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Second Circuit: Market Rate Preferred Over Formula Rate For Purposes of Secured Creditor Cramdown in Chapter 11 Issues

October 24, 2017

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Courts and professionals have wrestled for years with the appropriate approach to use in setting the interest rate when a debtor imposes a chapter 11 plan on a secured creditor and pays the creditor the value of its collateral through deferred payments under section 1129(b)(2)(A)(i)(II) of the Bankruptcy Code.  Secured lenders gained a major victory on October 20, 2017, when the Second Circuit Court of Appeals concluded that a market rate of interest is preferred to a so-called “formula approach” in chapter 11, when an efficient market exists.  In re MPM Silicones (Momentive), LLC, 2017 WL 4700314 (2d Cir. Oct. 20, 2017).

In Momentive, the bankruptcy court categorically dismissed expert testimony presented by the lenders to demonstrate a market rate of 5-6+%.  Because the debtor had offered to cash out the lenders (and prepared to borrow the funds necessary to do it), there was direct evidence of the economic terms on which an arm’s-length lender would have been willing to make a loan similar to the obligation held by the lenders after confirmation of the plan.  The bankruptcy court declined to consider this evidence, instead relying on a formula approach offered by the debtor, which started with a risk-free rate and built to a rate of 4.1-4.85%.  The economic difference was large, and justified multiple appeals, since the difference between the two rates translated to approximately $150 million over the term of the plan according to the lenders.

Since the Supreme Court addressed cramdown interest in the very different context of a chapter 13 case involving an automobile in Till v. SCS Credit Corp., 124 S.Ct. 1951 (2004), there has been an ongoing debate about whether building an interest rate through a formula approach or allowing the market to determine cramdown interest is more appropriate in chapter 11.  (For an in-depth discussion of the odd Till plurality, and the very different approaches among the Supreme Court justices, see here, co-authored by our dearly departed colleague Mark Stingley, as well as Leah Fiorenza of our Atlanta office.)

In Momentive, the debtor argued that the Till decision required an application of the formula method.  The Second Circuit reversed the bankruptcy and district court decisions, both of which found in favor of the debtor’s formula-driven interest rates.  Addressing this issue for the first time in the chapter 11 context, the Second Circuit adopted the Sixth Circuit’s two-step process for selecting an interest rate.  Specifically, when an efficient market exists in a chapter 11 case, a bankruptcy court should apply the market rate.  Only when no efficient market exists should a bankruptcy court employ the formula approach.  Momentive, pp.8-11.

The Second Circuit remanded the case to the bankruptcy court for further proceedings to determine whether there was an efficient market for the replacement notes being crammed down on the senior lenders.  In so doing, the Second Circuit added certainty to this issue in an important venue for chapter 11 cases and raised the possibility that the Supreme Court may intervene.

Significantly, the Second Circuit also rejected the debtor’s argument that this issue was equitably moot. Because the secured lenders repeatedly tried to obtain a stay and given the sheer size of this case, the Second Circuit ruled that the additional annual payments that would be required at a higher interest rate over seven years would not unravel the confirmed plan or threaten the debtor’s emergence from bankruptcy.

There are several practical implications of Momentive.  We expect more litigation in the future over what constitutes an “efficient market” for purposes of secured creditor cramdown, particularly in larger cases.  In smaller chapter 11s, it may remain difficult for a creditor to demonstrate that the market is efficient, and it will be the rare case in which a debtor lays the groundwork by undertaking refinancing efforts that result in relevant and comparable interest rate proposals.  (Indeed, could this create the perverse incentive whereby debtors don’t even seek exit financing for fear of creating a discoverable paper trail, and move directly to cramdown instead?)  But even when the evidence is less comprehensive than in Momentive, courts may become more comfortable using market-driven analysis for the value indications it can provide, rather than relying solely on the “build-an-interest-rate” formula approach.  Unless and until the Supreme Court addresses this issue in the chapter 11 context, however, this issue will likely remain the subject of further debate and litigation.

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A Lender’s Federal Post-Judgment Interest Quandary

February 11, 2017


Post-judgment interest is not something most lenders consider when making a loan. In fact, it is not ordinarily the subject of significant analysis even when litigation becomes necessary.  Where the United States District Court is the preferred venue, however, parties easily can fall into the quandary of being stuck with the federal statutory post-judgment interest rate, which is currently less than 1% per annum.

