By way of background, in 2010 certain holders of CompuCredit Holding’s convertible senior notes (the “Noteholders”) sued CompuCredit alleging that the company’s proposed $25 million dividend to shareholders would be in violation of the Uniform Fraudulent Transfer Act. The court denied the Noteholders’ request for an injunction, and the company made the dividend as planned. The Noteholders amended the lawsuit claiming, among other things, damages caused by the dividend.

After issuing the dividend, the Company launched a tender offer in respect of the Notes, offering 35-50 cents on the dollar depending on the series of Notes. Only a small percentage of the Notes tendered. Following the tender offer, in various communications to the company, the SEC and the Indenture Trustee, the Noteholders questioned CompuCredit’s solvency and its compliance with the Indenture. Additionally, the Noteholders communicated to the company that they would likely accept 65-70 cents on the dollar for their Notes, above the then trading price of 37-53 cents on the dollar.

In response to these communications, CompuCredit commenced a second lawsuit, in the United Stated District Court for the Northern District of Georgia, alleging that the Noteholders’ collective actions violated the antitrust laws. Specifically, CompuCredit sought an order (1) finding that Noteholders had violated the Sherman Act, and (2) requiring the Noteholders to tender all of their Notes to CompuCredit at the prices paid in the prior tender offer.

For those of you that were chatting it up in the United Airlines case, this will sound familiar. And perhaps you thought it was well settled, we did. In United, Judge Easterbrook held that United’s claim that the aircraft creditors had violated the antitrust laws was “thin to the point of invisibility” and creditors were entitled to negotiate jointly. CompuCredit attempted to distinguish its situation from that of United, noting that it was not in bankruptcy and there was no ongoing default. The District Court rejected that speech. Specifically the District Court held that the Noteholders’ conduct, just like that of the aircraft creditors in United, was an attempt to collect as much as possible under their existing debt and that was not the type of activity that implicated the antitrust laws.

CompuCredit appealed the District Court’s decision to the United States Court of Appeals for the Eleventh Circuit. The Eleventh Circuit was evenly divided on the issue and, therefore, affirmed the District Court’s decision. CompuCredit then filed a Petition for Writ of Certiorari with the Supreme Court seeking further review of the District Court’s decision. The Supreme Court has discretion over which cases it hears, and declined to continue the discussion.

So here are a few talking point takeaways:

• The primary goals of the antitrust laws are to ensure a competitive market and to protect commerce in the United States;
• Discussions regarding amendments to debt documents or recovery efforts on a loan already made or note already purchased do not raise antitrust concerns; and
• There is clear case law that the Sherman Act does not prohibit creditors from coordinating efforts to protect their rights or acting jointly in negotiations with a borrower or issuer, there is no requirement that there first be a default under the relevant documents or an ongoing bankruptcy proceeding.

So no matter which music speaks to you, Blondie, Bonnie Raitt, Carly Rae Jepsen or Of Monsters and Men: Call your fellow investors, you have Something to Talk About, Call Me Maybe, go ahead and have those Little Talks.

Applying Florida state law, which governed the original lease and amendments, the bankruptcy court concluded that the third amendment contained language demonstrating a direct connection between the original lease and the third amendment that evidenced the integrated nature of the documents. Noting that Allied had leased a third building from Golden in the same complex as the other two buildings, but that this third building was leased under a separate lease agreement, the court found that when the parties intended their lease arrangements to be separate, they knew how to do so. Allied got stuck holding the (whole) hot potato.

Cooking lesson for future debtors and creditors: in order to not get stuck with the whole hot potato, take care when drafting and don’t opt for the quick recipe shortcut; be choosey about your ingredients; and consider what could happen in the event of a possible rejection or assumption of your bundled contract ingredients. In this particular case, it would have been simple to draft a separate lease agreement for the new building, dice the potato accordingly and not get burned.

Secured creditors own the road of repossession outside of bankruptcy. But cross that line into postpetition country and the traffic laws back home no longer apply. The rule of the automatic stay under section 362 of the Bankruptcy Code is expansive. It extends so far as to require the turnover of property of the estate that was legally seized prepetition—so long as the debtor retains even an equitable interest in such property under state law. Moreover, failure to turn over such property to the estate after knowing the owner filed a bankruptcy petition subjects the lender to liability for damages, costs and fees for willful violation of the automatic stay—regardless of what the road signs indicated.

