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35 Ostrow[1] - Hot Topics in Bankrupcy Alec Ostrow Comments...

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Unformatted text preview: Hot Topics in Bankrupcy Alec Ostrow Comments and opinions expressed by the speaker do not necessarily reflect the positions, opinions or beliefs of the AICPA and should not be construed or interpreted as such. Speakers retain the copyright for all of the following materials. Any replication without written consent is unlawful. Session 35 AICPA NATIONAL FORENSIC ACCOUNTING CONFERENCE AICPA National Forensic Accounting Conference Alec P. Ostrow Stevens & Lee, P.C. September 25, 2009 The Swan Hotel, Orlando, Florida STEVENS & LEE Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Widespread use of asset sale power to transfer ownership of an ongoing business Currently, the preferred method over confirmation of a Chapter 11 Plan STEVENS & LEE 35-1 Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Plan Requirements (Part I) Classify Claims and Interests Specify Treatment (What Recovery Each Class Gets) Each Class Must Be “Unimpaired” – Rights Unaffected Vote to Accept its Treatment, or Get “Crammed Down” STEVENS & LEE Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Plan Requirements (Part II) Court-Approved Disclosure Statement Containing “Adequate Information” as Prerequisite to Voting Administrative and Priority Claims Paid in Full Each Class Gets At Least Liquidation Value “Best Interests” Test Must Be Feasible STEVENS & LEE 35-2 Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Sale Requirements Sound Business Reason for Sale Maximize Value – Auction Process Fair and Open Process – Level Playing Field Appropriate Marketing in Advance of Auction Credit Bidding by Secured Creditors Usually Permitted STEVENS & LEE Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Sale Process – “Stalking Horse” Bidding Inducements “Break-Up” or “Topping” Fee Expense Reimbursement Minimum Overbid Prequalification of Competing Bidders Restriction on Solicitation of Competitive Bids – “Window Shop” STEVENS & LEE 35-3 Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Benefits from Using Sale Process Quicker and Cheaper Can Usually Get a “Free and Clear” Order Claims and Liens Successor Liability Can Usually Get an Order Mooting Appeals If Closing Occurs Without a Stay STEVENS & LEE Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Detriments to Sale Process Can’t Control Who Is the Highest Bidder Can’t Distribute Sale Proceeds (Except to Validly Secured Creditors) STEVENS & LEE 35-4 Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process 2005 Bankruptcy Reform Exacerbated Trend to Sales Administrative Claim Status for Goods Delivered Within 20 Days of Bankruptcy Filing More Grounds to Appoint a Trustee, Convert to Liquidation or Dismiss the Case Less Judicial Discretion to Avoid Such Results Limitation on Extensions of Debtor’s Exclusivity Period for Proposing a Plan Limitation on Management Retention and Severance Pay STEVENS & LEE Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Sale Process vs. Plan Process Current Credit Crunch Exacerbates Trend to Sales In Current Climate Few Debtors with Assets Below $1 Billion Can Get Debtor in Possession (DIP) Loans to Finance True Reorganizations Very Short-Term DIP Financing Available - Enough to Get to a Consummated 363 Sale STEVENS & LEE 35-5 Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Abuse of Sale Process? Lehman Bros. Case Too Fast? – 5-day Process Emergency vs. Fair and Open Process Emergency vs. Maximizing Value The Role of the Government STEVENS & LEE Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Abuse of Sale Process? Chrysler and GM Cases Buyer Is Newly-Formed Government-Sponsored Entity Including Equity for Union Employee Interests “Sub Rosa” Plan? Impermissible Distribution of Value to Creditors? Circumvention of Plan Process? STEVENS & LEE 35-6 Hot Topics in Bankruptcy Section 363 – The New “Reorganization” Abuse of Sale Process? Chrysler and GM Cases Impermissible Barring of Successor Liability Claims? Products Liability Claims Asbestos Claims Pension Claims The Role of the Government STEVENS & LEE Hot Topics in Bankruptcy Section 363 “Free and Clear” Sale Issues Can Sell Free and Clear of “Interest” in Property If 1 - Applicable Non-Bankruptcy Law Permits 2 - Interest Holder Consents 3 - Liens: Price Greater than Aggregate “Value” of All Liens 4 - Interest Is in “Bona Fide” Dispute, or 5 – Can Compel Interest Holder to Accept Money Satisfaction in a Legal or Equitable Proceeding STEVENS & LEE 35-7 Hot Topics in Bankruptcy Section 363 “Free and Clear” Sale Issues Finality – Closing Can Render an Appeal Moot If Sale Is to “Good Faith” Purchaser No Stay of Sale Order Prior to Closing STEVENS & LEE Hot