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2010 Southeast Text Print.indd


									                                                  American Bankruptcy Institute

                                                RECENT DEVELOPMENTS:
                                            BUSINESS BANKRUPTCY CASES

                                                    HON. MARY GRACE DIEHL

                                     U.S. BANKRUPTCY COURT, NORTHERN DISTICT OF GEORGIA

                                             MATERIALS PREPARED WITH THE ASSISTANCE OF

                                            AMBER BAGLEY AND ELIZABETH ROSE, LAW CLERKS

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                                                  15TH ANNUAL SOUTHEAST BANKRUPTCY WORKSHOP

                                                           ABI SOUTHEAST SEMINAR 2010
                                                    RECENT DEVELOPMENTS - VUSINESS BANKRUPTCY

                     I.              CREDIT BIDDING § 363(k)

                     A.              Generally

                                     1. In re Philadelphia Newspapers, LLC, 418 B.R. 548 (E.D. Pa. 2009) aff’d 599 F.3d
                                        298 (3d Cir. 2010)

                                     The facts of In re Philadelphia Newspapers, LLC will be more thoroughly discussed in
                                     Part III’s summary of the recently decided Third Circuit opinion, but the district court’s
                                     summary of applicable Third Circuit law with respect to credit bidding provides a helpful

                                     Section 363(k) of the Bankruptcy Code codifies the secured creditor's right to credit bid
                                     with respect to asset sales conducted outside the ordinary course of business. Section 363
                                     deals with the sale of estate property outside the ordinary course of business and
                                     subsection (k) specifically provides that:

                                            at a sale under subsection (b) of this section of property that is subject to a
                                            lien that secures an allowed claim, unless the court for cause orders
                                            otherwise the holder of such claim may bid at such sale, and, if the holder
                                            of such claim purchases such property, such holder may offset such claim
                                            against the purchase price of such property. 11 U.S.C. § 363(k).

                                     A secured creditor who is granted the right to credit bid pursuant to section 363(k) is
                                     entitled to bid the full face value of the claim, rather than being limited to the economic
                                     value of the subject collateral. Cohen v. KB Mezzanine Fund II et al., (In re SubMicron
                                     Sys. Corp.), 432 F.3d 448, 459 (3d Cir. 2006).

                                     2.     In re Requilman, 2009 WL 4929397, *5 (Bankr. N.D. Cal. 2009)

                                     Within the context of a Chapter 7 Truth in Lending rescission suit, the court denied
                                     Trustee’s strategy to lien strip Debtor’s allegedly wholly unsecured junior mortgage to
                                     allow Trustee to comply with the court’s holding that required a tender of the net loan
                                     balance on the first mortgage as a condition of rescission. The court explained that
                                     Trustee’s pre-sale proposed value, which provided the value basis for the strip off, would
                                     undermine the protection afforded secured creditors. Specifically, § 363(k) “provides a
                                     check upon the trustee’s proposed sale price, by permitting the secured creditor to take
                                     the collateral if the proposed sales price would not pay the claim in full and the creditor
                                     believes it could do better.”

                     B.              Who can credit bid in syndicated or participant loan transactions
                                     The following courts have held that concluding a § 363(b) sale does not require an

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                                     amendment of any loan document and does not limit the agent's power to act in
                                     connection with a § 363 sale.

                                     1.     In re Chrysler LLC, 405 B.R. 84 (Bankr. S.D.N.Y. 2009) aff’d 576 F.3d 108
                                            (2d Cir. 2009), judgment vacated and dismissed as moot, In re Chrysler LLC,
                                            592 F. 3d 370 (2d Cir. 2010)

                                     This is an appeal from an Order of the District Court, which affirmed the Bankruptcy
                                     Court Order authorizing the sale of substantially all the assets of Chrysler LLC to New
                                     CarCo Acquisition LLC. The Second Circuit granted a stay of the underlying Order and
                                     considered the matter on an expedited basis.

                                     Debtor filed a “pre-packaged” Chapter 11 case on April 30, 2009. The key element of
                                     the Chapter 11 was a sale of substantially all of Debtor’s operating assets under § 363 of
                                     the Bankruptcy Code to New Chrysler in exchange for the assumption of certain
                                     liabilities and $2 billion cash. DIP and sale financing would come from the United
                                     States Treasury and Export Development Canada. The purchaser was to be owned 55%
                                     by an employee benefit entity created by the United Auto Workers, 20% by Fiat, 8% by
                                     the US Treasury and 2% by Canada. The sale was approved by the Court.

