presents Credit Bidding by Secured Lenders in Bankruptcy Sales Asserting and Defending Credit Bids and Resolving Intercreditor Disputes A Live 90-Minute Teleconference/Webinar with Interactive ti Q&A Today's panel features: Amy A. Zuccarello, Attorney, Sullivan & Worcester, Boston Carren B. Shulman, Partner, Sheppard Mullin Richter & Hampton,, New York Tuesday, August 17, 2010 The conference begins at: 1 pm Eastern 12 pm Central 11 am Mountain 10 am Pacific You can access the audio portion of the conference on the telephone or by using your computer's speakers. Please refer to the dial in/ log in instructions emailed to registrations.
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Credit Bidding by Secured Lenders in Bankruptcy Sales Amy A. Zuccarello
About the Speaker Amy A. Zuccarello is an associate in the Bankruptcy, Reorganization & Creditors Rights Group of Sullivan & Worcester's Boston office. Ms. Zuccarello practices in the areas of business restructuring, t workout and bankruptcy. She represents creditors, including indenture trustees, lenders and landlords in complex debt restructurings and insolvency matters. She has extensive transactional experience in commercial aircraft transactions, including restructurings, aircraft sales and leases and both public and private asset securitizations. Ms. Zuccarello has extensive experience in structuring and conducting UCC (Article 9) foreclosure sales, with respect to a variety of collateral types. She has also advised lenders on compliance with banking and consumer disclosure laws. Ms. Zuccarello s representative client work includes representation of a national banking association in its capacity as indenture trustee with respect to more than 600 financing transactions in the context of the Chapter 11 proceedings of United Air Lines, Inc. and Northwest Airlines. She assumed primary responsibility for negotiation and documentation of in excess of 300 aircraft restructurings, including more than 100 aircraft financed with publicly held debt. She has also represented multiple parties to financial contracts, including derivatives such as swap agreements, forward contracts and securities lending and purchase agreements, with respect to the Chapter 11 and SIPA proceedings of Lehman Brothers, Inc. and its affiliate entities, and purchasers and potential purchasers of assets, including going concern businesses, equipment, real estate and lease rights and intellectual property, both within and outside of bankruptcy proceedings. Ms. Zuccarello has been named a "Rising Star, " by Massachusetts Super Lawyers (2009). Ms. Zuccarello received her J.D., cum laude, from Boston College Law School and her B.A., summa cum laude, from Boston University. Prepared for 2010 Sullivan & Worcester, LLP 5
Strategic Decisions Amount of Bid May bid up to the full amount of debt outstanding Strategic concerns in establishing a value for the assets and preserving deficiency claims. Recourse vs. Non-Recourse Debt Guarantor or Co-obligor issues Tax implications of credit bidding Timing of Bid Bids have the potential of chilling the sale, or spurring other bidders to action. Prepared for 2010 Sullivan & Worcester, LLP 6
Resolving Disputes Collective action in syndicated loan facilities or indentured d issues Complexity of syndicated loan facilities and current economic climate has provided a backdrop for disputes over who is entitled to credit bid Generally, syndicated loan transactions are structured to limit individual lender activity, in favor of efficiency and avoiding gridlock in diffusely-held transactions Public debt issues may pose additional i challenges in obtaining unanimity of consent Exercise of remedies is exclusive right of the agent or trustee Credit bidding is a remedial action, the exercise of which is reserved for the agent or trustee Prepared for 2010 Sullivan & Worcester, LLP 7
In re Delphi Corp., No. 05-44481 (Bankr. S.D.N.Y.) [12/1/08 Hearing Transcript] Several minority DIP lenders objected to entry into Accommodation Agreement, which provided for forbearance from exercising remedies under the DIP agreement and order The court disagreed, holding that based on the DIP Agreement, the agent has the exclusive right to exercise remedies, and accordingly to compromise or forbear with respect to such remedies at the direction of the Required Lenders Prepared for 2010 Sullivan & Worcester, LLP 8
In re Chrysler LLC, 405 B.R. 84 (Bankr. S.D.N.Y. 2009) Lender group holding approximately 7.5% of the outstanding debt objected to proposed sale of substantially all of Chrysler s assets Court held that the objecting lender group had contracted away their right to act inconsistently with the determination of the Required Lenders and that their dissatisfaction with the ultimate outcome was not justification for disregarding d the express provisions of the agreements. Purpose of syndicated financing structures is to provide unified action, avoid chaos and prevent a single lender from being preferred over others. Prepared for 2010 Sullivan & Worcester, LLP 9
