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Tag Archives: Chapter 11

Free Lance-Star and Fisker Automotive: Development of the ‘For Cause’ Exception to Credit Bidding

Posted by Jonathan Brand on April 17th, 2014 in Bankruptcy Sales, Business Bankruptcy, Chapter 11, Chapter 7 Trustee, , , , , , , , ,

On April 14, 2014, the Bankruptcy Court for the Eastern District of Virginia issued an opinion limiting the credit bid of a party asserting that it held senior secured position in all assets of the debtors. In re The Free Lance-Star Publishing Co. of Fredericksburg, VA, et al., Case No. 14-30315-KRH (Bankr. E.D.Va. April 14, 2014).  The Free Lance-Star opinion coupled with the Bankruptcy Court for the District of Delaware’s opinion in In re Fisker Automotive, Inc. et al., Case No. 13-13087-KG (Bankr. D.Del. January 17, 2014) should be viewed as instructive for chapter 11 debtors, creditor committees, and aggressive lenders seeking to employ a loan-to-own strategy through a quick section 363 sale process.

In 2012, the Supreme Court in Radlax Gateway Hotel, LLC v. Amalgamated Bank, 132 S.Ct. 2065 (2012) clarified that the holder of a senior secured debt may credit bid in a chapter 11 plan auction. However, Free Lance-Star and Fisker demonstrate footnote 14 from In re Philadelphia Newspapers survives. Footnote 14 of Philadelphia Newspapers provides, in relevant part, “A court may deny a lender the right to credit bid in the interest of any policy advanced by the Code, such as to ensure the success of the reorganization or to foster a competitive bidding environment. See, e.g., 3 Collier on Bankruptcy 363.09[1] (“the Court might [deny credit bidding] if permitting the lienholder to bid would chill the bidding process.”).” In re Philadelphia Newspapers, 599 F.3d 298, 316 fn. 14 (3d Cir. 2010)(emphasis added).

While Fisker is an opinion limited to the facts of the case, the arguments raised by the Committee may be instructive – in the right situations – to frustrate, limit or deny a secured creditor’s attempt to credit bid. In Fisker, the debtor sought to sell the debtor’s assets through a private sale in connection with the secured party providing a $75 million credit bid. The debtor and committee presented a set of stipulations related to, among other issues, the committee’s motion to limit the secured creditor’s right to credit bid. The stipulations served as the factual basis for the court’s decision to limit the secured creditor’s credit bid. Therein, the competing bidder provided that it would not participate in an auction if the secured creditor was allowed to bid more than $25 million, or the purchase price of the DOE loan. As a result of the unresolved issues as to the validity of the debt buyer’s lien, and no bidding would take place unless the credit bid was capped, the court found ‘cause’ under section 363(k). The debt buyer’s bid was capped at $25 million. The debt buyer’s attempt to appeal the court’s decision were futile. As a result, a public auction went forward and the competing bidder purchased the debtor’s assets for $149.2 million. The unsecured creditors went from receiving approximately $500,000 under the debt buyer’s original credit bid, to potentially receiving approximately $35 million under a proposed settlement post-auction sale.

Fisker’s result and reasoning may be clear, however, the manner in which the court determined the amount to limit the credit bid is open to discussion. It must be assumed that the stipulations drove the court’s decision. This gives rise to a different issue: If the facts justify limiting a secured party’s right to credit bid, how should a court determine the appropriate amount of the credit bid?

The Free Lance-Star case may provide an answer. In Free Lance-Star, the debtor was a family-owned publishing, newspaper, radio and communications company. After securing a $50 million loan from Branch Banking and Trust (BB&T), the company fell on hard times. The loan was secured by certain assets of the Debtor. However, it was not secured by the debtor’s “tower assets” associated with the debtor’s radio broadcasting operations.

Eventually, BB&T sold its loan to Sandton Capital Partners (“Sandton”) in late June 2013. Sandton wanted to push the debtor through a chapter 11 case and sell substantially all the assets to a related entity of Sandton, DSP Acquisition LLC (“DSP”). DSP took certain actions pre-petition which put the scope of DSP’s security interest at issue, and lead to the debtor seeking to limit DSP’s credit bid under §363(k). The debtor, similar to Fisker, sought to limit DSP’s credit bid on the grounds that the validity and scope of DSP’s lien was at issue, DSP engaged in inequitable conduct, and limiting the credit bid would foster a robust bidding process.

At the combined evidentiary hearing on the debtors’ motion to limit credit bidding and cross-motions for summary judgment filed in an adversary proceeding seeking a determination as to the extent, and validity of DSP’s lien, the court determined DSP acted improperly and ‘cause’ existed to limit DSP’s credit bid. The court asked for testimony from DSP as to how much Sandton paid for the BB&T loan. No such testimony was provided. Typically, a debt buyer considers this information confidential. It was only known in Fisker because the debt buyer purchased a Department of Energy loan at a public auction a month prior to the filing of the Fisker case. The court, having determined that DSP acted improperly and did not have a valid perfected security interest in all of the debtors’ assets, found ‘cause’ pursuant to section 363(k) to limit the debt buyer’s credit bid.

