Chapter 11

Showing: 29 - 35 of 127 Articles
Business Bankruptcy Issues Recent Developments

Spring 2013 Edition Of Bankruptcy Resource Now Available

The Spring 2013 edition of the Absolute Priority newsletter, published by the Bankruptcy & Restructuring group at Cooley LLP, of which I am a member, has now been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy and insolvency topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • The U.S. Supreme Court’s decision upholding a secured creditor’s right to credit bid;
  • Determining when a claim arises under the Bankruptcy Code;
  • How the assumption of an executory contract can protect a party from a preference claim; and
  • A recent Seventh Circuit decision applying the absolute priority rule in a Chapter 11 plan context.

This edition also reports on some of our recent representations, including for official committees of unsecured creditors in Chapter 11 cases involving major retailers and others, and our work for Chapter 11 debtors. Recent committee cases include Mervyn’s Holdings, Appleseed’s Intermediate Holdings, Atari, Vertis Holdings, United Retail, and Urban Brands, among others.

I hope you find the latest edition of Absolute Priority to be of interest.

Business Bankruptcy Issues Recent Developments

Official Bankruptcy Forms Revised To Reflect April 1, 2013 Dollar Amount Adjustments

As discussed in an earlier post called "Going Up: Bankruptcy Dollar Amounts Will Increase On April 1, 2013," various dollar amounts in the Bankruptcy Code and related statutory provisions were increased for cases filed on or after today, April 1, 2013. Now several official bankruptcy forms have been revised to reflect these new dollar amounts.

Remember, the increased dollar amounts reflected on these forms apply only to cases filed on or after April 1, 2013.

Business Bankruptcy Issues The Financially Troubled Company

Using Chapter 11 Bankruptcy’s Sale Process To Achieve An Exceptional Sale Price

A Difficult Problem. Imagine that your company is facing a government investigation, requiring you to spend hundreds of thousands of dollars in legal fees and costs, while being threatened with substantially more legal expense. That financial burden is simultaneously starving the company of cash needed to grow the business, and cash balances are heading toward zero. Worse yet, the cloud over the company means it cannot raise additional investment or even find a buyer, as potential buyers fear being saddled with the government investigation and any underlying potential claims.

The Strategy. That was the trap confronting our client Cylex Inc., a Maryland-based life sciences company whose diagnostic test kit detects immune function in organ transplant patients, when they asked me for help. After considering alternatives, the strategy we crafted was to use Chapter 11 bankruptcy’s sale process to obtain a bankruptcy court order expressly permitting the buyer to purchase the company’s assets “free and clear” of the government investigation and underlying claims. 

 

The Stalking Horse Bidder. With the legal strategy in place, the next step was negotiating with a strategic buyer the company had identified.  Fortunately, Cylex recognized the need for a solution early enough that we had time to work through the challenges of implementing the strategy.

  • Given that the sale would be under Bankruptcy Code Section 363 – which allows a bankruptcy court to authorize an asset sale free and clear of liens, interests, claims and encumbrances – the buyer knew that its asset purchase agreement would be subject to “higher and better bids.” In effect, as seller, Cylex would have a chance to “shop” the buyer’s purchase agreement to try and find a better deal.
  • The buyer, known as a “stalking horse bidder” in bankruptcy parlance, wanted both a break-up fee (a percentage of the sale price) and an expense reimbursement (for legal and other direct expenses), in the event another bidder emerged and won the bidding. Those amounts also set the floor for a minimum “topping” or overbid price.
  • As is common, the stalking horse bidder also insisted on a no-shop provision until the bankruptcy was filed, meaning that Cylex would have a chance to shop the deal but only for a relatively short period after the bankruptcy was filed.
  • The pre-bankruptcy sale negotiations with the stalking horse bidder were challenging and took months. However, in November 2012, Cylex and the stalking horse bidder executed a formal asset purchase agreement calling for a $6 million purchase price, but also including a long list of closing conditions, an escrow holdback, and other non-economic terms unfavorable to Cylex.

