Bankruptcy Court Demolishes Baseless Lender Liability Complaint

A Delaware bankruptcy court held on Nov. 16 that a secured lender with a $128 million claim could credit bid at a judicial sale of a Chapter 11 debtor's assets, after dismissing the expansive complaint filed against the lender by the creditors' committee in the debtor's case (claims for recharacterization of debt as equity; equitable subordination; breach of fiduciary duty; invalid loans; voidable liens; and preference liability). Creditors' Committee of Radnor Holdings Corp. v. Tennenbaum Capital Partners, LLC, et al. (In re Radnor Holdings Corp.), 2006 WL 3346191 (Bankr. D. Del. 11/16/06). In his no-nonsense opinion, which relied heavily on the Third Circuit's Jan. 6, 2006, decision in Cohen v. KB Mezzanine Fund II, L.P. (In re SubMicron Systems Corp.), 432 F.3d 448 (3d Cir. 2006) (held, creditor's debt recharacterization and equitable subordination claims against lender failed because documents were debt instruments and because creditors had not been injured), bankruptcy judge Peter J. Walsh provided a road map that should sharply curtail the baseless, extortionate demands too often made by some creditors in large reorganization cases.