Topics in Bankruptcy Section 363 “Free and Clear” Sale Issues Clear Channel Case – 9th Circuit (California) Bankruptcy Appellate Panel – Issue 1 Court Says Can’t Sell Free and Clear of Valid, “Out of the Money” Junior Liens None of 5 “Free and Clear” Requirements Met Sale Price Must Exceed Face Amount of All Liens Compelling Money Satisfaction Credit-Bidding Senior Lienor Could Wind Up with Encumbered Property – Not What Was Bargained For STEVENS & LEE 35-8 Hot Topics in Bankruptcy Section 363 “Free and Clear” Sale Issues Clear Channel Case – 9th Circuit (California) Bankruptcy Appellate Panel – Issue 2 Court Says Appeal Not Moot After Closing Statutory Provision Only Applies to the Sale Authorization Not to the “Free and Clear” Aspect Based on Strict Reading of Cross-References to Specific Subsections of Statute STEVENS & LEE Hot Topics in Bankruptcy Section 363 “Free and Clear” Sale Issues Clear Channel Case – 9th Circuit (California) Bankruptcy Appellate Panel – Implications More Leverage for Junior “Out of the Money” Liens Delay Closing – Wait for Appeals to Be Decided Provide Ability to Unwind Sale Case Severely Criticized STEVENS & LEE 35-9 Hot Topics in Bankruptcy Transnational Bankruptcies Chapter 15 – 2005 U.S. Adoption of U.N. Model Law on Cross-Border Insolvencies Bankruptcy Relief in U.S. to Assist Foreign Proceeding Staying Actions Turning Over Assets Increased Coordination Between Courts in Different Countries Recognition Process for Foreign Proceedings Main or Non-Main Based on Center of Main Interests – “COMI” STEVENS & LEE Hot Topics in Bankruptcy T ransnational Bankruptcies U.S. Supremacy? Lyondell Case – Chapter 11 for U.S. Subsidiaries of European Conglomerate U.S. Court Grants Temporary Injunction Against Creditors from Suing European Parent or Commencing Involuntary Bankruptcy Proceedings in Europe Based on U.S. Bankruptcy Code Decision Does Not Address Ability to Enjoin Creditors’ Right to File Involuntary Bankruptcy Case Applicability of U.S. Law to Foreign Debtor-Creditor Relations Impact of COMI Analysis STEVENS & LEE 35-10 Hot Topics in Bankruptcy T ransnational Bankruptcies U.S. Supremacy? Gold & Honey Case – Existing U.S. Chapter 11 Cases and Subsequent Israeli Receiverships U.S. Court Rejects Petitions for Recognition of Foreign Proceedings Holds Institution of Foreign Proceedings Violated Automatic Stay from Earlier U.S. Chapter 11 Cases Recognition Thus Violates U.S. Policy Holds Foreign Proceedings Fail to Qualify for Recognition – Not “Collective” – Rights of All Creditors Not Considered STEVENS & LEE Hot Topics In Bankruptcy T ransnational Bankruptcies U.S. Supremacy? Bear Stearns Funds Case 2007 – Cayman Island Organized Investment Funds With Operations and Activities Based in U.S. U.S. Court Rejects Petitions for Recognition of Foreign Proceedings Not a Foreign Main – COMI is in U.S. – Rejects Presumption that COMI is Country of Organization Not a Foreign Non-Main – No “Establishment” – Non-Transitory Economic Activity in Cayman Islands Court Invites Real U.S. Bankruptcy Case – Chapter 11 or Chapter 7 Decision Affirmed on Appeal in 2008 STEVENS & LEE 35-11 Hot Topics in Bankruptcy **** Questions STEVENS & LEE Hot Topics in Bankruptcy **** Thank you STEVENS & LEE 35-12 Bankruptcy Client Alert October 22, 2008 A Bad Time to Enfeeble Free and Clear Bankruptcy Sales: Valid Out-of-the-Money Liens Can’t Be Stripped Away Says One Appellate Court; Buyers and Sellers May Need to Adapt by Alec P. Ostrow apo@stevenslee.com 212-537-0402 Amid the current market turmoil, and the increasing need to sell over-leveraged assets and the businesses carrying them, a reliable, efficient and effective tool for meeting this need – the bankruptcy free and clear sale – has been hobbled by a recent appellate decision. This decision undermines two of the foundations of the bankruptcy sales process: (1) the ability to sell assets free and clear of valid, but out-of-themoney liens; and (2) the inability to challenge free and clear sale orders on appeal without a stay of the closing. The Ninth Circuit Bankruptcy Appellate Panel (“B.A.P.”), an optional, intermediate, appellate court between the bankruptcy court and the real Ninth Circuit Court of Appeals, reversed such a free and clear sale order in an appeal by the junior lienor who had not obtained a stay of the closing.1 The result was that the buyer, who happened to be the credit-bidding senior lienor, could end up with real property that continues to be encumbered by the junior lien. Such a result is precisely contrary to the buyer’s intention. Although the appellate court framed the issue as restricted to credit bids,2 very little of court’s analysis is so limited. Indeed, if the court’s analysis is widely followed, the practice in free and clear bankruptcy sales will have to be significantly altered. The