option for unassumable licenses in certain circumstances. See Perlman v. Catapult Entertainment, Inc. (In re Catapult Entertainment, Inc.), 165 F.3d 747 (9th Cir. 1999). For a further discussion on the topic of the availability of ride through for unassumable contracts post-Catapult, see Ohlgren and Kurth article entitled "Ride Through Revisited (Again): The Strategic Use of the Ride-Through Doctrine in the Post-Catapult Era", ABI Journal, Vol. XXIV, No. 5, June 2005.
Authored by:
(213) 617-5596
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By: Mary Johnson
]]>The Ninth Circuit ruled that the Bankruptcy Court had erred in not evaluating the impact and likelihood of a successful appeal on the feasibility of the Debtor's plan of reorganization. The Court seemingly expanded their decision in Pizza of Hawaii, Inc. v. Shakey's, Inc. (In re Pizza of Hawaii), 761 F2d 1374 (9th Cir. 1985) to require the court to evaluate not only open and unresolved litigation, but also to include an evaluation of litigation that is final but subject to appeal, when determining feasibility of a plan of reorganization.
The dissent pointed out that the lower court made a proper determination of feasibility based on the law at the time of confirmation and stated that the majority's ruling could undermine the importance of finality in bankruptcy proceedings.
Authored by:
(213) 617-4236
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