Bankruptcy Sales: Is A Public Auction Required to Assure That Property Is Sold for The Highest and Best Price?
by | posted in: 363 Sale, Bankruptcy Roundtable Updates, Fiduciary Duties, Valuation | 0

By Vicki R. Harding (Vicki R. Harding, PLLC)

A buyer negotiating acquisition of commercial real estate from a Chapter 7 trustee or a Chapter 11 debtor-in-possession will almost always hear the mantra: “I have a fiduciary duty to maximize value for the benefit of the bankruptcy estate” – which the seller insists means the property must be sold through a public auction. The potential buyer may be designated as the stalking horse (e.g. its offer will be treated as an opening bid), and it may have input on the bidding procedures (bidder qualifications, minimum overbid, purchase price payment terms, etc.). But at the end of the day it runs a risk that after investing time and money in pursuing the acquisition someone else may be selected as having made a “higher and better” offer.

However, that is not always the case.  In re 160 Royal Palm, LLC, 600 B.R. 119 (S.D. Fla. 2019) presents an interesting case study. As discussed in Bankruptcy Sales: Highest Is Not Always Best, the bankruptcy court allowed a debtor to withdraw property from a previously authorized public auction and to proceed with a private sale to a designated buyer, subject only to an overbid by the stalking horse from the public auction. The court approved the private sale over the objection of a third party that claimed that in a public auction it would bid at least $1 million more than the private sale purchase price.

The full article is available here.

Post-Petition Interest: Not Very Predictable
by | posted in: Cramdown and Priority | 0

By Vicki Harding, Pepper Hamilton, LLP

hardingvIn a recent case a mortgagee battled the debtor over post-petition interest:  When did the lender become oversecured and thus entitled to interest?  Was it entitled to the default rate?  Should interest be compounded?

Some may be surprised to learn that a lender must do more than simply show that it is oversecured to receive its contract rate for the period between the petition date and confirmation.  Most courts hold that a bankruptcy court has at least limited discretion to use another rate.

Here the debtor filed a plan of reorganization that proposed to pay its senior lender in full with interest at 4.25% from the effective date of the plan, but did not include any post-petition, pre-effective date interest.

The lender argued that it was entitled to post-petition interest at the 14.5% contract default rate accruing from the petition date.  The debtor responded that the lender became oversecured only after a sale of its collateral and the default rate was unenforceable and inequitable.

Generally post-petition interest is not allowed, but there is an exception for oversecured creditors.  The 1st Circuit concluded that a bankruptcy court is not required to accept the contract rate, although there is a presumption that the contract rate (including default rate) applies if it is enforceable under state law and there are no equitable considerations leading to a different result. See here for a more detailed discussion of Prudential Ins. Co. of Am. v. SW Boston Hotel Venture, LLC (In re SW Boston Hotel Venture, LLC), 748 F.3d. 393 (1st Cir. 2014).

Preference Recovery: You May Be More Exposed Than You Think
by | posted in: Avoidance | 0

Author: Vicki R. Harding, Pepper Hamilton LLP

Imagine a $2 million property that secures a $1.75 million senior loan and a $500,000 junior loan.  The owner files bankruptcy, and during the 90 days prior to bankruptcy the senior lender received payments totaling $250,000.  Does the senior lender have preference exposure?

A typical assessment is that because the senior lender is over-secured, it did not receive a preference because it did not receive more than it would have in a chapter 7.  However, it can be argued that the payments constitute a preference to the junior lender since it will receive more than in a chapter 7 as a result:  Without the payments, only $250,000 would be left after payment of the senior lender, but with the payments, $500,000 is left.  And the senior lender could be liable in a recovery action as the transferee of the preference under Section 550.

But wait, isn’t that a Deprizio argument, and didn’t Congress fix the Code to preclude this result? The answer is no: Deprizio and Section 550(c) address transfers benefitting insiders made between 90 days and a year prior to bankruptcy.  It does not protect a lender for claims based on transfers made during the 90 days prior to bankruptcy.  Unfortunately for senior lenders, this is not a fanciful hypothetical, but rather the approach taken in Gladstone v. Bank of America, N.A. (In re Vassau), 499 B.R. 864 (Bankr. S.D. Cal. 2013), discussed more in Preferences:  Surprise – Being Fully Secured May Not Be A Complete Defense.