Deepening Insolvency Lender's Victory over Trustee May Have Far-Reaching Implications
January 25, 2005
The decision by Chief Judge Stuart M. Bernstein of the United States Bankruptcy Court for the Southern District of New York in <i>In re Global Service Group LLC</i>, 316 B.R. 451 (Bankr. S.D.N.Y. 2004), provides a sense of relief not only for lenders, but also for various other participants in the bankruptcy arena who may face claims based on "deepening insolvency." This case is especially significant because it helps define the conduct that may subject a party to liability under an amorphous concept that is still evolving.
Restructuring AMERCO
January 25, 2005
When AMERCO, the parent company of U-Haul International, emerged from bankruptcy protection in March 2004, it secured an unusual place in history -- exiting Chapter 11 with a global capital restructuring that resulted in zero dilution in shareholder value. Alvarez & Marsal, which was retained as the company's financial advisors, executed one of the most successful restructurings on record by developing and implementing a complex and consensual plan that required significant negotiations with a diverse group of debt and equity holders. By the end of the swift process, AMERCO's common equity value had increased by over 350% and nearly $300 million in value was restored to the investments of preferred stock and unsecured debt holders.
In Search of the Holy Grail
December 27, 2004
<b>Part Two of a Two-Part Article.</b> In our article that appeared in last month's issue, we discussed the special rule contained in Section 382(l)(5) with respect to the use of net operating losses by a company that has restructured under the protection of the bankruptcy court. Where the stock, debt and claims against a bankrupt company are traded, companies execute lock up agreements with their stockholders or request orders from the bankruptcy court to restrict trading in the stock, debt or claims so as to protect its net operating loss carry forwards. Often, out of an excess of caution, the orders requested have been overly broad and have disrupted trading in such debt and claims. On Nov. 22, 2004, The Bond Market Association and The Loan Syndications and Trading Association announced that in a joint effort they had developed a model NOL order to address these disruptions. Part Two discusses the results.
Section 547(C)
December 27, 2004
In recent years, one of the hottest topics in bankruptcy law has been the use and appropriateness of critical vendor orders (hereinafter, CVOs). Critics argue that CVOs directly contradict the mandate of the Bankruptcy Code requiring equal treatment of similarly situated creditors. Even worse, critics point out, is that requests for CVOs are often presented, and the CVO entered, in the first days of a Chapter 11 bankruptcy case on shortened and limited notice to a minimal amount of creditors, days or weeks prior to the appointment of any statutory committees under Section 1102. Thus, it is often the case that the very creditors that are being discriminated against by court sanctioned preferential behavior are not given the notice and/or do not have the knowledge to allow them to appear and object to the entry of the CVO.
Delaware Chancery Court Takes Fresh Look At Zone of Insolvency
December 27, 2004
Over a decade ago, a Delaware Chancery Court's footnote in <i>Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications</i>, 1991 WL 277613 (Del. Ch. 1991), established the "zone of insolvency" as something to be feared by directors and officers and served as a catalyst for countless creditor lawsuits. Claims by creditors committee and trustees against directors and officers for breach of fiduciary duties owed to creditors have since become commonplace. But in a decision that may have equally great repercussion both in the Boardroom and in bankruptcy cases, the Delaware Chancery Court has revisited zone-of-insolvency case law and limited this ever-expanding legal theory.
The Devil in the Details
December 27, 2004
In theory, a borrower's issuance of junior secured debt is a boon for its senior secured lender. The borrower obtains additional capital, and the claims of the junior lender against shared collateral, since "subordinated," don't diminish the senior lender's prospects for repayment. In practice, however, a senior secured lender should view proposed junior secured financing skeptically because the existence of such debt can become highly problematic for the senior lender. The key to protecting the senior lender lies in properly negotiating and documenting the intercreditor agreement with the junior lender to eliminate, or at least minimize the myriad of ways in which the junior lender's rights may, in practice, limit -- or even trump -- those of the senior lender.
The Trouble with Constructive Trusts
November 29, 2004
The equitable remedy of constructive trust is employed when "property has been acquired in such circumstances that the holder of the legal title may not in good conscience retain the beneficial interest," and therefore equity converts him into a trustee. <i>In re Koreag, Controle et Revision S.A.</i>, 961 F.2d 341, 353 (2d Cir. 1992). This legal theory arises in bankruptcy cases when a non-debtor party with a pre-petition contract, which ostensibly grants such party an ownership interest in funds or which establishes an agency relationship with a debtor, seeks, in the bankruptcy case, to assert its ownership rights to the funds held by the debtor.
The Costly Road
November 29, 2004
The voluntary winding-up (<i>liquidation volontaire</i>) of a corporation is one of the many, though expensive, options available to shareholders wishing to withdraw from a corporation facing financial difficulties. Other options include the sale of their stake or of the corporation itself, possibly following a restructuring. The corporation may be sold as a whole or, where these exist, through the divestment of one or more branches of activity. The transaction may then be effected through various share deals for the different subsidiaries, or through the sale of assets, subsequent to which the corporation will still have to be wound up. A lease of business (<i>location g'rance</i>) followed by the sale of the business may also be an option.