The Bankruptcy Filing.  Cylex filed Chapter 11 bankruptcy in the U.S. Bankruptcy Court for the District of Delaware on December 3, 2012. Among the motions we filed on the first day of the case was one to approve the break-up fee, expense reimbursement, and bidding procedures, and the Bankruptcy Court approved them two weeks later. Given the company’s dwindling cash, the bidding procedures set a deadline of January 18, 2013 for any overbids, an auction on January 22, 2013 (if any overbids were made), and a hearing on approval of the sale on January 23, 2013. The schedule was accelerated to be sure Cylex could get the transaction closed before it ran out of cash.

 

The Sale And Auction Process. The company and its advisors only had about six weeks to shop the stalking horse bid, including over the holidays, but they made the most of the limited time.

  • On the day of the overbid deadline, two new strategic bidders submitted overbids, both in the $6.7 million minimum overbid amount. That set the stage for the auction four days later.
  • The auction made all of the efforts worthwhile. After 16 rounds of bidding, spanning more than 12 hours, the winning bid (from one of the two overbidders) was a stunning $14.425 million, all cash at closing. Through the auction, Cylex had increased the sale proceeds by more than $8 million over the stalking horse bid.
  • When faced with bidding competition at the auction, the stalking horse bidder and each of the overbidders made concession after concession on non-economic terms, dropping closing conditions and the escrow holdback, and agreeing to purchase price adjustments favorable to Cylex.
  • The Bankruptcy Court approved the sale to the winning bidder on January 23, 2013, and entered an order expressly permitting the winning bidder to purchase Cylex’s assets “free and clear” of the government investigation and underlying claims. The sale closed in February.

Conclusion. Cylex, now known as Immunology Partners Inc., faced an extremely challenging set of problems caused by the government investigation, in turn triggered by a False Claims Act qui tam complaint. Although the government later declined to intervene in the qui tam case, that decision came too late for the company to have non-bankruptcy options.  As mentioned in the press release on the sale, despite the legal issues and financial distress it faced, the company was ultimately able to sell its assets for 2.6 times revenue, a multiple typically reserved for healthy companies in its industry. It never could have achieved that sale price, or perhaps any price, without a bankruptcy sale process given the cloud of the government investigation.  Chapter 11 bankruptcy may be considered a last resort, but there are times when it is simply the best way to address a company’s financial and legal problems.

Business Bankruptcy Issues Recent Developments

Going Up: Bankruptcy Dollar Amounts Will Increase On April 1, 2013

It hasn’t gotten much publicity yet, but certain dollar amounts in the Bankruptcy Code will be increased for new cases filed on or after April 1, 2013. Follow this link for a chart listing all of the changes on this Federal Register page, which printed this month’s official notice from the Judicial Conference of the United States.

Among the most meaningful increases for Chapter 11 and other business bankruptcy cases:

  • The total amount of claims required to file an involuntary petition rises to $15,325 from $14,425;
  • The employee compensation and benefit plan contribution priorities under Sections 507(a)(4) and 507(a)(5) both increase to $12,475 from $11,725;
  • The consumer deposit priority under Section 507(a)(7) rises to $2,775 from $2,600;
  • The dollar amount in the bankruptcy venue provision, 28 U.S.C. Section 1409(b), which requires that actions to recover for non-consumer, non-insider debt be brought against defendants in the district in which they reside, has increased to $12,475 from $11,725;
  • The minimum amount required to bring a preference claim against a defendant in a non-consumer debtor case, specified in Section 547(c)(9), rises from $6,225 from $5,475; and
  • The total debt amount in the definition of small business debtor in Section 101(51D) will rise to $2,490,925.

Other adjustments will affect consumers more than business debtors. For example, the debt limit for an individual to be able to qualify to file a Chapter 13 bankruptcy case will rise to $1,149,525 of secured debt, and certain exemption amounts will also rise.

Although the changes aren’t substantial, be sure to keep them in mind when assessing cases filed after April 1st.

