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With the economy still lagging and an apparent end to federal assistance for state and local governments, some experts are predicting an increase in chapter 9 bankruptcy filings. Chapter 9 of the Bankruptcy Code provides a rarely used avenue for municipalities and other political subdivisions to obtain relief from creditors.
In In re Boston Generating LLC, a New York bankruptcy judge held that second-lien lenders could object to a debtor’s bid procedures approved by the first-lien lenders despite the terms of an intercreditor agreement. [2] The intercreditor agreement provided the first-lien lenders with the “exclusive right to…make determinations regarding the…sale” of the collateral. According to the court, the agreement did not expressly preclude the second-lien lenders from objecting to bid procedures.
A series of recent court opinions have precipitated ominous warnings that we may be witnessing the erosion of secured creditors’ rights, an erosion that some have argued may herald substantially increased borrowing costs and a further dissipation of the credit markets as a whole.
The epic §363 sales that were consummated in the Chrysler and General Motors bankruptcies this past summer raised objections from parties in interest[1] and concerns from the broader legal community[2] that the sale transactions were, in effect, sub rosa plans that effectively bypassed the Bankruptcy Code’s important disclosure and voting requirements.
In September 2009, the Third Circuit issued a ruling in Wawel Savings Bank v. Jersey Tractor Trailer Training Inc. (In re Jersey Tractor Trailer Training Inc.), 580 F.3d 147 (3d Cir. 2009), that addressed significant issues that can arise in situations where competing claims to a debtor’s accounts receivable exist between a traditional lender and a factor. Although the court emphasized that it was rendering its decision based on the New Jersey version of the Uniform Commercial Code (UCC), its relatively broad holdings are generally applicable in the Circuit.
The Second Circuit Court of Appeals held on Nov. 5, 2009, that a creditor was entitled to its postpetition legal fees incurred on a prepetition indemnity agreement. In affirming the lower courts, the Second Circuit explained that the Bankruptcy Code “interposes no bar to recovery.”[1]
In In re Crescent Oil Company, et al., Case No. 09-20258, pending in the U.S. Bankruptcy Court for the District of Kansas, the court entered an order approving a gifting carve-out that could provide a road map for some undersecured lenders in their dealings with unsecured creditors’ committees.
Credit bidding, which has been used with increasing frequency as a tool for secured creditors to obtain possession of their collateral rather than receive the proceeds of a sale for consideration they view as inadequate, allows a secured creditor to set off sums owed to such secured creditor as a bid in certain sales of property of a debtor’s estate. Sales of property of the estate outside of the ordinary course may be conducted pursuant to §363 of the Bankruptcy Code, as well as pursuant to a plan of reorganization.
Many secured lenders do not realize the risks associated with lending upon collateral involving underground storage tanks (USTs). Whereas the Comprehensive Environmental Response, Compensation, and Liability Act of 1980, as amended (CERCLA), was amended years ago to protect and insulate from liability lenders who foreclose on environmentally-tainted collateral, USTs are governed by the Resource Conservation and Recovery Act of 1976, as amended (RCRA).
