Dechert OnPoint: NDNY Bankruptcy Court's Broad Interpretation of the Definition of "Interests" in 363 Sale

Posted on April 11, 2013 by Matthew Ginsburg

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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SCOTUS' RadLAX Decision Affirms Lenders' Rights to Credit Bid in Chapter 11

Posted on May 31, 2012 by Matthew Clark

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 3rd, 5th and 7th 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.

As background, in order for a cramdown plan to be confirmed over the objection of a class of secured creditors, the plan must be deemed to be “fair and equitable” – a determination requiring that one of three tests be met.  One test (relating to 363 sales (1129(b)(2)(A)(ii)) specifically requires that the secured creditor be permitted to credit bid.  However, an alternate test (1129(b)(2)(A)(iii)) requires only that the secured creditor be provided with the “indubitable equivalent” of its claim.  The 3rd and 5th Circuits interpreted these criteria as wholly independent of each other and therefore determined that a lien-free sale of assets by a debtor that would provide a secured creditor with the “indubitable equivalent” of its claim would be permitted under (iii) - notwithstanding the fact that the creditor was precluded from credit-bidding (in apparent violation of (ii)).

 

The 7th Circuit took a differing view in RadLAX when considering a plan similar in many respects to those confirmed by the 3rd and 5th.  In RadLAX, the Appeals Court prevented the confirmation of a plan that proposed auctioning the property (presumably to a stalking horse bidder for an amount reported to be approximately $50 million) and using the sale proceeds to repay secured creditors because those secured creditors were prohibited from credit-bidding.  In affirming the lower court’s decision, Scalia commented that a statutory interpretation that would allow the “indubitable equivalent” test to permit what the “363-sale test” would proscribe “to be hyperliteral and contrary to common sense”.  (His words not mine.) 

 

With June’s annual flood of decisions from the Supremes nigh, this decision stands as an important one for real estate lenders – granting lenders a critical strategic advantage over what shape a Chapter 11 plan might take.

 

By:  Matthew Clark and Eric Kotloff with Kaitlin McGrath
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Leaving Las Vegas: Further Thoughts on the ASF 2012 Conference

Posted on February 13, 2012 by Ralph Mazzeo

The ASF 2012 Conference held last month in Las Vegas was a success by any measure and attracted an impressive number of attendees (4,500).  Attendees were happy to escape New York and other chilly locales and attend some great panel discussions on securitization, regulatory developments and mortgage servicing (or, for some, at least read about those panels the next morning on their iPhones while waiting to tee off).  The owners of the Aria will definitely be able to make their mortgage payment this month with all of the money left behind by ASF attendees. 

My Dechert colleagues and I who attended the Conference cover almost all of the securitized asset classes.  As I described in my blog from the Conference, your particular view of the Conference depends largely on what asset class you focus on in your practice – autos and CLOs, for example, look very strong.  As someone who spent unimaginable amounts of hours of my pre-credit crisis life drafting RMBS deal documents, I yearn for the return of the public RMBS deals  - and not just because I miss spending my days (and most nights) trying to describe in “Plain English” the waterfall on a multi-group negative amortization deal.  I truly believe that we can’t have a meaningful recovery in the housing market without the return of private-label RMBS.  But regardless of what particular asset type you follow, there was undeniably a lot of buzz surrounding a couple of topics. 

It was clear from a Tuesday afternoon panel that the waves of civil litigation in the RMBS industry will continue to crash on the shores of every major financial institution.  Did you actually think that the statute of limitations would prevent plaintiffs from pursuing claims?  Unfortunately, in an effort to prove that the government can perform any task better than private actors, President Obama announced at his State of the Union address (televised on the last night of the Conference) that he was forming a new financial crimes unit to pursue mortgage securities fraud during the financial crisis.  Wells notices are flying out of D.C. at a rate only surpassed by the dollars coming off the printing presses at the U.S. Mint.  It’s ironic that this new focus of investigation is kicking off at the same time that a $25 billion agreement was reached with five large mortgage banks to settle federal and state investigations in 49 states into alleged foreclosure abuses.  (Oklahoma reached its own settlement with the banks on Thursday.)  Note also that the “settlement” doesn’t prevent individual borrowers from continuing to bring claims.  Some of my litigation partners and I plan to host a seminar in our NY office this spring to offer our clients and friends much more detail on all of these developments - I’ll inform you of the particulars of that event in a subsequent blog. 

But the other big topic that continues to garner a lot of attention is how to effectively manage the liquidation of the huge inventory of foreclosed homes on the balance sheets of the banks and the GSEs.  Analysts estimate that there are 500,000 REOs on the balance sheets of the GSEs and private lenders, and the number is obviously expected to increase as foreclosures continue at a high rate.  How then do banks liquidate these properties without having to sell them at fire sale prices and without putting downward pressure on a housing market that is desperately trying to plateau and inch upward in many markets?  With demand for rentals rising in many markets, there is a lot of buzz among private equity investors with the idea of buying up bundles of REO, renting them out for 1-5 years, and then flipping those properties when home values recover.  And the lenders sitting on a huge inventory should welcome this new investment strategy as such investors should drive up the bids for REO.  But the key to all of this happening is on what terms can investors get financing for the bundle of REOs they intend to buy up.  I think this discussion will dominate the residential market for the next year and may well be the key to a meaningful economic recovery.  Stay tuned for more information on a Dechert sponsored webinar on this topic.

 

By: Ralph Mazzeo
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