Pre-judgment, a lender often has solid rights to contract interest and potentially very high default interest rates, which often approach double-digits, added to a recovery when a solvent obligor is on the other side. But a final judgment may be a game-changer on the rate of interest a lender is able to receive.  Recent circuit court decisions are developing the law on post-judgment interest in a way contrary to the economic recovery of contracting parties, and lenders in particular.  It may be possible, however, to draft around this problem.

Current State of the Law

In cases pending before the United States District Court, “post-judgment interest is governed by federal law,” even where jurisdiction is based upon diversity, because post-judgment interest is viewed as a procedural issue. Citicorp Real Estate Inc. v. Smith, 155 F.3d 1097, 1107 (9th Cir. 1998). Federal post-judgment interest is governed by 28 U.S.C. § 1961(a), which provides for “a rate equal to the weekly average 1-year constant maturity Treasury yield” (currently 0.79% and 0.46% a year ago, see here under 1-year Treasury bills).

While federal case law uniformly holds that an “exception to § 1961 exists when the parties contractually agree to waive its application,” there has been significant recent litigation concerning how explicit contracts must be to constitute a waiver. See Fidelity Federal Bank, FSB v. Durga MA Corp., 387 F.3d 1021, 1023 (9th Cir. 2004).  Importantly, a typical contract imposing interest at a specific rate upon a default “until paid” is insufficient under the case law in the Second, Fifth, and Tenth Circuits. FCS Advisors, Inc. v. Fair Finance Co., Inc., 605 F.3d 144 (2d Cir. 2010); Tricon Energy Ltd. v. Vinmar Int’l, Ltd., 718 F.3d 448 (5th Cir. 2013); In re Riebesell, 586 F.3d 782 (10th Cir. 2009). The Fifth Circuit has gone so far as to hold that the term “post-judgment” should be used in order to evidence a clear intent by the parties to waive 28 U.S.C. § 1961 and impose the default contract interest rate post-judgment. Tricon Energy Limited, 718 F.3d at 459.

The Ninth Circuit is the only jurisdiction with an arguable basis in which to assert that a contractual default rate should apply to post-judgment interest. In Citicorp Real Estate, Inc. v. Smith, the court affirmed a judgment awarding post-judgment interest greater than that provided in 28 U.S.C. § 1961 because: 1) the promissory note at issue included an agreed-upon interest rate upon a default; and 2) the parties had previously stipulated to an arbitration award establishing liability that included an interest rate at the rate specified in the note “after judgment until collected.”  155 F.3d at 1108.  It is not clear from the Citicorp holding whether the outcome would have been the same if the parties had not stipulated to an arbitration award with a post-judgment interest rate.  Some trial courts within the Ninth Circuit, however, interpreted Citicorp to allow the application of a contractual default rate of interest to post-judgment interest based solely on a default interest clause. See Mission Produce, Inc. v. Organic Alliance Inc., 2016 WL 1161988 *11 (N.D. Cal. Mar. 24, 2016); Abbate Family Farms Ltd. Part. v. GD Fresh Dist., Inc., 2012 WL 2160959 *6 (E.D. Cal. Jun. 13, 2012); Best Western Intern., Inc. v. Richland Hotel Corp. GP, LLC, 2012 WL 608016 *11-12 (D. Ariz. Jan. 18, 2012); Beaulieu Group LLC v. Inman, 2011 WL 4971701 *5 (D. Ariz. Oct. 19, 2011).

Even Ninth Circuit courts now may require more explicit language before finding a waiver of the federal statutory post-judgment interest rate. While not binding precedent, the Ninth Circuit’s March 16, 2016 holding in the unpublished opinion OREO Corp. v. Winnerman, 642 Fed. Appx. 1951 (9th Cir. 2016), seems to signal that a typical default interest rate in a contract is insufficient to waive § 1961.  In OREO, the court reversed a trial court’s award of post-judgment interest at a promissory note’s default rate.  In doing so, the Ninth Circuit took a very narrow view of Citicorp and reasoned that post-judgment interest at the default rate was allowed in Citicorp  only because the parties had stipulated to an arbitration award with a higher rate of interest.


Plaintiffs should carefully consider the likely application of the federal statutory post-judgment interest rate when analyzing the benefits of filing in federal court. Unless the contract at issue includes a provision expressly applying the default interest rate post judgment, there is a strong probability the court will impose post-judgment interest at only the federal statutory rate, which is presently less than 1%.

