All items from Creditors' Rights

Seventh Circuit Expands its View on Indubitable Equivalent Cramdowns in In re River East Plaza, LLC

Last year the Seventh Circuit disagreed with opinions issued by the Third and Fifth Circuits on whether a debtor may confirm a plan under the Code's indubitable equivalent cram down provisions with a plan which provides for a sale of a secured creditor's collateral yet prohibits the secured creditor from credit bidding its claim. River Road Hotel Partners, LLC v. Amalgamated Bank, 651 F. 2nd 642 (7th Cir. 2011). The Supreme Court granted a petition for writ of certiorari on this issue under the name RadLAX Gateway Hotel, LLC v. Amalgamated Bank, No. 11-166, 2011 WL 3499633 (Dec. 12, 2011).



From Creditors' Rights
Posted 1 week 1 day ago

Tenth Circuit Prohibits Relief from Stay Where Bank Was Unable to Establish its Status as a "Party in Interest"

In In re Miller v. Deutsche Bank Nat’l Trust Co., 666 F.3d 1255 (10th Cir. 2012), the Tenth Circuit was faced with the determination of whether Deutsche Bank (the “Bank”) established that it was a “party in interest” and therefore, entitled to seek and obtain relief from the automatic stay.
Prepetition, the Debtors executed a promissory note (the “Note”) in favor of IndyMac Bank (“IndyMac”).  The Note was secured by a deed of trust (the “Deed of Trust”) on the Debtors’ real property.  The Debtors defaulted on the Note and the Bank, which claimed to be the current holder of the Note, filed a foreclosure action in Colorado state court (i.e. a Rule 120 Proceeding) seeking an Order Authorizing Sale (“OAS”).  The Debtors disputed the action by arguing that the state court lacked jurisdiction because the Bank lacked standing to seek an OAS because it was not an “interested person” for purposes of Colo. R. Civ. P. 120.  The state court disagreed and held that the Bank made a sufficient showing that it was an “interested person” because the Bank provided a copy of the Note, which had been indorsed in blank by IndyMac.  The Bank did not present the original Note to the state court.  The state court entered an OAS and found that the Bank had established jurisdiction.



From Creditors' Rights
Posted 2 weeks 5 days ago

Ninth Circuit Rejects Argument That a “Whole Enterprise Exception” Should Apply in Single Asset Real Estate Cases

Where a debtor which would otherwise be governed by the single asset real estate provisions of the Bankruptcy Code is one of many subsidiaries in a consolidated, interrelated enterprise, may it escape on that basis the SARE rules of the Code? The Ninth Circuit Court of Appeals has answered that question in the negative in its opinion in Meruelo Maddux Properties-760 S. Hill Street v. Bank of America. (9th Cir. 2012).
In Meruelo, the debtor ("MMP Hill") owned and operated a 92-unit apartment complex. The debtor was a subsidiary of Meruelo Maddux Properties, Inc. ("MMPI"). MMPI, the debtor and 53 of the debtor's affiliates also owned by MMPI, all filed chapter 11 petitions. The cases were jointly administered. MMPI utilized a centralized system to manage all of it's subsidiaries' properties on a consolidated basis. Revenues generated by all properties were swept each day into a consolidated account, with operating expenses for all subsidiary properties paid from the consolidated account.  Bank of America loaned MMP Hill $28.72 million, secured by a lien against MMP Hill's real estate. The bank was also an unsecured creditor of MMPI based on MMPI's guaranty of MMP Hill's debt.



From Creditors' Rights
Posted 3 weeks 1 day ago

Tenth Circuit BAP Approves Award of Attorneys Fees to Debtor’s Counsel Who Was Not Retained (Initially) by the Debt

The Tenth Circuit BAP recently entered an opinion affirming the bankruptcy court’s order awarding fees to debtor’s special litigation counsel in an unusual context—in which the special counsel was never retained pursuant to sec. 328.  The opinion is that of In re Market Center East Retail Property, Inc., BAP Appeal No. 11-107, March 6, 2012. 
In Market Center, the debtor had negotiated a sale of its real property to Lowe’s Home Center, Inc. for a purchase price of $13,500,000, with the sale set to close in February of 2009.  However, in December of 2008, blaming the bad economy, Lowe’s informed the debtor that it would not complete the transaction.
The debtor retained an attorney by the name of Barak Lurie to file suit against Lowe’s for its failure to complete the sale.  The fee arrangement negotiated between the debtor and Lurie was a blend of an hourly rate of $200 plus a contingent fee of 15% of any sums recovered in damages or the purchase price of the center.  Both the debtor and Lurie agreed that a settlement in the range of $200,000 was the maximum that they could reasonably expect.



From Creditors' Rights
Posted 5 weeks 1 day ago

9th Circuit BAP Rules that an Undersecured Creditor’s Right to Recover from a Non-Debtor Source is Grounds for Separate Classification of its Claim Under Section 1122

Section 1122 of the Bankruptcy Code provides that “a plan may place a claim or an interest in a particular class only if such claim or interest is substantially similar to other claims or interests of such class.”  In cases where the debtor’s bankruptcy proceedings are governed by the rules applicable to single asset real estate cases, a secured creditor’s deficiency claim—which often will be by far the largest unsecured claim in the case—is generally considered to be “substantially similar” to the debtor’s other unsecured claims and must be included in the same class.  This rule is designed to avoid gerrymandering classes in order to obtain an accepting impaired class. 