In re GWLS Holdings, 2009 WL 453110 (Bankr. D. Del. Feb. 23, 2009) Sole non-instructing lender, holding $1 million of $337 million outstanding, argued that collateral agent did not have authority to submit a credit bid on behalf of all lenders under the loan documents. Court found that credit bidding is an exercise of remedies; the right to exercise is held solely by the agent under the loan documents. Court also found that an exercise of remedies does not constitute an amendment or waiver of the loan documents which would require unanimous lender consent. Prepared for 2010 Sullivan & Worcester, LLP 10
In re Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y. 2009) Sole minority lender argued that agent did not have authority to credit bid all of the outstanding debt absent unanimous consent of the lenders Objecting lender also argued that credit bid constituted an amendment that released collateral from liens under the loan documents, also requiring unanimous consent Court found that under the loan documents, the agent did not need unanimous consent to credit bid and that it was authorized to submit a credit bid for the full amount outstanding Prepared for 2010 Sullivan & Worcester, LLP 11
Second lien holders Rights will be governed by Intercreditor Agreement Intercreditor Agreement will generally contain provisions providing that the second lien lender waives certain rights, including agreements not to contest first lien lender requests for adequate protection Frequently include provisions permitting the second lien holders to purchase the first lien debt at par after the occurrence of certain events, including acceleration or bankruptcy Compliance with Section 363(f) is required Prepared for 2010 Sullivan & Worcester, LLP 12
Negotiations with Unsecured Creditors Committees Approval of unsecured creditors committee, as the representative of all unsecured creditors, is important to add an air of legitimacy and provide a check to ensure that the rights of all creditors, not just the rights of secured creditors are being considered d Allocation of purchase price to un-encumbered assets included in the sale Waivers of deficiency claims Prepared for 2010 Sullivan & Worcester, LLP 13
Credit Bidding By Secured Lenders in Bankruptcy Sales Carren Shulman, Partner Sheppard Mullin Richter & Hampton LLP Sheppard, Mullin, Richter & Hampton LLP 2010
About the Speaker Carren Shulman is a partner in the Finance & Bankruptcy group at Sheppard Mullin Richter & Hampton, LLP in New York. For nearly twenty years she has represented the interests of secured and unsecured creditors in restructuring matters in and out of bankruptcy court, and represents debtors, committees, chapter 11 trustees, and indenture trustees in complex bankruptcy cases. She has significant experience representing secured creditors and buyers in sales under section 363 of the Bankruptcy Code. Carren can be reached at cshulman@sheppardmullin.com. Representative engagements: Access 360 Media in the debtor in possession funding and purchase through h a 363 sale of Arena Media in the case of In re Arena Media Networks LLC, SDNY Bankr. (Lifland, J.), the largest Italian private equity fund in its acquisition of intellectual property from Desa IP LLC, through a 363 sale in its bankruptcy case in Delaware, a large national private equity fund in the 363 sale of a nursing home through a 363 sale, her representation of MMFX Technologies and certain of debtor subsidiaries i connection with the sale through h a foreign bankruptcy of the assets of their subsidiary. Representative engagements also include Goodrich Corporation in bankruptcies worldwide for more than fifteen years, the representation of Marriott International, Inc. in out of court restructurings with deal parties, and in significant bankruptcy cases, including In re Village Hotel Investors, L.L.C. (involving The Ritz-Carlton Lake Las Vegas), In re Innkeepers USA Trust, et al., and her representation of The Bank of New York Mellon in In re Lehman Brothers Holdings Inc., and other significant matters. 15
Challenges to Right to Credit Bid A. 363 sale vs. sale through a plan of reorganization 1. In re Pacific Lumber 2. In re Philadelphia Newspapers B. Denial of Right to credit bid for cause C. Equitable subordination of lien loss of lender s priority 16
A. Debtors Options for Selling Property 1. Sale pursuant to 11 U.S.C. 363 a. In the ordinary course of business without notice and a hearing. b. After notice and a hearing through a public or private sale. 2. Sale under a Plan of Reorganization 17
1. Sale through 363 Public Auction Subject to court approval on notice and after a hearing on motion for approval of such sale. Public auction effected through approval of the terms of a purchase agreement with/without "stalking horse" bidder, typically approved by the secured creditor. Submission of bids and sale subject to "highest and best" offer. 18
11 U.S.C. 363(k) credit bidding A creditor with an allowed claim secured by property has the right to bid at a sale of that property pursuant to 363 and, if successful, may offset its claim against the purchase price, unless the bankruptcy court for cause orders otherwise. Secured creditor can bid full amount of claim without regard to the value of the claim or the underlying collateral. 19
Auction/Bid Process Secured lender should confirm willingness of debtor to allow credit bid and confirm whether there are parameters to credit bidding to avoid surprises. Consider desire for immediate cash vs. desire to own property that may increase in value over time. Costs to credit bidding for secured creditor must be considered Costs of 363 sale vs costs of sale through a plan Responsibility for administrative fees attendant to sale Sale through 363 process vs. foreclosure 20
