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First and Second Liens

By ALM Staff | Law Journal Newsletters |

One of the leading issues currently faced by bankruptcy practitioners can be found in the frequently recurring disputes between first and second lienholders ' an issue that was recently addressed in the context of a ' 363 sale. In Contrarian Funds, LLC v. Westpoint Stevens, Inc. (In re Westpoint Stevens, Inc.), 333 B.R. 30 (S.D.N.Y. 2005), the United States District Court for the Southern District of New York (the District Court) reversed a ' 363(b) sale order (Sale Order) of the bankruptcy court on the grounds that the Sale Order authorized an in-kind distribution of equities ' rather than cash ' to first lien holders outside the Chapter 11 plan confirmation process. The District Court held that: 1) in-kind distributions impaired the contractual rights of first lien holders to cash consideration; 2) such distributions were not sanctioned by Sections 105(a) and 363(b) of the Bankruptcy Code; and 3) '[no] decrease in the value of the [second lien holders'] interests in the replacement collateral would result from the Debtors' retention of the replacement collateral pending confirmation of a plan or other appropriate conclusion of the bankruptcy proceedings.'

The secured creditors held perfected liens in Westpoint's assets. The Sale Order in Westpoint provided for the sale of the debtor's assets, free and clear of all liens. The Sale Order further provided that secured creditors were to receive cash and replacement liens in the purchaser's securities, and that the cash and securities were deemed to fully satisfy the secured creditors' claims, thus terminating their liens.

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