Property of the estate is defined broadly under section 541(a) of the Bankruptcy Code to include “all legal or equitable interests in property as of the commencement of the case.”  Section 542(a) of the Bankruptcy Code requires any entity in possession, custody or control of certain property of the estate to deliver such property to the trustee. In tandem with those sections, section 362 of the Bankruptcy Code in turn shelters such property of the estate from creditor action by implementing an automatic stay.

Here, the debtor retained an equitable interest in a repossessed beater under New York state law, which entitled the debtor to certain rights in connection with the clunker and rendered such interest property of the estate under section 541. After it knew of the bankruptcy filing, lender SEFCU retained the jalopy in reliance on In re Alberto, a decision from the District Court of the Northern District of New York concluding that a secured lender had no obligation to return a repossessed slab upon a subsequent bankruptcy filing until the debtor took an affirmative action to reclaim it, such as obtaining a turnover order, and that such possession did not meanwhile constitute an exercise of control over property of the estate. The District Court reasoned that the creditor did not act to obtain possession or exercise control of the old barge in violation of the stay because the debtor no longer had a possessory interest in his ride and the creditor had lawfully taken possession.

Rejecting the District Court’s reasoning, the Second Circuit relied on a majority of other circuits which conclude that an estate’s equitable interest in property entitles it to turnover of such property. Such courts reason that the primary goal of reorganization is to assemble all property of the estate, even property seized prepetition, in an attempt to rehabilitate the debtor—and that assets should be used productively to such end in the physical custody of the debtor—even if the property interest held by the debtor would not entitle the debtor to physical possession under state law. The Court held that the plain language of the Bankruptcy Code requires turnover under section 542(a) and that a secured creditor may request adequate protection only upon such turnover—not before. Thus, SEFCU was in flagrant violation of the automatic stay, regardless of the Alberto highway signage.

SEFCU was heading down a one-way street. Not only did it have to turn the car around and take the long road home, but the advertising was there to issue a “safe driving award.” The Court held SEFCU liable for plaintiff’s damages, costs and attorneys’ fees for willful violation of the automatic stay under section 362(k). SEFCU argued in vain that it was protected by its good faith reliance on In re Alberto. However, the Court held that 362(k) does not require specific intent to violate the automatic stay. A creditor willfully violates the automatic stay by merely (i) knowing of the bankruptcy petition and (ii) possessing general intent to perform the act that violates the automatic stay.

So check the tires on your caddy, always use your blinkers, keep a watchful eye out for Tijuana Taxis and Sunoco Specials, and give the debtor back his rust bucket if he files for bankruptcy protection.

Having lost in the regular season, the Appellants argued on appeal to the OCA that claims of a provincial deemed trust are subordinate to DIP liens because provincial deemed trusts are not included in the federal insolvency scheme and, therefore, should not be included in CCAA proceedings. However, this screen pass was ruled incomplete by the OCA. But then the Appellants recalled Doug Flutie, who (among other exploits) led both the Calgary Stampeders and Toronto Argonauts to Canadian Football League championships. Reminiscent of the Notre Dame-Miami classic, Appellants heaved a Hail Mary, arguing that federal CCAA law superseded Ontario’s provincial pensions statute. The SCC signaled a touchdown, ruling that, under the doctrine of federal paramountcy, provincial trust law was as ineffective as the 49ers’ first-half offense where (1) it is impossible to comply with valid federal and provincial laws or (2) where applying the provincial law would frustrate the purpose of the federal law.

Applying that doctrine to the play in process, the SCC ruled that Appellants had hauled down the pass with both feet inbounds. Compliance with provincial law granting superpriority to the plan beneficiaries necessarily entailed defiance of the CCAA order made under federal law, and Indalex’s ability to restructure as a going concern (the purpose of the CCAA) would be frustrated without a superpriority DIP charge. In finding that the CCAA order preempts provincial law, the SCC noted that the priming of the DIP is key to the debtor’s ability to attempt a workout and that “[t]he harsh reality is that lending is governed by the commercial imperatives of the lenders, not by [provincial policy concerns and pension fund legislation].” Move over retirees, the Indalex DIP lenders won the Canadian Superpriority Bowl, and they’re going to Canada’s Wonderland![1]