Lenders and other contracting parties currently crafting documents would be wise to include language making clear that the parties intend for the default interest rate to apply not just upon an event of default, but also to post-judgment interest to the extent a lawsuit is necessary.

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When Going “All In” Pays Off: The Third Circuit Upholds The Decision of the Bankruptcy Court in In re Trump Entertainment Resorts, Inc.

April 11, 2016


In an appeal certified directly from the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to the Court of Appeals, the Third Circuit issued a ruling upholding Judge Kevin Gross’s decision that a chapter 11 debtor-employer may reject the continuing terms and conditions of a collective bargaining agreement (“CBA”) under 11 U.S.C. § 1113, despite that the CBA expired post-petition.

The Bankruptcy Court’s Decision

In December 2014, the Bankruptcy Cave first reported on the Bankruptcy Court’s decision in In re Trump Entertainment Resorts, Inc. (the “Bankruptcy Opinion”).  The controversy centered around whether provisions of the National Labor Relations Act (“NLRA”) that maintain the status quo of an expired CBA during negotiations for a new CBA mean that the expired CBA still exists as a contract that can be “rejected” under section 1113 of the Bankruptcy Code.  The Bankruptcy Opinion held in the affirmative – the Debtors could reject the expired CBA because section 1113 failed to distinguish between expired and unexpired CBAs.  The Bankruptcy Opinion was largely driven by practical factual considerations – the Union had engaged in “stiff-arm” negotiation tactics that left the Debtors with few choices, and absent the rejection of the expired CBA, the Debtors faced a complete shut-down, the loss of thousands of jobs, and the shuttering of the business.  The Debtors went “all in” on this poker hand, it was rejection or bust; the Bankruptcy Court agreed with the Debtors.

The Appeal

On appeal, In re Trump Entertainment Resorts, Case No. 14-4807 (3d Cir. Jan. 15, 2016), the Union centered its argument on a parallel to section 365, arguing that because a debtor may not assume or reject an expired executory contract under section 365, it also may not reject an expired CBA under section 1113.  However, the Third Circuit noted that due to the NLRA, the obligations of the expired CBA continue to burden the debtor (unlike that of a traditional executory contract).  In addition, Congress failed to include in section 1113 a distinction between expired or unexpired CBAs, and otherwise failed to address the continuing effect such agreements may have upon a debtor.  To that end, the court opined that Congress must have considered the overlapping impact of these federal statutory regimes.  The interpretation that permits a debtor to reject an expired CBA, held the Third Circuit, best balances a debtor’s ability to proceed through the protracted NLRA process with some speed, while still protecting workers by obligating the estate to honor the CBA’s provisions until there is a rejection.

The Third Circuit also noted the “exigencies” the Trump Debtors faced, which were significant factors in the Bankruptcy Opinion.  The Third Circuit noted that as a policy matter, it is preferable to preserve jobs through rejection rather than face the permanent loss of positions, and an entire business, by requiring debtors to continue to abide by the terms of an onerous CBA.

Analysis and Conclusion

Following the appeal, our initial analysis of the implications of this case appears to hold true.  The Third Circuit’s interpretation of section 1113 may be a boon to a would-be debtor that is laden with burdensome labor obligations, and is nearing the expiration of a CBA.  While outside bankruptcy a company would normally be required to bargain to impasse (a very time consuming endeavor), in bankruptcy court a company may be able to short-circuit this process and obtain rejection of the CBA, even where it expired post-petition.  As explained by the Bankruptcy Court and the Third Circuit, the ability of debtors to reorganize and emerge as operating companies, which is arguably the primary purpose of chapter 11, supports this interpretation of section 1113.

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Rolling the Dice on Collective Bargaining Agreements in Bankruptcy: A Lesson From In re Trump Entertainment Resorts, Inc.

December 7, 2014


In In re Trump Entertainment Resorts, Inc., a bankruptcy case currently pending before the United States Bankruptcy Court for the District of Delaware at Case No. 14-12103, the union at a famous Atlantic City casino made a bet on its ability to “hold up” the casino’s bankruptcy process and force hard line negotiations on an expired collective bargaining agreement. Ultimately, this gamble did not pay off, as the Honorable Judge Kevin Gross held that the casino was permitted to reject the expired collective bargaining agreement as an “executory contract” under the Bankruptcy Code. Put succinctly, the union’s negotiation tactics resulted in the loss of all benefits under the collective bargaining agreement for union members

While the holding in Trump is predicated on extreme factual circumstances, it serves as a reminder that parties seeking to “stiff-arm” negotiations may face serious repercussions, particularly in the context of bankruptcy.


