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July 26, 2017 | Posted by Marsha Sukach | Permalink

Kramer Levin Naftalis & Frankel and Debtwire recently co-sponsored a retail restructuring discussion that brought together a formidable roster of retail restructuring experts to discuss opportunities and strategies for preserving and unlocking the value of distressed retail assets.  The panel, which was moderated by Debtwire senior legal content specialist Richard M. Goldman, featured Kramer Levin partners Adam C. Rogoff and Erica D. Klein, Berkeley Research Group managing director Steve Coulombe, Gordon Brothers managing director Becky Goldfarb, Keen-Summit Capital Partners managing director Matthew Bordwin, and Consensus Advisors managing member Michael A. O’Hara.  Mr. O’Hara also delivered the keynote address preceding the panel, where he examined the current state of the distressed retail market, factors weighing against typical brick-and-mortar retailers, and efforts being taken by various retailers to keep up with the changing tide.

The panelists agreed that there are and will continue to be numerous opportunities to invest in the retail sector.  Retailers and investors should be aware of market trends and begin a dialogue now to plan a business strategy going forward.

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July 11, 2017 | Posted by Priya Baranpuria | Permalink

The Bottom Line

The Bankruptcy Court for the Central District of California examined the scope of the doctrine of recoupment for Medicaid and related payments, allowing the deduction by the state.  The court held that the California Department of Healthcare Services (“DHCS”) is authorized to withhold a percentage of Medi-Cal Payments and supplemental hospital quality assurance payments (“Supplemental HQA Payments”) owed to the Debtor for the purpose of recovering unpaid hospital quality assurance fees (“HQA Fees”) that the Debtor failed to pay pre- and post-petition.  In allowing the deduction, the court reasoned that the Debtor’s obligations to pay the HQA Fees and California’s obligation to distribute Supplemental HQA Payments arise from the same transaction or occurrence and are therefore logically related.

 

Why This Case is Interesting

Recoupment has become a powerful tool over the years, especially in the healthcare sector.  The doctrine of recoupment is especially nuanced in the context of healthcare restructurings where the Government has been successful in recouping significant Medicaid and Medicare overpayment liabilities.  Overpayment liabilities and state mandated quarterly fees may produce a material liability for a healthcare system.  When a distressed healthcare operator is relying upon government payables for liquidity, reducing liquidity – via recoupment – for historic liabilities can have a material impact on the restructuring.  At a minimum, it puts the government payor into a position of dictating post-petition funding through withholding its payables, requiring providers to negotiate with the government on continued access to funds to operate.  While setoff is sometime easier to determine when it applies, the doctrine of recoupment varies significantly from jurisdiction to jurisdiction in healthcare cases.  For example, there is a split among jurisdictions as to whether different provider “cost report years” are part of the “same transaction or occurrence” for purposes of calculating a healthcare system’s overpayment liability.  Healthcare providers entering bankruptcy with significant overpayment liabilities or unpaid Medicare/Medicaid fees need to be mindful of each jurisdiction’s position on recoupment and proactively deal with the prospects of reduced liquidity by reaching out to the government and negotiating a repayment plan that allows sufficient liquidity to operate post-petition. read more
July 11, 2017 | Posted by Marsha Sukach | Permalink

The Bottom Line

 

One critical issue affecting complex restructuring cases are efforts by the estate or creditors to recharacterize debt into equity.  This can happen in a variety of factual contexts, including where an existing equity stakeholder puts capital into a distressed company as “rescue capital” in the hopes of implementing an out-of-court turnaround.  When the turnaround fails, the rescue capital becomes a target of attack.  Over the years, various courts have approached this legal theory differently and one issue in dispute is whether to apply state law or federal law.  Recently, the Supreme Court has agreed to hear a dispute over the circumstances in which it is appropriate to “recharacterize” debt as equity.  The Supreme Court’s decision – to be heard next term – will resolve a circuit split on the issue of whether federal or state law governs the recharacterization of debt claims as capital contributions in bankruptcy.  This blog reviews the underlying case that will be addressed by the High Court next term.

 

Why This Case is Interesting

 

The Supreme Court’s decision in the case will have significant implications for business owners and insiders making loans or other investments to troubled companies.  PEM argues that “the difference between a federal and state rule of decision is outcome determinative in this case.”  Deciding the issue of which law courts should apply to the recharacterization of debt will result in more predictable outcomes.  This in turn will better enable lenders, distressed borrowers, and other parties in interest to engage in successful out-of-court restructuring transactions.

