All items from Business Finance & Restructuring News - Weil

“So make your life a little easier; When you get the chance, just take; Control”
– Janet Jackson
We know that a corporate parent cannot use its control over its subsidiary to deplete it of value and render the entity insolvent.  Veil-piercing and claims to recover fraudulent transfers or for breach of fiduciary duty (among others) can remedy such wrongful acts.  But can a subsidiary corporation wrongfully manipulate its parent?  If so, what is the remedy?
In Burtch v. Owlstone, Inc. (In re Advance Nanotech, Inc.), the United States Bankruptcy Court for the District of Delaware concluded that yes, children can control their parents, and yes, they can owe “upstream” fiduciary duties to their shareholders.  Consequently, the parties controlling a transaction should take particular care in ensuring that they are aware to whom exactly they owe their duties and that the various parties to any transaction are all at appropriate arm’s length.

Posted 14 hours 36 min ago

“Break-up fees,” a common deal-protection construct, both inside and outside of chapter 11, are designed to compensate an initial bidder or prospective lender for the time and money invested in formulating and documenting a transaction and establishing a “floor” for potential terms.  In recent years, however, courts have been critical of break-up fees and other bidding protections on the basis that such protections are unnecessary to safeguard lenders and may discourage debtors from exploring higher and better offers for the benefit of the estate and creditors.  So-called “stalking horse bidders” and break-up fees took yet another hit, in a recent decision, In re C & K Market, Inc., by the United States Bankruptcy Court for the District of Oregon, which ruled that a break-up fee for a prospective debtor-in-possession (DIP) financing lender was a prepetition claim not entitled to administrative expense priority.

Posted 1 day 12 hours ago

The highly publicized Fisker credit bidding decision has received much attention on our blog.  As we previously wrote, while some may argue that post-Fisker credit bidding concerns are unwarranted, the decision at least raises the question of what constitutes sufficient “cause” to limit credit bidding.  Well, it did not take long for the first Fisker domino to fall. 
The issue resurfaced last week when Judge Huennekens, United States Bankruptcy Court Judge for the Eastern District of Virginia, entered his Memorandum Opinion citing to Fisker as support for his decision to cap a secured lender’s ability to credit bid in the bankruptcy case of Free Lance-Star Publishing Co.  Although some of the same factors that existed in Fisker existed in that case (a less-than-complete collateral package, inequitable conduct on the part of the secured creditor), the court’s very harsh language directed at the mere use of a loan-to-own strategy may have distressed debt investors fearing a Fisker avalanche.

Posted 2 days 13 hours ago

Among equitable doctrines, the doctrine of equitable mootness — which essentially allows courts to dismiss appeals from bankruptcy confirmation or sale orders where, as a result of the plan going effective or the sale closing, granting the relief requested in the appeal would be inequitable — is well known.  Indeed, in the Second Circuit, it is arguably among the most significant legal rules that provide certainty to parties to a corporate transaction in a bankruptcy case.  The doctrine’s emphasis on the importance of finality to the successful operation of our federal bankruptcy system can be viewed as a pragmatic solution by the appellate courts to the otherwise uncertain, litigious, and time-sensitive nature of a bankruptcy case.
A perhaps lesser known — but equally powerful — equitable doctrine in the context of bankruptcy appeals is that of judicial estoppel.  Judicial estoppel prevents a party from contradicting previous declarations made, or actions taken, during the same or a later proceeding if the change in position would adversely affect the proceeding or constitute a fraud on the court.  The Supreme Court of the United States has explained that, while the “circumstances under which it can be invoked are likely not reducible to any general formulation or principle,” there are several factors that inform the decision whether to apply the doctrine in a particular case:

Posted 3 days 14 hours ago

An important issue in determining whether a transfer is avoidable as a constructive fraudulent transfer is determining whether the debtor received reasonably equivalent value in exchange for the transfer.  If the debtor receives reasonably equivalent value in exchange for assets transferred prior to the bankruptcy, there is no constructive fraud.  While section 548(d)(2)(A) of the Bankruptcy Code defines “value” as “property or satisfaction or securing of a present or antecedent debt of the debtor,” the Bankruptcy Code does not define “reasonably equivalent value.”
Courts treat reasonably equivalent value as a question of fact and determine whether a value is reasonably equivalent on a case-by-case basis.  “Reasonably equivalent” is not synonymous with fair market value; instead, fair market value is one of a number of important elements in a “totality of the circumstances” analysis.  Another important element used in courts’ analysis is good faith.  A recent decision from the Bankruptcy Court for the District of Colorado, Mercury Companies, Inc. v. FNF Security Inc. (In re Mercury Companies, Inc.), advises that a purchaser’s mere knowledge of a seller’s financial distress does not preclude a finding of a good faith transfer.