                                     The Sale Order is challenged on four grounds: (1) the sale is impermissible as a “sub
                                     rosa” plan; (2) the sale violates the rights of the Indiana Pensioners who hold a portion of
                                     the secured debt of Debtor; (3) the use of TARP funds to finance the sale is
                                     unconstitutional; and (4) the sale impermissibly extinguishes the rights of certain tort
                                     claimants. The Circuit Court rejects these challenges and affirms the Bankruptcy Court.

                                     The bondholders argue that the U.S. Treasury should not be allowed to credit bid because
                                     the pre-petition loan was an equity infusion, not a loan. The Court considers the factors
                                     used in determining whether to recharacterize a debt as equity—title and substance of the
                                     underlying transaction—and determines that the factors weigh in favor of the transaction
                                     being a true loan. Moreover, there is no basis to subordinate the loan on the equitable
                                     subordination factors set forth in Mobile Steel. Creditors were not harmed in any way.
                                     The government is free to assign its debt to the purchaser for use in a credit bid.

                                     Loan documents were also instructive since only 7.5% of debt holders objected to asset
                                     sale. By the terms of the First Lien Credit Agreement, the bondholders agreed to be
                                     bound by the administrative agents’ action made at the request of lenders holding a
                                     majority of indebtedness.

                                     2.     In re GWLS Holdings, Inc., slip op., No. 08-12430, 2009 WL 453110 (Bankr.
                                            D. Del. Feb 23, 2009)

                                     Debtors sought approval of the sale of substantially all of its assets to its First Lien
                                     Lenders as a result of a credit bid. Of the $337 million in first lien debt, holders of all but
                                     $1 million consented to the sale. Grace Bay Holdings (“Grace Bay”), a holder of $1
                                     million in first lien debt, objected. Grace Bay relied on contract provisions to assert that

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                                     unanimous consent was required for any modification of the agreement. The
                                     bankruptcy court rejected this argument, holding that the credit agreement only prohibits
                                     waivers and modifications of the loan documents themselves without unanimous consent,
                                     not credit bidding. Chrysler cites this case for the same proposition.

                                     The Grace Bay credit agreement provided that the First Lien Agent could "exercise such
                                     powers as are delegated to such Agents by the terms hereof and thereof together with
                                     such actions and powers as are reasonably incidental thereto." The Court concluded that
                                     this authority included actions taken pursuant to § 363(k). Additional broad language
                                     gave the First Lien Agent "all rights and remedies of a secured party under New York or
                                     any applicable law." Any applicable law would include the Bankruptcy Code and §
                                     363(k) specifically. The bankruptcy court determined that the First Lien Agent had
                                     authority to credit bid on behalf of all First Lien Lenders, including Grace Bay, and
                                     allowed the credit bid and the sale of Debtors' assets free and clear of Grace Bay's $1
                                     million lien.

                                     3.     In re Metaldyne Corp., 409 B.R. 671 (Bankr. S.D.N.Y.2009)

                                     Debtors moved for entry of order approving sale of all or substantially all of their assets
                                     on a bid submitted by collateral agent (MDI) for participating prepetition term lenders.
                                     The dissenting lender (BDC) objected to the credit bid component of collateral agent's
                                     bid. BDC owned $3.5 million of $425 million secured debt and objected to (1) MDI’s
                                     use of 100% of the debt in the bid and (2) the release of the BDC’s liens without consent.
                                     BDC relies upon a provision in the credit agreement that prohibits any modifications or
                                     amendments without consent of certain parties. Debtors argue that other provisions
                                     give MDI a broad grant of authority to exercise any and all rights afforded to a secured
                                     party under the “Uniform Commercial Code or other applicable law.”

                                     The bankruptcy court disagreed with BDC's interpretation of MDI’s limited right to
                                     credit bid. Addressing several specific provisions set forth by BDC as a restriction on
                                     MDI’s right to credit bid, the bankruptcy court determined provisions related to auctions
                                     were limited to those under the Uniform Commercial Code, not an auction conducted by
                                     the Debtors under § 363 of the Bankruptcy Code. Further, another provision provided
                                     MDI, as agent, authority to determine "in its sole and absolute discretion" whether the
                                     collateral is sold in its entirety or in separate parcels. Such provisions, therefore, did not
                                     restrict the MDI’s right to credit bid.