Without any evidence being offered by DSP, the court requested that the debtors’ expert witness provide testimony on the best procedure for fashioning a competitive auction sale and credit bid price. Here, the debtor’s expert eliminated the unencumbered assets (as determined by the court) and applied a market analysis to develop an appropriate cap for the credit bid. The court accepted this approach and limited DSP’s credit bid of approximately $38 million to $13.9 million. DSP has filed an appeal.

Depending on the outcome of the appeal, employing a market analysis in connection with determining what amount a credit bid should be limited in order to generate a competitive environment for an auction is a novel, creative approach. This approach may lay the ground work for other courts to employ such a valuation method to reduce a credit bid where the facts justify limiting a secured party’s right to credit bid. No matter the outcome of DSP’s appeal, Fisker and Free Lance-Star demonstrate that debtors and committees have grounds to challenge a credit bid, especially where the validity of a secured party’s lien is questioned.  Holders of secured debt, whether debt buyers or the loan originators, should evaluate their lien rights and develop options in advance of a chapter 11 filing when using a credit bid in a loan-to-own strategy in a section 363 sale process.

My bank took all the money in my account! Can they do that? Chapter 11 can help.

Posted by David Leibowitz on April 29th, 2009 in Bankruptcy, Business Bankruptcy, Chapter 11, , , ,

My client called and was frantic.  ”The bank took all the money from my account – I can’t make payroll and my checks are bouncing.  Can they do that?

This is called “set-off”.  And yes, the bank can do that.  

Here’s the idea.  If you have money in the bank, it is money that the bank owes you.  But suppose you also owe money to the same bank.  This typically happens to businesses which have loans with a bank and naturally maintain their checking account with the bank.  So the debt you owe the bank – say a business loan – may be offset by a debt that the bank owes you – your money in the bank.

If you are in default with your bank under your loan agreement, even if you simply haven’t abided by various covenants or agreements in your loan agreement with the bank, the bank has the right to enforce its agreement with you.

For example, the bank has the right to set off the money in your checking account against the debt you owe the bank.  This can be mighty inconvenient.  Your employees won’t get paid and your checks will bounce.  The bank also would have the right to enforce its security agreements with you – for example collect accounts receivable directly from your customers or even sell your assets at auction.

Chapter 11 of the bankruptcy code is your strongest response to these actions.

You’ll need a plan.  You’ll need financing to operate while you are in reorganization.  And you’ll need good legal counsel – like Lakelaw – to represent you in your chapter 11 case.

If your business can recover, you owe it to yourself to try.  Otherwise, your business and life work will face liquidation and a rapid demise.

Chapter 11 for individuals

Posted by David Leibowitz on February 10th, 2009 in Bankruptcy, Chapter 11,

Chapter 11 bankruptcy is for people and not just businesses. If you have more than about $1.3 million in secured debt or more than about $380,000 in unsecured debt, you cannot file a chapter 13 case. You may not be able to file a chapter 7 case if you make a good income and if the means test applies to you. Personal Chapter 11 reorganization can help you.

Lakelaw’s managing member, David P. Leibowitz, is an authority on chapter 11 for individuals. He is co-chair of the American Bankruptcy Institute Task Force studying individual chapter 11 bankruptcy cases. He has made presentations on this topic to the American Bankruptcy Institute’s Chicago Consumer Bankruptcy Conference and the Milwaukee Bar Association Bankruptcy Committee.

Frequently Asked Questions about Individual Chapter 11 Bankruptcy

Why would people decide to file a chapter 11 bankruptcy case?
Consider filing a chapter 11 case if you have debts beyond the limits allowed for chapter 13 and you are not eligible for chapter 7. Consider filing your personal chapter 11 case if you have substantial judgments outstanding that are accruing interest. In chapter 11, there is no post-petition interest on unsecured claims. Consider filing chapter 11 if you have a group of creditors who are interested and willing to help you. For example, you may have loans outstanding at several banks. Maybe one of the banks is very hostile but the others are more friendly and willing to make some accommodations for you. Chapter 11 can help you.

How long will I be in chapter 11?
It can take months if not more than a year from the time that a chapter 11 case is filed until your plan is confirmed.

Why does chapter 11 take so long?
In chapter 11, you have to file a plan and disclosure statement with the court. The bankruptcy court must approve the form of the disclosure statement. The court can confirm your plan only if at least one “class” of creditors that is affected or “impaired” by the plan votes for the plan. The court must find that the plan is “fair and equitable” for any class that does not accept the plan. It is much better to negotiate a plan that is agreeable to all classes of creditors. This takes time and is expensive.

What is a chapter 11 plan?
A chapter 11 plan is a legal document that divides your creditors into classes. Each class of creditors must have more or less the same type of claim. Each secured creditor is placed into a separate class. Unsecured creditors are a separate class. Priority creditors include tax claims, claims for alimony or child support (domestic support obligations) and administrative expenses (like attorneys’ fees). The plan sets out how you as the Debtor propose to treat each class of creditors. Your plan can change the amount due, the payment terms and the interest rate payable for each class of creditors.

