Bankruptcy Law Insights

Supreme Court Indubitably Grapples With Credit Bidding

Ben Feder — Tue, 24 Apr 2012 10:47:36 -0500

The Supreme Court heard arguments yesterday in RadLAX Gateway Hotel over whether the Bankruptcy Code permits a debtor in a chapter 11 case to sell encumbered assets without providing its secured lenders an opportunity to credit bid their debt.

As previously described on this site, a circuit split arose last year, when the Seventh Circuit in River Road Hotel Partners, a companion case to RadLAX Gateway Hotel, declined to follow the Third Circuit’s 2010 decision in Philadelphia Newspapers. The debtor in River Road sought to rely on Philadelphia Newspapers in putting forward a plan of reorganization that proposed an auction of the secured lenders’ collateral, but would have expressly denied the lenders the right to credit bid.

Section 1129(b)(2)(A) of the Bankruptcy Code describes three different means by which a plan of reorganization can be found to be “fair and equitable” and thus capable of being confirmed without the consent of a secured lender class (i.e., “crammed down”):

(i) lender retention of liens securing the obligations and receipt of the present value of its secured claim,

(ii) sale of collateral free and clear of liens but subject to credit bidding, or

(iii) the realization by the creditor of the “indubitable equivalent” of its secured claim.

Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Third Circuit in Philadelphia Newspapers held that a sale “free and clear” could also take place without allowing the lenders to credit bid under subsection (iii), the “indubitable equivalent” prong. The Third Circuit concluded that the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold “free and clear” under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, the opportunity to credit bid need not be provided. The bankruptcy judge in River Road expressly rejected the reasoning of the Philadelphia Newspapers majority, and the Seventh Circuit unanimously affirmed.

The lawyers at yesterday’s oral argument faced a “hot bench”, as the justices sought to understand the particulars of the process of selling assets in chapter 11 cases, and the distinction between selling assets pursuant to a plan and asset sales outside of a plan. Somewhat surprisingly, the justices focused very little on whether the “plain meaning” of the disjunctive “or” in the statute mandated the result sought by the debtor in River Road / RadLAX, and grappled instead with the concept of “indubitable equivalence”, and whether it could be ever be realized through a sale process that did not permit the secured lender to credit bid. As Justice Alito somewhat inartfully but rather succinctly stated the issue:

“[I]f the [Secured Lenders] thought that what the judge would determine would indubitably provide the indubitable equivalent, then there wouldn’t be an issue here, right? The reason there’s an issue is because [the Secured Lenders] don’t think that what the judge will decide will indubitably provide the indubitable equivalent.”

An analysis focused on the practical difficulties of providing “indubitable equivalence” for secured lenders, rather than on the so-called “plain meaning” of a highly formalistic reading of the Bankruptcy Code, likely portends a result that will uphold the right to credit bid.

State Legislature to Alabama's Jefferson County: Drop Dead?

Ben Feder — Mon, 16 Apr 2012 16:34:57 -0500

Opposing lawyers for Jefferson County, the debtor in the largest Chapter 9 municipal bankruptcy case ever filed, and the holders of its sewer warrants squared off last week in the ongoing fight over control of the County’s sewer system and the right to its revenues. (Expert witness Jay Goldin provided a notable link back to the New York City fiscal crisis of the 1970’s.) The dispute over the County’s sewer system, with it’s underlying tale of corruption and the use of complex derivatives gone rampant, has garnered nearly all of the attention that has been focused on the County’s financial travails and its Chapter 9 case.

In some ways, however, the sewer system disputes are a sideshow. The true source of the County’s present dire circumstances lies in the invalidation last year of the County’s occupational tax that had accounted for nearly 40% of its general revenues. The sewer system may be a veritable Gordian knot, but it is essentially self-contained. The holders of the sewer warrants have no recourse against the County’s general revenues. The loss of the funds from the occupational tax, however, has left the County virtually non-functional, barely able to provide basic governmental services.

The crisis can be alleviated only by the Alabama State Legislature. Under Alabama law, the County has no authority to replace the tax. The Legislature’s current session is rapidly drawing to a close, and no relief for Jefferson County appears to be at hand.

The sewer system dispute will probably generate precedential opinions from the Eleventh Circuit Court of Appeals, which will widely influence and affect the course of Chapter 9 cases going forward. But regardless of how the sewer system dispute gets resolved, Jefferson County’s only hope of being able to emerge from Chapter 9 with a feasible plan of adjustment lies with the State Legislature.

Throwing Money (Literally) Down the Sewer - Jefferson County and Warrant Holders Square Off on Sewer System Operating Expenses

Ben Feder — Thu, 05 Apr 2012 16:43:18 -0500

U.S. Bankruptcy Court Judge Thomas Bennett last month upheld the Chapter 9 bankruptcy filing of Jefferson County, Alabama, the largest municipal bankruptcy case in history. As has been widely reported, the County’s financial woes were precipitated by the disastrous funding of upgrades to its sewer system. Not surprisingly, given the billions of dollars at stake and the lack of applicable Chapter 9 precedents, the Jefferson County case has already produced a torrent of briefs and two extensive opinions from Judge Bennett. The main antagonists in this case - the County one side, and a group comprised of the holders of the County’s sewer warrants (the “Sewer Warrants”), the Indenture Trustee for the Sewer Warrants, the monoline insurers of the Sewer Warrants, and the state court appointed receiver for the sewer system (the “Sewer Warrant Parties”), on the other - have already fought bitterly over the County’s eligibility to be a debtor under Chapter 9, and over which party – the County or the receiver – would maintain control of the sewer system during the Chapter 9 case. The County has prevailed in both battles.

The two sides are now preparing to square off again next week on another crucial issue for which there exists no caselaw guidance. Section 922 of the Bankruptcy Code permits the holders of bonds or warrants that are secured by “special revenues”, such as those generated from the Jefferson County sewer system, to continue to receive payment from the application of such revenues during the course of a Chapter 9 case. However, Section 928(b) provides that the lien on such revenues is subject to the sewer system’s “necessary operating expenses”. With no governing definition as to what constitutes “necessary operating expenses” in the Bankruptcy Code and no previous court rulings on the scope of Section 928(b), the two sides predictably have staked out positions at opposite poles.

The parties agree that “Operating Expenses”, defined in part under the Indenture governing the Sewer Warrants as “the reasonable and necessary expenses of efficiently and economically administering and operating the [Sewer] System”, should be deducted from the sewer revenues collected by the County before payment to the holders of the Sewer Warrants. The dispute centers on certain specific categories of additional expenditures that the County now wants to subtract, including what a Joint Statement filed by the parties describes as “maintenance expenditures”, “project expenditures”, “professional fees and related costs”, and “reserves for depreciation and amortization and for future operating and/or capital expenditures”. Prior to the Chapter 9 Case, the Indenture Trustee was receiving $9.6 million each month to pay over to the holders of the Sewer Warrants. According to the Sewer Warrant Parties, the additional deductions sought by the County would reduce this amount to $4.25 million.

