presents Credit Bidding by Secured Lenders in Bankruptcy Sales presents Asserting and Defending Credit Bids and Resolving Intercreditor Disputes A Li 90 Mi t Tl f /W bi ith I t ti Q&A Today's panel features: Amy A. Zuccarello, Attorney, Sullivan & Worcester, Boston Carren B. Shulman, Partner , Sheppard Mullin Richter & Hampton, New York A Live 90-Minute Teleconference/Webinar with Interactive Q&A Tuesday, August 17, 2010 The conference begins at: The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
Transcript
presents
Credit Bidding by Secured Lenders in Bankruptcy Sales
presents
p yAsserting and Defending Credit Bids and Resolving
Intercreditor Disputes
A Li 90 Mi t T l f /W bi ith I t ti Q&A
Today's panel features:Amy A. Zuccarello, Attorney, Sullivan & Worcester, Boston
Carren B. Shulman, Partner, Sheppard Mullin Richter & Hampton, New York
A Live 90-Minute Teleconference/Webinar with Interactive Q&A
, , pp p ,
Tuesday, August 17, 2010
The conference begins at:The conference begins at:1 pm Eastern12 pm Central
11 am Mountain10 am Pacific10 am Pacific
You can access the audio portion of the conference on the telephone or by using your computer's speakers.Please refer to the dial in/ log in instructions emailed to registrations.
For CLE purposes, please let us know how many people are listening at your location by y
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Credit Bidding by Secured Lenders in Bankruptcy Sales
Amy A. Zuccarello
About the Speaker
• Amy A. Zuccarello is an associate in the Bankruptcy, Reorganization & Creditors’ Rights Group of Sullivan & Worcester's Boston office. Ms. Zuccarello practices in the areas of b i t t i k t d b k t Sh t dit i l di business restructuring, workout and bankruptcy. She represents creditors, including indenture trustees, lenders and landlords in complex debt restructurings and insolvency matters. She has extensive transactional experience in commercial aircraft transactions, including restructurings, aircraft sales and leases and both public and private asset securitizations. Ms. Zuccarello has extensive experience in structuring and conducting UCC (Article 9) foreclosure sales, with respect to a variety of collateral types. She has also advised lenders on compliance with banking and consumer disclosure laws.p g
• Ms. Zuccarello’s representative client work includes representation of a national banking association in its capacity as indenture trustee with respect to more than 600 financing transactions in the context of the Chapter 11 proceedings of United Air Lines, Inc. and Northwest Airlines. She assumed primary responsibility for negotiation and documentation of in excess of 300 aircraft restructurings, including more than 100 aircraft financed with g , gpublicly held debt. She has also represented multiple parties to financial contracts, including derivatives such as swap agreements, forward contracts and securities lending and purchase agreements, with respect to the Chapter 11 and SIPA proceedings of Lehman Brothers, Inc. and its affiliate entities, and purchasers and potential purchasers of assets, including going concern businesses, equipment, real estate and lease rights and intellectual property, both within and outside of bankruptcy proceedings. Ms. Zuccarello has been named a "Rising Star " by Massachusetts Super Lawyers (2009) Ms Zuccarello received named a Rising Star, by Massachusetts Super Lawyers (2009). Ms. Zuccarello received her J.D., cum laude, from Boston College Law School and her B.A., summa cum laude, from Boston University.
