Morgan Lewis on Restructuring, Summer 2011

July 07, 2011

In this issue:

  • Time to Think About Chapter 9?
  • Sharks in the Safe Harbor: The "End Run" Around Section 546(e)
  • Lessons for Proponents of "Gift Plans" and Purchasers of Claims After DBSD
  • Recent Noteworthy Decisions

Time to Think About Chapter 9?
by Andrew D. Gottfried and Patrick D. Fleming

While much press of late has been given to the federal budget and deficit, a close second in reporting goes to the fiscal problems of the nation's state and local governments. Some local governmental units have recently been the subject of bankruptcy proceedings (e.g., Vallejo, California), while others have been described as candidates for bankruptcy (e.g., Jefferson County, Alabama and Harrisburg, Pennsylvania).

The Bankruptcy Code (the Code), enacted in 1978, includes Chapter 9, titled "Adjustment of Debts of a Municipality." Chapter 9 has been infrequently utilized over the last 30 years. With the notable exception of the Orange County, California case in 1994, Chapter 9 has been primarily utilized by limited purpose governmental units or small municipalities such as the San Jose Unified School District and Prichard, Alabama, the latter having sought Chapter 9 relief twice in the 1990s.

In view of the likely application of Chapter 9 in the near future to larger governmental units with greater debt, an understanding of the basic statutory features is important, including (i) a comparison of the Chapter 9 debt adjustment provisions to the more commonly used and understood Chapter 11 reorganization provisions, and (ii) consideration of the entities eligible for Chapter 9 relief.

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Sharks in the Safe Harbor: The "End Run" Around Section 546(e)
by Menachem O. Zelmanovitz and Rachel Jaffe Mauceri

The growth of the distressed debt trading industry has led to the introduction of litigation as a business model: hedge funds or other investment funds trading in the secondary loan and similar markets (usually at prices substantially below par) regularly sue issuers and other parties on a variety of legal theories in an effort to increase the recovery on their investments. In the case of a leveraged buyout (LBO) that results in or is followed by insolvency and/or bankruptcy, such litigation often includes efforts to recover payments from former stockholders whose shares were redeemed or acquired in the LBO transaction.

To protect the investing public and the securities industry from such claims, Congress enacted Bankruptcy Code Section 546(e), the so-called "safe harbor" that insulates certain transactions from avoidance as constructive fraudulent transfers. Recent bankruptcy cases, however, are testing the limits of this "safe harbor." This article considers whether, notwithstanding Section 546(e), the failure of the debtor or other estate representative to timely assert fraudulent conveyance claims under state law empowers individual creditors to assert and prevail on such claims.

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Lessons for Proponents of "Gift Plans" and Purchasers of Claims After DBSD
by Wendy Walker

The recent decision by the Second Circuit Court of Appeals in In re DBSD North America, Inc. contains important rulings for all parties in interest in Chapter 11 cases: (i) "gift plans," under which a junior class receives plan consideration (e.g., equity or cash), while a senior class of interests or claims is not satisfied in full, violate the absolute priority rule, and (ii) purchasers of claims motivated by factors other than a monetary recovery could be at risk of having their votes under a reorganization plan disregarded.

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Recent Noteworthy Decisions

  • In re Adelphia Recovery Trust
  • In re Lett
  • In re TOUSA, Inc.

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