In an 83 page brief, the County forcefully argues that the statutory term “necessary operating expenses” in Section 928(b) must be read more broadly than the Indenture definition of “Operating Expenses”, and permits the County to withhold amounts evidencing the disputed expenditures. The Sewer Warrant Parties, with equal vigor and nearly equal length, assert that Section 928(b) must be read narrowly, that the statutory term “necessary operating expenses” encompasses what they describe as “the commonly used definition of ‘Operating Expenses’” under the Indenture, and that the County improperly seeks to use the Bankruptcy Code to reduce the payments properly due to the sewer warrant holders.

The County’s argument regarding expenditures for “professional fees and related costs” provides an interesting twist, particularly given the contentiousness of the case so far. The County believes that such expenditures should include litigation costs incurred with respect to the Sewer Warrants in the Chapter 9 case. The County thereby wants to deduct as “necessary operating expenses” under Section 928(b) its own legal expenses from the sewer revenues otherwise payable to the holders of the Sewer Warrants. Because the holders of the Sewer Warrants have no recourse to any County revenues or assets other than the sewer revenues, they effectively would find themselves paying the County’s legal costs out of their own pockets.

Corporate debtors in Chapter 11 cases typically must pay the legal costs and expenses of their secured lenders. This customary feature of loan documents acts to discourage debtors (or other parties acting on behalf of a debtor’s estate) from pursuing litigation against lenders, as the debtor’s estate funds the litigation costs of both sides. The County’s gambit, if successful, would turn this dynamic completely on its head, and could significantly alter the direction of the Chapter 9 case.

Legal Nightmare Ends for Mets' Owners. No Relief In Sight for Mets' Fans.

Ben Feder — Mon, 19 Mar 2012 10:33:47 -0500

At the end of the day, Picard really did not have a case, but there was no way that Wilpon and Katz could risk a trial. It looks to be a fair and reasonable outcome.

http://espn.go.com/new-york/mlb/story/_/id/7708498/new-york-mets-settle-madoff-trustee-162-million

Madoff Trustee Gets Call on Borderline Pitch - Judge "Skeptical" But Does Not Dismiss Claims Against Mets' Owners

Ben Feder — Mon, 05 Mar 2012 17:23:14 -0500

On the surface, Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), had a very good day. Judge Jed S. Rakoff granted Picard’s motion for summary judgment against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”) with respect to the $83 million of fictitious profits received by the Wilpon/Katz Group in the two year period before the filing of the BLMIS case. At the same time, Judge Rakoff denied the Wilpon/Katz Group’s summary judgment motion that sought to prevent Picard from clawing back any payments other than fictitious profits on the grounds that he could not prove that the Wilpon/Katz Group acted in bad faith in investing in BLMIS.

The Wilpon/Katz Group can take some comfort, however, from Judge Rakoff’s blunt skepticism regarding Picard’s ability to recover any further amounts. The ruling with respect to fictitious profits was hardly a surprise. In a ruling last September, Judge Rakoff had issued what amounted to a virtually gold-plated invitation when he said, “[T]he Trustee might well prevail on summary judgment seeking recovery of [such] profits.” However, with respect to the $300 million of invested principal that the Wilpon/Katz Group received from BLMIS during the two year period, Judge Rakoff reiterated his earlier expressed doubts in even stronger terms, stating that Picard’s efforts to demonstrate bad faith amounted to “nothing but bombast.”

The trial is scheduled to begin in two weeks on March 19. At this point, however, a settlement very likely makes sense for both parties. Although Picard has virtually no chance of recovering invested principal, Rakoff is going to allow him to present his evidence with respect to bad faith to a jury. The Wilpon/Katz Group, even if victorious after what will undoubtedly be an embarrassing and widely publicized trial, will thereafter face a lengthy appeal period. Picard has been successful before the Second Circuit, and may very well prevail in his appeal of Judge Rakoff’s earlier ruling from last September that, among other things, reduced the amount of fictitious profits which could be recovered from approximately $295 million.

The mediation efforts of former Governor Mario Cuomo may yet succeed.

Madoff Trustee and Mets' Owners Aim Final Beanballs at Each Other Ahead of Summary Judgment Hearing This Week

Ben Feder — Tue, 21 Feb 2012 17:59:49 -0500

Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), and Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”), each submitted their final arguments last week in support of their respective motions for summary judgment. As previously discussed on this site, Judge Jed S. Rakoff’s rulings on the motions could largely resolve this year-long legal battle.

Judge Rakoff’s decision last September dismissed most of the counts set forth in Picard’s complaint and substantially narrowed the focus of Picard’s adversary proceeding. Section 548(a) of the Bankruptcy Code allows a trustee to avoid transfers made up to two years prior to the commencement of the bankruptcy case if made with deliberate fraudulent intent. However, the rights of a good faith transferee are recognized and protected under Section 548(c). That section provides that a transferee “that takes for value and in good faith” may retain the property transferred to it “to the extent that such transferee . . . gave value to the debtor in exchange” for such transfer.

The briefs filed last week showed each side closely adhering to the paths provided by Judge Rakoff in his ruling last year. Rakoff strongly intimated that no value was provided with respect to the $83 million of fictitious profits received by the Wilpon/Katz Group in the two year period before the filing of the BLMIS case, and Picard accordingly contends now that no material facts or valid defenses exist with respect to those payments. On the other hand, Rakoff ruled that the Wilpon/Katz Group’s invested principal clearly did provide “value” to BLMIS, thus requiring Picard to demonstrate a lack of “good faith” in order to recover payments that constituted the return of such principal. The Wilpon/Katz Group argues strenuously that Picard’s mélange of supposed “red flags” fails to approach the standard of “willful blindness” that Judge Rakoff stated must be shown in order to show an absence of good faith.

Judge Rakoff must find with respect to each motion that there are no genuine factual issues to be determined at a full trial. Picard would appear to have the stronger chance for immediate success here. Unless Judge Rakoff determines to apply a different legal standard now than he did last year, the issue of fictitious profits looks to be clear and straight forward. On the other hand, the issue of good faith appears to be less susceptible to immediate disposition. While it does not appear that Picard will be able to satisfy Rakoff’s “willful blindness” standard, Judge Rakoff will probably allow Picard to present his evidence to a jury.

Madoff Trustee Seeks Summary Judgment With Respect To Fictitious Profits, Mets' Owners With Respect to Principal Repayments -- "Jack Sprat" Approach Could Resolve Entire Case

Ben Feder — Thu, 02 Feb 2012 11:35:30 -0500

The adversary proceeding of Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”), could be substantially resolved over the next few weeks. Although the trial is scheduled to begin on March 19, each side intends to ask Judge Jed S. Rakoff at a hearing on February 23 to rule in its favor with respect to certain of the transfers made by BLMIS to the Wilpon/Katz Group during the two-year period prior to the commencement of the BLMIS liquidation case in December 2008. Picard asserts that there are no material disputed issues of fact with respect to at least $83 million that evidences the fictitious profits received by the Wilpon/Katz Group during that period, and the Wilpon/Katz Group makes the same contention regarding the remaining payments over that time that constituted the return of principal.