• Collective action in syndicated loan facilities or i d d iindentured issues
› Complexity of syndicated loan facilities and current economic climate has provided a backdrop for disputes over who is entitled to credit bidover who is entitled to credit bid
› Generally, syndicated loan transactions are structured to limit individual lender activity, in favor of efficiency and avoiding gridlock in diffusely-held transactionsP bli d b i ddi i l h ll i › Public debt issues may pose additional challenges in obtaining unanimity of consent
• Exercise of remedies is exclusive right of the agent or trusteetrustee
• Credit bidding is a remedial action, the exercise of which is reserved for the agent or trustee
In re Delphi Corp.,No. 05-44481 (Bankr. S.D.N.Y.) [12/1/08 Hearing Transcript]
• Several minority DIP lenders objected to entry into “Accommodation Agreement”, which provided for forbearance from exercising remedies under the DIP agreement and order
• The court disagreed, holding that based on the DIP Agreement, the agent has the exclusive right to exercise remedies, and accordingly to compromise or f b h h d h dforbear with respect to such remedies at the direction of the Required Lenders
In re Chrysler LLC,405 B.R. 84 (Bankr. S.D.N.Y. 2009)
• Lender group holding approximately 7.5% of the outstanding debt objected to proposed sale of substantially all of Chrysler’s assets
• Court held that the objecting lender group had j g g p“contracted away their right to act inconsistently with the determination of the Required Lenders” and that their dissatisfaction with the ultimate outcome was not
f f d d h fjustification for disregarding the express provisions of the agreements.
• Purpose of syndicated financing structures is to provide “unified action”, avoid chaos and prevent a single lender from being preferred over others.
In re GWLS Holdings, 2009 WL 453110 (Bankr. D. Del. Feb. 23, 2009)
• Sole non-instructing lender, holding $1 million of $337 million outstanding, argued that collateral agent did not have authority to submit a credit bid on behalf of all lenders under the loan documents.
• Court found that credit bidding is an exercise of remedies; the right to exercise is held solely by the agent under the loan documents.
• Court also found that an exercise of remedies does not constitute an amendment or waiver of the loan documents which would require unanimous lender consent.
In re Metaldyne Corp.,409 B.R. 671 (Bankr. S.D.N.Y. 2009)
• Sole minority lender argued that agent did not have authority to credit bid all of the outstanding debt absent unanimous consent of the lenders
• Objecting lender also argued that credit bid constituted j g gan amendment that released collateral from liens under the loan documents, also requiring unanimous consent
• Court found that under the loan documents, the agent , gdid not need unanimous consent to credit bid and that it was authorized to submit a credit bid for the full amount outstanding
• Rights will be governed by Intercreditor Agreement• Intercreditor Agreement will generally contain
provisions providing that the second lien lender waives certain rights, including agreements not to contest first g g glien lender requests for adequate protection
• Frequently include provisions permitting the second lien holders to purchase the first lien debt at par after p pthe occurrence of certain events, including acceleration or bankruptcy
• Compliance with Section 363(f) is requiredp ( ) q
• Approval of unsecured creditors’ committee, as the representative of all unsecured creditors, is important to add an air of legitimacy and provide a check to ensure that the rights of all creditors, not just the i h f d di b i id d rights of secured creditors are being considered
• Allocation of purchase price to un-encumbered assets included in the sale
About the SpeakerCarren Shulman is a partner in the Finance & Bankruptcy group at Sheppard Mullin Richter & Hampton, LLP in New York. For nearly twenty years she has represented the interests of secured and unsecured creditors in restructuring matters in and out of bankruptcy court, and represents debtors, committees, chapter 11 trustees, and indenture trustees in complex bankruptcy cases. She has significant experience representingtrustees in complex bankruptcy cases. She has significant experience representing secured creditors and buyers in sales under section 363 of the Bankruptcy Code. Carren can be reached at [email protected].
Representative engagements: Access 360 Media in the debtor in possession funding d h th h 363 l f A M di i th f I A M diand purchase through a 363 sale of Arena Media in the case of In re Arena Media
Networks LLC, SDNY Bankr. (Lifland, J.), the largest Italian private equity fund in its acquisition of intellectual property from Desa IP LLC, through a 363 sale in its bankruptcy case in Delaware, a large national private equity fund in the 363 sale of a nursing home through a 363 sale, her representation of MMFX Technologies and certain of debtor
b idi i ti ith th l th h f i b k t f th t f th isubsidiaries connection with the sale through a foreign bankruptcy of the assets of their subsidiary. Representative engagements also include Goodrich Corporation in bankruptcies worldwide for more than fifteen years, the representation of Marriott International, Inc. in out of court restructurings with deal parties, and in significant bankruptcy cases, including In re Village Hotel Investors, L.L.C. (involving The Ritz-Carlton Lake Las Vegas) In re Innkeepers USA Trust et al and her representation of The BankLake Las Vegas), In re Innkeepers USA Trust, et al., and her representation of The Bank of New York Mellon in In re Lehman Brothers Holdings Inc., and other significant matters.
