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The financing of commercial litigation has grown enormously since it first appeared on the scene in the US, about 15 years ago.  While still small relative to the overall US financial market, it is estimated that more than $11 billion has been invested in litigation finance in the US last year alone.  In essence, lenders (often referred to as “funders”) provide commercial claimants and contingency law firms with the capital needed to prosecute legal claims which the funders believe have a strong likelihood of success.  Funders receive a return based upon, and typically conditioned upon, a successful conclusion of the litigation.  The use of litigation funding by bankruptcy practitioners is a growing phenomenon and one that we see as an increasingly important element in how bankruptcy-related litigation is managed.

Continue Reading The Use of Litigation Funding in Bankruptcy

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Backstop commitments have become commonplace in large corporate bankruptcy cases – they provide certainty to the debtor that it will have the funds needed to satisfy its obligations to creditors under its plan of reorganization and that it will have liquidity to operate post-bankruptcy as the reorganized entity. Backstop commitments are also a way for certain creditors to generate some additional return in the form of commitment fees and expense reimbursements in exchange for their agreement to backstop all or a material portion of a proposed rights offering or other financing arrangement. Typically, the opportunity to participate as a backstop provider is not offered to all creditors in a class but is rather limited to those having large claims – often members of an ad hoc group that have the leverage to negotiate for such treatment, and most importantly, the financial wherewithal to perform.  For that reason, the fees associated with backstop commitments are sometimes controversial, criticized by those not participating as an unnecessary expense paid by a debtor to a preferred group of creditors in exchange for their support and/or violative of Section 1124(a)(4) of the Bankruptcy Code which requires generally that similarly situated creditors receives the same treatment.

Continue Reading Backstops Survive Another Challenge

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Considerations of “environmental, social and governance” (or ESG) criteria with respect to a company’s management and operations continue to take on greater importance in lenders’ and investors’ credit and investment decisions.  How a borrower or a target company measures up to these ever-developing ESG standards will impact its cost of capital and value to potential investors and acquirors. While it remains difficult to predict how the perception of a company’s ESG performance (or even its rating) may impact its capital-raising efforts or its likelihood of success or failure, a number of trends seem inevitable.

Continue Reading Trends in ESG for Members of the Restructuring Community

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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

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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

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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

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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

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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

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Article 9 of the Uniform Commercial Code, adopted in all fifty states plus the District of Columbia with relatively few variations, sets out, among other things, the rules to be followed when obtaining a security interest in personal property collateral to secure a loan. The basic premise of Article 9 is that if the lender follows the rules, it should be protected against third parties, including other creditors or a bankruptcy trustee, who would seek to challenge the lender’s security interest or the priority of the security interest.

Continue Reading UCC Financing Statements and Debtor Name Errors: The Litigation Continues

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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