Between them, Picard and the Wilpon/Katz Group have covered virtually all of the payments that remain at issue following Judge Rakoff’s ruling last September that dismissed most of Picard’s claims. This “Jack Sprat” approach could resolve the entire case.

Both sides are following paths essentially laid out by Judge Rakoff in the September ruling. Judge Rakoff dismissed most of the counts against the Wilpon/Katz Group based on his reading of the “safe harbor” provisions Section 546(e) of the Bankruptcy Code, which substantially reduced Picard’s potential recovery from nearly $1 billion to approximately $384 million. Judge Rakoff also set a very high standard for Picard to meet in order to recover any payments other than “fictitious profits”, stating that “the principal invested by . . . Madoff’s customers ‘gave value to the debtor,’ and therefore may not be recovered by the Trustee absent bad faith.” In Judge Rakoff’s view, Picard can only recover payments evidencing a return of principal by showing a lack of good faith tantamount to “willful blindness”. The Wilpon/Katz Group details the so-called “red flags” that Picard has set forth to show that the Wilpon/Katz Group should have suspected Madoff, and argues that in total they do not come close to clearing the hurdle established by Judge Rakoff.

Picard, on the other hand, has taken Judge Rakoff up on his virtually gold-plated invitation to seek summary judgment for the fictitious profits. “[G]iven the difficulty defendants will have in establishing that they took their net profits for value, the Trustee might well prevail on summary judgment seeking recovery of the profits[,]” the judge wrote in the September ruling. While Judge Rakoff has not yet ruled on the appropriate method for calculating the portion of the $384 million attributable to fictitious profits, Picard has consistently taken the position that the amount is approximately $83 million.

A ruling in favor of both motions would constitute a far larger victory for the Wilpon/Katz Group than for Picard. The Wilpon/Katz Group will have reduced its potential $1 billion exposure down to a level that will likely allow them to retain ownership of the Mets, and avoid the time, costs, and publicity of a lengthy trial. On the other hand, even with a victory regarding the $83 million, an appeal by Picard of the September ruling is highly likely.

Five Weeks Until Pitchers and Catchers Report, Eight Weeks Until Lawyers Report - Madoff Judge Confirms Mid-March Trial For Trustee's Claims Against Mets' Owners

Ben Feder — Thu, 19 Jan 2012 12:00:59 -0500

Judge Jed S. Rakoff this week denied the request of Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”), to pursue an immediate appeal of Judge Rakoff’s recent decision to dismiss most of the counts set forth in Picard’s adversary proceeding against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”). He reaffirmed that the trial on Picard’s claims against the Wilpon/Katz Group will begin on March 19, 2012.

In his earlier ruling, Judge Rakoff held that the “safe harbor” provisions in Section 546(e) of the Bankruptcy Code limit Picard’s power to recover any transfer from a “stockbroker” that was a “settlement payment” made “in connection with a securities contract”. Crucially, this interpretation of 546(e) only permits a recovery of intentionally fraudulent transfers pursuant to Section 548(a)(1)(A) of the Bankruptcy Code, which has a two-year look back period. It completely eliminates Picard’s ability to rely on the six-year look back period under New York state law fraudulent transfer provisions, and reduces the maximum amount that Picard could possibly recover from the Wilpon/Katz Group from nearly $1 billion to approximately $384 million.

In yesterday’s opinion, Judge Rakoff held that Picard had failed to show the necessary “extraordinary circumstances” which would warrant the “interlocutory” appeal and justify the indefinite delay of the pending trial. He directed Picard to wait until after the trial, when “an appellate court will be able to review, on a full record, not just [the] rulings of which the Trustee now complains, but all relevant rulings in this [complicated] proceeding[.]” Judge Rakoff disregarded Picard’s contention that the Second Circuit’s recent opinion, rejecting customer claims based upon Madoff’s fabricated BLMIS account statements, should prevent Ponzi scheme transfers from qualifying for “safe harbor” protection under Section 546(e), because no stocks or securities were actually ever sold. Judge Rakoff noted that the extent of the Wilpon/Katz Group defendants’ knowledge of Madoff’s activities, “one of the key issues in the forthcoming trial,” could be highly relevant to the question of whether transfers made as part of a Ponzi scheme should qualify for “safe harbor” treatment, and that “the factual record thus developed will be useful for assessing [those] issues now raised by the Trustee.”

Judge Rakoff’s earlier decision also set a very high standard for Picard to meet in order to recover any distributions to the Wilpon/Katz Group other than “fictitious profits”. As previously discussed on this site, while amounts paid out by BLMIS to investors such as the Wilpon/Katz Group as part of the Ponzi scheme can satisfy the requirement of actual fraud under Section 548(a) of the Bankruptcy Code, under Section 548(c) the Wilpon/Katz Group defendants can defeat Picard’s efforts to recover such distributions to the extent that they can show that they provided value, such as invested principal, in exchange for such distributions. Judge Rakoff has not yet ruled on the key question of how much of the $384 million in aggregate distributions during the two-year look back period should constitute “fictitious profits” and how much should be deemed to be the return of invested principal. He requested the parties to brief this issue following his earlier decision. Insofar as Judge Rakoff noted in the earlier decision that Picard “might very well prevail on summary judgment seeking recovery of the [fictitious] profits”, his ruling on the method for the calculation of such profits will likely be the determinative issue in this case.

The Right Kind of Broke? Judge Weighs Deeply Insolvent County's Eligibility For Chapter 9 Protection

Ben Feder — Fri, 06 Jan 2012 11:35:55 -0500

The travails of Jefferson County, Alabama are well known. Ordered by a federal court to upgrade its sewer system in the late 1990’s, the project was marred by corruption, cost overruns and financing with complex derivatives that ultimately saddled the County with over $3 billion in debt. In addition, an occupational tax that provided the primary source of its unrestricted general fund revenues was invalidated, and the County faces both huge refund claims and operating revenue shortfalls. There is no dispute that Jefferson County is deeply insolvent, and there was little surprise when the County filed a petition under Chapter 9 of the Bankruptcy Code in early November in the Northern District of Alabama, commencing the largest municipal bankruptcy case in history.

For all of its problems, however, the County may not be eligible for Chapter 9 protection. The County’s bankruptcy petition has been challenged and a colorable issue exists as to whether the County can satisfy the strict requirements which must be met in order for a municipality to use Chapter 9 to seek adjust its debts. Among other things, those requirements, set forth in Section 109(c) of the Bankruptcy Code, state that a municipal entity seeking to be a debtor under Chapter 9 must demonstrate that it “is specifically authorized . . . by State law . . . to be a debtor under such chapter.” In Jefferson County’s case, the question is whether the nature of its debt obligations fall within the parameters of the Alabama authorization statute, Alabama Code Section 11-81-3. As strange as it sounds, Jefferson County’s staggering debt may not be the right kind of debt to enable it to utilize Chapter 9 of the Bankruptcy Code.

