CrunchedCredit : Capital Markets Finance and Real Estate Attorneys

A recent decision out of the Bankruptcy Court for the Northern District of New York has brought greater certainty to the interpretation of what qualifies as an “interest” when determining the scope of a Section 363(f) “free and clear” sale in bankruptcy. The decision in In re Tougher Industries, Inc. became the latest in a recent trend in the Second Circuit and elsewhere towards an expansive interpretation of what constitutes an “interest”, which should help bankruptcy estates (and creditors!) maximize the purchase price in asset sales.

As a bit of background, the sale of substantially all of the assets of two debtors was authorized by the Bankruptcy Court, which also expressly provided that the assets were being sold free and clear of all liens, claims, encumbrances, and interests as allowed under Section 363(f) of the Bankruptcy Code. The sale order specified that this included interests “relating to taxes arising under or out of, in connection with, or in any way relating to the operation of the Assets prior to the Closing….” The purchasers of the assets then continued to operate the business of the debtors after the sale.

Subsequently, the New York Department of Labor asserted that the debtors’ experience ratings (based on the time before the sale) would be used to calculate unemployment insurance tax premiums due from the purchasers. In response to a motion by the purchasers, the Bankruptcy Court adopted an expansive definition of “interest” to include the debtors’ experience rating as calculated by the DOL. The Bankruptcy Court specifically noted that its interpretation of “interest” was appropriate because it was consistent with the policy of maximizing the value of the asset and the return to creditors.

To read more about this recent decision, as well as the implications it will have on the price of assets sold in bankruptcy sales, check out this Dechert OnPoint by Dechert’s Business Restructuring and Reorganization group.

By: Matt Ginsburg and Linda Ann Bartosch

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Last October, I wrote about a scheme employed, in three separate bankruptcy cases, by debtors seeking to evade the absolute priority rule in order to keep the real property owned by the debtor in the hands of the ‘family’ at the expense of the debtors’ creditors.

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This is about bad law in the bankruptcy courts, but let us instructively begin with Charlie Brown. Bear with me. Everyone knows the classic Peanuts comic strip, which features the running joke of Lucy and Charlie Brown playing football – Charlie Brown goes to kick the football, only to have Lucy pull it away at the last second, leaving Lucy laughing and Charlie Brown on his back. Every time, Lucy promises Charlie Brown that this time she will let him kick the ball. Charlie Brown, blithely ignoring the obvious, goes to kick the football. Lucy, of course, pulls the ball away again, every time.

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May a Chapter 11 plan permit a debtor to auction property free and clear of a creditor’s lien while preventing that creditor from credit-bidding the amount of its debt?  A question that split the U.S. Circuit Courts was settled when earlier this week the Supreme Court came out 8-0 on the side of the secured creditors in a decision of paramount interest to lenders with bankrupt borrowers (Justice Kennedy took no part in the decision).

The concise, 12-page opinion penned by Justice Scalia in RadLAX Gateway Hotel v. Amalgamated Bank concludes that the debtor’s proposed auction procedures – which prevented the secured creditors from being able to credit-bid – could not satisfy the Code’s requirement that a cramdown be “fair and equitable” to non-consenting secured creditors.  Earlier cases from the 3^rd, 5^th and 7^th Circuits had created a split that called into question what had been, for many, an accepted tenant of the 363 sale – that a secured creditor could protect itself from the potential of a depressed auction price by credit bidding and obtaining the auctioned asset for its own account.

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Recently, the Ninth Circuit Court of Appeals brought smiles to the faces of many lenders (especially Bank of America, the appellee and secured lender) when it refused to combine the assets of related debtors without a substantive consolidation order and held that a single asset real estate debtor will be treated as a single asset real estate debtor.

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