Bankruptcy Risks for Second...
-
Upload
phungkhuong -
Category
Documents
-
view
216 -
download
0
Transcript of Bankruptcy Risks for Second...
Bankruptcy Risks for Second Lienholders Overcoming Challenges With Lien Stripping, Sect. 363 Sales,
Intercreditor Agreements, and More
Today’s faculty features:
1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific
The audio portion of the conference may be accessed via the telephone or by using your computer's
speakers. Please refer to the instructions emailed to registrants for additional information. If you
have any questions, please contact Customer Service at 1-800-926-7926 ext. 10.
THURSDAY, NOVEMBER 15, 2012
Presenting a live 90-minute webinar with interactive Q&A
Vincent J. Roldan, Of Counsel, Vandenberg & Feliu, New York
Matthew P. Ward, Partner, Womble Carlyle Sandridge & Rice, Wilmington, Del.
Adam S. Cook, Managing Director & Head of Investment Banking, Phoenix Capital Resources, New York
Sound Quality
If you are listening via your computer speakers, please note that the quality of
your sound will vary depending on the speed and quality of your internet
connection.
If the sound quality is not satisfactory and you are listening via your computer
speakers, you may listen via the phone: dial 1-888-450-9970 and enter your PIN
when prompted. Otherwise, please send us a chat or e-mail
[email protected] immediately so we can address the problem.
If you dialed in and have any difficulties during the call, press *0 for assistance.
Viewing Quality
To maximize your screen, press the F11 key on your keyboard. To exit full screen,
press the F11 key again.
For CLE purposes, please let us know how many people are listening at your
location by completing each of the following steps:
• Close the notification box
• In the chat box, type (1) your company name and (2) the number of
attendees at your location
• Click the SEND button beside the box
FOR LIVE EVENT ONLY
If you have not printed the conference materials for this program, please
complete the following steps:
• Click on the + sign next to “Conference Materials” in the middle of the left-
hand column on your screen.
• Click on the tab labeled “Handouts” that appears, and there you will see a
PDF of the slides for today's program.
• Double click on the PDF and a separate page will open.
• Print the slides by clicking on the printer icon.
Benefits of a second lien
The second lien holder enjoys all of the rights that the Bankruptcy Code provides to secured creditors. • Section 363(e) prohibits the debtor from using, selling, or leasing
property subject to a lien, unless the lienholder’s interest is adequately protected.
• Section 361 compensates a secured creditor for the delay associated with bankruptcy, through the concept of adequate protection.
• Under section 363(f), the debtor cannot sell property free and clear of a lien, unless • Non-bankruptcy law permits the sale of such property free and clear of the
lien; • The lienholder consents; • The property is sold for more than the value of lien; • The lien is in dispute; and/or • The lienholder can be compelled to accept a money satisfaction of the lien.
• Section 363(k) authorizes a secured creditor to “credit bid”.
6
Benefits of a second lien (cont’d)
• Separate classification under section 1122, which makes confirming plan of reorganization more difficult.
• Under Section 1129(b)(2)(A), the debtor cannot confirm a plan over a secured creditor’s objection unless the plan is “fair and equitable” with respect to secured claims, which means: • The secured creditors retain their liens in the collateral, and
receive in deferred cash payments “at least” the full value of their secured claims, measured as of the effective date of the claim; • This typically means that the plan must provide interest payments to
the secured creditors who are compensated through deferred cash payments.
• If the encumbered property is sold free and clear of liens, such liens attach to the proceeds of the sale; or
• The secured creditor will receive the “indubitable equivalent” of its claim.
7
Intercreditor agreements
Effectively limits the rights that the second lien holders enjoy as secured creditors, by subordinating their liens to the senior lien holders.
Section 510(a) of the Bankruptcy Code provides that subordination agreements are enforceable “to the same extent that such agreement is enforceable under applicable non-bankruptcy law.”
