We here at the Bankruptcy Roundtable wish you all happy holidays. We’ll be back in January.
By Abigail Pickering Bomba, Steven Epstein, Arthur Fleischer, Jr., Peter S. Golden, Brian T. Mangino, J.Christian Nahr, Philip Richter, Brad Eric Scheler, Robert C. Schwenkel, Gail Weinstein of Fried, Frank, Harris, Shriver & Jacobson LLP
In Quadrant Structured Prods. Co., Ltd. v. Vertin, No. 6990-VCL, 2015 WL 6157759 (Del. Ch. Oct. 20, 2015), the Delaware Court of Chancery emphasized that creditors’ rights will flow from the contractually agreed terms of the debt, and that creditors’ derivative claims for breach of fiduciary duty will rarely succeed.
Fried Frank discusses whether there are circumstances under which a creditor’s claim for breach of fiduciary duty might succeed. Based on Vertin and a prior opinion in the case, it can be argued that a creditor’s fiduciary duty claim regarding a company’s post-insolvency adoption of an equity value maximization plan can succeed only if the directors were so uncareful or disloyal in formulating the plan, or the plan was so patently flawed, that the plan would not pass muster under the business judgment rule. Moreover, although the transactions in Vertin did not support a claim for breach of fiduciary duty, the opinion leaves open whether affiliated transactions may give rise to a creditor’s claim for breach of fiduciary duty.
For the full memo, please click here.
By Amir Shachmurove
Chapter 11 of the Bankruptcy Code gives creditors whose rights will be impaired the right to vote to accept or reject a proposed plan of reorganization, subjecting this prerogative to only two limitations. The first is set forth in Section 1126(e), which provides that a vote not cast or “not solicited or procured in good faith” may be nullified. The second appears in the penultimate sentence of Bankruptcy Rule 3018(a), which requires “a creditor or equity security holder” seeking “to change or withdraw” a vote to establish “cause.” Though “cause” has always been the sole constraint on the right to change or withdraw a previously cast vote in the whole of bankruptcy law, Rule 3018(a)’s text and commentary provide no definition or example. Existing precedent, moreover, is threadbare.
In four substantive parts, Purchasing Claims and Changing Votes: Establishing ‘Cause’ Under Rule 3018(a) proposes a new blueprint for the application of Rule 3018(a)’s deceptively plain “cause.” Necessarily, Part II surveys the present and wanting legal landscape. Part III then summarizes the standards for interpreting federal rules generally and shows how bankruptcy law’s specialized character compels these precepts’ alteration when a bankruptcy rule is at issue. Thereafter, Parts III and IV employ these tenets to delineate the effective range of “cause” in Rule 3018(a). In so doing, this article explicates the rarely-noticed interpretive constraints applicable to the Bankruptcy Rules and reads Rule 3018(a) accordingly, demonstrating how bankruptcy’s lone check on a pivotal privilege must be understood in light of such modern phenomena as claims trading.
The full article is published in 89 Am. Bankr. L.J. 511 (2015), and is available here.
By Maxwell Tucker of Squire Patton Boggs
The correct method to determine the adequacy of the “cram-down” interest rate offered under a contested Chapter 11 plan remains subject to debate. Most bankruptcy courts first cite the “prime plus” formula set forth in Till v. SCS Credit Corp., 541 U.S. 465 (2004)(plurality opinion), then refer to various risk factors that may require an upward adjustment from the prime rate.
The recent bankruptcy court opinion issued in In re Couture Hotel Corporation, found in my blog post linked here, provides an excellent roadmap for parties contesting cram-down interest rates. The debtor’s Chapter 11 plan proposed to repay the loan with principal and interest amortized over thirty (30) years, and proposed that interest shall accrue at the rate of 4.25% interest per annum. The lender objected to the plan, contending that an interest rate in excess of 10% was required. Both parties offered expert testimony in support of their contentions.
For reasons explained in the opinion, the bankruptcy court disagreed with each expert’s testimony. The sixty-two page Couture Hotel opinion, rich in fact findings, provides detailed reasons for the court’s rejection of the respective experts’ risk adjustments, while refraining from giving an advisory opinion as to what interest rate would be adequate.