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Chapter 11 Bankruptcy

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The Stalking Horse Bid Protections: The Auction Credit Conundrum, and How to Avoid It

The Scenario

You’re an investor kicking the tires on a company in bankruptcy. If you agree to be the “stalking horse” bidder, you’ll expend significant time and money vetting the opportunity (including attorneys’ fees, quality of earnings analysis, valuation and appraisal work, and site visits), only to possibly end up in a bidding war with others wanting a free ride on your due diligence.

To lure you in, the debtor offers you $250,000 in “Bid Protections” (total breakup fee and expense reimbursement) if you don’t win at auction. Not only that, you’ll get a credit toward your cash bid at the auction in the amount of the Bid Protections.  This makes sense, you think, because the economic value of a competing bid is deflated by the $250,000 in Bid Protections that must be paid to you if the competitor is ultimately successful.  So to compare the economic value of

My Company Went Through Bankruptcy And All I Got Was This Lousy Release – How to Get a Non-Consensual Release of Third Parties in a Chapter 11 Plan

October 29, 2018

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Officers and directors work hard to shepherd their company through bankruptcy. But, even after all that hard work, creditors can still turn around and sue them individually for alleged acts prior to the bankruptcy.  What kind of thanks is that?  A debtor wishing to protect these hard-working officers and directors may seek to include a third party release in the plan.  However, if all parties do not agree, third party releases over objecting classes are closely analyzed because they are considered a “dramatic measure to be used cautiously, and [] only appropriate in unusual circumstances.”  In re Dow Corning Corp., 280 F.3d 648, 658 (6th Cir. 2002).  Fortunately, this post will discuss the steps officers and directors may take with the debtor to increase the likelihood of plan approval, with third party releases intact, over the objections of some parties.

Initially, the debtor must look to where it

Fifth Circuit Affirms Dismissal of Bankruptcy Case Due to Lack of Corporate Authority to File (and provides a blueprint for veto powers over bankruptcy filings?)

On June 14, 2018, the United States Court of Appeals for the Fifth Circuit issued a revised opinion that held that Federal law does not prevent a bona fide shareholder from exercising its right to vote against a bankruptcy petition just because it is also an unsecured creditor. In re Franchise Servs. of N. Am., Inc., 891 F.3d 198, 203 (5th Cir. 2018), as revised (June 14, 2018).

Franchise Services of North America, Inc. (“FSNA”) was once one of the largest rental car companies in North America. Id. at 203.  In 2012, FSNA desired to purchase Advantage Rent-A-Car and enlisted an investment bank, Macquarie Capital (U.S.A.), Inc. (“Macquarie”), to assist. Macquarie created a fully-owned subsidiary, Boketo, LLC (“Boketo”), to make a $15 million investment in FSNA.

In exchange for the capital infusion, FSNA gave Boketo 100% of its preferred stock in the form of a convertible preferred equity instrument.

Ninth Circuit Declines To Decide When Contempt Sanction Becomes Punishment

Bankruptcy courts have authority to hold in civil contempt one who refuses to comply with a bankruptcy court order, including incarceration and/or daily fines until the offender complies.[1]  But when does civil contempt[2] cross into criminal contempt, which is punitive and outside the scope of the bankruptcy court’s powers?[3]  While a bright-line rule is wanting, the 9th Circuit’s silence on a recent case implied that three years of incarceration plus a $1,000 daily fine to coerce compliance does not implicate criminal due process concerns and, therefore, is within the bounds of permissible bankruptcy court authority.

Kenny G Enterprises, LLC’s Chapter 11 case (which dealt with a developer named Kenny G, and not the world’s favorite saxophonist) was converted to Chapter 7, triggering a requirement

The Primary Purpose Test and SRP Chameleon: How the Obamacare “Penalty” Became a “Tax” Only to Become a “Penalty” Again

The Patient Protection and Affordable Care Act of 2010 (a/k/a “Obamacare” or the “ACA”), with its infamous “individual mandate”[1] (and corresponding “shared responsibility payment” (which we’ll call the “SRP”)),[2] is no stranger to controversy.  Everyone is well aware of the legal challenges mounted against the individual mandate, and the seminal SCOTUS opinion upholding the mandate as a valid exercise of Congress’s taxing power – National Federation of Independent Business v. Sebelius, 567 U.S. 519 (2012). Don’t worry, we’re well aware that you, along with nearly every other American (including us here at the Bankruptcy Cave), are sick and tired of hearing about ACA squabbles.  But this post will explore one side of the ACA that you’ve almost certainly not considered, but which is interesting (to us at least).  It’s interesting because it provides the leading thought on which government exactions should and shouldn’t be

Equity v. Statute: In Bankruptcy, the Code Prevails (The Official Committee of Unsecured Creditors v. The Archdiocese of Saint Paul and Minneapolis et al.)