                                     “While the loan documents restrict the right of the Agent to unilaterally alter or waive
                                     any provisions in the agreements without the various constituent lenders' consent, nothing
                                     in the agreements prohibits [MDI] from exercising rights that are consistent with § 363(k)
                                     of the Bankruptcy Code. The Court concludes that the Agent properly credit bid 100% of
                                     the term debt to purchase substantially all of the Debtors' assets in the auction and
                                     released the lien with respect to the remaining collateral that the Debtors will retain.”


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                                     The bankruptcy court also determined that there are sound business reasons for the sale of
                                     substantially all of the Debtors’ assets at this time. The evidence at the hearing showed
                                     that the value of the Debtors' business is declining rapidly and that the consideration MDI
                                     offered, which included a cash price, plus a credit bid of the entire prepetition term loan
                                     debt, plus the assumption of all cure costs, plus the assumption of $8.5 million in
                                     administrative expense claims, and a provision of $2.5 million to fund litigation, far
                                     exceeded any other offer for Debtors' assets. The bankruptcy court also noted that time
                                     was of the essence given the DIP lenders unwillingness to fund these cases beyond the
                                     next few weeks.

                                     4.     In re Electroglas, Inc., No. 09-12416-PJW (Bankr. D. Del. Sept.23, 2009)

                                     The bankruptcy court denied the right to credit bid for two separate holders of secured
                                     notes. The court found that these creditors could not bypass the indentured trustee and
                                     directly credit bid. Relying on prepetition credit agreements, the court found that the
                                     groups attempting to credit bid, including one majority group, were only allowed to
                                     prescribe procedures for the trustee’s enforcement of remedies. The court held that
                                     under the prepetition credit agreement, only the indentured trustee under a syndicated
                                     loan facility had the authority to submit a credit bid.

                       C.             Competing Bids: Credit Bids versus Cash Bids

                                      1.     In re Foamex Int'l Inc., No. 09-10560, (Bankr. D. Del. May 27, 2009)

                                      At the conclusion of a § 363 auction, there were two bids for substantially all of Debtors'
                                      assets. One was an all cash bid for $151.5 million by Wayzata Investment Partners
                                      (“Wayzata”, the same buyer from Propex, infra) and the other was a credit bid of $155
                                      million of debt, representing 51% of the aggregate $325 million in debt. The credit bid
                                      included a cash-out option for the non-bidding First Lien Lenders at an implied value of
                                      $146.5 million. (The original credit bid was for all of the indebtedness under the First
                                      Lien Term Loan Agreement and provided no cash-out option, effectively forcing the
                                      non-bidding lenders to accept a minority equity interest. The debtors rejected this bid
                                      and the majority lenders then offered the cash-out option.) The bid also included cash
                                      sufficient to fund the cash obligations under the purchase agreement.

                                      The Debtors selected the credit bid and sought approval of the sale from the bankruptcy
                                      court. Wayzata and the non-bidding lenders objected. Wayzata, which held
                                      approximately five percent of the First Lien Loans, argued that its all cash bid would
                                      have yielded a higher payout than the credit bid's cash-out option.

                                      Wayzata asserted that if the court did not require the majority lenders to provide a cash
                                      out option to the non-bidding lenders at a price that was equal to the full amount of their
                                      bid, the majority lender group could continue to outbid potential buyers without
                                      providing any increased return to the non-bidding lender. It offered the following as a
                                      hypothetical: if Wayzata cash bid $292 million, the majority lender group would be


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                                     permitted to credit bid $295 million but still only offer the non-bidding lenders the same
                                     $146.5 million cash-out option. Thus, the non-bidding lenders would have to choose
                                     between taking a minority equity interest or the same return they would receive under
                                     the present offer of a $155 million credit bid. However, they would be denied the vastly
                                     increased return from a $292 million cash only bid because the credit bid was being
                                     counted on a dollar-for-dollar basis. The only way that Wayzata could win the auction
                                     would be an all cash bid that exceeded the total amount of the First Lien Lenders’ debt.
                                     Whatever amount of cash the majority lenders offered to the non-bidding lenders would
                                     be both arbitrary and less than a maximum recovery.