8
Intercreditor agreements (cont’d)
Common provisions
Lift stay waiver – advance waiver of the second lien holder of its right to contest a motion by the first lien holder for relief from the automatic stay;
Voting rights/plan support – allowing the first lien holder to vote the second lien holder’s claim, or requiring that the second lien holder will not support a plan opposed by the senior lender;
Asset sales – advance consent by the second lien holder to any asset sale under section 363 of the Bankruptcy Code that is supported by the senior lender;
Adequate protection – prohibiting the second lien holder from seeking adequate protection of its interest in common collateral until the senior lender has received adequate protection of its interest;
DIP financing/cash collateral – advance consent by second lien holder to the priming of its liens by any DIP financing provided by the senior lender, and advance consent to any use of cash collateral approved by the first lien holder;
Exercise of remedies – prohibiting the junior lender from exercising any remedies against the common collateral;
Challenge rights – prohibiting the second lien holder from challenging the validity or priority of the first lien.
ABA Model Intercreditor Agreement can be found at www.abanet.org/dch/committee.cfm?com=CL190029
9
Intercreditor agreements (cont’d)
Key cases
Beatrice Foods Co. v. Hart Ski Mfg. Co., Inc. (In re Hart Ski Mfg. Co., Inc.), 5 B.R. 734 (Bankr. D. Minn. 1980) (Advance waiver of rights to contest senior lender’s lift stay motion, or right to seek adequate protection, are unenforceable).
• “The Bankruptcy Code guarantees each secured creditor certain rights [such as] the right to assert and prove its claim, the right to seek court-ordered protection for its security, the right to have a stay lifted under proper circumstances, the right to participate in voting for confirmation or rejection of any plan of reorganization, the right to object to confirmation, and the right to file a plan where applicable. The above rights and others are not related to contract priority of distribution pursuant to Section 510(a) and cannot be affected by the actions of the parties prior to the commencement of a bankruptcy case when such rights did not even exist.”
Bank of America, N.A. v. N. LaSalle St. Ltd P’ship (In re 203 N. LaSalle St. P’ship), 246 B.R. 325, 331 (Bankr. N.D. Ill. 2010) (holding that provision allowing the first lien holder to vote the subordinated claim was unenforceable; reasoning that section 510(a) affects the priority of claims, but not the transfer of voting rights).
In re Aerosol Packaging, LLC, 362 B.R. 43 (Bankr. N.D. Ga. 2006) (rejects 203 N. LaSalle, upholds a provision in a subordination agreement allowing a senior lender to vote the junior lender’s claim).
10
Intercreditor agreements (cont’d)
Key cases
In re Ion Media Networks, Inc., 419 B.R. 585 (Bankr. S.D.N.Y. 2009) (denied standing to a second lien creditor seeking to challenge a plan of reorganization; “plainly worded contracts establishing priorities and limiting obstructionist, destabilizing and wasteful behavior should be enforced and creditor expectations should be appropriately fulfilled.”).
In re Erickson Retirement Communities, LLC, 425 B.R. 309 (Bankr. N.D. Tex. 2010) (finding that subordination agreement prohibited the subordinated creditors from seeking enforcement of an examiner, because doing so was the taking of an “action” to seek to enforce “remedies” and to pursue “collection” of their claims, without consent of the agent).
In re Boston Generating, LLC, 2010 WL 4922578 (Bankr. S.D.N.Y. 2010) (allowing second lien holders to object to bid procedures motion because the intercreditor agreement did not specifically restrict that action).
11
In re Heritage Highgate, Inc. 679 F.3d 132 (3d Cir. 2012)
The players
Debtor – owned a mixed-use residential subdivision, planned for 411 units. 101 units constructed and delivered as of the petition date. Debtor had an appraisal establishing a FMV of $15 million for the project, just prior to the petition date.
First lien – $16.5 million, secured by substantially all of the debtor’s assets.
Second lien – $1.4 million, secured by a second lien on substantially all of the debtor’s assets.