Jefferson County issued its debt in the form of warrants; it has no outstanding bond debt. The differences between warrants and bonds may be highly technical but they are evidently cognizable under Alabama law. The debt holders opposing the Chapter 9 petition contend that the first sentence of Alabama Code Section 11-81-3 only authorizes a Chapter 9 filing by the “governing body of any county, city or town . . . which shall authorize the issuance of refunding or funding bonds”, and that the distinction between bonds and warrants is sufficient to render Jefferson County ineligible for Chapter 9, since it cannot show that has been “specifically authorized” to use Chapter 9 under Alabama law. One bankruptcy judge in the Southern District of Alabama recently dismissed the Chapter 9 case of another Alabama municipality that had no outstanding bond debt. The federal district judge hearing the appeal of that dismissal has certified the question to the Alabama Supreme Court.

The County argues in response that the second sentence of Alabama Code Section 11-81-3, which contains express language that “authorizes each county, city or town . . . to proceed under the provisions of the acts for the readjustment of its debts”, is not limited by the reference to bond debt in the first sentence. It alternatively contends that even if the first sentence of Section 11-81-3 does provide such a limitation, the County’s previous issuances of bonds, even if not currently outstanding, satisfies the requirement.

Judge Thomas Bennett, the bankruptcy judge overseeing the Jefferson County case, has indicated that he may also certify the issue to the Alabama Supreme Court.

Does a Single "Or" Excommunicate Congressional Intent From the Bankruptcy Code? Supreme Court to Resolve Circuit Split on Credit Bidding

Ben Feder — Tue, 13 Dec 2011 17:23:51 -0500

The U.S. Supreme Court will rule this term in RadLAX Gateway Hotel Inc. v. Amalgamated Bank on whether the Bankruptcy Code permits a debtor in a chapter 11 case to sell encumbered assets without providing the secured lender an opportunity to credit bid its debt. Determination of this question will require the Court essentially to choose between two opposing approaches to statutory interpretation, and decide whether the so-called “plain meaning” of a highly formalistic reading of the Bankruptcy Code should trump decades of established commercial practice.

A circuit split arose earlier this year, when the Seventh Circuit in River Road Hotel Partners, a companion case to RadLAX Gateway Hotel, declined to follow the Third Circuit’s 2010 decision in Philadelphia Newspapers, and instead expressly adopted the position set forth in the dissenting opinion from that case of Judge Tom Ambro. As previously described on this site, the debtor in River Road sought to rely on Philadelphia Newspapers in putting forward a plan of reorganization that proposed an auction of the secured lenders’ collateral, but would have expressly denied the lenders the right to credit bid their debt. Section 1129(b)(2)(A) of the Bankruptcy Code describes three different means by which a plan of reorganization can be found to be “fair and equitable” and thus capable of being confirmed without the consent of a secured lender class (i.e., “crammed down”):

(i) lender retention of liens securing the obligations and receipt of the present value of its secured claim,

(ii) sale of collateral free and clear of liens but subject to credit bidding, or

(iii) the realization by the creditor of the “indubitable equivalent” of its secured claim.

Judge Ambro, a longtime bankruptcy practitioner before being named to the bench, castigated the majority’s refusal to look beyond what it viewed as the sole plausible reading of Section 1129(b)(2)(A). In Judge Ambro’s view, the result flew in the face of both the established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and the expectation that the Bankruptcy Code expressly protects such non-bankruptcy rights -- particularly the right of a secured creditor to look to its collateral in the event of non-payment. As he wrote, “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code . . . [and] upset[s] three decades of secured creditors’ expectations[.]”

The bankruptcy judge in River Road expressly rejected the reasoning of the Philadelphia Newspapers majority. The Seventh Circuit unanimously agreed, stating that “like the bankruptcy court, we find the statutory analysis articulated by Judge Ambro in his Philadelphia Newspapers dissent to be compelling.”

The RadLAX Gateway Hotel debtor sought a writ of certiorari from the Supreme Court. They were joined by the Loan Syndication and Trading Association (“LSTA”), a loan market participants’ industry group that has been strongly supportive of lenders’ credit bidding rights. The LSTA announced that it “decided to support the appeal to the Supreme Court because, although [RadLAX Gateway Hotel] is a favorable ruling, the benefit to the market of certainty on credit bidding is an opportunity that cannot be missed.”

The Supreme Court has not been consistent in its approach to Bankruptcy Code interpretation. While it has strictly applied the “plain meaning” approach in several recent bankruptcy cases, at other times it has been willing to look to underlying Congressional purpose. The latter approach here will unquestionably result in an affirmation of the Seventh Circuit. The former will leave the LSTA regretting that it got what it asked for.

Los Angeles Dodgers' Chapter 11 Case: No Replay of Texas Rangers' Drama

Ben Feder — Wed, 09 Nov 2011 11:39:39 -0500

A World Series as exciting as any in memory ended two weeks ago. Notwithstanding the end of the season, the Los Angeles Dodgers’ chapter 11 case offered the promise of more baseball-related thrills. Dodger’s owner Frank McCourt and Major League Baseball (“MLB”) Commissioner Bud Selig appeared headed towards an epic courtroom showdown that promised to rival the high drama of the cliffhanger auction in last year’s Texas Rangers’ bankruptcy. However, the settlement last week between McCourt and MLB peremptorily ended the battle.

The Dodgers’ bankruptcy reflected a desperate effort by McCourt to remain in control of the team despite his personal financial woes and the embarrassing allegations that emerged in the wake of his divorce from his wife (and co-owner). The apparent strategy was to use the protections of bankruptcy as a shield to prevent Major League Baseball from exercising its right to remove him from control of the Dodgers for long enough to effect a sale of the team’s media rights. Such a sale almost certainly would have enabled McCourt to propose a plan that would have paid all of the Dodgers’ creditors in full, and attempt (over MLB’s certain objection) to assume the agreements pursuant to which the Dodgers’ are permitted under the Major League Baseball Constitution to operate as a MLB franchise (the “MLB Agreements”).

It was, however, a long-shot from the outset. As previously stated in this space:

[The team’s bankruptcy lawyers] will probably be able to stave off a quick takeover of the Dodgers by Major League Baseball, and to turn aside the demands that the case be dismissed or that a trustee be appointed to run the team. They should also succeed in buying McCourt enough time to negotiate a sale of the team on favorable terms. But McCourt’s true goal here – to use the Chapter 11 process to keep permanent control of the team – appears to be beyond the reach of any lawyer. The Major League Baseball Constitution, pursuant to which McCourt acquired and holds the Dodgers’ franchise rights, in the end vests too much power in Commissioner Bud Selig and the other owners. Even assuming that McCourt can come up with a plan to pay off the Dodgers’ creditors, the Dodgers’ bankruptcy will almost certainly only delay the inevitable exercise of power by Major League Baseball to terminate McCourt’s right to operate the franchise.