                                     Wayzata also argued that this proposed sale would violate a term of the credit
                                     agreement, which required equal and ratable distributions among all lenders. The value
                                     of the minority shares in the new company would be worth less than the majority shares.
                                     Since there was no valuation of the new equity, the cash-out offer was completely
                                     arbitrary and may not equal the value of the majority equity in the new company.
                                     Finally, Wayzata attempted to differentiate the holding in GWLS Holdings, Inc. based on
                                     the size of the dissenting lenders. Here, Wayzata held five percent of the debt and the
                                     non-bidding lenders held 35% of the debt compared to Grace Bay, the lone dissenting
                                     lender in GWLS Holdings, Inc., which held less than 1% of the secured debt.

                                     The non-bidding lenders argued that the Agent did not have the authority to credit bid
                                     without their consent. Like Wayzata, the dissenting lenders also claimed that the
                                     cash-out option had to be at the full face value of the credit bid (i.e., $155 million), not
                                     the discounted offer (i.e., $146.5 million), in light of the fact that there was a higher all
                                     cash bid (i.e., $151.5 million). The non-bidding lenders cited to the security agreement
                                     which authorized the Agent to purchase the collateral and to "use and apply any of the
                                     Secured Obligation owed to such person as a credit on account of the purchase price of
                                     the Pledged Collateral or any part thereof payable by such person at such sale." They
                                     interpreted the emphasized language as limiting the Agent's right to credit bid only the
                                     claims of the consenting lenders. Since the majority lenders could not credit bid any
                                     amount of the dissenting lenders claims, they should not be able to force the dissenting
                                     lenders to take less than the full value of the winning bid.

                                     The bankruptcy court granted the motion to approve the sale, overruling the objections
                                     of Wayzata and the non-bidding lenders.

                                     2.     In re Propex, Inc., No. 08-10249, (Bankr. E.D. Tenn. Mar. 30, 2009)

                                     Debtors sought to prohibit credit bidding based on the proposed sale with an all cash
                                     bidder, Xerxes Operating Company, LLC, an affiliate of the DIP lender, Wayzata
                                     Investment Partners, LLC (“Wayzata” see Foamex, infra) for $61 million. In Debtors’
                                     Motion to Approve the Bidding Procedures (Docket No. 890), Debtors asserted that
                                     allowing credit bids would chill bidding, considering the substantial size of the
                                     prepetition term debt ($230 million) compared to the reasonable range of the assets’
                                     value. Debtors also asserted that the availability of credit bidding would discourage


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                                     potential bidders from spending time and money to conduct due diligence and submit a
                                     bid when they would face an insurmountable credit bid. Debtors also argued that a
                                     cash bid was necessary to satisfy the existing DIP facility, cure contracts that were to be
                                     assumed and assigned, and pay administrative expenses. In addition, Debtors
                                     submitted that a pending adversary proceeding brought by the creditors’ committee
                                     demonstrated that the validity of the lien that would support credit bidding was disputed.
                                     Finally, Debtors argued that it was unclear whether the prepetition lenders seeking the
                                     right to credit bid were eligible to submit a bid and that such a determination would
                                     cause the sale to be delayed. Debtors were asserting that there were competing
                                     interpretations of the relevant intercreditor agreement, which may have required
                                     unanimity among the lenders or majority of the total debt. (The Agent asserted that
                                     only a majority was required to have access to bid the full amount of the obligation.)

                                     The Agent for the prepetition lenders set forth the following responses. The Agent
                                     objected to Debtors’ attempt to exclude credit bidding in favor of the stalking horse
                                     bidder, an affiliate of the DIP lender. The Agent argued that credit bidding would not
                                     chill the bidding process and that the size of a potential credit bid could not qualify as
                                     "cause" to disallow it under § 363(k) because cause would then be found in nearly every
                                     case. No bad faith was alleged, and the Agent propounded that cause should a more
                                     narrow concept. It cited cause examples from other cases, including collusion between
                                     the debtor and secured creditors designed to prevent certain creditors from collecting on
                                     their claims; claims of senior creditors would not be satisfied; and a failure to comply
                                     with bid procedures. The Agent also asserted that the DIP lender could get paid
                                     through a partial cash bid. The Agent also challenged the purported cash nature of the
                                     proposed purchaser, the stalking horse bid. Instead, it characterized the all cash bid as
                                     a credit bid with a cash component.

