July 2012

“The Bankruptcy Code standardizes an expansive (and sometimes unruly) area of law, and it is [the Court’s] obligation to interpret the Code clearly and predictably using well-established principles of statutory construction.”

                                                                                      -Justice Scalia

In This July 2012 Issue:

Supreme Court Upholds the Rights of Secured Creditors to Credit-Bid

Recent Developments in Connecticut Bankruptcy Law

Supreme Court Upholds the Rights of Secured Creditors to Credit-Bid

As the Connecticut Bankruptcy Beat previously reported, the Supreme Court recently agreed to consider whether a chapter 11 cramdown plan can provide for the sale of collateral free and clear of the secured liens, but bar secured creditors from “credit-bidding” at the sale. In an opinion delivered on May 29, 2012, the Supreme Court resolved this important question in a unanimous decision that secured creditors must always be offered the right to credit-bid in cramdown plans that seek to sell encumbered collateral. Redlax Gateway Hotel, LLC v. Amalgamated Bank, 566 U.S. 5 (2012). 

Traditionally, a plan of reorganization involving the sale of encumbered assets must allow secured creditors to compete against new cash-bidders by “credit-bidding” for the assets with the entire amount they are owed.  The right to credit bid is an important privilege to secured creditors under the Bankruptcy Code and is particularly valuable to undersecured creditors who seek some control over the collateral.  Yet in 2010, the Third Circuit ruled in In re Philadelphia Newspapers LLC, 599 F. 3d 298 (3d Cir. 2010) that credit-bidding rights could be circumvented so long as the secured creditors were given the “indubitable equivalent” of their secured claims through the sale.  The Seventh Circuit quickly challenged this assertion in In re River Road Hotel Partners, LLC, 651 F.3d 642 (7th Cir. June 28, 2011), and the Supreme Court was tasked with resolving the circuit split.

Despite what the Debtors had claimed was a textual ambiguity in 11 U.S.C. § 1129, the Supreme Court concluded that taking away the rights of secured creditors to credit-bid was “hyperliteral and contrary to common sense.” Redlax Gateway Hotel, 566 U.S. at 5.  The Court declared that § 1129(b)(2)(A)(ii) is a detailed provision that spells out the requirements of selling collateral free of liens, while subsection (iii) is a broadly worded provision that says nothing about a sale.  Examining the section as a whole, the Court held that “the specific governs the general.”  Thus, debtors may not sell their property free of liens under § 1129(b)(2)(A) without allowing secured creditors the right to credit-bid, as required by clause (ii).  The Court took no position on whether its ruling was good policy, as “[t]he pros and cons of credit-bidding are for the consideration of Congress, not the Courts.”


Recent Developments in Connecticut Bankruptcy Law

The following is a compilation of recent commercial bankruptcy decisions from Connecticut bankruptcy courts. 

Standards for Fee Applications of Trustees and Other Professionals Clarified and Trustee Denied Fees:

In re Robert T. DiLieto, 2012 WL 668939 (Bankr. D. Conn. Feb. 29, 2012) (Dabrowski, J.). 

The Bankruptcy Court recently sustained an objection to an application for compensation filed by the Chapter 7 trustee (the “Trustee”).  In doing so, the Court sent a message to all trustees and other professionals applying for compensation that fee applications will be rejected where supporting time records contain numerous instances of lumping, duplicate entries, mistakes and excessive and unnecessary time and are not contemporaneously kept.  Even if the deficiencies were unintentional, the Court alleged that nonetheless they still reflected a degree of negligence that warranted at least a reduction in the monetary fee award sought in the application.  The court also criticized the Trustee for repetitive instances of inappropriate behavior towards the debtors and their counsel throughout the case.  The Court ultimately held that the improper time records and unprofessional conduct warranted a complete denial of all monetary fees sought by the Trustee.

Unperfected Mechanics Lienholder Does Not Have to Return Preference:

In re Johnson Memorial Hospital, Inc., 2012 WL 836673 (Bankr. D. Conn. March 9, 2012) (Dabrowski, J.). 

