Secured Credit Committee

In this time of COVID-19, creditors and debtors alike have looked for ways to address the financial squeeze the pandemic has imposed on the global economy. On the one hand, debtors are likely to look for more time for their business operations to return to “normal.” On the other hand, creditors are likely to look for certainty of results in an otherwise uncertain time.

It may seem counterintuitive for banks and other lenders to provide loans to companies in bankruptcy, but they often do. All companies, especially those in bankruptcy, need liquidity to continue operating. Ensuring the availability of cash is one of the most important considerations in a chapter 11 reorganization, because debtors are often unable to reorganize without adequate cash flow.

Good-faith efforts can create good outcomes. A can cause B. The absence of B, however, does not necessarily mean that A was absent: Bad results can occur even with good-faith efforts.

In In re Alternate Fuels Inc.[1], the Tenth Circuit Court of Appeals describes and applies standards for (1) recharacterizing debt claims as camouflaged equity and (2) equitably subordinating debt claims. In doing so, the court confirmed two things:

What happens if an undersecured creditor makes an election under 11 U.S.C. § 1111(b) but does not otherwise participate in the bankruptcy process? The Fifth Circuit Court of Appeals addressed this question in In re R.L. Adkins Corp. In In re Adkins, the debtor filed a plan of reorganization recognizing the lien of Bakers Hughes Oilfield Operations, Inc. (BHO) on four mineral leases and one well. The total amount due to BHO far exceeded the value of its collateral.

Secured lenders often look to the borrower's or guarantor's rights under insurance policies to improve their collateral position. For example, obtaining a collateral interest in a business interruption insurance policy may protect a lender who is dependent upon the ongoing cash flow of its borrower for debt service. Moreover, obtaining an assignment of an interest in a life insurance policy of the borrower's owner or a principal guarantor protects...

In the spirit of the New Year, and in the spirit of par-plus-interest recoveries for secured lenders everywhere, we would like to share five New Year’s resolutions culled from recent case law and our experience assisting secured creditors in pre-bankruptcy planning for a defaulted borrower.

Editor’s Note: The Secured Credit Committee recently hosted a webinar titled “Understanding Make-Whole and No-Call Provisions: Key Takeaways From Recent Decisions.” This webinar discussed recent cases such as AMR Corp. (American Airlines), School Specialty, GMX Resources and Chemtura.

In a dispute regarding entitlement to proceeds resulting from an auction of livestock in possession of a dairy farmer/debtor,[1] the U.S. Court of Appeals for the Sixth Circuit issued an order on Aug. 14, 2014, in favor of a dairy cattle lessor, despite the secured creditor’s pre-existing security interest in all livestock that is “currently owned or hereafter acquired.” The court found that the dairy cattle leases were not disguised security agreements, as the bankruptcy and district courts in Kentucky had concluded, but were instead true leases.

Courts have long grappled with the question of whether “stripping” an unsecured junior lien is permitted by § 506 of the Bankruptcy Reform Act of 1978 (the Bankruptcy Code).[1] In 1992, in the case of Dewsnup v. Timm, the Supreme Court granted certiorari on the topic, holding that “stripping down” partially unsecured junior liens was not permissible under the plain meaning of the Code.[2] Recently, however, the practical implications of the intersection of § 506(a) and (d) of the Code have been in flux as courts across the country weigh in on the distinction between “stripping down” and “stripping off.”