2. Sale Through a Plan 1129(b)(2)(A)(ii) (b)(1) The court shall confirm a plan that is fair and equitable with respect to each impaired class that has not accepted. (b)(2)(a) Fair and equitable includes the following with respect to secured creditors: (i) secured creditors retain their liens, and receive deferred payments in the amount of the present value of the collateral at the time of confirmation; (ii) a sale of property pursuant to 363(k) free and clear of liens with lien attaching to proceeds; or (iii) distribution of the indubitable equivalent. The above list is by definition not exhaustive and courts have begun to hold that the disjunctive language allows a debtor to choose the manner of treatment for a secured creditor. 21
In re Pacific Lumber 584 F.3d 229 (5 th Cir. 2009) Following confirmation of plan of reorganization that provided for a sale of secured creditors collateral and payment in cash of the value of the collateral (determined after an evidentiary hearing), secured creditor appealed the denial of its alleged right to credit bid for collateral under the confirmed plan. Fifth Circuit upheld bankruptcy court decision to confirm plan. Fifth Circuit it found that t approval of plan based upon 1129(b)(2)(A)(iii), authorizing distribution of the indubitable equivalent, did not render (ii) superfluous despite Bankruptcy Code principal i of applying the specific over the general. 22
In re Pacific Lumber 584 F.3d 229 (5 th Cir. 2009) Significant factors supporting Fifth Circuit finding: secureds own proposed plan not confirmable secureds failed to object to order lifting exclusivity it to allow certain parties, including the successful plan proponents/buyers, to propose plan. Court unpersuaded by argument that secureds had right to benefit from potential future increase in value. 23
In re Philadelphia Newspapers, LLC 599 F.3d 298 (3 rd Cir. 2010) Appeal of bankruptcy court decision requiring debtor to allow secured creditor to credit bid at proposed auction pursuant to plan. Third Circuit held debtor is entitled to preclude credit bidding by secured creditor under plan of reorganization and pay secured creditor the indubitable equivalent of the value of collateral. Bankruptcy sale stayed pending appeal. Ultimately, secured creditor was the successful cash bidder for its collateral and was repaid on its allowed claim. Notable dissent 24
B. Denial of Right to Credit Bid For Cause Bases for finding of cause to deny right to credit bid private/ordinary course sale (e.g. In re Pacific Lumber sale through plan that did not provide for credit bidding was allowed) chill bidding, harmful to the debtor and other creditors indubitable equivalent sufficient to make creditor whole (e.g. In re Philadelphia Newspapers) Result of denial for cause loss of power by secured creditors to control case long-held belief that secured creditors are entitled to credit bid no longer holds true secured creditor loses right to benefit from potential future increase in value of its collateral which it bargained for when it entered the transaction Why does the tide appear to be changing? 25
C. Equitable Subordination of Secured Claim 11 U.S.C. 510(c) After notice and a hearing, the court may Subordinate for distribution purposes all or part of an allowed claim or interest to all or part of another allowed claim or interest Order that a lien securing a subordinated claim be transferred to the estate 26
Application of Equitable Subordination Harsh result for a secured creditor Powerful tool used sparingly since it changes statutory priorities Typically results from misconduct of lender or insider transaction though not required; see In re Kreisler and Erenberg, 546 F.3d 863 (7th Cir. 2008) Alternative argument with similar effect recharacterization of loan from debt to equity; see Cohen v. KB Mezzanine Fund II, LP (In Re: Submicron Systems Corp.), 432 F.3d 448 (3d Cir. 2006). Congress deemed the undersecured nonrecourse creditor s ability to credit bid the full value of his claim adequate protection in the 363 context, t, rendering 1111(b)(1)(A) ) unnecessary: The legislative e history verifies this congressional intent in limiting the applicability of the statutory recourse status: Sale of property under [ ] 363 or under the plan is excluded from treatment under [ ] 1111(b) because of the secured party s right to bid in the full amount of his allowed claim at any sale of collateral under section 363(k).... (Quoting 124 Cong. Rec. H11,103-04 (1978)) (emphasis added). Id. 27
Lessons Prepetition, lenders should ensure All indicia of proper loan exist to avoid potential for recharacterization or subordination No basis exists for objection to claim in a bankruptcy Borrower is sufficiently capitalized to repay debt Awareness of other creditors who may pursue similar assets, particularly undersecured second lien lenders Consider contract language relating to potential bankruptcy/distressed sale and right to credit bid/right of first refusal Work with borrower on disposition of collateral to ensure a position postpetition titi in the sale of the assets Postpetition, lenders should Act immediately to protect interests Work with the debtor on the sale/foreclosure l opportunity 28