12
Bankruptcy Code Section 506(a)
An allowed claim of a creditor secured by a lien on property
in which the estate has an interest … is a secured claim to the
extent of the value of such creditor’s interest in the estate’s
interest in such property … and is an unsecured claim to the
extent that the value of such creditor’s interest …. is less than
the amount of such allowed claim. Such value shall be
determined in light of the purpose of the valuation and of the
proposed disposition or use of such property, and in
conjunction with any hearing on such disposition or use or on
a plan affecting such creditor’s interest.
13
Standard for valuing claims Burden of Proof
Some courts hold that the secured creditor bears the burden of proof. See In re
Sneijder, 407 B.R. 46, 55 (Bankr. S.D.N.Y. 2009).
Other courts hold that the party challenging the value (usually the debtor) bears the
burden of proof. See In re Weichey, 405 B.R. 158, 164 (Bankr. W.D. Pa. 2009).
Third method (ultimately adopted by Heritage Highgate): debtor bears the initial
burden of proof to overcome the presumed validity and amount of the secured
creditor’s claim, but the ultimate burden of persuasion is upon the creditor to
demonstrate by a preponderance of the evidence, both the extent of its lien and the
value of the collateral securing its claim. In re Robertson 135 B.R. 350, 352
(Bankr. E.D. Ark. 1992).
14
Standard for valuing claims (cont’d)
Section 506(a) does not specify the appropriate valuation standard. See In re Winthrop Old Farm Nurseries, Inc., 50 F.3d 72, 73-74 (1st Cir. 1995).
Value does not necessarily mean liquidation, value, forced sale value, or a full going concern value. Rather, Congress envisioned a flexible approach whereby courts choose the standard that best fits the circumstances of a particular case. Heritage Highgate, 679 F.3d at 141 (citing H.R. Rep. No 95-595, at 356 (1977) reprinted in 1978 U.S.C.C.A.N. 5787, 6311).
Heritage Highgate rules, “the appropriate standard for valuing collateral must depend upon what is to be done with the property – whether it is to be liquidated, surrendered, or retained by the debtor.”
• E.g., if the debtor intends to use collateral to generate income with which to pay creditors, a valuation based on a hypothetical foreclosure sale would be inappropriate. Instead, the collateral’s fair market value is preferable.
• Bankruptcy courts will determine the appropriate time as of which to value the collateral.
Heritage Highgate rejected the second lien holders’ use of projections attached to the plan in order to determine value as of confirmation. Instead, valuation must be based on “realistic measures of present worth.”
15
Lien Stripping
Dewsnup v. Timm, 502 U.S. 410 (1992)
• Chapter 7 case.
• Rejected the notion that a mortgagee could be forced to accept a judicially determined value, if at a later time a foreclosure sale produces more.
• Court was guided by the principle that liens pass through bankruptcy unaffected.
Majority of courts analyzing the issue in the context of Chapter 11 limit Dewsnup to Chapter 7 cases.
• The distinction is, Chapter 11 involves the retention of property in a debtor’s rehabilitation.
• Pre bankruptcy code law provided for the modification of liens in reorganization cases.
Heritage Highgate found section 1129(b), which provides for the retention of liens only up to the value of the secured creditor’s claim for purposes of cram down, as indicative of a chapter 11 debtor’s ability to strip liens.
Also, the Heritage Highgate court found support in section 1111(b), which allows an undersecured creditor to be treated as fully secured to the extent of their allowed claims, which suggests that Chapter 11 debtors have the authority to limit secured claims to the value of their collateral.
16
Heritage Highgate take-aways
Importance of presentation of evidence in support of valuation
Importance of creditors committee taking an active role
17
Heritage Highgate Unanswered questions
Would Heritage Highgate have applied Dewsnup if the plan was a plan of liquidation outside the ordinary course of business?
What happened to the value of the second lien? Did it erode?
• Sign of lack of adequate protection
• Possible super priority claim for erosion of collateral or lack of adequate protection.
What if the second lienholders presented evidence to rebut the appraisal used by the committee?
• The second lien holders declined to present their own appraisal, but instead relied on the plan budget.