Business Bankruptcy Issues Recent Developments

Supreme Court Bids Adieu To Plans Denying Secured Creditors The Right To Credit Bid

On May 29, 2012, only a little more than a month after the April 23, 2012 oral argument in the case, the U.S. Supreme Court issued its decision in RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank on the question of "credit bidding." You can get a copy of the opinion by following the link in this sentence. (You are also welcome to follow my Twitter feed @BobEisenbach for updates; I tweeted a link to the opinion the afternoon it was issued.)

The Circuit Split. The Supreme Court took the case to resolve a split between the circuits on this issue. In an earlier case, In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), the Third Circuit had confirmed a plan of reorganization that prevented credit bidding, and the Fifth Circuit had done so in a case involving an asset transfer under a plan, which was considered to be a sale. However, in the RadLAX case, decided as River Road Hotel Partners, LLC, et al. v. Amalgamated Bank, 651 F.3d 642 (2011), the Seventh Circuit took the opposite view. It rejected proposed bidding procedures that would have precluded the secured creditor from credit bidding at an auction contemplated by the plan of reorganization.  For more analysis of these issues and the split in the circuits, follow the link in this sentence to the Winter 2012 edition of Cooley’s Absolute Priority newsletter.

The Supreme Court’s Decision. By an 8-0 vote (Justice Kennedy did not participate), the Supreme Court held that a secured creditor has a right to credit bid its secured debt under a Chapter 11 plan of reorganization that provides for a sale of its collateral. The decision affirmed the Seventh Circuit’s decision rejecting the bidding procedures in the RadLAX case.

  • The issue is important because with a "credit bid," a secured creditor is able to acquire the assets being sold by using its debt, up to the amount it’s owed, without having to pay cash upfront for the assets. It can be challenging for secured creditors to raise large amounts of cash, especially when a syndicate of lenders (or, as the Supreme Court noted, the Federal Government) is involved, even though presumably they will later be paid back out of the sale proceeds.
  • Secured creditors argue that, without the right to credit bid, for these reasons they would be unable to participate in the sale and their collateral could be sold for an unreasonably low price.
  • Debtors argue that a secured creditor’s credit bid could chill bidding by third parties, particularly if the secured creditor’s debt, and thus potential credit bid, is substantially higher than what a cash bidder would be likely to pay.

Indubitable What? The Bankruptcy Code requires that if a secured creditor objects to a plan, it must receive "fair and equitable" treatment, a term of art under Section 1129(b)(2)(A) of the Bankruptcy Code. That section provides that "fair and equitable" means that a secured creditor must either (i) retain its lien and be paid deferred cash payments, (ii) be entitled to credit bid at a sale of its collateral, or (iii) realize the "indubitable equivalent" of its claim. The RadLAX debtor was attempting to sell its assets (the secured creditor’s collateral) without permitting the secured creditor to credit bid, pay the resulting sale proceeds to the secured creditor, and "cram down" this treatment over the secured creditor’s objection, arguing that it constituted the "indubitable equivalent" of its claim. 

The legal issue at the core of the decision involved the interpretation of Section 1129(b)(2)(A)(ii) and (iii) of the Bankruptcy Code. In RadLAX, although the Supreme Court did not decide what "indubitable equivalent" means, it held that even though Section 1129(b)(2)(A)(iii) may appear to permit a plan to provide a secured creditor with the "indubitable equivalent" of its claim, when a plan provides for a sale of the secured creditor’s collateral, it must permit the secured creditor to credit bid under Section 1129(b)(2)(A)(ii).

  • Section 1129(b)(2)(A)(ii) provides that when a plan of reorganization calls for a sale of a secured creditor’s collateral, the sale is "subject to Section 363(k)," which permits a credit bid as discussed below.
  • The Supreme Court held that the "indubitable equivalent" alternative may be available in some situations, but it’s not an option when the Chapter 11 plan of reorganization calls for a sale of the secured creditor’s collateral.
  • Although the RadLAX case involved a Chapter 11 plan sale, typical bankruptcy sales do not. Far more often, sales are conducted, separately from a plan, under Section 363 of the Bankruptcy Code. Section 363(k) specifically provides that a secured creditor has a right to credit bid and offset its secured claim at such a non-plan Section 363 sale, absent "cause" to take that right away. No such "cause" was present in the RadLAX case, and the Supreme Court held that Section 363(k)’s credit bid right applied.