                                     At the hearing on Debtors’ Motion to Approve Bid Procedures, the parties agreed to
                                     delay the court's decision on the issue until a credit bid was actually submitted. The
                                     prepetition lenders submitted a bid two weeks later. The credit bid offered the
                                     non-bidding lenders cash payment in an amount equal to the amount that they would
                                     receive if the credit bid had been an all cash bid, resulting in the minority of non-bidding
                                     lenders getting a choice between a cash buyout or equity.

                                     The court authorized credit bidding and the debtors conducted an auction. There were
                                     three qualified bidders at the auction. The debtor selected the all cash $82 million bid by
                                     the stalking horse bidder as the highest and best bid.

                       D.            Credit Bidding in a Plan - Indubitable Equivalent 1129(b)(2)(A)(ii)

                                     1.     In re Pacific Lumber Co., 584 F.3d 229 (5th Cir. 2009)

                                     The bankruptcy court confirmed a plan that provided a minimum cash payout to
                                     noteholders that was deemed the indubitable equivalent of its claim (following a
                                     valuation hearing), notwithstanding a provision barring credit bidding. The certified


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                                     direct appeal asserted included the restriction on credit bidding and several other plan
                                     confirmation procedures. A stay pending appeal was denied. The plan was
                                     substantially consummated but equitable mootness did not bar review of certain legal

                                     The Fifth Circuit disagreed with the bankruptcy court’s analysis that § 1129(b)(2)(A)(ii)
                                     was inapplicable because the reorganization plan constituted a transfer rather than a sale.
                                     It found that a sale occurred and subsection (ii) could have applied. However the
                                     language of § 1129(b)(2)(A)’s cramdown provision provides for three disjunctive
                                     alternatives and is not exhaustive, emphasizing use of the word “includes.”

                                     The Fifth Circuit explained the cramdown provision and the effect of the cash payment
                                     as follows:
                                             Congress did not adopt indubitable equivalent as a capacious but
                                             empty semantic vessel. Quite the contrary, these examples focus
                                             on what is really at stake in secured credit: repayment of principal
                                             and the time value of money. Clauses (i) and (ii) explicitly protect
                                             repayment to the extent of the secured creditors' collateral value
                                             and the time value compensating for the risk and delay of
                                             repayment. Indubitable equivalent is therefore no less demanding
                                             a standard than its companions. The MRC/Marathon Clause (iii)
                                             plan obviated both of the bases for protection by offering cash
                                             allegedly equal to the value of the Timberlands. No need arose to
                                             afford collateral or compensate for delay in repayment. Whatever
                                             uncertainties exist about indubitable equivalent, paying off
                                             secured creditors in cash can hardly be improper if the plan
                                             accurately reflected the value of the Noteholders' collateral.

                                     The noteholders argued that by eliminating their right to credit bid, that they were
                                     deprived of the potential upside value of the collateral, which would change the value of
                                     the indubitable equivalent. The Fifth Circuit noted, however, that the indubitable
                                     equivalent protects the value of a claim, not the potential value. The valuation
                                     determination, also challenged by the noteholders, was also affirmed based on the
                                     bankruptcy court’s specific findings as to flaws with the noteholders’ appraisal
                                     methodology and assumed facts. The Fifth Circuit held that through payment of the
                                     noteholders’ allowed secured claim, the plan did not violate the absolute priority rule,
                                     was fair and equitable, and satisfied § 1129(b)(2)(A)(iii).

                                     2.     In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010)

                                     The bankruptcy court denied Debtors’ proposed auction and sale procedures under a
                                     proposed plan that did not permit credit bidding by the secured lenders. Under the
                                     proposed reorganization plan, a sale of substantially all of the Debtors’ assets would be
                                     sold at a public auction and the assets would transfer free and clear liens. Debtors
                                     simultaneously entered into an APA with the stalking horse bidder. (A majority


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                                      interest in the stalking horse bidder held an equity interest in the parent company until
                                      one day prior to APA was signed.) The plan proposed that the secured lenders’ claims
                                      would be paid in cash, and the proposed bidding procedures precluded these lenders
                                      from credit bidding. Debtors stated that the restriction on credit bidding was proper
                                      since the sale was conducted through a plan and under § 1123(a) and (b), not § 363.
                                      Debtors relied on the indubitable equivalent prong under § 1129(b)(2)(A)(iii) to justify
                                      the restriction on credit bidding, but the bankruptcy court noted that the plan sale was
                                      structured under § 1129(b)(2)(A)(ii) in every other respect, and that code subsection
                                      specifically provides for credit bidding.

