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May 26, 2017 | Posted by Philip Guffy | Permalink

The Bottom Line

The Delaware District Court affirmed the bankruptcy court’s decision that the combination of a narrow arbitration provision and the bankruptcy court’s reservation of jurisdiction warranted denial of a motion to compel arbitration.  The specific language of the arbitration provision, combined with the use of an accounting term of art, narrowed the scope of the arbitration provision sufficiently to rebut the presumption of arbitration under the Federal Arbitration Act.


Why This Case is Interesting

The decision addresses two basic premises that sometimes clash in bankruptcy.  First, under the appropriate circumstances, arbitration provisions will be enforced in bankruptcy.  However, parties (at least estate-parties) typically want the bankruptcy court to interpret disputes that can affect the assets or liabilities of the estate – especially disputes arising out of a court approved sale agreement.  The resolution of that clash turned here on careful drafting.  Both the bankruptcy court and the district court found the use of an accounting term of art (“item”) to be significant in interpreting a narrow scope of the arbitration provision.  Parties should take care to focus on whether they want to use specific terms of art (to give a narrow scope) or avoid terms of art (for a broader scope).  Second, the decision shows the importance of including the standard retention of jurisdiction language in orders.  Such language is often included by default without giving thought to how it might affect the agreement being approved.  Yet in this case, both the bankruptcy court and the district court found that the parties intentionally included the language as part of the APA despite an arbitration provision.  That warranted giving meaning to the language according to the perceived intent of the parties, in this case removing questions of contract interpretation from arbitration.  As always, drafting matters and this decision highlights an important aspect of preserving (or avoiding) bankruptcy court review of contracts entered into after the commencement of the case.

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May 25, 2017 | Posted by Priya K. Baranpuria | Permalink

The Bottom Line
The Bankruptcy Court for the Central District of California determined the Attorney General’s approval was not required for the sale of a non-operating, non-profit hospital because the hospital no longer qualified as a “health facility” upon its closure. Section 363(d)(1) of the Bankruptcy Code requires that sales of non-profit assets be done “only in accordance with nonbankruptcy law applicable to the transfer of property[.]” California state law requires the Attorney General’s approval for any sale of material assets of a non-profit health facility to a for-profit entity. CAL. CORP. CODE § 5914(a) (West 2017). “Health facility” is defined under California state law as a facility that operates for the diagnosis, care, prevention and treatment of human illness – the key word being “operates”. CAL. HEALTH & SAFETY CODE § 1250 (West 2017). Because the hospital closed its doors and no longer accepted patients, it was no longer operating and therefore was not considered a health facility. If the hospital was no longer a health facility, it was not required to obtain state approval to sell its assets, or, at a minimum, show compliance with the applicable state law standards for such sales.

Why This Case is Interesting
On its face, the decision is a straight-forward application of the definition of a health facility under California law. By determining that a non-operating provider was not required to comply with the statute, the court could proceed to approve the sale under section 363, including section 363(d)(1). As an initial matter, the decision acts as a reminder that sales of non-profit assets may require a review and compliance with applicable state law. However, legislative history to section 363(d) likewise states that the decision need not be made by the applicable non-bankruptcy forum, but rather that the bankruptcy court need only consider whether the sale is consistent with applicable nonbankruptcy law. Therefore, a health care provider as debtor seeking to sell assets as a going concern and facing the prospects of a denial by an attorney general, reviewing the sale under the charitable guidelines, could seek to have the bankruptcy court determine the merits of the sale under applicable nonbankruptcy law as well as the purposes of section 363. By centralizing the issues before the bankruptcy court, a debtor could best ensure that all of the purposes of the restructuring, including the continuation of health care operations and maximizing going concern value, are preserved. Each case will turn on its dynamics (for example, is the state review being done under general charitable entity guidelines or based upon healthcare guidelines), but consideration of “applicable nonbankruptcy law” may best be made by the forum seeing the entire picture of the restructuring.

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May 18, 2017 | Posted by David Braun | Permalink

The Bottom Line
The Second Circuit affirmed the bankruptcy and district courts’ decisions subordinating claims asserted against the Debtor by holders of restricted stock units. However, while the court agreed with the lower courts that the claims must be subordinated under section 510(b) of the Bankruptcy Code, the court did not agree that all of the claims must also be disallowed as equity interests. The decision provides a thoughtful analysis of what constitutes an equity interest versus a claim, although the conclusion was to subordinate the claims to general unsecured creditors anyway.

Why This Case Is Interesting
The Second Circuit’s decision clarifies the narrow scope of claims that may be reclassified as equity and disallowed and suggests that courts should employ a more careful analysis to determine the bases for claims asserted by equity holders. Going forward, courts will be more likely to focus on whether an equity holder’s proof of claim is duplicative of its equity interest or if it instead reflects an independent claim that is related to, but different from, its underlying equity interest (e.g., a breach of contract claim related to the purchase of the equity security).

However, the practical impact of this decision may not be very significant in the end because these claims will often still be subordinated given the broad construction of section 510(b). Nevertheless, better to be subordinated than disallowed as at least subordinated claims will be entitled to a recovery in circumstances where general unsecured creditors are paid in full and subordinated claims must be paid in full before equity holders receive any distributions.

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May 12, 2017 | Posted by Kramer Levin | Permalink

Philip Bentley’s article “Expert Witnesses in Bankruptcy Court: Some Legal and Practice Points for Litigators” appeared in the April 26, 2017 issue of The Review of Banking and Financial Services.

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May 10, 2017 | Posted by Priya Baranpuria | Permalink

The Bottom Line
The Bankruptcy Court for the District of New Jersey denied the Debtors’ request for approval of a sale of property free and clear of liens encumbering the property. The court determined that the term “value” in section 363(f)(3) of the Bankruptcy Code referred to the face value of all liens on the property and not the “economic value”. Because the value of liens encumbering the property in this case exceeded the proposed sale price, the property could not be sold free and clear of all liens pursuant to section 363(f)(3).

Why This Case is Interesting
Absent a secured creditor's consent, debtors may be unable to sell a property free and clear of all liens. Although Collins remains good law in the Eastern District of Virginia, as Lutz shows, debtors in other jurisdictions may not be able to rely upon section 363(f)(3) in seeking approval of a free and clear sale where the face value of the liens exceeds the proposed sale price. Note that the Court did not address the secured creditor's right to credit bid under section 363(k) which also precludes a debtor from selling the collateral to a third party for less than the allowed secured claim by allowing the secured creditor to submit a protective bid up to the amount of its lien.

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