The Debtors operate a “racino” (combination horse track and casino) in Shelbyville, Indiana, within just a few furlongs of Indianapolis (and not to be confused with the Shelbyville of Civil War fame, which also happens to be the “American Saddlebred Capital of the World”). The Debtors declared as win, place and show three pieces of prepetition secured debt heading into the Chapter 11 race – a $98 million first lien, $375 million second lien and $78 million third lien – leaving the Debtors well short of the finish line from a financial perspective.  Chapter 11 ensued. A year later, the Debtors pulled into the starting gate with a Restructuring Support Agreement that permitted the jockey to either push toward the rail for an internal recap or move outside for a third-party sale. A sale it was, and the Debtors proposed to cross the finish line holding the reins of a $500 million offer. Various insiders (known as the Oliver Parties) objected, forcing the Judge to choose the right horse for the course.

First, the Oliver Parties sought to disallow the votes of the creditors who had entered into the RSA, on the basis that it comprised an improper postpetition solicitation of votes on the Plan. This was not a lame attempt – there were cases that legitimately supported both sides. In the end, however, Judge Shannon rode with the Debtors, concluding that properly negotiated and pursued RSAs should be encouraged. The Judge started with the Secretariat of solicitation cases: the Third Circuit’s decision in In re Century Glove, which applied a narrow construction of the type of conduct that would constitute “improper solicitation.”

The Bankruptcy Court also relied heavily on a Texas bankruptcy case – In re Heritage Organization, L.L.C. – in reaching its decision not to disallow the votes. In the Heritage court’s words, “if a creditor believes that it has sufficient information about the case and the available alternatives to jointly propose a Chapter 11 plan with another entity . . . it is absurd to think that the signing of a term sheet by those parties (that contains the material terms of their to-be-filed joint plan and states that the co-proponent creditor(s) will vote for their agreed upon joint plan) is an improper solicitation of votes in accordance with § 1125(b).” The Bankruptcy Court found the reasoning in Heritage dispositive, and held that signing the RSA postpetition helped to facilitate creditor negotiations, especially where the prepetition negotiations had broken down, and it was therefore not an improper solicitation warranting designation of voting rights.

The Oliver Parties also tried to make hay by challenging the Plan’s fee payment provisions. First, they argued that the Plan’s cap on professional fees violated the Bankruptcy Code’s requirement that all administrative expenses must be paid in full. Second, they tried to trip up the Plan’s proposal to pay the fees of an ad hoc committee. However, it was the lawyers who galloped to victory when the Judge hobbled both these arguments. As to administrative expenses, the Bankruptcy Court concluded that the Plan did not provide for capped payment of professional fees, it only provided that the RSA parties no longer needed to support the Plan if the caps were exceeded. For the ad hoc committee fees, the Court said you cannot expect the jockey to ride for free. The ad hoc committee’s professionals trained and rode the winning horse and should be entitled to payment for their services. 

Finally, the Oliver Parties rode double on the United States Trustee’s mount, which reared up over third-party releases in the Plan. Of particular interest here was the Plan’s provision that, if you do not vote on the Plan, you are deemed to have consented to the releases. This sounded to the US Trustee like losing a bet you never even place. However, the Court sent the US Trustee back to the stables, concluding that the non-voting creditors had been fully informed about the deemed release and therefore had a fair opportunity to escape before the barn door closed.

There are four important takeaways from Indianapolis Downs that will leave you four lengths ahead as a creditor in a race to confirm a Chapter 11 plan in Delaware. First, when you sign an appropriately drafted Restructuring Support Agreement postpetition, you have good odds that you will be permitted to spur it on towards victory. Second, you can condition your support on a fee cap, as long as you realize that, sooner or later, the lawyers need to be fed their oats. Third, if you are in an ad hoc group and you make a substantial contribution to the case, there is now a well-reasoned decision to keep you on track for reimbursement of your fees. And finally, third-party releases can be enforced in Delaware under certain circumstances, even as against creditors who cast no vote at all.  And, of course, when dealing with a racino, expect a wild ride but don’t get thrown by fences in your path.