                                     On an expedited appeal, the district court reversed, adopting a plain language approach -
                                     1129(b)(2) provides alternative treatment under cramdown and is disjunctive. "No
                                     statutory right to credit bid exists for a secured credit whenever the debtor chooses to sell
                                     its collateral under the indubitable equivalent prong." The district court limited its
                                     holding to preconfirmation auctions.

                                     The Third Circuit affirmed, relying on the unambiguous plain language of §
                                     1129(b)(2)(A). The disjunctive “or” in the cramdown statute lead the Third Circuit to
                                     explain the options under § 1129(b)(2)(A): “The three subsections of § 1129(b)(2)(A)
                                     each propose means of satisfying a lender's lien against assets of the bankruptcy estate.
                                     Subsection (i) provides for the transfer of assets with the liens intact and deferred cash
                                     payments equal to the present value of the lender's secured interest in the collateral.
                                     Subsection (ii) provides for the sale of the collateral that secures a lender free and clear of
                                     liens so long as the lender has the opportunity to “credit bid” at the sale (i.e., offset its bid
                                     with the value of its secured interest in the collateral) with the liens to attach to the
                                     proceeds of the sale. Subsection (iii) provides for the realization of the claim by any
                                     means that provides the lender with the “indubitable equivalent” of its claim.” The
                                     Third Circuit further explained that “[s]ection 1129(b)(2)(A)(iii) states that a plan of
                                     reorganization is fair and equitable if it provides “for the realization by the holders of the
                                     indubitable equivalent of [allowed secured] claims.” Subsection (iii), unlike subsection
                                     (ii), incorporates no reference to the right to credit bid created in § 363(k). A plain
                                     reading of § 1129(b)(2)(A)(iii) therefore compels the conclusion that, when a debtor
                                     proceeds under subsection (iii), Congress has provided secured lenders with no right to
                                     credit bid at a sale of the collateral.” The Third Circuit also relied on the recent Fifth
                                     Circuit decision of In re Pacific Lumber, 584 F.3d 229 (5th Cir. 2009), which held that
                                     full cash equivalent of their unsecured claims satisfied the indubitable equivalent of the
                                     cramdown provision.

                                     Judge Ambro issued a dissenting opinion, interpreting the statute while considering its
                                     context, purpose, and congressional intent. He also highlights some more of the facts
                                     with respect to insider and equity ties relied upon by the bankruptcy court. Specifically,
                                     he notes that “credit bidding appeared necessary to ensure fairness in light of the insider
                                     nature of the Stalking Horse Bidder, the extensive “Keep it Local” campaign, and its
                                     perception that the debtors' strategies were designed “not to produce the highest and best
                                     offer.” He also explained that the decision to deny credit bidding also provided more


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                                     leverage to steer the sale to the favored stalking horse bidder. Additionally he notes that
                                     the stalking horse bidder is the only party that would benefit from an undervaluation of
                                     the assets.

                                     Judge Ambro disagreed that the statute’s plain meaning was unambiguous and stated that
                                     this is evident by the different interpretations by the bankruptcy and district courts. He
                                     reframed the interpretation of § 1129(b)(2)(A) by putting it within the context of a
                                     provision governing the “fair and equitable” treatment of a dissenting, impaired class. He
                                     asserts that the 3 options are requirements for distinct scenarios, not “mere examples.”
                                     “[C]lause (i) applies to all situations, including plan sales, where the lien on the sold
                                     collateral is retained. Clause (ii) applies to all plan sales that sell the collateral lien-free. It
                                     provides specific requirements to apply when a plan proposes such a sale. Clause (iii) is a
                                     general provision often regarded as a residual “catch-all” that applies to the balance of
                                     situations not addressed by clauses (i) and (ii).” He further explains that if the
                                     indubitable equivalent prong is used to accomplish a sale free and clear of liens, then (ii)
                                     and (iii) are in conflict. He would read congressional intent to limit the indubitable
                                     equivalent prong to situations not addressed by the prior prongs. Judge Ambro
                                     concluded that he would reverse the District Court’s judgment and restore the
                                     presumptive right to credit bid.