The circuits are split on the issue of whether a bankruptcy court retains jurisdiction to consider a motion to reject an expired collective bargaining agreement under 11 U.S.C. § 1113(c), or if a bankruptcy court lacks jurisdiction because the only duties following the expiration of a collective bargaining agreement are statutory (specifically, arising under the National Labor Relations Act (“NLRA”)), and thus, fall outside a bankruptcy court’s powers to accept or reject such agreements under section 1113. Weighing in on this issue, on October 20, 2014, Judge Gross entered an opinion (“Opinion”) in the Trump bankruptcy case finding that the Court retained jurisdiction to approve the rejection of an expired collective bargaining agreement under section 1113(c).


The Debtors, which include affiliates Trump Entertainment Resorts, Inc. and Trump Taj Mahal Associates, LLC (“Taj Mahal”) filed for bankruptcy protection on September 9, 2014, and shortly thereafter, on September 26, 2014, filed a motion (“Motion”) seeking to reject the collective bargaining agreement (“CBA”) between Taj Mahal and UNITE HERE Local 54 (“Union”) on the grounds that the affiliated Debtors would be forced to liquidate if the estates were not permitted to reject the CBA.

The Debtors operated two casinos, including the Taj Mahal Casino Hotel on the Atlantic City boardwalk. The Court characterized the Debtors’ financial situation as “desperate,” with EBITDA falling from $32 million to negative $6.1 million in 2013, and with the last twelve months EBITDA of negative $25.7 million as of June 30, 2014. Opinion, pp.2-3. At the time of the Motion, the Debtors only had enough cash to operate for two months and were unable to obtain debtor-in-possession financing.

Prior to bringing the Motion, the Debtors made various efforts to negotiate the terms of the CBA with the Union, which “stiff-armed” the Debtors and engaged in a “program of misinformation” designed to drive customers away from the Taj Mahal Casino. Opinion, p.7. The rejection of the CBA offered the Debtors a chance to save $14.6 million per year in payments thereunder, which, along with a handful of other concessions, would enable the Debtors to remain operational. Absent the rejection of the CBA, the Debtors would be forced to shut down by October 20, 2014, liquidate all assets, and lay off over 3,000 employees. Thus, the Debtors’ reorganization was “dependent on rejection of the CBA.” Opinion, p.8.


When a collective bargaining agreement expires, the NLRA provides that an employer must maintain the status quo of the prior agreement while negotiating the terms of a new collective bargaining agreement. Under the Bankruptcy Code, a debtor’s ability to accept or reject a collective bargaining agreement is governed by section 1113. Courts have split on the issue of whether section 1113 applies “in a situation where a collective bargaining agreement has expired but the terms of the agreement remain in effect by virtue of the employer’s status quo obligations under the NLRA.” Opinion, p.10 (collecting cases).

In Trump, the Union argued that since the CBA had expired and the Debtors’ only continuing liabilities thereunder were statutory (e.g., imposed by the NLRA) rather than contractual, the expired CBA was no longer an “executory contract” that the Debtors were able to accept or reject under section 1113. The Court rejected the Union’s reading of section 1113, and found that both the language and legislative history of the provision established that the Court may enter an order rejecting the obligations under a CBA that continue in effect due to the NLRA in the wake of an expired collective bargaining agreement. Opinion, p.11. The Court also noted that the Union’s reading of section 1113 made “little sense,” and created an “illogical result” in which the Debtors would be forced to liquidate and all employees (including Union members) would lose their jobs. As such, the CBA would be of no effect.

Finally, the Court stated that there is little reason to distinguish between an expired and unexpired collective bargaining agreement, as the distinction would merely give labor unions the “power to hold up a debtor’s bankruptcy case.” Opinion, p.18. This “hold-up power . . . wholly ignores the policy and bargaining power balances Congress struck in Section 1113 and exalts form over substance.” Id. Given these factors, the Court found that it had jurisdiction under section 1113(c) to consider the Motion, which it ultimately granted.

