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Foreign companies seeking to protect their overseas assets from their creditors have often turned to the United States for immediate relief under Chapter 11 of the Bankruptcy Code.  Establishing jurisdiction in the US for purposes of a bankruptcy filing has proved easy – the establishment of a nominal professional fees retainer with a local law firm on the eve of a bankruptcy filing will suffice.  Upon such a filing, the automatic stay under Section 362 of the Bankruptcy Code goes into global effect, shielding a foreign debtor’s assets, wherever they may be located, from creditors’ recovery actions and litigation. At times, that relief may be short-lived. An aggrieved creditor may challenge a bankruptcy filing as having been made in “bad faith”, seeking to dismiss a pending bankruptcy proceeding that it believes was designed for the sole purpose of frustrating the exercise of its creditor rights and remedies and for which US jurisdiction was manufactured.

Continue Reading Foreign Debtors and Chapter 11 – Seeking Relief from Turbulent Skies

The merchant cash advance (“MCA”) industry recently provided two different bankruptcy courts with an opportunity to consider the characterization of MCA funding transactions as either “true sales” of receivables or “disguised loans”. [1] MCA funders typically provide cash to a financially distressed company in exchange for a percentage of that company’s future receivables collection. Companies in need of liquidity will often seek to monetize their receivables, either by selling them (i.e., a true sale) or using them as collateral for a loan (i.e., a secured loan). Recognizing the benefits of having an ownership interest in such assets in case of a counterparty’s bankruptcy, MCA funders typically attempt to structure their transactions as “purchases” of a company’s future receivables. For that same reason, a bankruptcy trustee or a debtor-in-possession will often argue that these transactions are really “disguised loans” and that the MCA funder is only a secured creditor of the bankruptcy estate that owns the receivable.

Continue Reading Receivables Transactions Revisited: Recent Decisions Split on Sale vs. Loan Characterization

Earlier this year, Mexican airline, Grupo Aeromexico, S.A.B. de C.V. (together with its affiliates, the “Debtors”) announced that their creditor body had overwhelmingly voted to approve their proposed Chapter 11 restructuring plan (the “Plan”) save for one class of unsecured creditor claims that voted to reject the Plan.  Those claims were held by Invictus Global Management, LLC (“Invictus”), a distressed investment fund that recently purchased the claims subject to a “plan support provision” which purportedly compelled the claimholder to support the Debtors’ Plan.  Invictus nonetheless voted against the Plan which threatened to hold-up confirmation and force an expensive trial relating to whether the Debtors are able to satisfy the “cram-down” provisions of the Bankruptcy Code.[1]

Continue Reading Plan Support Covenants Survive Attack in Aeromexico’s Bankruptcy Proceeding

The practice of granting third party releases in bankruptcy was recently dealt another blow by the District Court for the Eastern District of Virginia. In Patterson et. al. v. Mahwah Bergen Retail Group, Inc., Civil No. 3:21cv167 (DJN), the District Court found that the lower bankruptcy court lacked the constitutional authority to both rule on certain of the claims covered by the third-party releases at issue and, it follows, to confirm the debtors’ plan of reorganization.  The District Court went so far as to sever the third-party releases from the plan, vacating the plan and remanding the matter for consideration of the plan without the releases.  But the District Court didn’t stop there. The District Court further ordered that the case be reassigned to a different bankruptcy judge in a different regional division (that is not known for consistently granting third-party releases), adding that the Chief Judge could “assign it to himself if he believes the interests of justice so warrant.”  Doc. 79 at 86.

Continue Reading Another Blow: Third Party Releases Under Attack

The Bankruptcy Court for the District of Delaware recently expressed its view regarding the reach of the “solvent debtor exception” in In re The Hertz Corp., et al.  The solvent debtor exception is an equitable doctrine which supports the proposition that creditors are entitled to the full suite of their contractual rights if the debtor in bankruptcy is solvent. Notably, the doctrine has been advanced to support the argument that solvent debtors are required to pay post-petition interest owed to unsecured creditors at the contract rate of interest, including in some instances, the default rate.

Continue Reading Hertz: The “Solvent Debtor Exception” Loses Some Traction

In its much-discussed decision, City of Chicago v. Fulton, 141 S. Ct. 585 (2020), the Supreme Court ruled that the City of Chicago (“City”) was not in violation of Section 362(a)(3) of the Bankruptcy Code for failing to release an impounded car to a debtor in bankruptcy. Section 362(a)(3) imposes an automatic stay over “any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate.” According to the Supreme Court, a violation of this section requires some affirmative act beyond mere retention of a debtor’s property.  Secured creditors applauded the decision as it shed some light on factors to consider when deciding whether to return property of their bankrupt borrowers that may have been impounded, seized or otherwise have come into their possession prior to bankruptcy. The Supreme Court, however, limited its ruling to the particular section before it (Section 362(a)(3)), and did not address potential automatic stay violations set forth in other sections, including Sections 362(a)(4), (6) and (7), of the Bankruptcy Code.[1]  Whether the reasoning in Fulton applies to these other sections remains an open question, but one that may soon be answered.

Continue Reading Lenders Beware: The Supreme Court’s Ruling in Fulton May Not Be the Final Word on Violations of the Automatic Stay

With the confirmation of Carlson Travel’s plan of reorganization within 24 hours from the company’s filing, expedited confirmations took another step toward normalization. Carlson Travel (better known as Carlson Wagonlit Travel) together with 37 affiliated entities filed bankruptcy in the Southern District of Texas (Houston Division) on the evening of Thursday, November 11, 2021. The debtors managed to schedule a joint hearing on the approval of their disclosure statement and confirmation of their prepackaged plan for Friday morning, the next day. As with all pre-packs, the debtors had solicited votes on their plan prior to filing their cases, including a pre-petition notice period for objections. The company reported that it had received acceptances from all of its bank lenders and more than 90% of its other secured debt. Earlier in 2021, Belk Inc. and affiliates accomplished a similar feat in the same Court. Others to confirm their prepackaged plans on an expedited timetable include Sunguard Availability Services Capital, Inc. and FullBeauty Brands Inc., both in 2019.

Continue Reading Further Support for Expedited Confirmations with Carlson Travel

The District Court for the Southern District of New York recently issued an important decision that provides further support for a holistic analysis when applying the Bankruptcy Code’s “safe harbors.”  In Mark Holliday, the Liquidating Trustee of the BosGen Liquidating Trust v. Credit Suisse Securities (USA) LLC, et al., 20 Civ. 5404 (Sept. 13, 2021),

Participation agreements, in the form promulgated by The Loan Syndications and Trading Association, Inc. (LSTA), are widely regarded as dependable vehicles for conveying loan ownership interests from a lender to a participant as “true sales” in the United States.  But what if the underlying credit agreement describes the participation as a financing relationship between a

Does a lender’s demand for the appointment of a Chief Restructuring Officer (or CRO) by its borrower constitute “undue duress” for purposes of invalidating a personal guarantee? That question was before the Fifth Circuit in Lockwood International, Inc. v. Wells Fargo, National Association et al. v. Michael F. Lockwood, Case 20-40324 (5th Cir. 2021).