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Category Archives: The Financially Troubled Company

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Ordinary Course Preference Case Takes Extraordinary Turn: Ninth Circuit Strikes Down Local Bankruptcy Rule On Jury Trials

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
Preference lawsuits are filed all the time in bankruptcy cases and the ordinary course of business defense is frequently asserted. Still, it’s the rare case that ends up with a federal court of appeals decision addressing jury trial rights and invalidating a bankruptcy court’s local rule. This post is about just such a case. The Bankruptcy Preference. As a… Continue Reading

The Best Of Both Worlds: Can A Secured Creditor Get A Section 503(b)(9) “20 Day Goods” Administrative Claim Too?

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
In a decision from August 17, 2007, just released for publication, the Ninth Circuit’s Bankruptcy Appellate Panel (BAP) faced a previously unanswered question under Section 503(b)(9) of the Bankruptcy Code, the section enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (known as BAPCPA).  Is a Section 503(b)(9) administrative claim available… Continue Reading

S&P Warns A Big Increase In Debt Defaults Is Coming

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
In an article entitled "Defaults wave to hit corporate US," the Financial Times reports that Standard & Poor’s is predicting that $35 billion in corporate debt will go into default by the end of 2008. This is similar to the view taken by Moody’s, reported in a recent post. According to the Financial Times, S&P… Continue Reading

A UK Perspective On The Turmoil In The Credit Markets

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
On his Insolvency Blog, Chris Laughton, a recovery and insolvency partner at the UK’s Mercer & Hole firm of chartered accountants, gives a UK and European perspective on the recent gyrations in the credit markets. His new post is entitled "The boom-bust cycle: where are we now?" and it chronicles the progression of the credit crunch from the… Continue Reading

Are “Termination On Bankruptcy” Contract Clauses Enforceable?

Posted in Business Bankruptcy Issues, The Financially Troubled Company
Practically every contract has a provision that makes the bankruptcy or insolvency of one contracting party a trigger for the other party to terminate the contract. These are standard fare and rarely negotiated unless they also include a provision for the reversion back of ownership of property, often intellectual property, upon bankruptcy or insolvency. This post takes a… Continue Reading

Is The Default Rate On High-Yield Debt About To Double?

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
According to Moody’s, the credit rating and investor service firm, the default rate on high-yield or junk bond debt is likely to increase substantially from the current level of 1.4%. Moody’s predicts that the default rate will rise to 4.1% by August 2008 and then to 5.1% by August 2009.  As reported by Credit, Moody’s… Continue Reading

Delaware Supreme Court Issues Long-Awaited Decision In Deepening Insolvency Case

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
On August 14, 2007, the Delaware Supreme Court, sitting en Banc and following oral argument, issued its decision in the Trenwick America Litigation Trust v. Billet deepening insolvency case. Rather than write its own opinion, the Delaware Supreme Court released a two-page order affirming Vice Chancellor Strine’s August 10, 2006 Chancery Court decision "on the basis of… Continue Reading

Section 363 Sales: Interesting Article Takes A Further Look

Posted in Business Bankruptcy Issues, The Financially Troubled Company
David Powlen, Managing Director and Partner at Western Reserve Partners LLC, has an interesting article on the Turnaround Management Association website entitled "Bargains Await Buyers Skilled At Navigating Section 363 Minefields." It gives a good overview of the range of issues that arise in the context of a sale under Bankruptcy Code Section 363. Among… Continue Reading

Signs Of A Turn In The Private Equity Buyout Market?

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
Last week saw what may prove to be early signs of a turn in the robust market for the debt that finances private equity buyouts. In just a week’s time, The New York Times reported on a possible cooldown in the buyout market, and the Financial Times published a commentary on signs of a possible "bondholder… Continue Reading

New Case Addresses Whether A Security Interest In A Patent Can Be Perfected With Just A PTO Filing

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
When a debtor grants a security interest in a patent issued by the U.S. Patent and Trademark Office (PTO), the creditor must take steps to perfect that security interest. Given that the PTO issues patents but the Uniform Commercial Code (UCC) generally governs perfection of security interests, creditors have often filed both a UCC-1 financing… Continue Reading

Third Circuit Holds Contemporaneous Exchange Defense To Preference Claim Is Available Even For Credit Transactions

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
On June 7, 2007, the U.S. Court of Appeals for the Third Circuit issued a decision in the In re Hechinger Investment Company case holding that the "contemporaneous exchange for new value" defense to preference claims can apply even if the payments were made in the context of a credit arrangement. The key is whether the parties… Continue Reading

Who Gets The Benefit Of A D&O Policy’s Proceeds, The Directors And Officers Or A Bankruptcy Trustee?