However, don’t assume the brace position just yet. The Court did not permanently ground make-whole premiums along with the 787 Dreamliner. In fact, the Court said make-whole premiums are alive and well and can pass inspection. However, in American, the indentures explicitly stated that make-whole premiums were not payable following a bankruptcy default. Although the indenture trustee argued to the contrary, the Court refused to read an obligation to pay make-whole into a contract that explicitly said it was not due under the circumstances. While the indenture trustee will presumably appeal the decision, the lesson remains clear: to avoid turbulence, know your contract, and make sure the make-whole provisions are favorable, explicit and unambiguous.

By way of (simplified) background, American issued various series of equipment notes under indentures. Each of the indentures provides that American’s voluntary bankruptcy filing in November 2011 constituted an event of default that automatically accelerated the notes and caused all amounts due thereunder to become immediately due and payable. The key fact is that the indentures carve out the payment of make-whole in these circumstances. Specifically, the indentures provide that where an event of default has occurred following a voluntary bankruptcy filing “the unpaid principal amount of the Equipment Notes then outstanding, together with accrued but unpaid interest thereon and all other amounts due thereunder (but for the avoidance of doubt, without Make-Whole Amount), shall immediately and without further act become due and payable . . . .” Additionally in the priority of payment section, the indentures specifically provide that “no Make-Whole Amount shall be payable on the Equipment Notes as a consequence of or in connection with an Event of Default or the acceleration of the Equipment Notes.”

The language seems clearer than the blue sky at 30,000 feet, but the indenture trustee tried to cloud the situation, arguing that (1) it did not affirmatively accelerate the debt, (2) it had the right to decelerate the debt, and (3) the acceleration provision was an unenforceable ipso facto clause. The Court dismissed all of the these arguments, noting that the automatic acceleration provisions were explicit in the indentures. The Court held that efforts to decelerate the notes would violate the automatic stay because doing so adversely affected American’s contractual rights under the indentures by triggering additional amounts owing. Further, the Court noted that ipso facto clauses are only prohibited in connection with executory contracts and unexpired leases and that the parties had acknowledged that the indentures did not fall into either category.

The indenture trustee also argued that the make-whole premium was due because American was voluntarily redeeming the notes in order to take advantage of low interest rates currently available in the aircraft financing market. The Court followed settled case law which concludes that once notes are accelerated, they cannot voluntarily be repaid.

As noted above, true believers in make-whole amounts should not jump out of the plane without parachutes. According to the Court: “There is no dispute that make whole amounts are permissible. The entitlement to such payments, however, is a matter of contract, not policy.” A few lessons learned and make-whole claims can still fly high. First, whether you are buying already-issued notes in the market or are engaging in a negotiated financing, make especially sure the make-whole provisions are in the upright position. Second, the documents should not explicitly exclude make-whole following acceleration (or under any circumstances except payment on the original stated maturity date). Third, in a negotiated financing, take it one step further and explicitly state that make-whole will be due following acceleration – this is a common provision in private placement note purchase agreements but, with rare exception, still has not charted its course in the public note indenture airspace. While underwriters, not prospective holders, typically draft public indentures, holders still have their choice of make-whole flight paths in real estate and project finance negotiated deals.

Fourth, an especially important contractual question is whether you have the little “md” or the big “MD.” That is, is the make-whole due anytime payment is made prior to the “maturity date” or the “Maturity Date”? The term “maturity date” could potentially be interpreted as the date on which payment becomes due following acceleration (i.e. it is an “acceleration of maturity”) instead of the fixed original stated maturity date of the notes when issued. The first interpretation results in a zero make-whole. Instead, use a clearly defined term (such as “Original Stated Maturity Date”) to refer to the original stated maturity date of the notes when issued to clarify that any payment prior to such date triggers make-whole, irrespective of default or acceleration.

In sum, whether you are buying notes in the market or negotiating a new financing, don’t assume that all make-whole provisions are the same or that a make-whole is due in every payment or default scenario. As we have clearly seen from a number of Bankruptcy Court decisions, with American being the latest, only some make-whole claims get to ride in first class. Others don’t even get peanuts.

