Bryan Cave Bankruptcy & Restructuring Blog

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Spring Cleaning, Avoidance Actions, and Time to Tweak the Loan Forms, Just In Case

Winter is over; time for spring cleaning. Alas, your authors are so desperate to put off such drudgery that they decided to write about avoidance actions, and form language for notes and security agreements. If you represent lenders, try taking five from the cluttered garage, dust-bunnied closet, or bursting kitchen junk drawer, and read this; you may save your lender client a buck or two.

The Basics: Workout lawyers all agree on certain principles. For instance, fully secured creditors with undisputed claims deserve to be paid. Further, if the collateral value exceeds the amount of the secured creditor’s claim then payment must include interest, costs, and attorneys’ fees, if the loan documents so provide.[1]

The Wrinkle: But add a wrinkle – the kind of wrinkle rarely considered when structuring a loan, in the glorious salad days of the lending relationship. That wrinkle: Upon the obligor’s bankruptcy, what if the obligor, or its bankruptcy trustee, sues the lender to recover a preference or fraudulent transfer to the lender made prior to the bankruptcy?[2] If the lender defeats such an action, then surely the principles listed above would allow the lender to automatically add its defense costs to

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Second Circuit Decision Reminds Us to Double-Check Documents

Official Committee of Unsecured Creditors v. JPMorgan Chase Bank, N.A. (In re Motors Liquidation Co.), Appeal No. 13-2187 (2nd Cir. Jan. 21, 2015)

Second Circuit Decision Reminds Us to Double-Check Documents

In a decision that sent a shiver down the spine of attorneys and lenders alike, on January 21, 2015, the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) ruled that JPMorgan Chase Bank, N.A. (“JPMorgan”) had released its security interest on a $1.5 billion loan to General Motors (“GM”) by inadvertently filing a UCC-3 termination statement. The Second Circuit held that although JP Morgan and GM did not intend to terminate the security interest at issue, the termination was effective because JP Morgan authorized the filing of the UCC-3 termination statement.

In October 2001, GM entered into a synthetic lease financing transaction (“Synthetic Lease”), by which it obtained approximately $300 million in financing from a syndicate of lenders (the “Lenders”) including JPMorgan who served as the administrative agent. The Synthetic Lease was secured by mortgages on several pieces of real estate, which were perfected by the filing of two UCC-1 financing statements by JPMorgan (the “Synthetic Lease UCC-1s”). Separately, GM entered into an unrelated term loan

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A Look At Committee v. JP Morgan

By now, every secured lender and attorney that represents secured lenders should be familiar with the opinion from the Second Circuit Court of Appeals styled Official Committee of Unsecured Creditors of Motors Liquidation Company v. JP Morgan Chase Bank, N.A. (In Re Motors Liquidation Co.) Covered in articles with titles such as “JP Morgan Loses $1.5 Billion Feud with Creditors of GM Forerunner,”[1] the opinion sent a shock wave through the lending community. As our finance colleagues have rightly noted, this case is a stark reminder that best practices require transactional attorneys to “measure twice, cut once.”[2] However, the case also offers important lessons for workout and restructuring professionals, who are often in the position to correct documentation mistakes before a subsequent bankruptcy filing makes the mistakes devastatingly permanent.

Factual Background

To recap the Motors Liquidation/General Motors case, in September 2008, the lender and the borrower entered into a loan repayment and release, which included the termination of certain UCC-1 financing statements in favor of the lender. Both the lender and the borrower retained sophisticated counsel to document the transaction. The errant UCC-3 termination statement was drafted by borrower’s counsel, and it referenced three

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The Stern Files: A Review of In re Fisher Island Investments, Inc.

March 9, 2015

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The latest in Stern analysis can be found in a fascinating story of mystery, money, and international intrigue. Last month, the Eleventh Circuit in In re Fisher Island Invs., Inc., No. 12-15595, 2015 WL 729689 (11th Cir. Feb. 20, 2015), upheld the bankruptcy court’s ruling as to the ownership of putative debtors, despite a party’s objection to the bankruptcy court’s constitutional authority to decide the putative debtors’ ownership under Stern v. Marshall.[1]