Practical Implications

While the ruling in the Trump case seems to be driven largely by extreme facts (e.g., the reality of a complete shut-down absent the rejection of the CBA, and a Union that was unwilling to negotiate), the Opinion eliminates any distinction between an expired and unexpired collective bargaining agreement in bankruptcy. This holding may operate to shift the balance of negotiating power to debtors. In jurisdictions following this holding, bankruptcy may prove a particularly attractive option for a company that is heavily laden with union obligations and is facing difficult negotiations, as it enables the employer to short-cut its negotiation obligations under the NLRA, which otherwise requires the parties to negotiate to an impasse. Thus, parties seeking to agree to the terms of a collective bargaining agreement that is near expiration would be wise to factor this bankruptcy-effect on NLRA regulations as a risk in pushing off or shirking negotiation responsibilities.

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A debtor’s “increasing” burden of proof in the face of a motion for relief from stay

October 6, 2014


In Ryerson, the court held that a debtor’s burden of showing a successful reorganization changes depending on the timing in the case. The court found that early in the case, a debtor must show that reorganization is “plausible,” near the expiration of the exclusivity period a debtor must show that reorganization is “probable,” and, after expiration of the exclusivity period, the debtor must show reorganization is “assured.”

I. Short Factual Background.

In 2003, the debtor, a real estate developer, used funds from a line of a credit to purchase acres of contiguous lakefront land on Lake Coeur d’Alene in Idaho. The debtor’s obligations under the line of credit were restated and evidenced by three promissory notes secured by liens on the property. In 2013, the debtor defaulted on his obligations and filed for chapter 11 relief less than two weeks prior to the scheduled foreclosure sale for the property. Twenty-six days after the petition date, the lender requested relief from the automatic stay under Section 362(d)(2) to pursue foreclosure on the property.

II. Legal Discussion.

The court first examined the value of the property and the various claims against the property to determine if the debtor lacked equity. The court found that after taking into considering the lender’s claim, various judgment liens, and claims for unpaid real property taxes, the debtor lacked equity in the property.

The court cited United Sav. Ass’n of Tex. v. Timbers of Inwood Forest Assocs., Ltd., 484 U.S. 365, 375-76 (1988) for the proposition that after the party seeking relief from the automatic stay demonstrates the debtor lacks equity in the property, the burden then shifted to the debtor to show both a “reasonable possibility of successful reorganization within a reasonable time” and “if there is conceivably to be an effective reorganization, this property will needed for it.” Id. Although acknowledging that a relief stay hearing should not be converted into a confirmation hearing, the court stated that the “effective reorganization is a moving target, which is more difficult to attain as the chapter 11 case progresses” and that the “debtor’s burden increases from showing a successful reorganization is ‘plausible’ early in the case, to showing reorganization is ‘probable’ near the expiration of the exclusivity period, and finally to showing reorganization is ‘assured’ after the exclusivity period expires.” In re Ryerson, 2014 WL 642876, at *7 (quoting In re Sun Valley Newspapers, Inc., 171 B.R. 71, 75 (B.A.P. 9th Cir. 1994)).

In deciding which standard to apply, the “plausible” standard—reorganization is “plausible” early in the case—the “probable” standard—reorganization is “probable” near the expiration of the exclusivity period—or the “assured” standard—after the exclusivity period expired, reorganization must be “assured”—the court noted that the lender had filed its relief stay motion only twenty-six days after the petition date, but by the time the court heard the motion, the exclusivity period had expired and the debtor had filed a plan of reorganization. The court held, however, that the debtor had not carried its burden even under the least stringent “reorganization is plausible” standard.

The proposed plan of reorganization failed to address key issues, including, among other things, the lender’s ability to credit bid and the logistics of payment of claims from the sale of the property in question while simultaneously attempting to reserve funds to later attack lender’s claim. Additionally, the proposed plan was predicated on using proceeds from the sale of the property to pay other creditors; however, the evidence established that the property would not generate value beyond the amount of the secured claims.

III. Conclusion.

This case will be helpful in the representation of lenders, particularly in single asset real estate cases where the debtor under Section 362(d)(3) must either begin making adequate protection payments or file a plan of reorganization that has a reasonable likelihood of being confirmed within a reasonable time, because it holds that further along in a bankruptcy case, it becomes more difficult for a debtor to demonstrate the likelihood of a successful reorganization.

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