Garrison Keillor once said, “Sometimes I look reality straight in the eye and deny it.”[1]  Being that the case arose in Minnesota, perhaps Circuit Judge Michael Melloy channeled Keillor, one of that state’s great humorists, when he authored the opinion in The Official Committee of Unsecured Creditors v. The Archdiocese of Saint Paul and Minneapolis et al. (In re: The Archdiocese of Saint Paul and Minneapolis) Case No. 17-1079 2018 WL 1954482 (8th Cir. April 26, 2018) [a link to the opinion is here].[2]  Regardless, the quote must sum up the Appellant’s view of the outcome. The unsecured creditors that make up the Committee, most of whom were victims of clergy sexual abuse, will not obtain access to the value of over 200 non-profit entities affiliated with the Archdiocese of Saint Paul and Minneapolis to pay their claims.

In a concise opinion, the

The Palmaz Plan: Investors Can Have Their Direct D&O Claims But Not The D&O Insurance Proceeds #WinningWhileLosing

In In re Palmaz Scientific Inc., the bankruptcy court for the Western District of Texas determined that a confirmed plan of reorganization would not stop a group of investors from pursuing direct (non-derivative) claims against directors and officers of the debtor companies because plan injunction language only covered claims against the debtors.  2018 WL 1036780, at *5 (Bankr. W.D. Tex. Feb. 21, 2018) (slip op. at 11).  Unfortunately for the investor plaintiffs, this proved to be a success without victory because the court went on to hold that the plan precluded the investors from using the D&O insurance proceeds to satisfy their claims.  Id. at *7 (slip op. at 14).  This case is both a cautionary tale for claimants and a potential boon for post-confirmation trustees.

When (and why) do D&O Insurance Proceeds become the coveted prize?

When D&O claims are asserted against a distressed company and/or its directors

Clear Error They Say! Supreme Court Opines On Standard Of Review For Determining Non-Statutory Insider Status

Pictured:  Reno Nevada’s The Villages at Lakeridge, a great investment for non-statutory insiders, or for anyone else!!

 

Last April, we updated you that the Supreme Court had granted review of In re The Village at Lakeridge, LLC, 814 F.3d 993 (9th Cir. 2016). Our most recent post is here.

On March 5, 2018, the Supreme Court held a clear-error standard of review should apply to a review of a determination of non-statutory insider status. U.S. Bank Nat. Ass’n v. Vill. at Lakeridge, LLC, No. 15-1509, ___ S. Ct. ___2018 WL 1143822, at *2 (U.S. Mar. 5, 2018).

As a refresher, in Village at Lakeridge, in exchange for $5,000, an insider (Bartlett) transferred a $2.76 million claim against the debtor to an individual (Rabkin) who was not a statutory insider. 

In Case You Missed It – PACA Trust Rights in Bankruptcy are Just Plain Old Secured Claims

Happy 2018!  We at The Bankruptcy Cave have been itching to write about the Cherry Growers Chapter 11 case – which really is ground-breaking – but the holidays, life, and yes, work for clients too, all just got in the way.  But with each passing week, the case stayed on our minds.  So now that time permits, here is the writeup – and see below for the remarkable significance of the case.

In re Cherry Growers (now reported at 576 B.R. 569, Bankr. W.D. Mich. 2017), is a garden-variety produce-related bankruptcy case.  (Ha ha, “garden-variety” produce, get it?)  The Debtor bought produce and sold it to others, in addition to conducting other food distribution activities.  When the Debtor filed for bankruptcy, there was the typical push-and-pull between a lender secured by the Debtor’s inventory and a/r, and a supplier claiming a trust interest in those same assets, protected by the

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