January 25, 2017 - In the past year the LSTA weighed in as amicus curiae (friend of the court) in four cases of enormous importance to the loan market. Happily, the results in the two cases decided so far have been decidedly good. The two other cases have been fully briefed and argued and await decision in the next few months. The cases are recapped below.
- In Stonehill Capital Management v. Bank of the West, the New York State Court of Appeals, the state’s highest court, issued a unanimous decision on December 20, 2016 that emphatically reinforced the construct that a “trade is a trade”. The Court ruled that (i) a seller at auction cannot withdraw a loan after it has accepted a winning bid for that loan, and (ii) an oral loan trade is enforceable so long as it identifies the material terms of the trade even if it is subject to documentation. The LSTA filed an amicus brief in this case (which Court cited favorably during oral arguments) because an adverse decision could have had serious negative ramifications for the viability of the loan trading market. An adverse decision could have led to a significant disruption of the liquid loan trading market.
- A 2014 ruling in the federal District Court in New York that expansively interpreted an obscure provision of the Trust Indenture Act cast doubt on the ability of distressed companies to achieve out-of-court financial restructurings. But, as reported by the WSJ, a decision in early January by the U.S. Circuit Court in Marblegate v. Education Management Corp. has restored a good measure of certainty by taking a narrow view of that same provision. The effect of the ruling is that secured creditors have regained leverage against hold-out junior creditors seeking to extract concessions. The LSTA, recognizing the importance of this issue, filed an amicus brief supporting the adoption of a narrow view. A long list of law firms, including Katten, Latham, Simpson Thacher, and Shearman & Sterling, also recognized its importance and weighed in with their memos.
- In September 2016, the LSTA filed an amicus brief with the Supreme Court in In re Jevic urging the court to overturn the use of structured dismissals that violate the “absolute priority rule”, a foundational tenet of the bankruptcy code. This case will determine whether Chapter 11 of the Bankruptcy Code permits a bankruptcy court to approve a settlement where proceeds are distributed in disregard of the priorities established in the code without the consent of the adversely affected creditors. In the brief, the LSTA explains the significant impact this case will have on the lending markets due to an erosion of predictability and an increase in risk and emphatically asserts that structured dismissals should be impermissible. The Supreme Court heard oral arguments on December 7, 2016 and is expected to rule in the next few months.
- In November 2016, the U.S. Circuit Court of Appeals for the 2nd Circuit heard oral arguments in In re MPM Silicones LLC (“Momentive”), on the issue of whether a debtor could “cram down” over-secured senior creditors with replacement notes that carried below-market-rate interest. The bankruptcy court ruled that they could and the District Court agreed. The LSTA filed an amicus brief on this issue asserting that requiring secured creditors to accept below market notes was not “fair and equitable” under Section 1129(b) of the bankruptcy code, which provides that a plan may be confirmed over a secured creditor’s objection only if it maintains the value of their claims. The 2nd Circuit is expected to rule soon in this closely watched case.
The LSTA will continue to advocate on behalf of important market principles in court cases in 2017 and beyond.