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
On June 8, 2007, Delaware Bankruptcy Judge Kevin Gross issued a decision in the World Health Alternatives, Inc. bankruptcy case that corporate directors, officers, attorneys, and bankruptcy professionals alike will find of interest. A copy of the Court’s 13-page decision and short order is available here. The Three-Sided D&O Policy. The issue in the case was whether… Continue Reading

New Article Examines What Might Happen To Private Equity Buyouts In A Downturn

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
The Globe And Mail has a story on its Report On Business.com site entitled "Private equity’s high-wire act: Can leveraged buyout artists build firm foundations on soft money?" The article discusses the current low default rate on the debt that has been financing private equity buyouts and considers who will get hurt when the default rate rises.… Continue Reading

Ninth Circuit Clarifies Earmarking Defense To Preference Claims

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
On June 4, 2007, the U.S. Court of Appeals for the Ninth Circuit brought some additional clarity to the earmarking defense to preference claims in its decision in Metcalf v. Golden, an adversary proceeding within the In re Adbox, Inc. Chapter 7 case. In this post, I’ll give a little background on preferences and the earmarking defense and then discuss… Continue Reading

Delaware Bankruptcy Court Considers Whether Key Employee Incentive Plan Milestones Can Be Lowered Without Triggering The Restrictions On Retention Plans

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
One of the significant changes made by the Bankruptcy Code amendments that took effect in October 2005 was the imposition of severe restrictions on "key employee retention plans," known in the bankruptcy world as KERPs.  In this post I’ll discuss how several courts have handled these issues in the year and a half since the… Continue Reading

Delaware Supreme Court Addresses, For The First Time, Whether Creditors Can Sue Directors For Breach Of Fiduciary Duty When The Corporation Is Insolvent Or In The Zone Of Insolvency

Posted in Recent Developments, The Financially Troubled Company
Almost sixteen years ago, the Delaware Chancery Court’s decision in Credit Lyonnais Bank Nederland, N.V. v. Pathe Communications Corp., 1991 WL 277613 (Del. Ch. 1991), helped introduce the terms "vicinity of insolvency" and "zone of insolvency" into the legal and business lexicon. Since then, the Chancery Court issued a number of decisions on the question of… Continue Reading

Defending A Preference: Ninth Circuit Holds That Even First Time Transactions Can Be In The “Ordinary Course”

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
In a decision issued on April 3, 2007 in the In re: Ahaza Systems, Inc. case, the Ninth Circuit held that even first time transactions can qualify for the "ordinary course of business" defense to preferences. A copy of the Court of Appeal’s decision is available here. The Bankruptcy Preference. As a quick refresher, preferences… Continue Reading

Report On The Delaware Supreme Court’s Recent Oral Argument In The Trenwick America Deepening Insolvency Case

Posted in Recent Developments, The Financially Troubled Company
One of the most important recent decisions by the Delaware Court of Chancery in the insolvency area was the August 10, 2006 opinion in the Trenwick America Litigation Trust case. As discussed at length in an earlier post, the Trenwick America decision by Vice Chancellor Strine (available here) squarely held that there was no cause of action… Continue Reading

The New Section 503(b)(9) Administrative Claim: The Latest On What Courts And Debtors Have Been Doing

Posted in Business Bankruptcy Issues, Recent Developments, The Financially Troubled Company
A couple of months ago I posted on the new "20 day goods" administrative claim enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). BAPCPA, which took effect in October 2005, added Section 503(b)(9) to the Bankruptcy Code giving vendors an administrative priority claim for "the value of any goods received by… Continue Reading

Assessing The Distressed Company: A Peek Inside The VC’s Toolbox

Posted in The Financially Troubled Company
Will Price, a principal with venture capital firm Hummer Winblad, has a very interesting post called Isolating Causality: Bad Market or Bad Company. Will identifies a series of factors that can help start-up companies and their investors tease out whether a company’s financial and performance problems are company-centric or instead the result of not having a viable market… Continue Reading

20 Day Goods: New Administrative Claim For Goods Sold Just Before Bankruptcy

Posted in Business Bankruptcy Issues, The Financially Troubled Company
In a recent post about a vendor’s reclamation rights, I discussed how the 2005 amendments to the bankruptcy laws, known as the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (called "BAPCPA"), extended a vendor’s right to reclaim goods once a bankruptcy petition has been filed. This post focuses on another of BAPCPA’s important changes affecting vendors, specifically, the new… Continue Reading

Reclamation: Can A Vendor “Get The Goods” From An Insolvent Customer?

Posted in Business Bankruptcy Issues, The Financially Troubled Company
Although vendors sell goods to get paid, it doesn’t always work out that way. If the customer is insolvent or files bankruptcy, the vendor may be stuck with an unpaid account. To make matters worse, some customers (especially those with limited prospects for financing) may even "load up" on inventory and then file bankruptcy without paying. Regardless… Continue Reading

New Delaware Decision Limits Direct Creditor Claims Against Directors In The “Zone Of Insolvency”

Posted in Recent Developments, The Financially Troubled Company
The Delaware Court of Chancery has issued another decision involving creditor claims against directors of a financially troubled corporation. In North American Catholic Educational Programming, Inc. v. Gheewalla, et al., 2006 WL 2588971 (Del. Ch. Sept. 1, 2006), Vice Chancellor Noble made two important holdings: First, although derivative claims can be brought, creditors may not assert… Continue Reading