All items from Business Finance & Restructuring News - Weil

This article has been contributed by Julien Morissette, associate in the Insolvency and Restructuring Group of Osler, Hoskin & Harcourt LLP.
The approach to be used for insolvent single asset real estate companies has been debated before Canadian courts for some time. Typically, the companies want to continue operating and attempt a restructuring, while the first ranking secured creditor wants to foreclose or appoint a receiver. The debate often came down to who should benefit from any upside. While certain courts have been receptive to secured creditors, in a recent judgment the Superior Court of Québec allowed a one-building company to attempt a restructuring, a result which should be noted by the insolvency and financing communities.
Casperdiny IFB Realty Inc. (Casperdiny) and Les Appartements Club Sommet Inc. (together with Casperdiny, the Debtors) were the developers of a 291 unit apartment tower in downtown Montréal. They were in default of making payments to their creditors, including importantly the first ranking secured creditor, Timbercreek Senior Mortgage Investment Corp. (Timbercreek).

Posted 12 weeks 21 hours ago

Meridian Sunrise Village, LLC v. NB Distressed Debt Investment Fund Limited, No. 13-5503RBL, 2014 WL 909219 (W.D. Wash. March 7, 2014).
What You Need To Know:  Buyer beware: Distressed debt investors who purchase the debt of a borrower in bankruptcy, where the borrower’s underlying loan agreement contains an “Eligible Assignee” restriction, may be at risk of not being able to hold such debt and exercise the rights of a lender.  Meridian Sunrise turned on a choice between two competing interpretations of “financial institution” under a $55 million loan agreement governed by Washington state law.  In this case, distressed debt funds were held not to be “financial institutions” by the United States District Court for the Western District of Washington and were therefore not “Eligible Assignees.”  It may seem obvious, but purchasers of distressed debt from debtors/borrowers in the secondary market should review loan agreements governing the debt they purchase, confirm they are permitted assignees of the paper, and ensure they have recourse against the seller of the debt in the event of ambiguity or challenge.

Posted 12 weeks 2 days ago

In a decision resolving an interlocutory bankruptcy appeal, the United States District Court for the Southern District of New York concluded that certain prepetition federal claims based on the False Claims Act asserted against the reorganized debtor, a military aircraft manufacturer, might not be dischargeable despite the debtor’s confirmed plan.  In United States ex rel. Minge v. Hawker Beechcraft Corporation, the district court reversed the bankruptcy court and ruled that the exceptions to the corporate discharge provisions under section 1141 of the Bankruptcy Code did not incorporate the procedural requirements under section 523 and Rule 4007(c) of the Federal Rules of Bankruptcy Procedure, which mandated the commencement of an adversary proceeding to determine dischargeability prior to a set deadline.  The district court concluded that because the plaintiffs alleged the debtor’s fraud in government contracting, the FCA claims could fall under the provision of the Bankruptcy Code that excepts from discharge those debts that were obtained by “false pretenses, a false representation, or actual fraud . . . .”
The FCA Claims

Posted 12 weeks 4 days ago

“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 12 weeks 6 days 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 12 weeks 6 days 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 13 weeks 23 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 13 weeks 1 day 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 13 weeks 4 days 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 13 weeks 6 days 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 14 weeks 1 hour ago