An "Easy" Decision. Ultimately, as the unanimous decision reflects, the Supreme Court held that this was "an easy case," that the debtor’s reading of Section 1129(b)(2)(A) was "hyperliteral and contrary to common sense," and that the more specific provisions of subsection (ii) controlled over the general "indubitable equivalent" language of subsection (iii). The Supreme Court’s decision should put to rest efforts to sell a secured creditor’s collateral without allowing for credit bids, except in cases where there are issues with the validity of the secured creditor’s secured claim or cause exists under Section 363(k) of the Bankruptcy Code.

Business Bankruptcy Issues The Financially Troubled Company

Forced Into Bankruptcy: The Involuntary Bankruptcy Process

When a company is facing financial distress, the question often comes up whether creditors can "force" the company into bankruptcy. Although the answer is more complicated than it may seem, this post aims to sort out what being "forced into bankruptcy" really means (hint: there are two different ways this can happen) and why it matters to companies and creditors.

Forced But Voluntary Bankruptcy. When a company is "forced" into bankruptcy, often what actually has happened is that the company filed a voluntary bankruptcy petition under Chapter 11 (reorganization) or Chapter 7 (liquidation) of the U.S. Bankruptcy Code in response to creditor actions. For example, a secured lender may have declared a default under its loan documents and commenced foreclosure proceedings, or an unsecured creditor may have filed a lawsuit or obtained a judgment against the company. In response, the company filed bankruptcy.

While it may be fair to describe the company as having been "forced" into bankruptcy, technically the company’s board of directors made a voluntary decision to file bankruptcy given the company’s financial circumstances or creditor actions. The distinction is important because a voluntary bankruptcy filing puts the company in bankruptcy immediately, making it subject to the Bankruptcy Code’s provisions and the bankruptcy court’s supervision. In contrast, the other kind of bankruptcy — an involuntary bankruptcy filing — does not. 

A Truly Involuntary Bankruptcy. This begs the question: if the company does not consent, can creditors literally force a company into bankruptcy anyway? The answer is yes, under certain circumstances, and subject to meeting the requirements for filing an involuntary bankruptcy petition. The major requirements, discussed below, are found in Section 303 of the Bankruptcy Code.

  • Required number of creditors. The Bankruptcy Code specifies the minimum number of creditors and amount of their claims: 
    • If a company has 12 or more creditors, an involuntary bankruptcy petition requires (a) three or more creditors whose claims are not contingent as to liability or subject to a bona fide dispute as to either liability or amount to file the petition, and (b) those qualifying claims must total, in the aggregate, at least $14,425 if unsecured or $14,425 more than the value of any liens securing those claims if any are secured.
    • If the company has fewer than 12 creditors, it only takes one qualifying creditor to file an involuntary petition.
    • Additional creditors can join the petition later, and if only one creditor files and it turns out that the company has more than 12 creditors, the bankruptcy court will give other creditors an opportunity to join.
    • The $14,425 amount is adjusted every three years, with the next adjustment due in April 2013.
  • Generally Not Paying Debts. If the company timely objects to the involuntary filing, for the company to be placed in bankruptcy, the company also must: 
    • generally not be paying its debts as they become due unless those debts are subject to a bona fide dispute as to liability or amount, or
    • have had a custodian appointed within the past 120 days to take possession or control of substantially all of its assets.
  • Choosing The Chapter. In the involuntary petition, the petitioning creditors must designate which bankruptcy chapter (Chapter 7 or 11) into which they seek to force the company.

How Is An Involuntary Different? When an involuntary petition is filed, the automatic stay of bankruptcy kicks in immediately to prevent creditor actions, but that’s where the similarities with voluntary bankruptcy end.