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Challenges to Right to Credit BidA. 363 sale vs. sale through a plan of
reorganizationg1. In re Pacific Lumber2. In re Philadelphia Newspapers2. In re Philadelphia Newspapers
B. Denial of Right to credit bid “for cause”C Equitable subordination of lien loss ofC. Equitable subordination of lien – loss of
lender’s priority
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A. Debtors’ Options for Selling Property1. Sale pursuant to 11 U.S.C. § 363
a. In the ordinary course of business without notice and a hearing.
b. After notice and a hearing through a public or private salesale.
2. Sale under a Plan of Reorganization
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1. Sale through § 363 Public Auction
• Subject to court approval on notice and after a hearing on motion for approval of such sale.
• Public auction effected through approval of the terms of a purchase agreement with/without p g"stalking horse" bidder, typically approved by the secured creditor.
• Submission of bids and sale subject to "highest and best" offer.
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11 U.S.C. § 363(k) – credit bidding• A creditor with an allowed claim secured by property has the right to bid at a sale of that property pursuant to §363 and, if successful, may offset its claim against the p rchase price nless the bankr ptc co rtpurchase price, unless the bankruptcy court “for cause” orders otherwise.
Secured creditor can bid full amount of• Secured creditor can bid full amount of claim without regard to the value of the claim or the underlying collateralor the underlying collateral.
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Auction/Bid Process• Secured lender should confirm willingness of debtor to allow credit bid and confirm whether there are parameters to credit bidding to avoid surprisesare parameters to credit bidding to avoid surprises. • Consider desire for immediate cash vs. desire to own property that may increase in value overto own property that may increase in value over time.• “Costs” to credit bidding for secured creditor must be considered
Costs of § 363 sale vs costs of sale through a planResponsibility for administrative fees attendant to saleResponsibility for administrative fees attendant to saleSale through § 363 process vs. foreclosure
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2. Sale Through a Plan § 1129(b)(2)(A)(ii) • (b)(1) The court shall confirm a plan that is fair and equitable with respect to each impaired class that has not accepted.(b)(2)(A) Fair and equitable includes the following with respect to secured creditors:secured creditors:
• (i) secured creditors retain their liens, and receive deferred payments in the amount of the present value of the collateral at the time of confirmation;
• (ii) a sale of property pursuant to § 363(k) free and clear of liens with lien attaching to proceeds; or
• (iii) distribution of the indubitable equivalent. The above list is by definition not exhaustive and courts have begun toThe above list is by definition not exhaustive and courts have begun to hold that the disjunctive language allows a debtor to choose the manner of treatment for a secured creditor.
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In re Pacific Lumber584 F.3d 229 (5th Cir. 2009)
• Following confirmation of plan of reorganization that provided for a sale of secured creditors’ collateral and payment in cash of the value of the collateral (determinedpayment in cash of the value of the collateral (determined after an evidentiary hearing), secured creditor appealed the denial of its alleged right to credit bid for collateral under the confirmed plan.confirmed plan. • Fifth Circuit upheld bankruptcy court decision to confirm plan.
Fifth Ci it f d th t l f l b d §• Fifth Circuit found that approval of plan based upon §1129(b)(2)(A)(iii), authorizing distribution of the indubitable equivalent, did not render (ii) superfluous despite B k t C d i i l f l i th ifi thBankruptcy Code principal of applying the specific over the general.
