ABSOLUTE ROULETTE — The Absolute Priority Rule in Individual Chapter 11 Cases.
Excuse the gambling references please — I wrote this in conjunction with the September, 2012 ABI event in Las Vegas.
All posts in Chapter 11
DAP/Pro Bono Committee Meeting
I attended the LOS ANGELES COUNTY BAR ASSOCIATION–COMMERCIAL LAW AND BANKRUPTCY SECTION–PRO BONO BANKRUPTCY SUBCOMMITTEE (DAP/Pro Bono Committee) meeting today. Some interesting info:
-The Central District leads the nation in bankruptcy filings. At the end of June, 2012, our filings were 108% higher than the next “busiest” place to file, Illinois.
-Chapter 13 Trustee Nancy Curry’s new website will be in place by next week. I will keep you updated on this.
-Chapter 11 filing fees are going up again. I will keep you updated on this.
9th Circuit BAP Affirms Cramdown Interest of 4.5%
A few weeks ago, the 9th Circuit BAP affirmed the bankruptcy court’s confirmation of a chapter 11 plan in In re Windmill Durango Office, LLC. The single asset debtor owned a building worth $19 million on which it owed $16.2 million to the bank. The court confirmed over the objection of the bank, a 4.5% interest rate, balloon in 10 years. The opinion is here.
What is surprising to me is that since the debtor is solvent, the sole beneficiary of the cramdown as to the interest rate is the debtor. The unsecured totaled only a few thousand dollars and were paid in full. I have seen many cases that say the debtor can’t simply change its mind about the deal and re-write the loan to lower the interest rate. The attempt to do that is not in good faith. It’s possible that the bank didn’t think of that argument so it didn’t come up. The opinion also doesn’t state the original interest rate so maybe the 4.5% was close to the contract rate.
As a debtor lawyer, I was happy to see approval of the 4.5% interest rate as “reasonable.” I still think most judges confronted with the decision are looking at higher interest rates, especially when the loan is 100% LTV.
First Time for Everything: My First Webinar
On August 7, 2012 at 10:00 a.m., Peter Lively and I will teach a webinar entitled “Chapter 11: Handling the Individual Chapter 11 Case.” Should be good. Peter and I met yesterday to review the program and were arguing about something and pulling out our respective codes within minutes. We are preparing a powerpoint slide which can be followed while we talk. The program will be geared to the fairly sophisticated chapter 11 practitioner.
Chapter 11 Filing Fees Going Up Again
From the Wall Street Journal Bankruptcy Beat
Chapter 11 is getting more expensive, but top-dollar attorney fees aren’t the reason…this time.
Starting Nov. 1, it will cost a company $1,213 to file a Chapter 11 petition, or nearly $200 more than the current filing fees. The extra cash will cover the cost of legislation to extend temporary judgeships at bankruptcy courts across the nation in order to avoid a judge shortage.
The $1,213 price tag includes the current $46 administrative fee but increases the case-filing fee to $1,167 from $1,000. Attorneys, take note: failure to pay these fees could result in the bankruptcy case being thrown out.
Judge Vincent Zurzolo Updated Website
Judge Zurzolo updated his forms, procedures, and pleadings that he does not want sent to him, as well as various other requirements on his (the court’s) website.
Go the court’s website here, then: Home; Information; Zurzolo, Vincent P.; FORMS/PROCEDURES/SELF-CALENDARING.
4th Circuit Rejects Broad View; First Among CCAs to Address Abrogation of Absolute Priority Rule in Individual Chapter 11 Case
On June 14, 2012 the United States Court of Appeals for the Fourth Circuit published its opinion in In re Maharaj which succintly concludes that, “the absolute prioirty rule as it applies to individual debtors in Chapter 11 has not been abrogated by BAPCPA.” See, In re Maharaj, -F.3d-, No. 11-1747 (4th Cir. 2012). The case was before the 4th Circuit on direct appeal from an order denying confirmation entered by the bankruptcy court.
In reaching its decision, the 4th Circuit compiled all of the divergent published opinions recognizing that one district court, one bankruptcy appellate panel and five bankruptcy courts have taken the “broad view” (including the BAP’s Friedman decision) and over a dozen bankruptcy courts have adopted the “narrow view” (including Judge Kwan’s Arnold decision and Judge Albert’s Kamell decision). On June 20, 2012 the Ninth Circuit dismissed the Friedman appeal, thus leaving intact the 9th Circuit BAP decision.
Thus, the status of the absolute priority rule in individual chapter 11 cases within the Central District remains a matter to be determined on a judge by judge basis. First, Central District Courts differ on whether BAP opinions bind the Bankruptcy Courts. Second, if not bound by the BAP’s Friedman decision, our Courts still differ on the legal issue as to whehter BAPCPA abrogated the absolute priority rule in individual chapter 11 cases.
The author is aware that Judge Smith, Judge Tighe and Judge Ahart (based on his CBJ article) subscribe to the “broad view.” Replies with experiences on the subject before other Central District courts would be helpful.
Does RadLAX Opinion Help re Absolute Priority Rule in Individual Cases?
A friend commented that the last paragraph of Justice Scalia’s opnion in RadLAX gives us a clue to how the Supremes may rule in Friedman, if the absolute priority rule issue in that case gets to the Supreme Court. He is certainly right (again). The code says what it says.
“The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is our obligation to interpret the Code clearly and predictably using well established principles of statutory construction. See United States v. Ron Pair Enterprises, Inc., 489 U. S. 235–241 (1989). Under that approach, this is an easy case.”
The previous paragraph states:
“[N]othing in the generalized statutory purpose of protecting secured creditors can overcome the specific manner of that protection which the text of §1129(b)(2)(A) contains. As for pre-Code practices, they can be relevant to the interpretation of an ambiguous text, but we find no textual ambiguity here. And the pros and cons of credit-bidding are for the consideration of Congress, not the courts.”
Supreme Court Affirms Bank’s Right to Credit Bid in RadLAX Hotel
RadLAX Gateway Hotel, LLC v. Amalgamated Bank, — U.S. —, — S.Ct. — (May, 2012)
Issue: Where a debtor proposes to sell property of the estate as part of a chapter 11 plan, must the secured creditors be entitled to credit bid?
Holding: Yes.
Justice Antonin Scalia for 8-0 court, Kennedy did not take part
This chapter 11 debtor owned a hotel valued at roughly $50 million. Amalgamated Bank was the first priority lienholder and was owed approximately $120 million. The debtor submitted a chapter 11 which proposed to sell the hotel for $55 million, subject to overbids. The sale was to be free and clear of liens. The plan provided that the bank would not be permitted to “credit bid” at the sale. The debtor filed a Motion to Approve Sale at the same time. The bank objected to both on the basis that it had the right to credit bid pursuant to section 1129(b)(2)(A)(ii). The debtor argued that if the bank had no right to credit bid, it was more likely that there would actually be bidders which was good for everyone. The debtor argued that it was required by section 1129(b)(2)(A)(iii) only to give the bank the indubitable equivalent of its claim and since the bank was to receive all of the net proceeds of the sale, that was the indubitable equivalent of its secured claim. The bankruptcy court denied the motion. The Seventh Circuit Court of Appeals affirmed.
GMAC Mortgage Sale Pleadings
You can access the sale pleadings here. The motion is 330 pages and will tell you more than you ever wanted to know about this business and includes the actual Asset Purchase Agreements. The hearing on the proposed sale is June 18, 2012. If you would like to bid on the assets, you have until September 14 to do so. The proposed breakup fee to the “stalking horse” Nationstar is $72 million.
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