Distressed Assets & Alternative Investments

Decoding the Code: Bankruptcy Code Section 510(a) – Subordination Agreements in Bankruptcy

Lawrence PeitzmanPosted on September 3, 2015

Once upon a time, under the Bankruptcy Act of 1898, subordination agreements entered into outside bankruptcy were generally enforced by bankruptcy courts, but the issue was left to the discretion of the courts to be determined on a case-by-case basis. Since 1979, when the current Bankruptcy Code came into effect, however, the treatment of subordination agreements in bankruptcy has been governed by statute: “A subordination agreement is enforceable in a case under this title to the same extent that such agreement is enforceable under applicable nonbankruptcy law.” 11 U.S.C. § 510(a).

Since a bankruptcy court is supposed to enforce a subordination agreement that is enforceable under applicable nonbankruptcy law, section 510(a) closes the door on the exercise of case-by-case discretion by bankruptcy courts, but the statute nevertheless opens up a series of other issues that the courts have been grappling with for over 35 years now. What constitutes a “subordination agreement”? Must a bankruptcy court enforce all the provisions of a “subordination agreement”? What about rights of the parties that are not spelled out in the agreement (including rights that are derived from equitable principles) or that are dealt with in the agreement in ambiguous terms? How are the answers to such questions affected by section 510(a)’s mandate that “subordination agreements” should be enforced in bankruptcy cases?

The Restructuring Mid-Summer Review: Europe and the Emerging Markets

Daniela Andreatta and Scott MorrisonPosted on July 22, 2015

For those focused on the debt restructuring market, the Greek sovereign crisis (covered extensively in our recent updates¹) has drowned out news of other debt restructuring matters this year. Our Alert below addresses key trends in Europe and the Emerging Markets this year which may have gone unnoticed given the understandable emphasis on Greece.

Opportunities for Distressed Debt Funds to buy attractively priced distressed corporate assets and work them out have been few and far between in recent terms. Prices of distressed assets have been high, and often par lenders have decided to extend and amend loans (rather than engage in loan sales to funds or effect fundamental work outs of problem loans). Risk has not been fairly reflected in the price of either primary or secondary market debt. The risk/reward dynamic has been skewed in favour of high risk and low yields; not an attractive combination. The main driver of the activities of Distressed Debt Funds is the default rate. In the 2015 Deutsche Bank Annual Default Survey, Deutsche Bank commented, ‘We can’t overstate how low defaults are…the 2010-2014 cohort [of High Yield Bonds] is the lowest 5 year period for HY defaults in modern history’. Hence, the low level of distressed debt activity.

Poor European growth rates, the difficult backdrop of the Greek debt restructuring talks, and major geopolitical risk, have yielded surprisingly few loan defaults and insolvencies in recent times. In Europe, restructuring activity has tended to be concentrated more in Southern than Northern Europe.

Decoding the Code: Reclamation Under Section 546(c) of the Bankruptcy Code

Debra Felder and Amy PasacretaPosted on July 20, 2015

This is the second post in our “Decoding the Code” Series. The Series intends to discuss various sections of the Bankruptcy Code in a clear and easy to understand manner. Today’s post addresses enforcement of reclamation rights in a bankruptcy case.

Let’s decode the basics:

Supreme Court Says Underwater Junior Liens Survive Bankruptcy

Lorraine McGowenPosted on June 5, 2015

On March 30, we reported on two cases pending before the U.S. Supreme Court: Bank of America v. Caulkett^{^[1]} and Bank of America v. Toledo-Cardona^{^[2]}. Each involved chapter 7 bankruptcy cases in which the debtors had no equity in their homes because the houses were worth less than the amount outstanding on the senior mortgage loans—that is, the second lien-lenders were “unsecured” or totally “underwater”.

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts, but the debtor’s non-exempt assets are liquidated by a bankruptcy trustee, who then distributes the proceeds to creditors. In Dewsnup v. Timm^[3], the Supreme Court held that Bankruptcy Code § 506 does not permit an individual chapter 7 debtor to reduce (or “strip down”) a first-lien mortgage loan to the value of the real property where the amount owed ($119,000) is greater than the property value ($39,000). Caulkett and its companion case addressed whether the outcome should be different where the debtor seeks to void (or “strip off”) a second lien mortgage that is wholly underwater.

On its decision announced on June 1, the Supreme Court found the question effectively controlled by its prior holding in Dewsnup. Noting that the debtors had not asked it to overrule Dewsnup, the Court held by unanimous decision^[4] that a debtor in a chapter 7 bankruptcy case may not void second mortgage liens under Bankruptcy Code section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral. The Court rejected respondents’ attempts to limit Dewsnup’s interpretation to partially underwater mortgages, concluding that there was no principled way to distinguish those from wholly underwater mortgages within the terms of the Bankruptcy Code. In Dewsnup, the Court defined an “allowed secured claim” under section 506(d) as “claim supported by a security interest in property, regardless of whether the value of that collateral would be sufficient to cover the claim”. Thus, section 506(d) voids underwater liens only where the underlying debt is invalid under applicable law.

