Presenting a live 90 ‐ minute webinar with interactive Q&A Bankruptcy Risks for Secured Lenders Minimizing Claims Involving Fraudulent Transfer, Preference Challenges, Equitable Subordination and Recharacterization, and Other Risks for Secured Lenders TUESDAY, FEBRUARY 26, 2013 1pm Eastern | 12pm Central | 11am Mountain | 10am Pacific T d Today’s faculty features: ’ f l f Theodore A. Cohen, S pecial Counsel, Sheppard Mullin Richter & Hampton , Los Angeles Zachary G. Newman, Partner, Hahn & Hessen , New Y ork The audio portion of the conference may be accessed via the telephone or by using your computer's speakers. Please refer to the instructions emailed to registrants for additional information. If you have any questions, please contact Customer Service at 1-800-926-7926 ext. 10 .
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Bankruptcy and Lender Liability Risks for Secured Lenders and Recent Developments February 26, 2013 Theodore A. Cohen, Sheppard Mullin tcohen@sheppardmullin.com 213.617.4237 Zachary G Newman Hahn & Hessen Zachary G. Newman, Hahn & Hessen znewman@hahnhessen.com 212.478.7435
Overview: Recent Developments Affecting Secured Lenders I. The last 2 years have been a mixed bag for secured lenders II. Some issues have been resolved A. Credit bidding under a plan – US Supreme Court III. Some issues have a split in authority A. Separate classification of similar claims B. B Application of absolute priority rule in individual chapter 11 cases Application of absolute priority rule in individual chapter 11 cases IV. Some decisions have favored secured lenders V. Some decisions have favored debtors and debtor-related parties VI. We’ll cover many issues that affect secured lenders A. Recent cases and their holdings B. Best practices and how to minimize risk and exposure p p 6
Recent Developments Affecting Secured Lenders: p g Topics Covered Topics Covered I. Gerrymandering deficiency claims to control voting II. II Credit bidding under a bankruptcy plan C dit biddi d b k t l Determining lack of confirmability of plan at disclosure statement stage III. IV IV. Admissibility of parol evidence to contradict unambiguous loan Admissibility of parol evidence to contradict unambiguous loan documents when promissory fraud is alleged V. Equitable Subordination and Recharacterization VI. Setting aside pre-petition credit bid as a preference 7
Recent Developments Affecting Secured Lenders: Topics Covered Topics Covered VII. Applicability of absolute priority rule in individual chapter 11 cases cases VIII.363 sales free and clear of junior liens without consent of junior lienholders Clear Channel lienholders – Clear Channel IX. Interpretation of “single asset real estate” case X. Standard for “reasonable reliance” on misrepresentations as to financial condition for dischargeability analysis XI XI. Fraudulent transfers and reasonably equivalent value Fra d lent transfers and reasonabl eq i alent al e 8
Recent Developments Affecting Secured Lenders: Recent Developments Affecting Secured Lenders: Gerrymandering deficiency claims to control voting G Gerrymandering Claims d i Cl i I. Background A A. Cl Classification Requirements: A plan may place a claim in a particular class only if such claim ifi i i A l l l i i i l l l if h l i is substantially similar to the other claims of such class. 11 U.S.C. § 1122(a). To separately classify similar claims, the plan proponent must show there is a legitimate business or economic reason to do so. In re Barakat , 99 F.3d 1520, 1526 (9th Cir. 1996). B. B Voting Requirements: When secured lender has a deficiency claim large enough to control V ti R i t Wh d l d h d fi i l i l h t t l unsecured class under 11 U.S.C. § 1126(c) [2/3 in amount; ½ in number], debtor cannot confirm plan over secured lender’s objection if only impaired class is unsecured creditors because at least one class of impaired claims must vote in favor of a plan for the plan to be confirmed. 11 U.S.C. § 1129(a)(10). C. To obtain the required class of impaired claims accepting the plan, debtors may attempt to separately classify similarly situated claimants. The Ninth Circuit, and a majority of other circuits, have ruled that this type of gerrymandering is impermissible. In re Barakat , 99 F.3d at 1525. BUT . . . 9
Recent Developments Affecting Secured Lenders: Recent Developments Affecting Secured Lenders: Gerrymandering deficiency claims to control voting Gerrymandering Claims Gerrymandering Claims I. Recent case law has held that a secured lender’s unsecured deficiency claim can be classified separately from unsecured claims A. A Wells Fargo Bank, N.A. v. LOOP 76, LLC (In re LOOP 76, LLC) , 465 B.R. 525 (B.A.P W ll F g B nk N A LOOP 76 LLC (In LOOP 76 LLC) 465 B R 525 (B A P 9th Ci . 9th Cir. 2012): A partially secured creditor’s deficiency claim was properly classified separately because the creditor had a third-party source – a guarantor -- for repayment of its claim. In this single asset real estate case, the lender could have vetoed the debtor’s plan by voting to reject it if the lender’s deficiency claim had been included in the class of unsecured claims. Loop has been criticized, including in In re 4 th Street East Investors, Inc. , 2012 Bankr. LEXIS B. 2144 (C.D. Cal. 5/15/12). The court disagreed with Loop , and also distinguished the case on the grounds that the guarantor was insolvent C. In re Red Mt. Mach. Co. , 448 B.R. 1 (Bankr. D. Ariz. 2011): Partially secured lender's deficiency claim was separately classified because, unlike other unsecured claims, (1) lender held personal guarantees on its claim; (2) lender’s deficiency claim was embroiled in an adversary proceeding with the Debtor; and (3) lender’s deficiency claim could have been paid in full and/or differently than all other unsecured claims, because the plan provided p y , p p that the claim was to be paid in accordance with any final order in the adversary proceeding. 10
Recent Developments Affecting Secured Lenders: Recent Developments Affecting Secured Lenders: Credit Bidding Under a Chapter 11 Plan Credit Bidding Under Plan I. Issue: Whether a plan providing for the sale of a debtor’s assets free and clear of liens must include a provision allowing an objecting secured creditor to credit bid at the sale. II II. Background Law B k d L A. Free and Clear Sale: When a debtor sells its assets out of bankruptcy, it can sell them "free and clear" of all liens. B. If a secured creditor (often placed in its own class) objects to a plan proposing a free and clear sale, the plan must nonetheless be "fair and equitable" with respect to that class. 11
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