What is a disclosure statement?
The disclosure statement is a legal document you file with your plan and provide to all your creditors. It explains your financial history, why you filed a chapter 11 case, how you plan to resolve your financial problems and lays out financial and other information necessary for a creditor to make an informed decision as to whether the creditor should accept, or vote for, your plan.

What does it mean to accept a chapter 11 plan?
Creditors in chapter 11 have the right to vote on a plan. If the form of the plan is approved by the Court, we will send each creditor a ballot. The creditors can accept or reject your chapter 11 plan. A class of creditors who vote in favor of the plan by 2/3 in amount and a majority in number who vote is deemed to have accepted a chapter 11 plan. Acceptance of the plan is binding on the creditors in the class who vote against the plan.

Who can propose a Plan in Chapter 11?
You as the Debtor have the right to propose the plan before anyone else does. This is called the exclusivity right. The period within which you have the sole or exclusive right to file a plan can be extended by the Court. After that time, a creditor or any other party in interest could propose a plan.

What is the role of the United States Trustee?
The United States Trustee oversees all bankruptcy cases including chapter 11 cases. The United States Trustee can advise the bankruptcy judge whether you as a chapter 11 debtor are doing what you are required to do under the chapter 11. You will have to make monthly reports to the United States Trustee showing all your income and expense while you are in Chapter 11. You will have to make quarterly payments to the United States Trustee as long as you are a debtor in Chapter 11.

What happens if a creditor moves to appoint a Trustee for me?
If you engaged in dishonesty or misconduct, a creditor, the United States Trustee, or any party in interest could move for the appointment of a Trustee to take over your Chapter 11 case. It is very important for you to disclose all of your activities before and during your bankruptcy case so that we can properly advise you, particularly if you are at risk for appointment of a trustee.

What are my chances of success?
Chapter 11 cases for individuals are difficult. Your chances of success are greatly increased if you are working with experienced counsel and if you can develop a plan that can gain the support of most of your creditors. Your chances of success are also greatly increased by working with counsel who is familiar with the bankruptcy judges, the United States Trustee, the creditors’ bar and their tendencies and expectations.

What will my plan involve?
Like chapter 13, your plan probably will require to pay all of your disposable income during a five year period. Unlike chapter 13, you will probably apply to the court for authority to spend money from your post-petition earnings according to an agreed upon budget. You’ll also have to take into account income tax considerations. Your chapter 11 bankruptcy estate is a separate taxable entity. So please be sure to discuss this with us and your income tax advisor or accountant.

What will chapter 11 cost?
Individual chapter 11 cases require a great deal of time and attention. The bankruptcy court regulates fees in individual chapter 11 cases. The United States Trustee might also have comments about fees. We will work out a suitable retainer for your case and apply to the court from time to time as needed for additional fees. Any attorney you retain will want adequate assurances that you will pay necessary fees or that you will make suitable arrangements to do so.

Must I file with my spouse?
Not necessarily. It depends on his or her financial situation. Effectively, a joint chapter 11 case you’re your spouse constitutes two separate chapter 11 cases. These can be handled together, at least for procedural purposes.

Can I file a chapter 11 case at the same time as my business partner?
You might want to do this. However, you and your business partner will need separate representation as your interests are different than those of your business partner even if you have a lot of common creditors.

Can I file a chapter 11 case at the same time as my corporation?
You can do this. You may want to address the corporation’s needs first. You might be able to get a stay of actions against you in your corporation’s bankruptcy. If you do need to file a personal chapter 11 case while your corporation is in chapter 11, you and the corporation will probably need separate counsel because you and the corporation have separate and conflicting legal interests.

What are some practical considerations for individual chapter 11 cases?
You will have to get the court’s permission to use rental income or other proceeds or accounts (“cash collateral”) which have been pledged to one of your creditors. You’ll have to file monthly operating reports with the United States Trustee. You will have to establish new bank accounts called “debtor – in – possession” accounts since you’re financial life will be under court supervision. You’ll need to budget carefully as you will certainly have additional cash needs in chapter 11. You may need to raise some money from outside sources to make payments required to fund your plan of reorganization since some creditors may want a down payment on their claims. So you may have to line up post-petition financing or financing for your exit strategy. It’s best to do this even before you file your case. You’ll have to shore up your relationships with your creditors as you are going to need some of them, if not all of them, to have an interest in your financial survival.

What are my chances of success?
Chapter 11 for individuals is difficult. Your best chance of success is to have a plan before you file your case. Work with experienced attorneys who know chapter 11. Many judges won’t even allow an attorney to represent a client in an individual chapter 11 case unless that attorney has experience in the field. Attorneys like David Leibowitz and Jonathan Brand at Lakelaw have successfully represented people in chapter 11. Be sure that you insist on a track record of success when selecting an attorney to represent you in your personal chapter 11 bankruptcy case.


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