By way of background, in 2009, Vitro stopped making interest payments on $1.2 billion of notes (the “Notes”) guaranteed by its subsidiaries (including the New Debtor Subsidiaries). After failing to obtain creditor support for three restructuring proposals, Vitro announced in November 2010 that it would initiate a voluntary reorganization proceeding, or concurso, in Mexico. Soon after, the Noteholders filed involuntary chapter 11 petitions against the New Debtor Subsidiaries and five of Vitro’s other US subsidiaries. Those five US subsidiaries ultimately consented to chapter 11 relief, but the New Debtor Subsidiaries continued to resist the involuntary petitions.

Generally speaking, the Bankruptcy Code provides that an involuntary petition must be filed by three or more creditors holding claims that are not “contingent as to liability or the subject of a bona fide dispute as to liability or amount”. Specifically, a court must grant a contested involuntary petition if the debtor is “generally not paying [its] debts as they become due unless such debts are the subject of a bona fide dispute as to liability or amount.” See 11 U.S.C. § 303(b)(1), (h)(1). The Bankruptcy Court initially denied the involuntary petitions, holding that the New Debtor Subsidiaries’ obligations were contingent as to liability and that the New Debtor Subsidiaries were generally paying their debts as they became due. Unbroken, the Noteholders successfully appealed that decision to the District Court for the Northern District of Texas. The District Court held that because the relevant indentures waived demand of payment, the obligations were not contingent. The District Court further found that the Bankruptcy Court erred in its determination that the New Debtor Subsidiaries were paying their debts as they became due, noting that payment of multiple invoices constituting less than 1% of the debt outstanding was not sufficient.

On remand, the only remaining issue for the Bankruptcy Court to decide was whether the Noteholders’ claims were the subject of a bona fide dispute as to amount. The parties’ arguments hinged on whether certain indenture provisions operated as a savings clause or a limitation on guarantor liability. The Bankruptcy Court held that various New York state court judgments involving the parties (recall the multi-paned ongoing litigation) established that the disputed provisions operated as a savings clause and, accordingly, there was no bona fide dispute as to the amount of the Noteholders’ claims. If the opinion ended there, the New Debtor Subsidiaries might have escaped with just some hairline cracks.  But there’s more.

In a shattering blow, the court further (and arguably unnecessarily) invoked the Fifth Circuit’s “special circumstances” exception to the technical requirements of section 303(b) of the Bankruptcy Code. Under this exception, a creditor can push a debtor into the bankruptcy window even if the statutory requirements are not satisfied “where there is fraud, trick, artifice or scam by an alleged debtor.” The Court held that the New Debtor Subsidiaries’ post-petition conduct triggered the special circumstances exception. Specifically, after the initial dismissal of the involuntary petitions, five of the New Debtor Subsidiaries reformed as Bahamian entities. Also, while the appeal was pending, one of the New Debtor Subsidiaries sold all of its stock to another entity. Despite numerous opportunities, the New Debtor Subsidiaries did not disclose the reincorporations and transfer of stock to the Bankruptcy Court, the District Court or the New York state courts. The Bankruptcy Court concluded that, to the extent it is still alive and well in the Fifth Circuit, the special circumstances exception applied because the New Debtor Subsidiaries were actively trying to conceal their actions and evade the Noteholders’ attempts to collect a debt.

Now that we can all hear the Rolling Stone bellowing “Shattered” in the background, what does this mean for the Noteholders and the New Debtor Subsidiaries? To start, there is now another active US forum for the Noteholders to seek recovery on their guarantee claims. This is relevant, given the Fifth Circuit’s decision a few weeks ago affirming the Bankruptcy Court’s refusal to enforce Vitro’s concurso plan in the US to the extent it sought to release and extinguish obligations of non-debtor subsidiaries. Additionally, the Court that will oversee the New Debtor Subsidiaries’ cases has already found evidence that they concealed material facts. So settle back, raise your glass and wait for another “pane”-ful round of litigation.

As the BIC noted of the Chapter 11 process, “It is an emergency room; it is not a health spa.”

You can see the poetry in motion here.