18
19
Sale Issues When Second Liens
Are Involved in a
Bankruptcy Case
Matthew P. Ward
(302) 252-4338
Wilmington, DE
November 15, 2012
21
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(e):
– Prohibits use of encumbered property without adequate protection
22
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(e):
– Prohibits use of encumbered property without adequate protection
– States:
“(e) Notwithstanding any other provision of this section, at any time, on
request of an entity that has an interest in property used, sold, or leased,
or proposed to be used, sold, or leased, by the trustee, the court, with or
without a hearing, shall prohibit or condition such use, sale, or lease as
is necessary to provide adequate protection of such interest . . . .”
23
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(e):
– Prohibits use of encumbered property without adequate protection
– States:
“(e) Notwithstanding any other provision of this section, at any time, on
request of an entity that has an interest in property used, sold, or leased,
or proposed to be used, sold, or leased, by the trustee, the court, with or
without a hearing, shall prohibit or condition such use, sale, or lease as
is necessary to provide adequate protection of such interest . . . .”
– Further provides that property subject to personal property lease is not
subject to relief from automatic stay
24
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(e):
– Prohibits use of encumbered property without adequate protection
– States:
“(e) Notwithstanding any other provision of this section, at any time, on
request of an entity that has an interest in property used, sold, or leased,
or proposed to be used, sold, or leased, by the trustee, the court, with or
without a hearing, shall prohibit or condition such use, sale, or lease as
is necessary to provide adequate protection of such interest . . . .”
– Further provides that property subject to personal property lease is not
subject to relief from automatic stay
– Discussion of second lien rights in Glenn E. Siegel (Dechert), “Second
Liens,” 1 BLOOMBERG CORPORATE LAW JOURNAL 471 (2006)
26
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
27
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– States:
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate, only
if—
28
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– States:
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate, only
if—
(1) applicable nonbankruptcy law permits sale of such property free and clear
of such interest;
29
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– States:
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate, only
if—
(1) applicable nonbankruptcy law permits sale of such property free and clear
of such interest;
(2) such entity consents;
30
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– States:
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate, only
if—
(1) applicable nonbankruptcy law permits sale of such property free and clear
of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is
greater than the aggregate value of all liens on such property;
31
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– States:
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate, only
if—
(1) applicable nonbankruptcy law permits sale of such property free and clear
of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is
greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
32
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– States:
(f) The trustee may sell property under subsection (b) or (c) of this section free
and clear of any interest in such property of an entity other than the estate, only
if—
(1) applicable nonbankruptcy law permits sale of such property free and clear
of such interest;
(2) such entity consents;
(3) such interest is a lien and the price at which such property is to be sold is
greater than the aggregate value of all liens on such property;
(4) such interest is in bona fide dispute; or
(5) such entity could be compelled, in a legal or equitable proceeding, to accept
a money satisfaction of such interest.
33
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
34
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
• 9th circuit: Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25
(B.A.P. 9th Cir. 2008)
35
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
• 9th circuit: Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25
(B.A.P. 9th Cir. 2008)
• New York: In re Becker Indus. Corp., 63 B.R. 474 (S.D.N.Y. 1985)
36
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
• 9th circuit: Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25
(B.A.P. 9th Cir. 2008)
• New York: In re Becker Indus. Corp., 63 B.R. 474 (S.D.N.Y. 1985)
• New York: In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)
37
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
• 9th circuit: Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25
(B.A.P. 9th Cir. 2008)
• New York: In re Becker Indus. Corp., 63 B.R. 474 (S.D.N.Y. 1985)
• New York: In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)
• Delaware: In re Kellstrom Indus., Inc., 282 B.R. 787 (MFW) (Bankr. D. Del. 2002)
38
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
• 9th circuit: Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25
(B.A.P. 9th Cir. 2008)
• New York: In re Becker Indus. Corp., 63 B.R. 474 (S.D.N.Y. 1985)
• New York: In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)
• Delaware: In re Kellstrom Indus., Inc., 282 B.R. 787 (MFW) (Bankr. D. Del. 2002)
• Delaware: Sale Order, In re Cyber-Defender Corp., Case No. 12-10633 (BLS)
(Docket No. 192) (Bankr. D. Del. May 7, 2012)
39
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(f):
– Governs sales free and clear
– May apply to second liens where second liens are out of the money and
do not consent
• 9th circuit: Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25
(B.A.P. 9th Cir. 2008)
• New York: In re Becker Indus. Corp., 63 B.R. 474 (S.D.N.Y. 1985)
• New York: In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)
• Delaware: In re Kellstrom Indus., Inc., 282 B.R. 787 (MFW) (Bankr. D. Del. 2002)
• Delaware: Sale Order, In re Cyber-Defender Corp., Case No. 12-10633 (BLS)
(Docket No. 192) (Bankr. D. Del. May 7, 2012)
– Sale of assets to junior lienholder (e.g., Contrarian Funds LLC v.
