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SDNY Bankruptcy Court Allows Unamortized Original Issue Discount As a Claim

By Michael J. Sage and James O. Moore
March 25, 2014

The Bankruptcy Court for the Southern District of New York (the bankruptcy court) recently held that unamortized interest associated with original issue discount (OID) originating from a fair market value exchange constitutes an allowed bankruptcy claim. While there was caselaw both in the Second and Fifth Circuits holding that a face value exchange does not generate new OID for the purposes of claim allowance under the Bankruptcy Code, until 2013, no court had yet decided the same question in the context of a fair market value exchange. When the issue squarely arose in the ResCap bankruptcy cases, the bankruptcy court considered the question as a matter of first impression and issued an opinion allowing the unamortized interest associated with OID claimed by ResCap's junior secured noteholders (the Holders). See Official Comm. of Unsecured Creditors v. UMB Bank (In re Residential Capital, LLC), 501 B.R. 549 (Bankr. S.D.N.Y. 2013) (the Opinion).

The OID ruling is just one component of the Opinion, which more generally established that the Holders' claims are undersecured and thus not entitled to postpetition interest and fees. This article, though, focuses on only the OID ruling aspect of the Opinion because it will have far reaching implications, especially in the pricing of other OID notes that are the product of fair market value exchanges.

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