The Dodgers did proceed with a motion to establish auction procedures for the sale of media rights, and MLB responded by seeking to compel a sale of the team. MLB’s papers emphasized the futility of allowing McCourt to proceed with a sale, arguing that he would never be able to cure the breaches of the MLB Agreements.

A hearing on both matters was initially scheduled to be heard on October 31, and was then postponed until late November. One can only speculate as to why McCourt abandoned the fight when he did. It is possible that a damaging new piece of evidence came out in the discovery leading up to the hearing. It is also possible that McCourt finally realized the scope of the odds against him, and that following a sale, as MLB described in its pleadings, “Mr. McCourt will likely receive hundreds of millions of dollars, placing him in a position to pay all of his personal debts, and be left a very wealthy man.”

Judge Rakoff Squeezes Strike Zone for Madoff Trustee

Ben Feder — Fri, 07 Oct 2011 15:42:04 -0500

Judge Jed S. Rakoff last week largely sided with Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”) on their motion to dismiss the adversary proceeding brought by Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”). Judge Rakoff’s decision will affect not only this particular lawsuit, but also many of the other lawsuits Picard has commenced seeking the recovery of funds from former investors of BLMIS. (Kelley Drye & Warren LLP represents other Madoff investors who may benefit from this ruling.)

Judge Rakoff dismissed most of the counts against the Wilpon/Katz Group based on his reading of the “safe harbor” provisions Section 546(e) of the Bankruptcy Code. That section limits a trustee’s powers to recover any transfer from a “stockbroker” that was a “settlement payment” made “in connection with a securities contract” to transfers made with actual fraudulent intent. Crucially, this interpretation of 546(e) only permits a recovery of intentionally fraudulent transfers pursuant to Section 548(a)(1)(A) of the Bankruptcy Code, which has a two-year look back period. It completely eliminates Picard’s ability to rely on the six-year look back period under New York state law fraudulent transfer provisions.

The ruling constitutes a huge victory for the Wilpon/Katz Group. In addition to substantially reducing Picard’s potential recovery by reducing the look back period from six years to two years, Judge Rakoff set a very high standard for Picard to meet in order to recover any payments other than “fictitious profits”. As has been widely-publicized, Picard has sought the return of all transfers made from BLMIS to the Wilpon/Katz Group, including those that constituted the return of invested principal, due to a lack of “good faith”, based on the so-called “red flags” that Picard believes should have given the Wilpon/Katz Group reason to suspect Madoff. In Judge Rakoff’s view, however, Picard can only recover payments evidencing a return of principal by showing a lack of good faith tantamount to “willful blindness”.

Judge Rakoff did leave open one issue that could somewhat mitigate the Wilpon/Katz Group’s victory here. Although the “fictitious profits” they received from BLMIS during the two year look back period totaled $83 million, Rakoff stated in a footnote that he would not resolve “whether the Trustee can avoid as profits only what the defendants received in excess of their investment during the two year look back period . . . or instead the excess they received over the course of their investment with Madoff.” In a separate order issued the following day, directing the parties to set a briefing schedule, he elaborated, “[T]he total of all transfers made during the two-year [look back] period . . . appears to be $386 million. However, it remains an open question whether, in determining what portion of that sum should be considered principal and what portion profits, reference should be made only to that period or should be made to earlier transfers as well.”

An appeal by Picard is a near-certainty. Even if Picard and the Wilpon/Katz Group reach a settlement, it will affect too many other adversary proceedings brought by Picard for him to let stand. The Second Circuit Court of Appeals recently handed Picard a major victory by rejecting the ability of Madoff investors to rely on the fabricated account statements for the purpose of asserting claims against the BLMIS estate. He will undoubtedly look to try his luck there again.

NewPage - A Good Old Fashioned Free-Fall Chapter 11 Case

Ben Feder — Fri, 16 Sep 2011 14:59:32 -0500

Last week’s Chapter 11 filing by NewPage Corporation, a company with assets and liabilities in the billions of dollars, stands as a relative rarity in the current restructuring environment. Running contrary to the “new normal” in larger restructurings, NewPage filed for bankruptcy protection without a pre-arranged or pre-negotiated exit solution, such as a back-stopped rights offering or a stalking horse bidder for a sale of the enterprise as a going concern. The company instead will take advantage of the protections offered by Chapter 11 while it seeks to work out a solution with its creditors. It promises to be an interesting case to watch.

NewPage at first glance appears to have viable core operations and an extremely top heavy balance sheet. A deleveraged enterprise that successfully uses Chapter 11 to shed unprofitable or less profitable business lines, reject burdensome contracts, sell unneeded assets, and streamline operations would likely have substantial long term value.

The primary focus in this case therefore will be the simple question: where’s the fulcrum? In other words, which level of debt in the capital structure will be entitled to receive the majority of the equity when the company emerges from Chapter 11? So far, it looks to be shaping up to be a battle of NewPage's First Lien Noteholders versus its Second Lien Noteholders. Unsurprisingly, both groups are controlled by aggressive hedge funds that specialize in buying distressed debt at prices below par.

The First Lien Noteholders are almost certainly looking to push NewPage to move forward quickly with a plan predicated on a low valuation that would cram down most or all junior creditors and deliver to themselves the equity in the reorganized enterprise. The Second Lien Noteholders will vociferously oppose any such valuation, and may be looking for the opportunity to backstop a rights offering that would cash out the First Lien Noteholders.

NewPage itself very much looks to be seeking to tee things up so that the Second Lien Noteholders will have such an opportunity to step up with new capital, rather than have this case come down to a complex and lengthy valuation fight. As part of its debtor in possession financing, NewPage sought authorization to reimburse the Second Lien Noteholders for professional fees and expenses, “subject to the Court’s ultimate determination as to whether the Second Lien Lenders make a substantial contribution” to the bankruptcy case. Under the “substantial contribution” standard, a creditor that acts for the benefit all parties, and not only its own narrow interests, can be reimbursed its costs and expenses. NewPage states, “[T]his reorganization may well depend on the Prepetition Second Lien Noteholders’ ability to refinance all or a portion of the first lien debt . . . The Debtors believe that such authority . . . will incentivize and expedite the administration of these cases and will prevent unwarranted litigation and benefit the estates and the reorganization.”

Alliances between and among the First and Second Lien Noteholders and various other parties will be made and broken over the next several months. These will include holders of NewPage’s subordinated 12% Senior Unsecured Notes and the company’s trade creditors. One or more rivals may make an unsolicited purchase offer. Finnish paper manufacturer Stora Enso, which sold certain assets to the Debtors in 2007 and took back equity and structurally subordinated notes, may look to make a strategic acquisition here. Enlivening the mix will likely be the company’s labor unions (particularly if NewPage seeks to modify collective bargaining agreements or retiree benefits), the EPA, the PBGC, and Cerberus Capital Management, the Debtors’ primary equity sponsor.

