August 3, 2017 - This week the LSTA hosted the sixth installment of its quarterly roundup of Recent Developments in Bankruptcy Law. As usual, Rich Levin of Jenner & Block focused on a number (11, to be exact) of key recently-decided bankruptcy cases that could impact loan market participants.
Importantly, the first two cases involved issues on which the LSTA is considering filing amicus briefs. PEM Entities is a case involving the recharacterization of senior debt that will be before the Supreme Court next term. Recharacterization of debt to equity is a means by which a bankruptcy court can reorder the priority of claims and is often used when “insiders” of the debtor make loans to the debtor. While the question presented is whether state law or federal bankruptcy common law governs the determination of recharacterization (and state law tends to be more favorable to lenders than bankruptcy common law), the case is especially concerning to loan market participants because the Fourth Circuit ruled that antecedent debt extended by a non-insider third party but purchased by an insider in an arms-length transaction was subject to recharacterization.
A second case that may get to the Supreme Court, In re Sunnyslope Housing, involved a unique set of circumstances that could nevertheless have negative ramifications for the loan market. In Sunnyslope, for idiosyncratic reasons, the foreclosure value of the lender’s collateral greatly exceeded the going concern value of the collateral in a proposed cram down plan of reorganization. But the 9th Circuit ruled that under a Supreme Court precedent called Rash, it was bound to value the collateral at its proposed use rather than giving the secured lender at least the foreclosure value. The vigorous dissent argued that Court was picking out selected words from the Supreme Court opinion in Rash but effectively missing the opinion’s forest for its trees. The webinar also covered other issues including substantive consolidation, litigation funding and champerty, extraterritoriality, and preferences. The presentation slides and summary of cases are available here.