Articles Posted in Chapter 11

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We asked some of our financial advisor colleagues to give us brief read outs on what they felt 2017 has in store for us now that we have gotten beyond the inauguration and into the first weeks of the Trump administration.  Their thoughts follow:

https://www.southerncaliforniabankruptcylawyersblog.com/files/2017/02/2012-03-31-10.05.15-214x300.jpgWe have been seeing a lot of highly leveraged deals that impact the performance of the business. These deals are leading to reduced spending on capital expenditure, marketing and even experienced management.  Once new ownership is in place, these strictures prevent the company from operating with the same efficiency as in the past, let alone growing.  Another scenario we have been encountering is companies getting beyond the management ability of the founder as the company increases revenues from $25M to $50M and then to $100M or more. In either case, increasing interest rates will cause dislocation, because it does not take much to push these companies into a zone where they are showing significant financial stress.

That being said, we are also seeing that lenders are still being lenient because it’s really hard to get a full recovery in a liquidation, and appraisal firms always seem to be the first to hedge on their ability liquidate inventory en masse.  Also, my sense is that lenders don’t really want to sell their loans to exit a credit as it hurts their reputation.  Still, we are finding that lenders keep getting surprised with over-advances for many reasons.  When we are called in to assist in such situations, we focus our efforts on trying to fix the operating issues of the businesses and make a reasoned re-allocation of limited resources.

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Any property owner which has experienced the bankruptcy of a tenant is doubtless keenly aware of the limitation on damages which the Bankruptcy Code imposes on the landlord. A new decision by the Ninth Circuit bolsters the position of landlords in this long-running tussle.

Section 502(b)(6) Cap Refresher

Before getting to the Ninth Circuit’s recent opinion, here is a quick review for those who have not confronted the issue recently: Bankruptcy Code section 502(b)(6) generally “caps” a landlord’s claim for “damages” against a bankrupt tenant when a lease is terminated before or during the bankruptcy case to (a) the greater of the next year of rent due, or 15% of all the remaining rent due up to 3 years of the remaining term, and (b) any unpaid rent owing as of the date of the bankruptcy, or the date the tenant lost possession of the premises if prior to bankruptcy.  Fairly or not, the policy justification for the cap is that large claims of landlords, which are by their nature long-term and hard to calculate, should not overwhelm the claims of other trade creditors.

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On December 1, 2016, something extraordinary happened. No, it was not president-elect Trump visiting another Carrier air conditioning factory in Indianapolis. It was an event that made no headlines and caused no stir.  The Federal Rules of Bankruptcy Procedure were silently amended to remove all references to “core” and “noncore” proceedings.

So what’s the big deal?

Besides eliminating one of the last tools I possessed to sound smarter than my non-bankruptcy colleagues, the change reflects the final chapter in a 34-year saga regarding bankruptcy court jurisdiction and the constitutional authority of bankruptcy judges.

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Inauguration is still about 2 months away, but it is not too early to begin thinking about what the Trump Administration will mean for commercial lawyers in general and bankruptcy lawyers in particular.

Bankruptcy Reform?

We are not hearing anything about a push for bankruptcy reform as part of the new administration’s agenda. Two potential exceptions are the fate of the proposed Financial Institution Bankruptcy Act of 2016, H.R. 2947, 114th Cong. (2016), which would add a new chapter to the Bankruptcy Code dealing with large financial institutions.  Another is the potential for the new administration to take a different position than the Obama administration on Czyzewski v Jevic Holding Corp., which is now pending before the United States Supreme Court.  To date, the Solicitor General has argued that the Third Circuit was wrong to affirm the Bankruptcy Court’s approval of the “structured settlement” which resolved that case.[i]  With so many other issues swirling about, it does not seem likely that bankruptcy reform per se is in the offing.  However, a number of other potential policies may impact bankruptcy practices.

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The additional “default interest” owed when a borrower defaults under a loan agreement is a technical but highly critical part of any lending arrangement. This important “default interest” was the subject of a recent Ninth Circuit decision in which the Circuit made a nearly 180 degree u-turn away from its prior precedent.  Earlier this month in a case called In re New Investments, Inc. the Ninth Circuit adopted a new rule which may significantly constrain the ability of distressed companies to reorganize by restructuring their debt.

In that case, two members of a three judge Ninth Circuit panel reversed a bankruptcy court’s decision, and ruled that the chapter 11 debtor could not cure a default under its loan agreement by paying only the contractual pre-default interest but instead must pay interest at the higher post-default rate. This ruling is contrary to the Circuit’s prior decision in In re Entz-White Lumber & Supply, Inc. 850 F. 2d 1138 (9th Cir. 1988), and represents a dramatic shift in the Bankruptcy Code’s balance of power away from debtors and towards secured creditors.  The decision makes it much more difficult for a debtor to cure a loan default as part of a plan of reorganization.

In 1988, in the Entz- White decision, the Ninth Circuit held that a debtor who proposes to cure a loan default through a plan of reorganization is entitled to avoid all consequences of the default including higher post-default interest rates.  At that time, the Court acknowledged that under the Bankruptcy Code, a plan of reorganization “shall provide adequate means for the plan’s implementation, such as curing or waiving of any default.”  The Court recognized that there was no definition of “cure” in the Bankruptcy Code, and adopted the following definition, which had been used by the Second Circuit:

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In my blog article on August 9, I focused on some of the issues that licensors need to be aware of as they license IP rights, including the concept of allowing distributors to include “damages only” clauses in the distribution agreements.