Mets' Owners Swing for the Fences Against Madoff Trustee

Ben Feder — Wed, 24 Aug 2011 14:25:25 -0500

Fred Wilpon, Saul Katz, and their families and affiliated enterprises (the “Wilpon/Katz Group”) last week formally requested the dismissal of the adversary proceeding commenced by Irving Picard, the trustee of Bernard L. Madoff Investment Securities LLC (“BLMIS”). In a two hour hearing before U.S. District Court Judge Jed Rakoff, the Wilpon/Katz Group argued that Picard has no basis to seek the return of approximately $1 billion received over the years by the Wilpon/Katz Group from BLMIS.

Picard’s complaint seeks to avoid all transfers made by BLMIS to the Wilpon/Katz Group as “fraudulent conveyances”, and to recover such amounts on behalf of the BLMIS estate. Both the U.S. Bankruptcy Code and New York State law permit a trustee to recover transfers made up to six years prior to the bankruptcy case by an insolvent debtor for less than “reasonably equivalent value” or which were made with fraudulent intent. However, a “good faith” transferee can retain such property or funds to the extent it gave value to the debtor in exchange for the challenged transfer, such as the satisfaction of antecedent debt.

The Wilpon/Katz Group argued that “reasonably equivalent value” existed for the $300 million of fictitious profits that the Wilpon/Katz Group received from BLMIS. Since the account statements issued by BLMIS prior to the discovery of Madoff’s fraud evidenced substantial account balances, the Wilpon/Katz Group contends that such payments constituted the satisfaction of antecedent debt as reflected by those statements. Unfortunately for the Wilpon/Katz Group, the U.S. Court of Appeals for the Second Circuit last week squarely rejected the ability of Madoff investors to rely on the fabricated account statements for the purpose of asserting claims against the BLMIS estate, and it is highly unlikely that Judge Rakoff would view the account statements any differently in this context.

The hearing’s primary focus centered on Picard’s highly aggressive efforts to claw back $700 million of payments that were constituted the return of invested principal. Insofar as invested principal typically constitutes “reasonably equivalent value” or value given in “good faith”, Picard’s efforts turn on whether his many allegations and inferences regarding the so-called “red flags” regarding Madoff’s fraud, which he contends were willfully ignored by the Wilpon/Katz Group, add up to a level of malfeasance or knowledge on the part of the Wilpon/Katz group sufficient to vitiate “good faith”. While Picard seems to have an uphill battle on this issue, a ruling that would allow him to proceed to trial would put immense pressure to settle on the Wilpon/Katz Group. Because Judge Rakoff went ahead and scheduled a March trial date, even though he has expressly reserved his decision on the motion to dismiss, some commentators have taken this as an indication that he is going to allow Picard the chance to prove his allegations that the Wilpon/Katz Group knew or should have known about Madoff’s fraud, thus putting the entire $1 billion at risk for the Wilpon/Katz Group.

However, a trial may be necessary even if Judge Rakoff rules in favor of the Wilpon/Katz Group with respect to the $700 million. One highly material issue remarkably has received very little attention so far even from the parties themselves; in the briefs filed ahead of the hearing it was addressed solely in footnotes. Of the $300 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period. Picard contends that the six year limitation under New York law should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS[,]”, an argument that seems discordant with his allegations about the plethora of “red flags” that the Wilpon/Katz Group supposedly ignored. A ruling by Judge Rakoff directing a trial solely on the amount of fictitious profits which may be recovered would in fact be a favorable outcome for the Wilpon/Katz Group.

Judge Rakoff probably will not rule until late September. At that time, the Wilpon/Katz Group may be looking at a trial with $1 billion at stake. Picard may just as easily be looking at a trial that would reduce his likely recovery to $167 million.

Former Governor Mario Cuomo, the mediator appointed in this proceeding, will likely be very busy over the next few weeks.

So This Is Why Judges Bother to Write Dissenting Opinions -- Seventh Circuit Decision on Credit Bidding Vindicates Judge Ambro's Philadelphia Newspapers Dissent

Ben Feder — Tue, 26 Jul 2011 15:40:32 -0500

Critics of last year’s decision on credit bidding by the Third Circuit Court of Appeals in the Philadelphia Newspapers chapter 11 case welcomed the Seventh Circuit’s recent unanimous opinion in River Road Hotel Partners LLC. The Seventh Circuit expressly adopted the Judge Tom Ambro’s cogent analysis in his Philadelphia Newspapers dissent.

In River Road, the debtors sought to rely on Philadelphia Newspapers in putting forward a plan of reorganization that proposed an auction of the secured lenders’ collateral, but would have expressly denied the lenders the right to credit bid their debt. The rationale in both cases rested on a formalistic reading of Section 1129(b)(2)(A) of the Bankruptcy Code. That section describes three different means by which a plan of reorganization can be found to be “fair and equitable” and thus capable of being confirmed without the consent of a secured lender class (i.e., “crammed down”):

(i) lender retention of liens securing the obligations and receipt of the present value of its secured claim,

(ii) sale of collateral free and clear of liens but subject to credit bidding, or

(iii) the realization by the creditor of the “indubitable equivalent” of its secured claim.

Notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens, the Third Circuit in Philadelphia Newspapers held that a sale “free and clear” could also take place without allowing the lenders to credit bid under subsection (iii), the “indubitable equivalent” prong. The River Road debtors asked the bankruptcy court to follow the Third Circuit’s conclusion that the “plain meaning” of the use of the disjunctive “or” in the statute shows that subsection (ii) is not the “exclusive means” by which a secured lender’s collateral may be sold “free and clear” under a plan of reorganization and that, so long as the debtor or other plan proponent could show that the “indubitable equivalent” prong were being satisfied, the opportunity to credit bid need not be provided.

The bankruptcy judge, Judge Bruce Black of the Northern District of Illinois, declined the invitation. Judge Black expressly rejected the reasoning of the Philadelphia Newspapers majority, stating that he found the dissent from Judge Ambro, “well-reasoned [and] more persuasive.” At the River Road debtors’ request, Judge Black certified an appeal directly to the Seventh Circuit. The court affirmed Judge Black’s decision, stating that “like the bankruptcy court, we find the statutory analysis articulated by Judge Ambro in his Philadelphia Newspapers dissent to be compelling.”

The Seventh Circuit decision first takes aim at the contention that there exists a single “plain meaning” interpretation of Section 1129(b)(2)(A) that directs the result.

Nothing in the text of Section 1129(b)(2)(A) directly indicates whether Subsection (iii) can be used to confirm any type of plan or if it can only be used to confirm plans that propose disposing of assets in ways that can be distinguished from those covered by Subsections (i) and (ii). Hence, there are two plausible interpretations of the statute: one that reads Subsection (iii) as having global applicability and one that reads it as having a more limited scope.