Posted 6 days 12 hours ago

Does the creditor asserting a “subsequent new value” exception to preference liability have to be the creditor that provided the value directly to the debtor?  In In re LGI Energy Solutions, Inc., the Eighth Circuit became the first court of appeals to interpret section 547(c)(4) of the Bankruptcy Code under such facts.
Before its bankruptcy, the debtor provided bill payment services to its clients, large utility customers such as restaurant and fast food chains.  During the 90 days prior to bankruptcy, the debtor made transfers totaling approximately $259,000 to two utilities to pay outstanding invoices for services provided to the debtor’s clients.  The debtor’s chapter 7 trustee sought to recover the payments from the utilities as avoidable preferences under section 547(b) of the Bankruptcy Code.  In response, the utilities asserted the subsequent new value defense under section 547(c)(4).

Posted 1 week 14 hours ago

An important factor in many successful chapter 11 reorganizations is the debtor’s ability to procure necessary goods and services postpetition.  Without some additional incentive, however, third parties would be unlikely — if not altogether unwilling — to do business with a debtor postpetition.  To this end, the Bankruptcy Code includes a number of provisions aimed at encouraging third parties to conduct business with chapter 11 debtors.  One of the Bankruptcy Code’s most powerful incentives in this regard is section 507(a)(2)’s grant of priority for the “actual, necessary costs and expenses of preserving the estate” allowed as administrative expenses under section 503(b)(1).  These provisions ensure that vendors providing postpetition goods and services to the debtor will generally receive payment ahead of the debtor’s prepetition unsecured creditors.

Posted 1 week 1 day ago

Recently, the Eleventh Circuit Court of Appeals issued a decision in Menotte v. United States (In re Custom Contracting LLC) that serves as a harsh reminder of the consequences of being on the wrong side of unfavorable facts (if not unfavorable law).  In Menotte, a chapter 7 trustee attempted to recover estimated income tax payments made by an insolvent debtor, on behalf of its principal, to the IRS.  The problem?  The IRS had already refunded the money to the debtor’s principal, who never returned the money to the debtor.  Though the bankruptcy court found in favor of the trustee, the district court reversed the decision.  On appeal, the Eleventh Circuit held that the IRS could not qualify as an “initial transferee” under section 550 of the Bankruptcy Code on account of estimated income tax payments because the IRS already had refunded the payments.
In 2006, Brian Denson formed Custom Contracting, LLC as a single-member LLC structured as an S-corporation.  As an S-corporation, the debtor did not pay federal income tax.  Instead, profits—if any—passed through to Denson who then paid taxes on income earned through the Custom Contracting.

Posted 1 week 2 days ago

This article has been contributed to the blog by Caitlin Fell and Jamie Rosenblatt. Caitlin Fell is an associate in the Insolvency & Restructuring group of Osler, Hoskin & Harcourt LLP and Jamie Rosenblatt is an articling student at Osler, Hoskin & Harcourt LLP.
In Re Colossus Minerals Inc. (2014), 2014 CarswellOnt 1517, 2014 ONSC 514 (Ont. S.C.J.), a debtor company filed a notice of intention to make a proposal under section 50.4(1) of the Bankruptcy and Insolvency Act (the “BIA”). Pursuant to section 65.13 of the BIA, the Ontario Superior Court of Justice approved the debtor’s proposed sale and investor solicitation process (the “SISP”). The Court also granted the other relief sought, including: a DIP Loan and DIP Charge, an Administration Charge, and a Directors’ and Officers’ Charge.
Proposals under the BIA

Posted 1 week 3 days ago

As we have noted in number of previous posts, auctions under section 363(b) of the Bankruptcy Code end with the bankruptcy judge’s gavel, not the auctioneer’s.  To the dismay of many readers, the delay between concluding an auction and court approval leaves open the possibility of post-auction bids that leaves the debtor/trustee to choose between a higher and/or better offer and preserving the integrity of its auction process.  In a recent decision, the United States Bankruptcy Court for the District of New Mexico allowed a higher post-auction bid and re-opened the auction, reasoning that the winning bid at auction could not be approved because the court could not make a finding that a sale pursuant to that bid was in the best interests of the estate.
The Facts

Posted 1 week 6 days ago