  • Unlike a voluntary bankruptcy filing, when an involuntary bankruptcy petition is filed, a company is not immediately placed into bankruptcy and the company may continue to operate its business and use, acquire, or dispose of its property as if an involuntary bankruptcy case had not been filed.
  • Instead, an involuntary bankruptcy petition functions more like a complaint asking the court to declare that the company should be put into bankruptcy. Like a complaint, the involuntary petition must be served together with a summons.
  • Although the bankruptcy court has the authority to appoint an interim trustee or order other restrictions on the company, those do not automatically apply, have to be sought by motion, and may be denied by the bankruptcy court.
  • The company can consent to the involuntary bankruptcy filing. When an involuntary Chapter 7 filing is made, the company can also respond with its own voluntary Chapter 11 filing and take control over the case as a debtor in possession.
  • To contest an involuntary petition, the company must do so within the time allotted by the Federal Rules of Bankruptcy Procedure, currently 21 days after service of the summons. Typically that involves filing an answer or a motion to dismiss.
  • Litigation over whether the requirements discussed above have been met, and thus whether the company should be put in bankruptcy, can involve various pleadings, document and deposition discovery, status conferences, motions for summary judgment, and/or an evidentiary hearing or trial. 
  • If the bankruptcy court ultimately rules in favor of the petitioning creditors, an "order for relief" is entered and the company is officially placed into bankruptcy. At that point, the company is subject to the Bankruptcy Code’s provisions and supervision by the bankruptcy court.

What If The Involuntary Fails? Filing an involuntary bankruptcy petition against a company is, of course, serious business, and the consequences of failing are equally serious.

  • Once filed, an involuntary petition cannot be dismissed without a notice and an opportunity for a hearing, even if the petitioning creditors and the company agree.
  • If the involuntary petition is dismissed, the petitioning creditors can be liable for costs and attorney’s fees of the company.
  • If the bankruptcy court determines that the involuntary petition was filed in bad faith, the petitioning creditors can be liable as well for damages caused by the involuntary filing and even for punitive damages.

When Do Creditors Typically File An Involuntary? The prospect of creditor liability for costs, attorney’s fees, damages, and possibly punitive damages makes involuntary petitions one of the lesser-used creditor tools. Involuntary bankruptcy is most often used when unsecured creditors suspect fraud on the part of a company, such as when a Ponzi scheme is discovered, or for some other extraordinary reason. Otherwise, creditors will typically pursue collection of their own claims directly, including through litigation in state or federal court. That might end up "forcing" the company into bankruptcy, but technically it would be a bankruptcy of the voluntary kind.

Business Bankruptcy Issues Recent Developments

Winter 2012 Edition Of Bankruptcy Resource Now Available

The Winter 2012 edition of the Absolute Priority newsletter, published by the Bankruptcy & Restructuring group at Cooley LLP, of which I am a member, has recently been released. The newsletter gives updates on current developments and trends in the bankruptcy and workout area. Follow the links in this sentence to access a copy of the newsletter. You can also subscribe to the blog to learn when future editions of the Absolute Priority newsletter are published, as well as to get updates on other bankruptcy and insolvency topics.

The latest edition of Absolute Priority covers a range of cutting edge topics, including:

  • The Supreme Court’s recent Stern v. Marshall decision and its impact on the ability of bankruptcy courts to enter final judgments in certain cases;
  • Recent decisions on the ability of secured creditors to credit bid their debt in bankruptcy asset sales;
  • Issues involving the recharacterization of debt as equity; and
  • The ability of directors and officers to obtain coverage under a D&O liability policy purchased by a bankrupt company.

This edition also reports on some of our recent representations, including our work for official committees of unsecured creditors in Chapter 11 cases involving major retailers and others. Recent committee cases include Blockbuster, Orchard Brands, Alexander Gallo Holdings, Claim Jumper, Signature Styles, Urban Brands, and Mervyn’s Holdings, among others.

I hope you find the latest edition of Absolute Priority to be of interest.