stage for the legal battle is easily set. The debtor, PW, LLC, a real estate development company, owned 18 parcels of land in Burbank, California. Its lender, DB Burbank, LLC, a hedge fund affiliate, held a more than $40 million senior lien on the property. A junior lien was granted to secure a $2.5 million obligation in favor of Clear Channel Outdoor, Inc. A chapter 11 bankruptcy filing interrupted DB’s foreclosure proceedings, and a chapter 11 trustee later replaced PW’s management. The trustee and DB then agreed to sell the real property at a bankruptcy auction, under sections 363(b) and 363(f) of the Bankruptcy Code, free and clear of liens, using DB’s credit bid as the upset price. No higher bids were received. Over Clear Channel’s objection, the bankruptcy court approved the sale of the property to DB, free and clear of the junior lien, whose validity was not at issue. Clear Channel appealed, and sought a stay of the closing pending appeal. The stay was denied, and the closing held.3 The B.A.P. considered two issues: (1) Whether the appeal could proceed in the face of a statute, section 363(m) of the Cherry Hill • Harrisburg • Lancaster • Lehigh Valley • New York • Bankruptcy Code, that prohibits unwinding an unstayed sale to a good faith purchaser; and (2) whether the Bankruptcy Code’s free and clear sale provision, section 363(f), allows the sale free and clear of a valid, but out-of-the-money lien. On both counts, the appellate court supported the junior lienor. The Appeal Isn’t Moot The statute restricting appeals, the effect of which is often referred to as “statutory mootness,” imposes a necessary finality on bankruptcy sales. Knowing that a sale to a good faith purchaser cannot be undone on appeal, unless the closing is stayed, encourages the participation of bidders, and thereby aids in maximizing the value of assets sold at bankruptcy sales. It also allows for the prompt distribution of the sales proceeds, and thereby aids in getting the creditors paid. Despite these principles and DB’s unchallenged status as a good faith purchaser, the B.A.P. read the statutory language restrictively. The relevant statute, section 363(m), by its express terms, applies solely the sale authorization under either section 363(b)4 or section 363(c),5 but not to the free and clear authorization, which is contained in section 363(f). The court held that this failure to include a reference to section 363(f) meant that the free and clear aspect of the sale could be challenged on appeal, even after a closing. Significantly, the appellate court rejected the argument that the free and clear authorization was an integral part of the sale that could be not treated separately without destroying the buyer’s benefit of the bargain.6 The Out-of-the-Money Lien Can’t Be Stripped Away Section 363(f) authorizes a sale free and clear of an interest in property held by someone other than the bankruptcy estate, if one of five conditions is satisfied. Because no applicable nonbankruptcy law permitted the free and clear sale in these circumstances,7 the junior lienor did not consent, and its lien was not subject to a bona fide dispute, three of these conditions were clearly inapplicable.8 The propriety of the free and clear sale turned on the remaining two. Section 363(f)(3) permits a sale free and clear of a lien when the sale price “is greater than the aggregate value of all liens on such property.” Although the use of the word “value” renders the meaning of this condition ambiguous,9 the B.A.P., like many courts that have considered the issue, held that this condition is satisfied only when the Philadelphia • Princeton • Reading • Scranton • Valley Forge • Wilkes-Barre • Williamsport • Wilmington price exceeds the total amount of the lien claims.10 As so interpreted, this condition was not satisfied by DB’s credit bid. The fifth condition that permits a free and clear sale is satisfied when the holder of the interest in the property “could be compelled, in a legal or equitable proceeding, to accept a money satisfaction of such interest.” There is no definitive authority construing this provision, section 363(f)(5). The bankruptcy court relied on it in authorizing the sale free of Clear Channel’s interest, construing it to apply whenever the interest in question “could be satisfied with money.”11 The B.A.P. rejected this simple equation. Instead, the appellate court held that the satisfaction mentioned in the statute must be for less than full payment, and a specific legal or equitable proceeding applicable to the interest must be identified. Because neither the bankruptcy court nor the parties had identified such a proceeding, the free and clear sale aspect of the sale – the stripping away of the junior lien – could not stand, although the sale itself was unassailable. The case was sent