The Seventh Circuit then considered whether Congress, having specified in Section 1129(b)(2)(A)(ii) the means by which a debtor could confirm a plan when proposing to sell a secured lender’s assets free and clear, i.e., by expressly protecting the lender’s right to credit bid, would then negate such protection in the immediately following subsection by permitting the debtor to conduct a “free and clear” sale without allowing for credit bidding. “The infinitely more plausible interpretation,” the court held, would only permit “free and clear” collateral sales as specified in subsection (ii). “Under such a reading, plans could only qualify as ‘fair and equitable’ under Subsection (iii) if they proposed disposing of assets in [a] way that [is] not described in [Subsection (ii)].”

The Seventh Circuit’s vigorous seconding of Judge Ambro’s approach shows plainly why judges take the time to publish dissenting opinions. Judge Ambro, writing from a practitioner’s pragmatic viewpoint, clearly found it hard to accept the Philadelphia Newspapers majority’s refusal to look beyond what it viewed as the sole plausible reading of Section 1129(b)(2)(A) and consider any sense of Congressional purpose or the underlying principles of the Bankruptcy Code as evidenced by complementary Code sections. As he wrote, “In effect, a single ‘or’ becomes the bell, book and candle that excommunicates Congressional intent from the Bankruptcy Code . . . [and] upset[s] three decades of secured creditors’ expectations[.]” The Seventh Circuit’s decision in River Road vindicates Judge Ambro’s arguments.

Los Angeles Dodgers Chapter 11 - Can They Get Kirk Gibson Admitted Pro Hac in Delaware?

Ben Feder — Fri, 01 Jul 2011 15:58:11 -0500

The Chapter 11 filing of the Los Angeles Dodgers is a desperate move by Frank McCourt to try to maintain his ownership of the team. At least McCourt, whatever his shortcomings as a major league franchise owner, chose wisely in selecting bankruptcy lawyers. Partners Bruce Bennett and Martin Bienenstock of proposed debtor's counsel Dewey LeBeouf would be high selections on any legal fantasy team. Even, the best, however, will likely not be enough here.

Bennett and Bienenstock will probably be able to stave off a quick takeover of the Dodgers by Major League Baseball, and to turn aside the demands that the case be dismissed or that a trustee be appointed to run the team. They should also succeed in buying McCourt enough time to negotiate a sale of the team on favorable terms. But McCourt’s true goal here – to use the Chapter 11 process to keep permanent control of the team – appears to be beyond the reach of any lawyer. The Major League Baseball Constitution, pursuant to which McCourt acquired and holds the Dodgers’ franchise rights, in the end vests too much power in Commissioner Bud Selig and the other owners. Even assuming that McCourt can come up with a plan to pay off the Dodgers’ creditors, the Dodgers’ bankruptcy will almost certainly only delay the inevitable exercise of power by Major League Baseball to terminate McCourt’s right to operate the franchise.

On the other hand, not a lot of people thought a great deal of the Dodgers’ chances in the ninth inning of Game 1 of the 1988 World Series. Two outs and down by run, Kirk Gibson, who could barely walk due to injury, was sent up to pinch hit . . . .

Keeping Pace With Chapter 11's "New Normal"

Ben Feder — Wed, 15 Jun 2011 09:12:23 -0500

I am serving this year on the Editorial Advisory Board for the Journal of Corporate Renewal, published by the Turnaround Management Association and available to all TMA members. My guest editor's column for the June issue, "Keeping Pace With Chapter 11's 'New Normal'", is available here.

Looks Like Fred Wilpon Picked the Wrong Week to Quit Drinking

Ben Feder — Fri, 27 May 2011 13:39:16 -0500

The well known travails of Fred Wilpon, the principal owner of the New York Mets, have all converged this past week. He, his partner Saul Katz and their families and affiliated enterprises (the “Wilpon/Katz Group”) lost several hundred million dollars when Bernard Madoff’s long running Ponzi scheme finally unraveled at the height of the financial crisis in 2008. The Mets’ on-field performance has been dismal, and their cash flow, weighed down by the debt incurred to build their under-attended new stadium, has been even worse. Finally, there have been the efforts by Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securites (“BLMIS”), to recover from the Wilpon/Katz Group over $1 billion that it withdrew from BLMIS over many years. (Kelley Drye & Warren LLP represents other Madoff investors from whom recovery is being sought.) Wilpon further has had to suffer the ignominy of Picard’s public assertions that no good faith defense can apply which would permit an offset of $700 of principal invested during such period, because the Wilpon/Katz Group either knew or was willfully blind to the fraud that lay at the heart of BLMIS.

The past several days have seen, first, Picard file his opposition to the Wilpon/Katz Group’s motion to dismiss the recovery action, and then a magazine article in which Wilpon makes disparaging references to three of the Mets’ best players. Finally, yesterday came the announcement by the Wilpon/Katz Group of a prospective sale of a minority interest in the Mets to hedge fund investor David Einhorn.

The statements made by Wilpon about David Wright, Jose Reyes and Carlos Beltran have been fulsomely discussed by the sports media and are outside the purview of this blog. Bringing in Einhorn as a minority partner, while unquestionably easing the Wilpon/Katz Group’s immediate financial distress, likely will have long term ramifications that Wilpon may prefer not to consider right now. Suffice it to say that Einhorn, who famously denigrated Lehman Brothers before its demise, has never been particularly shy about speaking his opinions about under-performing enterprises.

Strangely enough, the best long term news for Wilpon appears to lie in Picard’s latest pleading. While Picard of course forcefully repeats his assertions that the Wilpon/Katz Group possessed sufficient information to have been on “inquiry notice”, and that the failure to conduct a “diligent inquiry” obviates any claim now of good faith, the legal brief breaks little new ground and mostly rehashes previous arguments made.

Picard particularly focuses on brief efforts by the Wilpon/Katz Group in 2001 to obtain fraud insurance for its BLMIS investments as evidence that it possessed sufficient information to undertake an investigation. However, as with his earlier allegations regarding the mischaracterization of a short term $54 million loan, Picard appears to place far more weight on certain isolated incidents than can reasonably be supported. By his own argument, the standard set forth in similar cases to place a hedge fund investor on inquiry notice requires, for example, credible evidence that a purportedly profitable fund was in fact losing money, or might be insolvent. The incidents to which Picard alludes come off as myriad loose strands that Picard fails to weave into a larger fabric.

Indeed, Picard’s intensive efforts to recover the $700 million in invested principal may well wind up impairing his chances of recovering a substantial portion of the “fictitious profits” that he is seeking. Of the $295 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period that is permitted under New York law. Picard has previously argued that the six year limitation should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS”. However, the more that he contends that there were a plethora of “red flags” that the Wilpon/Katz Group ignored, the more he undercuts his own argument to extend the six year look back period. There were, after all, numerous other Madoff victims equally as sophisticated as the Wilpon/Katz Group. Picard even notes that the Wilpon/Katz Group’s investigation into fraud insurance supposedly arose out of discussions had with another Madoff investor – a fact clearly discordant with any argument that the Madoff fraud “was not reasonably discoverable” by others.

Fred Wilpon has clearly had a highly eventful week. The effect of his intemperate words about his best players, and the long term ramifications of bringing on David Einhorn, can only be guessed at right now. But things do not appear to be measurably worse for him and his partners in the Madoff litigation as a result of Picard’s latest pleading.

