Articles Posted in Ninth Circuit

Published on:

As a creditor, the news of a debtor who owes you a substantial sum of money filing bankruptcy is often the most alarming news you can learn—that is, until you seek advice of counsel and learn that payments the debtor made to you within 90-days prior to the bankruptcy will be the subject of a lawsuit and likely recoverable by the bankruptcy estate as a “preference.”  This is usually the point I offer soothing chamomile tea to the client.

Recovery of “preference” transfers in bankruptcy cases, though seemingly unfair to the individual creditor, serve an important role and offer a degree of protection to the creditors as a whole.  The primary elements of a preference transfer are relatively straightforward: a debtor who is insolvent, makes a payment or payments to a creditor, within 90 days[1] prior to the bankruptcy filing, to satisfy at least a portion of a pre-existing debt[2], and the creditor receives more than it would have had the debtor filed a chapter 7 (liquidation) bankruptcy case.  Though the “don’t rob Peter to pay Paul” concept appears clear enough, the Ninth Circuit has recently illustrated how complicated the matter can become in In re Tenderloin Health[3] where the court addressed the often overlooked final element to a preference—the “greater amount” test.

As the Ninth Circuit noted, the “greater amount test … ‘requires the court to construct a hypothetical chapter 7 case and determine what the creditor would have received if the case had proceeded under chapter 7’ without the alleged preferential transfer.” Id. at *7.  This task of creating a hypothetical chapter 7 liquidation grows ever more daunting as a case grows more complex, leading to uncertainty for a creditor client, especially when unresolved legal issues come up within the hypothetical bankruptcy.

Published on:

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.

Published on:

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:

Published on:

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.”