From Creditors' Rights
Posted 7 weeks 1 day ago

Utah Court of Appeals Rules that the Duty of Good Faith and Fair Dealing Cannot be Used to Vary the Clear Terms of a Contract

In its decision in Keybank National Association v. Systems West Computer Resources, Inc., 2011 UT 324 (2011) reiterated and strengthened prior rulings from Utah’s appellate courts that evidence supporting a claim of breach of the duty of good faith and fair dealing is not admissible to vary the clear terms of a contract.
In Keybank, the bank and its borrower entered into a revolving loan agreement which contained a specific maturity date.  Over the course of several years following the execution of the loan documents, the bank and the borrower entered into a series of agreements modifying the terms of the original loan agreement, with each extension also extending the maturity date of the loan by setting a new, specific maturity date. As is customary in this type of loan transaction, the loan documents required the borrower to pay the loan at maturity, and further provided that its failure to do so would constitute a default. The last such extension resulted in a maturity date of July 15, 2008.  Although Keybank had agreed to numerous extensions of the maturity date, nothing in the loan documents required it to extend the maturity date if the borrower was not otherwise in default under the loan documents.



From Creditors' Rights
Posted 11 weeks 1 day ago

Tenth Circuit Joins All Other Circuits in Holding the Automatic Stay Applies to Appeals by a Debtor of a Judgment in a Suit Brought Against Him

We reported earlier this year on the Tenth Circuit’s opinion in Chizzali v. Gindi (In re Gindi), 642 F.3d 865 (10th Cir. 2011), where the Tenth Circuit noted that it alone among the circuit court had held that the automatic stay does not stay an appeal by a debtor of a an adverse judgment in a lawsuit brought against the debtor.  However, because Mr. Gindi’s state court appeal had already run its course by the time the automatic stay issue was presented to it, the Tenth Circuit chose not to overrule its prior opinions, but did send a strong message that courts in the circuit may want to rule in the future that the automatic stay does apply to a debtor’s pending appeal from an adverse judgment in a case brought against him.
As it turns out, the Tenth Circuit recently was presented itself with the opportunity to reverse its prior opinions on the issue.  In TW Telecom Holdings, Inc. v. Carolina Internet, Ltd., 661 F.3d 495 (10th Cir. 2011).   TW Telecom obtained a default judgment against Carolina Internet in the United States District Court for the District of Colorado.  Carolina Internet perfected an appeal to the Tenth Circuit Court of Appeals.  After filing its appeal, Carolina Internet filed a voluntary petition under chapter 11 of the Bankruptcy Code in the Bankruptcy Court for the Western District of North Carolina. 



From Creditors' Rights
Posted 13 weeks 1 day ago

Lead Lender in a Participation Agreement Is Not an Initial Transferee Under Section 550(a)(1)

In case of apparent first impression, the United States Bankruptcy Court for the District of Kansas has held that a lead lender in a participation agreement, who receives loan payments from a debtor on behalf of all participating lenders, is not the initial transferee of the debtor’s payments under section 550(a)(1). 
The trustee of the bankruptcy estate of Brooke Corporation sued The Stockton National Bank (“Stockton”) and other lenders seeking to recover as preferential transfers payments made by the debtor to Stockton on a promissory note.  Stockton extended a loan to the debtor, which was reflected by the note.  Thereafter, Stockton sold participating interests in the note to eight other lenders, with the participation agreement providing that each purchasing lender would be considered for all purposes the legal and equitable owner of its share in the loan.  Stockton was appointed by the participating lenders as the administrator of the loan.  As the debtor made payments to Stockton, Stockton immediately forwarded each participating lender’s portion to it. 



From Creditors' Rights
Posted 15 weeks 1 day ago

Lead Lender in a Participation Agreement Is Not an Initial Transferee Under Section 550(a)(1)

In case of apparent first impression, the United States Bankruptcy Court for the District of Kansas has held that a lead lender in a participation agreement, who receives loan payments from a debtor on behalf of all participating lenders, is not the initial transferee of the debtor’s payments under section 550(a)(1). 
The trustee of the bankruptcy estate of Brooke Corporation sued The Stockton National Bank (“Stockton”) and other lenders seeking to recover as preferential transfers payments made by the debtor to Stockton on a promissory note.  Stockton extended a loan to the debtor, which was reflected by the note.  Thereafter, Stockton sold participating interests in the note to eight other lenders, with the participation agreement providing that each purchasing lender would be considered for all purposes the legal and equitable owner of its share in the loan.  Stockton was appointed by the participating lenders as the administrator of the loan.  As the debtor made payments to Stockton, Stockton immediately forwarded each participating lender’s portion to it. 



From Creditors' Rights
Posted 15 weeks 1 day ago

Update—Tenth Circuit Extends Application of the Automatic Stay to Pending Appeals

In May 2011, we posted an article entitled Tenth Circuit Signals a Change in Applying the Automatic Stay to Pending Appeals, which discussed the Tenth Circuit’s indication that it would overrule its prior interpretations of Section 362(a)(1) and extend the application of the automatic stay to pending appeals that were originally brought the debtor.  See Chizzali v. Gindi, (10th Cir. No. 10-1186, Feb. 14, 2011).  In Chizzali, the court refused to reach the issue but indicated that bankruptcy courts may wish to rule in the alternative in future cases.
Recently, however, the Tenth Circuit decided to finally overrule its prior interpretation of Section 362(a)(1) and to read "section 362…to stay all appeals in proceedings that were originally brought against the debtor, regardless of whether the debtor is the appellant or the appellee.  Thus, whether a case is subject to the automatic stay must be determined at its inception.  That determination should not change depending on the particular stage of the litigation at which the filing of the petition in the bankruptcy occurs."  T.W. Telecom Holding, Inc. v. Carolina Internet Ltd., 661 F.3d 495, 497 (10th Cir. 2011).  In overruling its prior interpretation of Section 362(d)(1), the Tenth Circuit noted that at least nine other circuit courts of appeals and Collier on Bankruptcy disagreed with its prior interpretation. 



From Creditors' Rights
Posted 16 weeks 2 days ago