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June 27, 2017 | Posted by Rama Douglas | Permalink

The Bottom Line

In In re FAH Liquidating Corp., Case No. 13‐13087 (Bankr. Del. June 13, 2017), the Bankruptcy Court for the District of Delaware recently followed the Fourth Circuit and Bankruptcy Court for the Southern District of New York in holding that avoidance claims under section 548 of the Bankruptcy Code apply to fraudulent transfers made outside the U.S.  In reaching this decision, the Delaware Bankruptcy Court relied on the decision in Weisfelner v. Blavatnik (In re Lyondell), 543 B.R. 127 (Bankr. S.D.N.Y. 2016), where Judge Gerber held that “Congress’ intent was to extend the scope of section 548 to cover extraterritorial conduct.”  Judge Gerber reached this decision, in turn, by relying on the Fourth Circuit’s decision in French v. Liebmann (In re French), 440 F.3d 145, 149 (4th Cir. 2006), where the Fourth Circuit concluded that since section 541 of the Bankruptcy Code defines property of the estate as all interests of the debtor in property, then section 548 allows a trustee to avoid any transfer of property that would have been property of the estate prior to the transfer in question, including an extraterritorial transfer.

Why the Case is Interesting

While there is generally a longstanding presumption against applying federal laws extraterritorially, the decision recognizes that bankruptcy law has worldwide reach, which is a reflection of the fact that companies in bankruptcy have international business transactions or assets located outside of the United States.  For example, section 541 of the Bankruptcy Code defines property of the estate to be “property, wherever located and by whomever held[.]”  This has been used to extend the benefit of the automatic stay under section 362 to property of the estate located outside of the United States, with the prime issue being the ability to enforce the injunction against an entity that is outside of the United States.  (Typically, the answer is to look to stay offenders with a presence or property (including accounts receivables) located in the United States.)  With respect to the reach of avoidance actions, there has been a split of authority.  Some courts have held that avoidance provisions apply extraterritorially.  These courts view section 541’s expansive definition of property of the estate as evidence that Congress intended avoidance provisions like section 548 to apply extraterritorially.  Other courts have held that avoidance provisions do not apply extraterritorially because Congress did not clearly express an intent in the avoidance related Bankruptcy Code sections for these provisions to do so.  Furthermore, some courts that oppose applying avoidance claims extraterritorially view section 541 as merely defining the scope of property recoverable but not expanding the trustee’s avoidance powers which should be addressed by other applicable Code sections.  The Bankruptcy Court for the District of Delaware’s decision in In re FAH Liquidating Corp. has now deepened the divide by relying on Lyondell and concluding that section 548 can be applied extraterritorially.

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June 14, 2017 | Posted by Megan Wasson | Permalink

The Bottom Line

The Puerto Rico Bankruptcy Court followed the Third Circuit in holding that the Anti-Injunction Act, which prohibits suits to restrain the assessment or collection of any tax, is not superseded by section 105(a) of the Bankruptcy Code.  The Court looked to the plain language and legislative history of section 105, and determined that Congress did not intend to overrule the application of the Anti-Injunction Act to protect non-debtor third parties from tax collection.  Section 105 does not exempt the principals of chapter 11 debtors “by reason of their corporation’s bankruptcy.”  This decision directly affects certain directors and officers of a debtor as “responsible persons” for unpaid trust fund taxes (such as sale and withholding taxes) and the ability to stay the collection of these claims during the pendency of a chapter 11 case.

Why the Case is Interesting

This case represents the deepening of a circuit split between the Third Circuit, Eighth Circuit, and courts in the First Circuit regarding whether the bankruptcy court has the power to enjoin the IRS from pursuing collection actions against non-debtors.  The result is increased uncertainty over whether debtors’ principals may be shielded from IRS collection actions when a corporation files for bankruptcy, and may lead to forum shopping when companies with extensive tax liabilities decide where to file chapter 11 petitions.  In addition, given the risk of non-payment upon the corporate officers and directors, this will likely lead to continued negotiation of sufficient funds to pay all outstanding “trust fund” taxes as part of “first day” motions.  As a practical matter, many debtors already include this type of relief in such “first day” motions and the Condado decision underscores the need (from a debtor’s view) of such relief.

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