•secureds own proposed plan not confirmable•secureds failed to object to order lifting
l i it t ll t i ti i l di thexclusivity to allow certain parties, including the successful plan proponents/buyers, to propose plan.plan.•Court unpersuaded by argument that secureds had right to benefit from potential future g pincrease in value.
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In re Philadelphia Newspapers, LLC599 F.3d 298 (3rd Cir. 2010) Appeal of bankruptcy court decision requiring
debtor to allow secured creditor to credit bid at proposed auction pursuant to plan.proposed auction pursuant to plan.
Third Circuit held debtor is entitled to preclude credit bidding by secured creditor under plan of reorganization and pay secured creditor thereorganization and pay secured creditor the indubitable equivalent of the value of collateral.
Bankruptcy sale stayed pending appeal. p y y p g pp Ultimately, secured creditor was the successful
cash bidder for its collateral and was repaid on its allowed claimallowed claim.
Notable dissent24
B. Denial of Right to Credit Bid “For Cause”Bases for finding of “cause” to deny right to credit bid
private/ordinary course sale (e.g. In re Pacific Lumber – sale through plan that did not provide for credit bidding was allowed) hill biddi h f l t th d bt d th ditchill bidding, harmful to the debtor and other creditors
indubitable equivalent sufficient to make creditor whole (e.g. In re Philadelphia Newspapers)
Result of denial for causeResult of denial for causeloss of power by secured creditors to control caselong-held belief that secured creditors are entitled to credit bid no longer holds truegsecured creditor loses right to benefit from potential future increase in value of its collateral which it bargained for when it entered the transaction
Why does the tide appear to be changing?Why does the tide appear to be changing?
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C. Equitable Subordination of Secured Claim
11 U.S.C. § 510(c) After notice and a hearing, the court may –g, y– Subordinate for distribution purposes all or part
of an allowed claim or interest to all or part of panother allowed claim or interest
– Order that a lien securing a subordinated claim be transferred to the estate
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Application of Equitable SubordinationHarsh result for a secured creditor Powerful tool used sparingly since it changes statutory priorities Typically results from misconduct of lender or insider transaction though
not required; see In re Kreisler and Erenberg 546 F 3d 863 (7th Cirnot required; see In re Kreisler and Erenberg, 546 F.3d 863 (7th Cir. 2008)
Alternative argument with similar effect – recharacterization of loan from debt to equity; see Cohen v. KB Mezzanine Fund II, LP (In Re: Submicron Systems Corp.), 432 F.3d 448 (3d Cir. 2006).
“Congress deemed the undersecured nonrecourse creditor’s ability to credit bid the full value of his claim adequate protection in the § 363 context, rendering § 1111(b)(1)(A) unnecessary: The legislative history co te t, e de g § (b)( )( ) u ecessa y e eg s at e sto yverifies this congressional intent in limiting the applicability of the statutory recourse status: ‛Sale of property under [§] 363 or under the plan is excluded from treatment under [§] 1111(b) because of the secured party’s right to bid in the full amount of his allowed claim at any p y g ysale of collateral under section 363(k) . . . .’ (Quoting 124 Cong. Rec. H11,103-04 (1978)) (emphasis added).” Id.
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Lessons Prepetition, lenders should ensure
– All indicia of proper loan exist to avoid potential for recharacterization or subordinationN b i i t f bj ti t l i i b k t– No basis exists for objection to claim in a bankruptcy
– Borrower is sufficiently capitalized to repay debt– Awareness of other creditors who may pursue similar assets,
particularly undersecured second lien lendersparticularly undersecured second lien lenders– Consider contract language relating to potential
bankruptcy/distressed sale and right to credit bid/right of first refusal– Work with borrower on disposition of collateral to ensure a position
t titi i th l f th tpostpetition in the sale of the assets Postpetition, lenders should
– Act immediately to protect interestsW k ith th d bt th l /f l t it– Work with the debtor on the sale/foreclosure opportunity
