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Posts by: Peter Amend

Third Circuit Departs from Momentive and Reinstates EFIH Noteholder Make-Whole Claims Causing Uncertainty over EFH’s Ability to Exit Bankruptcy

Recently, the Third Circuit reversed decisions issued by the Delaware Bankruptcy and District Courts and permitted first and second lien noteholders of Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. to receive payment of a make-whole premium. In re Energy Future Holdings Corp., No. 16-1351 (3d Cir. Nov. 17, 2016).  The decision, which is largely grounded in New York law, departs from recent controversial decisions issued by the Bankruptcy Court and District Court for the Southern District of New York in the Momentive bankruptcy, which we have previously discussed here and here.  In Momentive, the courts reached the opposite conclusion on substantially similar facts.  In Momentive, the courts reached the opposite conclusion on substantially similar facts.  In addition to creating a split between the Third Circuit and the Southern District of New York, the ruling creates uncertainty regarding the ability for the debtors in the long-running EFH bankruptcy to confirm their proposed chapter 11 plan. READ MORE

Foreign Debtors’ Access to U.S. Bankruptcy Courts: Expansion of “Property in the United States” Definition in Chapter 15 Cases

When is a foreign entity eligible to file a chapter 15 petition?  This question has been the subject of debate over the last few years, and Judge Martin Glenn’s recent opinion in In re Berau Capital Resources Pte Ltd. will add to this debate.  Although the debtor in the case was foreign and did not have a place of business in the United States, Judge Glenn concluded that the debtor had satisfied the eligibility provisions under section 109(a) of the Bankruptcy Code because the New York choice of law and forum selection clause in the underlying bond indenture rendered the bonds “property in the United States.”  No. 15-11804 (MG), 2015 WL 6507871 (Bankr. S.D.N.Y. Oct. 28, 2015).

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Supreme Court Rules Against Fees For Fee Application Defense

Issuing its third bankruptcy ruling in a month, the Supreme Court held, by a 6-3 margin, that the Bankruptcy Code does not permit awarding fees to debtor’s counsel, when counsel incurred those fees defending its own fee application.  The Court held that services defending fee applications were not rendered to the debtor’s estate, and therefore the fees did not constitute “actual, necessary services”  payable under section 330(a)(1) of the Bankruptcy Code as reasonable compensation.  This decision could increase leverage on parties seeking to rein in bankruptcy litigation by threatening to challenge attorney’s fees.  Baker Botts L.L.P. et al. v. ASARCO LLC, No. 14-103, 2015 WL 2473336 (S. Ct. June 15, 2015) (hereinafter, the “Opinion”).

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A Battle in the Making in the Oil and Gas Sector: Second Lien vs. High Yield Debt

In the oil and gas industry, there is a storm brewing between holders of second lien debt and unsecured high yield bonds.  These creditor groups are finding themselves pitted against one another as oil and gas companies become increasingly leveraged in an effort to alleviate liquidity constraints.

As widely publicized, oil prices precipitously decreased in 2014 and depressed prices have continued into 2015, with prices falling from $103 per barrel a year ago to around $60 per barrel today.  With this prolonged decline and period of weak oil prices, oil and gas companies are having difficulty breaking even.  Therefore, it is not surprising that many industry players, particularly the upstream division (comprised of exploration and production activities), have experienced tightened liquidity.  Larger and well-diversified companies are best equipped to weather the storm because they are able to rationalize liquidity by suspending new projects and future exploration, selling non-core/non-producing assets and demanding price reductions from service providers.  While these measures have helped ease some financial stress, they are often not enough and companies have turned to the debt capital markets as a source of liquidity.  These new financings provide companies with much needed time to either wait out this period of depressed oil prices or formulate a restructuring plan.

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Momentive: Case Update

As an update to our prior blog post, on May 4, 2015, Vincent Briccetti, United States District Court Judge for the Southern District of New York, issued a decision affirming the Bankruptcy Court’s order confirming Momentive’s cramdown chapter 11 plan.  The decision was long awaited with the parties having completed briefing in December 2014.

Judge Briccetti followed the reasoning of the Bankruptcy Court and affirmed the use of the “formula” approach to determine the cramdown interest rate.  Under the formula approach, the cramdown interest rate is equal to the sum of a “risk free” base rate (such as the prime rate) plus a risk margin of 1-3%.  Judge Briccetti rejected the “efficient market” approach advocated by the first and 1.5 lien noteholders, affirming the view that rates should not include any profit to secured creditors.  Under the efficient market approach, the cramdown interest rate is based on the interest rate the market would pay on such a loan.

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Momentive: Where does it stand?

On September 9, 2014, following a hotly contested four-day confirmation hearing, Robert Drain, U.S. Bankruptcy Judge for the Southern District of New York, issued a bench ruling approving Momentive’s chapter 11 plan.  See In re MPM Silicones, LLC, No. 14-22503-rdd, 2014 Bankr. LEXIS 3926 (Bankr. S.D.N.Y. Sept. 9, 2014).  Momentive’s plan provided for the company’s first and 1.5 lien noteholders to receive new notes with extended maturities at a reduced interest rate, while fully equitizing the second lien noteholders.  Holders of senior subordinated notes did not receive any recovery.  At the heart of the plan was a $600 million rights offering backstopped by the second lien noteholders.