Orrick Ranked Among Top Ten Bankruptcy Law Firms

Orrick Restructuring GroupPosted on June 1, 2015

Orrick has been ranked a Top Ten Bankruptcy Law Firm by The Deal Pipeline. These rankings are compiled on a quarterly basis through comprehensive deal intelligence to identify the top law, crisis management, investment, and non-investment firms and professionals involved in bankruptcy transactions throughout the United States.

Recent highlights for Orrick’s restructuring team include advising the City of Stockton, California on the confirmation of its chapter 9 plan of adjustment and its successful exit from bankruptcy; representing the bidding lenders in a potential $400 million post-petition DIP financing for the City of Detroit; and advising several of the world’s largest banks in the $6 billion restructuring of the Indiana Toll Road—the largest toll-road debt restructuring to date. For their work on these and other matters, the Orrick team was recognized by Law360 as one of the publication’s Bankruptcy Practice Groups of the Year.

To see the full list of rankings, please click here.

2015 Oil and Gas Outlook Webcast

Orrick Restructuring GroupPosted on May 27, 2015

The recent dip in oil prices has set many leading oil and gas companies into situations of financial distress, which could lead to increased deal flow in the second half of the year as these companies are faced with a need to sell assets.

On May 19th, Orrick’s Restructuring Practice Chair, Raniero D’Aversa, sat on The Deal Pipeline’s expert panel, a 60 minute round table which addressed these issues in the oil and gas industry and provided viewers with an insight into the key factors for their success in 2015.

This webcast is available for viewing here.

Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations

Orrick Restructuring GroupPosted on May 14, 2015

Part Three of Three

Earlier this year, Orrick’s Restructuring team began a three-part look at the American Bankruptcy Institute’s Chapter 11 Reform Report. In part one we looked at issues related to confirmation, valuation, financing and asset sales. Last month, in part two, we focused on modifications to the Bankruptcy Code’s “safe harbors” for derivatives and other complex financial transactions. This final part focuses on a variety of critical issues: third party releases, rejection of collective bargaining agreements, professional compensation issues and treatment of executory contracts in bankruptcy.

To view part three, please click here.

The Unappealing Prospects For Debtors Whose Bankruptcy Plans Are Denied Confirmation

Jeffery HermannPosted on May 13, 2015

The United States Supreme Court decided a bankruptcy appeal on May 4th that holds that, even though creditors and others aggrieved by the confirmation of a bankruptcy plan can appeal the order confirming the plan as a matter of right, a debtor has no such right to appeal an order denying confirmation. The basic logic employed by the Court is that an order confirming a plan moves the case forward and alters the rights of the parties, whereas an order denying confirmation does neither because the debtor can merely propose another, different plan.

The case is Bullard v. Blue Hills Bank,^{^[1]} an appeal from the Bankruptcy Court for the District of Massachusetts that made its way through the Bankruptcy Appellate Panel for the First Circuit and the First Circuit Court of Appeals. The unanimous decision was authored by Chief Justice John Roberts.

Momentive: Case Update

Raniero D'AversaPosted on May 7, 2015

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.

Should Underwater Junior Liens Survive Bankruptcy?

Lorraine McGowen and Joanna McDonaldPosted on March 31, 2015

This article is an excerpt written for the Distressed Download. The full article is available here.

Introduction

On March 24^th, the Supreme Court heard oral argument on the consolidated appeals of two decisions from the Eleventh Circuit Court of Appeals, Bank of America v. Caulkett^{^[1]} and Bank of America v. Toledo-Cardona.^{^[2]} The appeals address an issue left unresolved by the Supreme Court’s decision in Dewsnup v. Timm:^[3] that is, does section 506 of the Bankruptcy Code void, i.e., “strip off” a valid junior mortgage lien in a chapter 7 case if the mortgage loan is completely underwater. These cases involve the treatment in chapter 7 bankruptcy cases of “undersecured” or “underwater” second-lien home mortgages. Debtors who have granted such mortgages have no equity in their houses because the houses are worth less than the amount outstanding on the mortgage loans.

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts following the liquidation of the debtor’s non-exempt assets by a bankruptcy trustee, who then distributes the proceeds to creditors. In Dewsnup, the Supreme Court held that section 506 does not permit an individual chapter 7 debtor to reduce (or “strip down”) a first-lien mortgage loan to the value of the real property where the amount owed is greater than the property value. Relying on Dewsnup, every circuit court to consider the issue except the Eleventh Circuit has determined that section 506 also does not permit individual debtors to void completely underwater junior mortgage.^[4]

Although the housing market has been rebounding in many jurisdictions, there are numerous properties subject to multiple mortgage liens that are worth less than the amount of the first-priority mortgage. The Supreme Court’s resolution of the Caulkett and Toledo-Cardona cases will either ratify the trend of other circuits, which would benefit junior lenders, or overturn it, which would favor homeowners and first-lien mortgagees. A ruling prohibiting lien stripping also could severely impair the ability of business and individual debtors to use the statutory power to restructure and avoid liens in chapters 11, 12 and 13. Regardless of the outcome, the decision will have widespread ramifications through the secondary housing market.