The Bankruptcy Court protected the holders of unperfected mechanic’s liens from having to return allegedly preferential payments made during the 90-day preference period.  The court held that payments were not avoidable where, at the time of each payment, the lienholder (1) remained eligible to perfect the lien pursuant to relevant state law, and (2) such perfection would not otherwise have been avoidable under the Code.  New England Radiator Works (“NER”) installed an emergency generator radiator for Johnson Memorial Hospital (“JMH”) in August 2008.   Under Connecticut law, NER held a statutory mechanic’s lien on JMH’s real property and the right to record the lien on the appropriate land records within 90 days after completion of the work.  Since NER was paid in full in September 2008, the lien was never recorded.  In November 2008, JMH filed its Chapter 11 bankruptcy petition and sought to recover the payment to NER as a preference.  Mechanic’s lienholders, the Court noted, should not be faced with “the Hobson’s choice between accepting payment or taking the commercially unreasonable step of declining payment in order to perfect an inchoate statutory lien.”

Plan Which Provided for Abandonment of Collateral to Secured Creditor in Satisfaction of its Debt Was Not Confirmable:

In re Bridgeport Redevelopment, Inc., Docket No. 722, Case No. 10-33102 (Bankr. D. Conn. Feb. 7, 2012) (Weil, J.) 

The proposed Chapter 11 Plan of Reorganization for the Debtor did not satisfy the “indubitable equivalent” standard for fair and equitable treatment of an impaired secured class.  The Court held that a transfer of collateral to a secured creditor can meet the indubitable equivalent standard, but only if the transfer is “unqualified.”  An unqualified transfer is typically found where collateral is abandoned prior to foreclosure.  Here, however, the Plan sought to relinquish the secured creditor’s collateral to the secured creditor on the condition that it would be “in full satisfaction and extinguishment of any debt” pursuant to the original mortgage.  The Court clarified that under 1129(b)(2)(A), the Debtor is not allowed to “do” anything to the debt of a non-consenting class. Accordingly, the Plan provision was an impermissible qualification on the proposed collateral transfer which prevented the Plan from meeting the indubitable equivalent standard.

Perhaps if the Plan had provided that the transfer was “in full satisfaction of the secured debt,” a different result could have been achieved.

No Post-Confirmation Jurisdiction for Claims Against Debtor Fiduciaries and Insiders Even Though they Implicated Integrity of Bankruptcy Process:

Vanguard Products Corp. v. Citrin, (In re Indicon, Inc.), Docket No. 116, Case No. 11-05133 (Bankr. D. Conn. March 30, 2012) (Shiff, J.)

The Court found that it had no subject matter jurisdiction over an adversary proceeding commenced post-confirmation by the Debtor’s former landlord. It granted 12(b)(6) Motions to Dismiss as to all defendants, even though the basis of the adversary proceeding was alleged fraud and breach of fiduciary duty by insiders in failing to disclose an asset sale that had been negotiated during the Chapter 11 case, but consummated three weeks after the plan’s confirmation. There was also a claim that certain professionals employed by the Debtor received substantial compensation without having obtained court approval for their employment or, with respect to one court-approved professional, without having applied for and obtained court approval for his fees.  The Bankruptcy Court nonetheless held that because the plain language of the Debtor’s plan of reorganization stated that the Bankruptcy Court’s jurisdiction over the bankruptcy case would cease upon the entry of the final decree, it did not have post-confirmation jurisdiction to adjudicate the adversary proceeding.  While the court did grant the motion to reopen the case filed by the former landlord, the court reasoned that its order to reopen merely restored the case to its status as of the closing date.  Therefore, the final decree remained in effect.  Under an alternative ruling, the Bankruptcy Court held that in order to exercise post-confirmation jurisdiction, there had to be a “close nexus” between the adversary proceeding and the Plan, which it found was lacking here.  The case is on appeal to the U.S. District Court.

Please feel free to contact any of our attorneys in this practice area for additional information.

Elizabeth Austin                                                            Irve Goldman
eaustin@pullcom.com                                               igoldman@pullcom.com
203.330.2243                                                               203.330.2213

Jessica Grossarth                                                       H. William Shure   
jgrossarth@pullcom.com                                          hwshure@pullcom.com
203.330.2285                                                               203.330.2232      


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