back to the bankruptcy court to determine whether an applicable legal or equitable proceeding existed that would enable the free and clear sale under section 363(f)(5).12 A mortgage foreclosure proceeding seems to be a prime candidate for consideration. Extension of the Result to Non-Credit-Bidding Purchasers As noted above, the B.A.P.’s interpretation of the three relevant statutory provisions did not depend on the purchaser’s being a credit-bidding senior lienor. Consequently, this result could be applied in a sale to a purchaser who is completely unrelated to the debtor and the creditors. And since the finality of the sale itself, but not the lien stripping, was recognized, such a purchaser could conceivably be stuck as the unhappy owner of property subject to a lien, despite what its asset purchase Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (9th Cir. B.A.P. 2008). 2 Id. at 29. 3 Id. at 29-32. 4 11 U.S.C. § 363(b) authorizes the use, sale or lease of property of the estate outside the ordinary course of business, after notice and a hearing. 5 11 U.S.C. § 363(c) authorizes the use, sale or lease of property of the estate, other than cash collateral, in the ordinary course of business without notice or a hearing. 6 Clear Channel, 391 B.R. at 36. The court commented that the parties cannot by agreement restrict the appellate court’s jurisdiction. 7 An example of a nonbankruptcy law that permits sales free and clear of certain liens is found in the Uniform Commercial Code. U.C.C. § 9-320(a) permits a sale free and clear of a security interest granted by a seller, when the sale is to a buyer in the ordinary course of business. 1 agreement says. Presumably, a purchaser in such a situation could return to the bankruptcy court to undo or reform the deal. Such a remedy, however, with its attendant risks, costs and delays, neither encourages the participation in bankruptcy sales nor enables the creditors to be promptly paid. Adapting to this Decision – Changes to Bankruptcy Sales Buyers at bankruptcy sales almost invariably request and usually receive a court finding that they are good faith purchasers entitled to the section 363(m) protections against their sales being unwound on appeal, in the absence of a stay of the closing. If the B.A.P.’s ruling is followed, such protections are illusory when the appeal is taken by a lienor fighting a free and clear order under section 363(f). To prevent unwelcome results, changes will likely be made to the way bankruptcy sales are conducted. Closings may be substantially delayed in the face of such appeals. Holders of out-of-the-money junior liens may be able to demand and receive consideration to forgo appeals, or to consent to sales. Contracts and court orders may need to be recast to provide for the escrowing of sale proceeds pending appeals, or the quick ability to undo or redo a closed sale. It is incumbent on participants in bankruptcy sales and those advising them to be aware of the B.A.P.’s decision, and to take appropriate precautions against the unwarranted risks that stem from the decision and any others that follow its lead. For more information on how these issues may affect your rights, contact Alec P. Ostrow at apo@stevenslee.com or 212-537-0402. Mr. Ostrow is a Shareholder of Stevens & Lee, P.C., and Co-Chair of the Bankruptcy and Financial Restructuring Group practicing in the New York office. These conditions are contained in subdivisions (1), (2) and (4), respectively, of 11 U.S.C. § 363(f). 9 For example, 11 U.S.C. § 506(a) determines the allowed amount of a secured claim as the value of the collateral, subject to valid secured claims of higher priority in the collateral. If “value” in § 363(f)(3) is given the same meaning, then an out-of-the money lien can be said to have no “value.” 10 Clear Channel, 391 B.R. at 40 (collecting cases). 11 Id. at 42. 12 Id. at 42-47. 8 ©2008 Stevens & Lee, a Pennsylvania Professional Corporation Richard J. Pinto and Harry A. Horwitz, shareholders responsible for the Princeton and Cherry Hill, New Jersey offices, respectively. This material is provided as a general informational service to clients and friends of Stevens & Lee. It should not be construed as, and does not constitute, legal advice on any specific matter. The delivery of this material does not create an attorney-client relationship. This material may be considered ATTORNEY ADVERTISING in some states. Please note that prior results discussed in this material do not guarantee similar outcomes. Readers must not rely on this general information in making decisions about such things as structuring transactions or arbitrating, settling or resolving any dispute, contested or uncontested; professional advice should be sought as to any such specific situation. ...
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