By way of background, Argentina issued various series of debt securities (the “Bonds”) starting in 1994 pursuant to a Fiscal Agency Agreement (the “FAA”). The FAA provided that the Bonds would be (1) direct and unsubordinated obligations of the Republic of Argentina and at all times rank pari passu as between themselves, and (2) that the payment obligations of the Republic under the bonds would at all times rank equal with other unsecured debt of the Republic (the “equal treatment clause”). Argentina defaulted on the bonds in 2001. Following the default the Argentine government enacted a law providing a “moratorium” on repayment of the bonds (referred to as the “Lock Law” in the relevant court papers). In 2005 and then again in 2010, Argentina proposed exchange offers, whereby holders of the Bonds would agree to exchange into new bonds at a rate of 25-29 cents on the dollar (collectively, the “Exchanged Bonds”). After the issuance of the Exchanged Bonds, Argentina made periodic payments on the Exchanged Bonds but not on the original Bonds. Ultimately, certain of the holders of the Bonds that did not exchange commenced a suit in the Southern District of New York on the grounds that the payments on the Exchanged Bonds violated the equal treatment clause of the FAA. The District Court agreed with the Plaintiff-bondholders and, in addition to delivering a judgment in their favor, entered a broad injunction prohibiting Argentina from making payment on the Exchanged Bonds without a comparable payment on the original Bonds. 

Argentina appealed the injunction, arguing, among other things, that (1) the terms of the Exchanged Bonds did not render them senior to the original Bonds and, therefore, the payments on the Exchanged Bonds did not contravene the equal treatment clause, and (2) the injunction deprived Argentina of control over its property in violation of the Foreign Sovereign Immunities Act (the “FSIA”). 

As to the first point, the Second Circuit noted that the equal treatment clause prohibited the “de facto” subordination (and not just stated legal subordination) that had occurred as a result of (1) the regular payments to the Exchanged Bonds and not the original Bonds as well as (2) the legislation which prohibited payment on the original Bonds, even though they had been in default for years. Essentially, the Exchanged Bonds did not have to be labeled senior to the original Bonds to violate the equal treatment clause; Argentina’s actions, including passing legislation prohibiting the payment on the original Bonds, rendered the bonds subordinate.

The Second Circuit rejected Argentina’s FSIA arguments as well, noting that the injunction did not attach or arrest any of the sovereign’s property, but only ordered that Argentina comply with its contractual obligations by making comparable payments on the original Bonds if it made payments on the Exchanged Bonds. This portion of the decision is a step towards a more limited view of the scope of the FSIA, and counter to the controversial Allied Irish decision earlier this year by the same court which held that the FSIA barred plaintiff-noteholders from bringing a cause of action against their issuer on the grounds that the issuer had been nationalized by the Irish government (click here for our Allied Irish blog entry). 

In its Petition for Rehearing, Argentina argues that the Second Circuit decision (1) conflicts with settled FSIA precedent, and (2) threatens future sovereign debt restructurings. 

While we are supportive of restructuring-favorable precedent, the second argument fails to acknowledge that the original Bonds are still outstanding, in default and have never been compromised or restructured in any way. We view the goals of restructuring to include a (somewhat) equitable allocation of value, a negotiated revised arrangement  and a continuation of the company as a going concern. Restructuring should not be about an issuer, even if it is a sovereign, unilaterally deciding to never distribute value to debt that has been in default for over 10 years (and in fact pass legislation prohibiting such a payment), while paying other debt in the ordinary course.

If we analogize this to a public bond exchange offer by a company, the company sets the requisite participation threshold—generally around 95%—and accepts that the non-exchanging 5% will need to be paid pursuant to the terms of their original contracts. What Argentina has done is the equivalent of benefitting from the new terms for the 95%, and ignoring its obligations to the remaining 5%.  Sovereignty has its benefits, but those benefits should not include the unilateral repudiation of obligations for borrowed money. At the very least, Argentina should have proposed that the non-exchanging debt be treated the same as the Exchanged Bonds, a sort of de facto collective action clause. 
Stay tuned for further updates from the Second Circuit or news on arrested Argentine warships . . .

The District Court, like the Bankruptcy Court below, found no ambiguity in the Second Circuit’s Enron analysis and holding that a “settlement payment” for purposes of the safe harbor provision of Bankruptcy Code § 546(e) is interpreted broadly to mean “the transfer of cash or securities made to complete a securities transaction.” The Court concluded that it was compelled to follow the Second Circuit’s decision in Enron and that any narrowing of the term “settlement payment” would have to come from the Second Circuit itself or from the Supreme Court. We’ll stay tuned.