In approving the plan, Judge Drain overruled objections filed by trustees for the first and 1.5 lien noteholders who argued that the plan was not “fair and equitable” because the proposed cramdown interest rate for each of the new notes was below the applicable market rate.  The first and 1.5 lien noteholders also asserted that a make-whole premium would have been due upon a repayment of the debt  pursuant to language in the first and 1.5 lien note indentures.  The trustee representing holders of senior subordinated notes also objected to the plan on the grounds that it impermissibly subordinated the claims of senior subordinated noteholders to the deficiency claims of second lien noteholders, which resulted in the senior subordinated noteholders not receiving any recovery.  The trustee for the senior subordinated notes also argued that the plan violated the absolute priority rule because Momentive and its debtor-subsidiaries retained intercompany interests even though the senior subordinated notes were not paid in full.

Although Judge Drain’s bench decision touched on several important confirmation topics, the ruling was controversial because it explicitly rejected a market-based approach to calculating the cramdown interest rate and endorsed the “formula approach” espoused in the chapter 13 cases Till v. SCS Credit Corp., 541 U.S. 465 (2004) and In re Valenti, 105 F.3d 55 (2d Cir. 1997).  Under the formula approach, the debtor must, in a cram-down scenario, provide a secured creditor with new notes bearing interest equal to a “risk free” base rate (such as the prime rate) plus a risk adjustment of 1-3%.  Importantly, he found while market pricing includes an element of profit, the Bankruptcy Code has no such requirement and thus the risk adjustment should be just that – an adjustment that reflects the ultimate risk of nonpayment, and not a mechanism to recover opportunity costs.  Judge Drain’s decision conflicts with decisions issued by the U.S. Court of Appeals for the Fifth and Sixth Circuits as well as some lower court opinions.  In economic terms, Momentive’s oversecured first and 1.5 lien noteholders lost nearly $100 million in trading value for their existing notes because the cramdown interest rate was calculated using the formula approach versus a market rate.

Following his confirmation decision, Judge Drain denied the creditors’ immediate request for a stay of consummation of the plan pending appeal.  Whether a stay pending appeal is granted is committed to the discretion of the judge after considering the following factors:  (i) whether the movant will suffer irreparable injury absent a stay, (ii) whether a party will suffer substantial injury if a stay is issued, (iii) whether the movant has demonstrated a substantial possibility of success on appeal, and (iv) the public interest that may be affected.  On September 11, 2014, Judge Drain formally entered an order confirming Momentive’s plan, prompting the trustees for the first and 1.5 lien noteholders as well as the trustee for the senior subordinated noteholders to file an appeal with the district court and once again seek a stay pending appeal.

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Detroit Confirms Chapter 9 Plan of Adjustment

Approximately 16 months after filing the largest chapter 9 bankruptcy in history, Detroit received approval November 7 of its chapter 9 plan of adjustment.  Bankruptcy Judge Stephen Rhodes of the Eastern District of Michigan Bankruptcy Court, confirmed the plan at a several-hour hearing where he read into the record an “oral opinion.”  Judge Rhodes held that the plan “meets the legal requirements for confirmation” and lauded the plan, describing it as an “extraordinary accomplishment in bankruptcy and an ideal model for future municipal restructurings.”  In re City of Detroit, Case No. 13-53846 (Bankr. E.D. Mich., November 7, 2014).  Read More.

Law360: Rakoff’s Foreign Fund Clawback Ruling Has Limitations

On July 6, 2014, Jed S. Rakoff, U.S. district judge for the Southern District of New York, declined to extend the reaches of Section 550(a) of the Bankruptcy Code abroad to permit the recovery of funds that were alleged to be fraudulently obtained from Bernard L. Madoff Investment Securities LLC in connection with Bernard Madoff’s Ponzi scheme. Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), No. 12-mc-115 (JSR) (SDNY Jul. 6, 2014).  

The decision involves the attempted extraterritorial application of Section 550(a), which allows a trustee to recover “property transferred … to the extent that a transfer is avoided” under bankruptcy law. In essence, Irving Picard, the trustee, sought to not only seek recovery from feeder funds that invested directly into Madoff funds, but also sought to recover from subsequent transferees. The Madoff decision should give comfort to foreign investors that there is a reduced risk that proceeds of their indirect investments in U.S. companies will be clawed back under bankruptcy law — even if such proceeds were obtained fraudulently. There are, however, important limitations to consider.  Read More.

Oregon Bankruptcy Court Denies Administrative Priority Status to Potential DIP Lender for Breakup Fee Claim

On April 8, 2014, Chief Bankruptcy Judge Frank R. Alley, III for the United States Bankruptcy Court for the District of Oregon found that Sunstone Business Finance, LLC’s claim against debtor C&K Market, Inc. did not constitute an administrative expense claim.  The claim arose from a breakup fee for proposed DIP financing after C&K selected an alternative DIP lender.

The Court denied Sunstone’s request for an administrative claim for two reasons.  First, the Court found that the breakup fee did not arise from a transaction with a debtor in possession because the parties executed the DIP term sheet prepetition.  Second, the Court found that Sunstone, as a potential lender, did not provide a direct and substantial benefit to the estate because the alleged benefits either occurred prepetition or were too indirect and intangible to qualify for priority treatment.  If this opinion were to gain acceptance beyond this case, it could chill prepetition offers to serve as new DIP lenders, or possibly even affect the market for stalking horse bidders in a section 363 sale.  In re C&K Market, Inc., No. 13-64561-fra11 (Bankr. D. Or. Apr. 8, 2014) [Dkt. No. 786].  Read More.