Take Me to the River (Road): The Seventh Circuit Prepares to Weigh In On Credit Bidding

Ben Feder — Mon, 25 Apr 2011 15:35:04 -0500

The U.S. Court of Appeals for the Seventh Circuit has taken under advisement the latest case involving the now contentious issue of credit bidding.

Judge Bruce Black of the United States Bankruptcy Court for the Northern District of Illinois last year refused to permit the debtors in In re River Road Hotel Partners LLC, et al. (“River Road”) to circumvent a secured lender’s right to credit bid in connection with a sale of assets subject to the lender’s lien. The debtors in River Road were relying on the Third Circuit Court of Appeals’ controversial decision in Philadelphia Newspapers, which upheld a debtor's efforts to prevent its secured lenders from credit bidding in connection with an auction held under a plan of reorganization.

The majority opinion in Philadelphia Newspapers determined that, notwithstanding the express reference in subsection (ii) of Section 1129(b)(2)(A) to the right to credit bid in connection with a sale “free and clear” of liens pursuant to a plan of reorganization, a sale “free and clear” could also take place pursuant to a plan, without allowing the lenders to credit bid, under Section 1129(b)(2)(A)(iii), the “indubitable equivalent” provision. Third Circuit Judge Thomas Ambro, a bankruptcy practitioner of many years, penned a lengthy dissent, noting that the result flew in the face of the established principle that property rights in bankruptcy look to applicable non-bankruptcy law, and the long standing expectation that the Bankruptcy Code expressly protects such non-bankruptcy rights – particularly the right of a secured creditor to look to its collateral in the event of non-payment.

Judge Black expressly rejected the reasoning of the Philadelphia Newspapers majority, stating that he found the dissent from Judge Ambro, “well-reasoned [and] more persuasive.”

At the River Road debtors’ request, Judge Black certified an appeal directly to the Seventh Circuit, and the court heard arguments earlier this month. The Seventh Circuit panel, consisting of Judges David Hamilton, Richard Cudahy, and Daniel Manion, presented a “hot bench”, directing numerous questions at counsel for both sides.

Interestingly, at no point during oral argument was it noted that the Third Circuit in Philadelphia Newspapers never actually decided whether the non-credit bid plan at issue in that case could be confirmed. It only upheld the debtor’s right in that case to seek to do so. Since the lenders in Philadelphia Newspapers subsequently chose to participate in the sale auction and won with a cash bid, the ultimate question of whether such a plan would provide the secured lenders with the “indubitable equivalent” of their secured claims was never answered.

The Seventh Circuit should affirm Judge Black’s ruling and follow Judge Ambro’s reasoning in Philadelphia Newspapers, and in doing so plainly address the unanswered open question from that case. Even if an argument could plausibly be made, through a hyper-literal reading of Section 1129(b)(2)(A), that a secured lender can be denied the right to credit bid in connection with a sale under a plan of reorganization, beyond such hyper-literalism there really is no valid basis to contend that any such plan could provide the “indubitable equivalent” of the lender’s secured claim, and such a plan should never be confirmed over the secured lender’s objection. The Bankruptcy Code contains strong protections, including the right to credit bid under Section 363(k) and the anti-lien stripping provisions of Section 1111(b), that unambiguously work to prevent a debtor from “cashing out” a secured creditor by paying such creditor a depressed value for the collateral. The cramdown provisions of Section 1129(b)(2)(A) clearly are intended to complement those protections, not abrogate them through a resort to the “indubitable equivalent” standard.

Madoff Trustee's Amended Complaint - More Bad Stuff 'bout the Mets (Owners)

Ben Feder — Wed, 23 Mar 2011 14:44:46 -0500

Irving Picard, the trustee overseeing the liquidation of Bernard L. Madoff Investment Securites (“BLMIS”), has filed an amended complaint (the “Amended Complaint”) that seeks to buttress his allegations against Fred Wilpon and Saul Katz, the owners of the New York Mets, and their families and affiliated enterprises (the “Wilpon/Katz Group”). Among other things, the Amended Complaint details an alleged deliberate mischaracterization of a $54 million bridge loan from Madoff to one of the businesses controlled by the Wilpon/Katz Group, and cites the episode as further evidence of supposed wrongful behavior that demonstrates the complicity of the Wilpon/Katz Group in Madoff’s fraudulent activity.

The Wilpon/Katz Group, in the meantime, in its first legal counter-attack, has filed a motion to dismiss the Amended Complaint (the “Dismissal Motion”). Also, an article in today’s New York Times details the jousting taking place with respect to the massive trove of documentary information gathered by Picard prior to the commencement of the lawsuit.

The Amended Complaint and the Dismissal Motion reveal flaws and risks that each side faces.

The Amended Complaint seeks the repayment of over $1 billion. However, over $700 million constitutes the return to the Wilpon/Katz Group of invested principal, and Picard’s many allegations and inferences may simply not add up to the level of malfeasance or knowledge on the part of the Mets’ owners that he needs to demonstrate in order to recover those funds. Although a number of bad or grossly negligent actions are alleged, the Dismissal Motion refutes Picard’s factual allegations regarding many of the so-called “red flags” that Picard believes should have given the Wilpon/Katz Group reason to suspect Madoff. Some of Picard’s efforts to show mendacity, such as the $54 million transfer that helped the Wilpon/Katz Group to avoid a delay in closing an important deal and then was immediately repaid, come off on closer examination as somewhat thin gruel (or “bad stuff”, as one fictitious former Mets player might have put it).

In addition, of the remaining $295 million in “fictitious profits” that Picard is looking to recover, nearly $133 million was transferred outside of the six year look-back period. Picard contends that the six year limitation under New York law should not apply because “the fraudulent scheme perpetrated by BLMIS was not reasonably discoverable by at least one unsecured creditor of BLMIS[,]” an argument that seems to be discordant with his allegations regarding the plethora of “red flags” that the Wilpon/Katz Group ignored.

The Dismissal Motion, on the other hand, while strongly rebutting many of Picard’s allegations, shows the challenge that the Wilpon/Katz Group will have in fending off the demand for the return of $163 million in “fictitious profits” during the six year look-period. The bulk of the legal arguments in the Dismissal Motion raise nearly precisely the same issues that were recently argued before the Second Circuit Court of Appeals on Picard’s method for determining which customers hold claims against BLMIS. The Wilpon/Katz Group forcefully contends again that customers of BLMIS should hold claims based on the fictitious statements furnished to them by BLMIS, rather than being determined by the straight-forward mathematical calculation of invested principal less funds withdrawn. However, Judge Burton Lifland, the U.S. Bankruptcy Court judge overseeing the BLMIS case, has already rejected this argument, and the Second Circuit panel that heard the appeal earlier this month betrayed a fair degree of skepticism.

The incentives for both sides to work with former Governor Cuomo and reach a settlement remain strong.