Articles Posted in Chapter 9

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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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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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After the housing market collapse, many cities and towns fell on hard times and have yet to recover.  In quite a few communities, housing prices remain low, municipal debt levels are unsustainable, and attempts to raise revenue have been rejected by voters—who are often cash-strapped themselves.  Bankruptcy offers breathing room, political cover for tough decisions, and the chance to renegotiate collective bargaining agreements and restructure debt.  The bankruptcy process is frequently used by businesses and individuals seeking a “fresh start.”  Why don’t more distressed municipalities file bankruptcy? Continue reading