Aretex LLC (In re WestPoint Stevens, Inc.), 600 F.3d 231 (2d Cir.
2010))
41
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(k):
– Governs right to credit bid
42
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(k):
– Governs right to credit bid
– States:
“(k) At a sale under subsection (b) of this section of property that is
subject to a lien that secures an allowed claim, unless the court for
cause orders otherwise the holder of such claim may bid at such sale,
and, if the holder of such claim purchases such property, such holder
may offset such claim against the purchase price of such property.”
43
Sale Issues Involving Second Liens
• Bankruptcy Code section 363(k):
– Governs right to credit bid
– States:
“(k) At a sale under subsection (b) of this section of property that is
subject to a lien that secures an allowed claim, unless the court for
cause orders otherwise the holder of such claim may bid at such sale,
and, if the holder of such claim purchases such property, such holder
may offset such claim against the purchase price of such property.”
– Applies to second lien creditors’ right to credit bid
44
Sale Issues Involving Second Liens
• Standing of second lien creditors to object to section 363 sale
45
Sale Issues Involving Second Liens
• Standing of second lien creditors to object to section 363 sale
– In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)
46
Sale Issues Involving Second Liens
• Standing of second lien creditors to object to section 363 sale
– In re Boston Generating, LLC, 440 B.R. 302 (Bankr. S.D.N.Y. 2010)
– Purchaser’s Brief, In re Cyber-Defender Corp., Case No. 12-10633
(BLS) (Docket No. 166) (Bankr. D. Del. April 30, 2012)
48
Role of Unsecured Creditors Committee
• Often, a second lien will hold the “fulcrum security”, and the
committee might seek to have such debt converted to equity
49
Role of Unsecured Creditors Committee
• Often, a second lien will hold the “fulcrum security”, and the
committee might seek to have such debt converted to equity
• Ability to charge the secured lender for expenses necessary to
preserve the secured lender’s collateral under section 506(c)
50
Role of Unsecured Creditors Committee
• Often, a second lien will hold the “fulcrum security”, and the
committee might seek to have such debt converted to equity
• Ability to charge the secured lender for expenses necessary to
preserve the secured lender’s collateral under section 506(c)
• Unless the debtor has unencumbered assets (e.g., chapter 5
avoidance actions), unsecured creditors will have a limited
economic stake in the case
51
Role of Unsecured Creditors Committee
• Often, a second lien will hold the “fulcrum security”, and the
committee might seek to have such debt converted to equity
• Ability to charge the secured lender for expenses necessary to
preserve the secured lender’s collateral under section 506(c)
• Unless the debtor has unencumbered assets (e.g., chapter 5
avoidance actions), unsecured creditors will have a limited
economic stake in the case
• Heritage Highgate shows that another role is to ensure equality
of treatment among similarly situated creditors
52
Role of Unsecured Creditors Committee
• Often, a second lien will hold the “fulcrum security”, and the
committee might seek to have such debt converted to equity
• Ability to charge the secured lender for expenses necessary to
preserve the secured lender’s collateral under section 506(c)
• Unless the debtor has unencumbered assets (e.g., chapter 5
avoidance actions), unsecured creditors will have a limited
economic stake in the case
• Heritage Highgate shows that another role is to ensure equality
of treatment among similarly situated creditors
• Still an important role in investigating liens