February 21, 2019 - In the same week that the LSTA hosted its popular quarterly webinar reviewing recent bankruptcy decisions, the US Supreme Court and a New York District Court were busy weighing in on other cases that could have significant implications for the loan market.

The bankruptcy webinar featuring, as always, Richard Levin of Jenner & Block, covered cases involving the allowability of “make-whole provisions” and post-petition attorney’s fees; fiduciary duties of shareholders, officers and directors; super-priority claims; perfection under the UCC and other issues.  A recording of the webinar, the slides and the case summaries are available by clicking here.

But that’s just the tip of the iceberg! Just one day earlier, the US Supreme Court finally put to rest the question of the whether underwater second liens can be stripped in bankruptcy, a critical issue for the distressed loan market.  Why is this important?  The ability to void even temporarily underwater second lien commercial loans could have dealt a major blow to that $40 billion market. Instead, by declining to consider an appeal from the 9th circuit in a case called Ritter v. Brady, the Supreme Court let stand a controversial 1992 decision in a case called Dewsnup that ruled that partially underwater liens cannot be stripped under Section 506(d) of the bankruptcy code. Readers may recall that a related issue of lien stripping was addressed by the SCOTUS in 2015 in a case called Caulkett (in which the LSTA filed an amicus brief).  In that case the plaintiffs unsuccessfully sought to distinguish between completely and partially underwater liens but, utilizing tactics that were criticized at the time by a number of commenters, declined to ask the SCOTUS to overturn Dewsnup (even though many believe it was wrongly decided).  In contrast, Ritter was a direct attack.  Alas, the commenters who criticized the Caulkett tactics misunderstood how Supreme Court jurisprudence works.  In a nutshell, the doctrine of stare decisis makes it exceptionally difficult to get the Court to overturn precedent.  The bottom line?  Dewsnup lives and second liens remain unstripped.

Another case getting a huge amount of attention in the loan market is Windstream v. Aurelius, recently decided by the US District Court for the Southern District of New York.  In 2015, Windstream, the holding company, spun off an important subsidiary in a transaction they claimed was not a sale-leaseback which, without bondholder consent, would have violated the company’s bond indenture.  Aurelius purchased a significant portion of those bonds and, in 2017, sued the company arguing that the spinoff was a sale leaseback and that the company was in default of the indenture.  The company denied the allegations but nevertheless tried to cure the alleged default by issuing new bonds under the indenture as part of an exchange offer, thus seeking to dilute Aurelius’s interest in the bonds and obtain the consent of the new majority of bondholders.   In his decision, Judge Jesse M. Furman ruled that (i) Windstream’s spinoff was a sale-leaseback that violated its bond indenture and (ii) its attempt to cure the default by issuing additional notes was ineffective.  As a result of the ruling, the bonds held by Aurelius became due and payable immediately and Windstream was on the hook for $310 million plus interest, a judgment that analysts noted could force the company into imminent bankruptcy.  Were the maneuvers by Windstream to strip the company of an important asset an example of “bankruptcy hardball” and part of the wave of “control opportunism” exercised by distressed debtors (described by Jared Elias and Robert Stark in their recent law review article that we recently highlighted)?  Did Judge Furman, in finding those maneuvers “too cute by half” agree with the authors’ recommendation by pushing back on aggressive debtor tactics that result in complicated schemes to defeat the intent of the business deal?  Or is there more to this than meets the eye, as noted in a Bloomberg Opinion piece?  For example, do we know whether Aurelius holds credit default swaps on the Windstream bonds and stands to gain from their default on the bonds?  Could this have been bankruptcy hardball initiated, in this case, by a distressed investor?  Or was it both?  We will continue to closely monitor this case as it makes its way through the judicial maze.

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