Fisher Island Investments is merely one part of the global litigation following the unexpected death of Arkadi Patarkatsishvili regarding the disputed ownership of three trusts—purportedly worth billions of dollars—between two competing groups: the Redmond Group and the Zeltser Group. Following litigation in the Republic of Georgia, the United Kingdom, Liechtenstein, the British territory in Gibraltar, and state litigation in the United States, a group of six entities (the “Petitioning Creditors”) filed three separate involuntary Chapter 11 bankruptcy petitions in the United States Bankruptcy Court for the Southern District of Florida against the three trusts (the “Alleged Debtors”) based on an unpaid promissory note purportedly executed by the Alleged Debtors. Two sets of attorneys, one representing the Redmond Group and the other representing the Zeltser

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Good News for Rent-Stabilized Debtors in New York

Late last year, the New York Court of Appeals issued an interesting opinion: In Mary Veronica Santiago-Monteverde v. John. S. Pereira, 24 N.Y.3d 283 (2014), the Court held that a bankruptcy debtor’s interest in her rent-stabilized apartment is exempted from her bankruptcy estate as a “local public assistance benefit.”

The debtor lived in Manhattan for 40 years in a rent-stabilized apartment. In 2011, after her husband passed away, she became unable to pay her credit-card debts, which totaled about $23,000, and she subsequently filed for Chapter 7 bankruptcy. In her initial filing, the debtor listed her apartment lease as an ordinary unexpired lease.

The debtor’s landlord offered the trustee a deal: The landlord would pay the $23,000 credit-card debt in exchange for the debtor’s interest in the lease and would continue to let the debtor live in the apartment at the rent-controlled rate of $703 a month for the rest of her life. The “catch,” so to speak, is one that anyone living in any of New York’s approximately one million rent-controlled apartments would quickly recognize: If the debtor’s interest in the lease were regained by the landlord, then the debtor’s son, who shares her apartment, would not be able

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In this world nothing is certain, except taxes—but does that include pre-petition tax sales?

February 13, 2015

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On November 6, 2014, the United States Bankruptcy Court for the Western District of New York in Canandaigua Land Dev., LLC v. Cnty. of Ontario, ruled that an in rem tax foreclosure conducted by a county—in full compliance with Article 11 of the New York Real Property Tax Law—was capable of being set aside in bankruptcy as a constructively fraudulent transfer, pursuant to 11 U.S.C. § 548(a)(1)(B).

The County had foreclosed on a real property tract, 642-732 pdfvalued at approximately $300,000 to $425,000, in order to satisfy a tax debt of $16,595. Further, the sale was conducted only a few hours after the debtor filed its Chapter 11 petition.  The debtor argued that the County’s foreclosure of its tax lien constituted a constructively fraudulent transfer because the debtor was rendered insolvent by the transfer and received less than reasonably equivalent value in exchange for the transfer of the property to the County.

The Canandaigua court distinguished the United States Supreme Court case BFP v. Resolution Trust Co. (holding that a properly-conducted, non-collusive mortgage foreclosure sale is entitled to a presumption of reasonably equivalent value) on the grounds that the tax foreclosure process did not include the safeguards provided

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Ninth Circuit Holds Twombly / Iqbal “Plausibility” Standard Does Not Apply To Denials

In a seminal pair of decisions, Bell Atlantic Corp. v. Twombly, 550 U.S. 544 (2007) and Ashcroft v. Iqbal, 556 U.S. 662 (2009), the United States Supreme Court clarified that the pleading standard under Federal Rule of Civil Procedure 8(a) requires that a complaint contain sufficient factual allegations to state a claim to relief “that is plausible on its face.” Neither Twombly nor Iqbal addressed, however, whether this “plausibility” standard also applies to denials under Federal Rule of Civil Procedure 8(b). In its recent decision in In re Mortgages Ltd., 771 F.3d 623 (9th Cir. 2014), the Ninth Circuit Court of Appeals weighed in and held that the “plausibility” standard does not apply to denials.

The debtor in this case, Mortgages Ltd., was a private lender that made loans secured by real estate located in Arizona. Mortgages Ltd. funded its lending operations, in part, by selling fractional interests in its loans to investors. Under this arrangement, the investors owned their fractional interests in the Mortgages Ltd. loans in which they invested.

After Mortgages Ltd.’s bankruptcy filing, the Bankruptcy Court confirmed a plan that created an entity known as ML Manager LLC to manage and liquidate Mortgages Ltd.’s loan portfolio. Issues

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