The second issue that often arises in distribution agreements related to DVD distribution rights is that the producer/licensor grants to the distributor/licensee the right to distribute a movie in various media, including, but not limited to DVD. The distributor will often pay for the cost of manufacturing the DVDs and then have the first right to recover the cost of manufacturing out of the first sales of those DVDs.  Sometimes the producer/licensor will pay for the cost of manufacturing the DVDs.  In either instance, however what happens when a distributor files a bankruptcy and holds on to the DVDs, the cost for which may have already been recouped through prior sales or which have actually been paid for by the producer.

The “automatic stay” which comes into being on the filing of a bankruptcy by the distributor, precludes the producer from immediately recovering those DVDs, and a significant question arises whether or not those DVDs become “property of the distributor’s bankruptcy estate”.

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Published in the Los Angeles Business Journal on January 18, 2015

Imaging3, Inc., a Burbank-based medical technology developer, emerged from Chapter 11 bankruptcy in 2013 after the reorganization plan that would convert the company’s debt to equity was approved by the court. The company faced several setbacks when a minority shareholder opposed the plan and appealed multiple times.  On December 17, 2016, a three-judge panel in the Ninth Circuit Court of Appeals rejected the dissenting shareholder’s argument and granted Imaging3’s request to move forward.

Greenberg Glusker partner Brian Davidoff, who represented Imaging3 was interviewed by the Los Angeles Business Journal on January 18, 2016, “He [minority shareholder] has been very persistent and notwithstanding.  Three courts have ruled against him.  It’s not that typical but obviously you do see it happen.”

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On July 30, 2015, Relativity Media, along with 144 of its affiliates, filed a Chapter 11 bankruptcy.  The multi-million dollar entertainment company, which produced films such as The Social Network, The Fighter, Limitless, and others, is headquartered on Beverly Blvd. in Beverly Hills.  As of the date of the bankruptcy, according to its court filings, Relativity and its affiliates had approximately 89 full- and part-time employees and approximately 760 temporary production personnel in the film and television side of the business.

Lead bankruptcy counsel for Relativity are Rick Wynne, Bennett Spiegel, and Lori Sinanyan, three well-known Los Angeles bankruptcy lawyers.  The most recent hearing in the case on August 25 was an all-day affair to consider Relativity’s request for debtor-in-possession financing and for approval of procedures so that it can sell all of its assets within the next six weeks.  At that hearing, Relativity’s lenders — who are owed $350 million on account of pre-petition obligations and another approximately $50 million which they have advanced or committed to advance since the filing and who are also the proposed buyers of all of the assets for a credit bid of approximately $250 million — were represented by Mark Shinderman, another prominent Los Angeles bankruptcy practitioner.   At that same Court hearing, Mr. Wynne and Mr. Shinderman sparred for hours with Evan Jones, another noted Los Angeles bankruptcy attorney, who represents a hedge fund that had also advanced money to Relativity.

Others making appearances at the Court hearing were veteran Los Angeles bankruptcy attorneys Joseph Kohanski, representing the directors’, screen actors’ and writers’ guilds, and Ted Stoleman, on behalf of a licensor of the film Act of Valor.  A review of the case docket shows notices of appearance in the case by many other Los Angeles bankruptcy lawyers including Brian Davidoff of our office, Peter Gilhuly, Pamela Webster, Sam Newman and others, representing a variety of Los Angeles-based production companies, talent, or other creditors or contract parties of Relativity.

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The rapper Curtis James “50 Cent” Jackson III filed a voluntary chapter 11 bankruptcy petition in Connecticut bankruptcy court on Monday, July 13, 2015.  Jackson rose to prominence with songs like In Da Club and P.I.M.P. from his 2003 album Get Rich or Die Trying (also the name of his 2005 film biopic) and has starred in many film and television projects, including the Starz show Power and the upcoming movie Southpaw.

“This filing for personal bankruptcy protection permits Mr. Jackson to continue his involvement with various business interests and continue his work as an entertainer, while he pursues an orderly reorganization of his financial affairs,” Jackson’s attorneys said in a statement.

The chapter 11 filing was made the same day a jury was scheduled to determine whether Jackson is liable for punitive damages in a 2010 lawsuit filed by Lastonia Leviston.  Just days prior to the filing, the same jury awarded Leviston $5 million in compensatory damages, after she alleged that Jackson violated her privacy by posting a sex tape of her online without her permission.  Jackson’s attorneys are disputing the damages award.  As a result of the bankruptcy filing, the proceedings in the sex tape lawsuit are stayed, meaning that Leviston cannot try to enforce or collect her $5 million award, or obtain a finding from the state court jury on the amount of punitive damages, without first obtaining relief from the automatic stay in the bankruptcy case.

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Commercial landlords should take notice. Within the last several months, one women’s clothing retailer after another has gone out of business. On Dec. 4, 2014, Philadelphia-based Deb Shops filed Chapter 11. Next came Delia’s, based in New York, which filed bankruptcy only four days later. On Jan. 9, 2015, Body Central, based in Florida, a chain with 265 stores, announced that it was closing all of its stores by way of an assignment for the benefit of creditors, an alternative to federal bankruptcy. On Jan. 15, Wet Seal, a Southern California-based company, filed its own Chapter 11. Then on Feb. 4, Cachè, another New York-based chain filed Chapter 11. In addition to these, Jones New York andKate Spade Saturday recently announced that their retail locations would be closing.

If one is an anomaly, two a coincidence and three a trend, then we should pay attention when we see so many substantial retail women’s clothing companies file bankruptcy all within a few months. There is anecdotal evidence that as millennials get older and start to assert their spending power, traditional brick-and-mortar businesses may be in for some tough times.

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