Business Reorganization

Courts may Override 1111(a) and Require Proofs of Interest to be Filed

 By: Brett Joseph

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In In re Greenwich Sentry, L.P.,[1] the Bankruptcy Court for the Southern District of New York held that section 1111(a) of the Bankruptcy Code did not prevent the court from requiring all interest holders to file proofs of interest.[2] In 2010, Greenwich Sentry Partners, L.P. (“the Debtor”) filed a petition for Chapter 11 relief.[3] The Debtor also filed its schedules and a statement of financial affairs,[4] which listed Christopher McLoughlin Keough, Quantum Hedge Strategies Fund, LP, and SIM Hedged Strategies Trust (the “Purported Limited Partners”) as interest holders. The Purported Limited Partner’s interests were listed on the Debtor’s schedules, but were not listed as disputed, contingent, or unliquidated.[5] The court issued an amended bar date order requiring all interest holders to file proofs of interest, even if their interests were not listed as disputed, contingent, or unliquidated.[6] Despite receiving a copy of the amended bar date order, the Purported Limited Partners did not file proofs of interest by the bar date. Nevertheless, the Purported Limited Partners sought a declaration from the court that they were holders of allowed limited partner interests, entitled to distribution.[7] The court denied the motion, holding that the Purported Limited Partners were required to submit proofs of interest in accordance with the amended bar date order and that they had failed to do so.[8]

The Challenge of Exclusivity Appeal of Original Equity Owners

By: Michael M. Harary

St. John's Law Student

American Bankruptcy Institute Law Review Staff 

 

In H.G. Roebuck & Son, Inc. v. Alter Communications, Inc.,[1] (“Roebuck”) the United States District Court for the District of Maryland reversed the bankruptcy court’s decision to grant the debtor, Alter Communications, Inc. (“Alter”), the exclusive right to file a plan of reorganization because the proposed plan violated the absolute priority rule.[2] H.G. Roebuck (“Roebuck”) sought to submit a competing plan, but was denied because the bankruptcy court determined that Alter’s plan satisfied the absolute priority rule and was confirmable. The court held that Alter’s prior equity holders, the Buerger family, could be granted the exclusive right to purchase shares in the reorganized company, even though the proposed plan provided for less than a 16% return to certain general unsecured claimants, including Roebuck.[3] Alter’s remaining unsecured creditors were to be paid in full.[4] The court reasoned that it was permissible to pay an old equity holder a greater return than certain unsecured claimants because the plan required the prior equity holders to contribute $34,850 in “new value” and therefore the “new value” exception to the absolute priority rule was satisfied.[5]

Section 546(e) Safe Harbor Held Inapplicable to Small Private LBOs

By:  Shlomo Lazar

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

Recently, in In re MacMenamin’s Grill Ltd.,[1] the Bankruptcy Court for the Southern District of New York held that 11 U.S.C. section 546(e)’s safe harbor for settlement payments does not apply to private leveraged buyouts (LBOs).[2]  MacMenamin’s, a closely-held corporation, funded a stock purchase agreement in the form of a LBO through a $1.15 million loan from Commerce Bank, N.A., secured by a security interest in substantially all of MacMenamin’s assets.[3] The lender transferred the loan proceeds directly to the bank accounts of three former shareholders that controlled 93% of MacMenamin’s stock.[4] The court held that the LBO payouts were not settlement payments under 546(e) and were, therefore, avoidable as constructively fraudulent.[5]

Severance Compensation is Earned on Termination for Section 507(a)(4) Priority

 

By: Eric Small

St. John’s Law Student

American Bankruptcy Institute Law Review Staff

 

In a case of first impression, the Fourth Circuit, in Matson v. Alarcon, held that employees terminated pre-petition “earned” their entire severance compensation upon termination.[1] The debtor, LandAmerica, offered employees severance based on each employee’s length of employment with the company.[2] Because the debtor terminated the employees within 180 days of the petition date,[3] the Fourth Circuit determined that the employees were entitled to priority treatment pursuant to section 507(a)(4) of the Bankruptcy Code up to the then statutory maximum amount: $10,950.[4] In so holding, the Fourth Circuit rejected the trustee’s view that employees should receive only a pro-rated portion of the compensation based on the amount “earned” during the 180 days prior to the bankruptcy petition.[5]

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