                     A.              Boyer v. Crown Stock Distribution, Inc. (In re Boyer), 587 F.3d 787 (7th Cir. 2009)

                              The Seventh Circuit held that the Uniform Fraudulent Transfer Act can apply to
                     leveraged buyouts and that a leveraged buyout that leaves a corporation drained of cash at the
                     time of the transfer and highly likely to enter bankruptcy can be a fraudulent transfer even if the
                     corporation continues to operate for another three and a half years before filing bankruptcy.
                              The Debtor corporation (“New Crown”), came into existence in 2000 and filed a Chapter
                     7 petition in 2003. New Crown was the result of the Debtor’s predecessor’s (“Old Crown”)
                     agreement to sell all its assets to an individual named Smith. Prior to the sale, Old Crown
                     employed Smith so that he could evaluate the business. Then Smith formed New Crown, using
                     the same business name because it was among the sold assets.
                              To accomplish the sale, Smith took out a loan secured by all the assets of the company.
                     Old Crown received the loan proceeds in cash and a promissory note from New Crown. The
                     promissory note, which was also secured by all the assets of the company, would generate
                     $232,000 in annual interest but New Crown was only required to pay $100,000 a year on the
                     note. Smith personally contributed only $500 toward the purchase. Although the sale was for
                     all its assets, Old Crown was permitted to transfer money from its bank account just prior to
                     closing. Those funds, plus the loan proceeds, were distributed to Old Crown’s shareholders.
                     Upon the distribution, Old Crown ceased operating.
                              New Crown operated for three and a half years, during which time it made two of the
                     scheduled payments to Old Crown, and then filed for bankruptcy. The Chapter 7 Trustee filed
                     an adversary proceeding, arguing that the loan proceeds, the payments on the promissory note,
                     and the funds that Old Crown withheld from the sale were part of a leveraged buyout and that the


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                     buyout was a fraudulent transfer pursuant to 11 U.S.C. § 544(b) and the Uniform Fraudulent
                     Transfer Act. The bankruptcy court held that the sale was not a leveraged buyout but involved
                     a fraudulent transfer and awarded the Trustee the loan proceeds and the post-sale interest
                     payments, but also held that the funds withdrawn from the bank account prior to closing and paid
                     to Old Crown’s shareholders was a legitimate dividend paid out of cash that belonged to Old
                     Crown.      The district court confirmed that judgment. Both parties appealed.
                              The Seventh Circuit determined that whether this transaction was a leveraged buyout
                      would not establish whether it was a fraudulent transfer. Fraudulent transfer law is about the
                      substance of transactions, not about form. Nonetheless, the Court held that this transaction
                      was a leveraged buyout, that it was a fraudulent transfer, and that the dividend was part of that
                      transfer. First the Court addressed the reluctance of some courts to apply UFTA’s language to
                      LBOs by stating that, when both the old and new Crowns were closely held corporations, the
                      economic arguments in favor of lenient treatment for LBOs do not apply.
                              Second, the Court addressed the claim that the sale was for assets, not stock. The
                      Court found that the sale of all the assets was actually a sale of the ownership of the corporation
                      because Old Crown became only a shell, New Crown operated under the same name, and
                      creditors had no notice that they were dealing with a new corporation. Next, the Court
                      addressed the defense that New Crown’s ability to avoid bankruptcy for three years proved that
                      the sale was not a fraudulent transfer. The Court found that the sale encumbered all the
                      company’s assets, reduced its ability to borrow funds, and forced New Crown to engage in
                      continual borrowing to survive. Those facts indicated that New Crown had made payments
                      and incurred debts without receiving reasonably equivalent value in return. New Crown’s
                      ultimate failure, however, was not the determining factor of whether a fraudulent transfer had
                      occurred. The company’s lack of unencumbered assets and heavy debt load when the sale was
                      made showed that the transfer was fraudulent and not for reasonably equivalent value.
                              Finally, the Court held that the dividend that Old Crown paid to its shareholders from
                      money withdrawn just prior to the sale was part of the transfer. The dividend represented 50%
                      of the company’s prior year’s profits and left the company drained of much-needed cash. In
                      light of those facts, the defendants failed to prove that the dividend was a normal distribution of
                      profits. Finally, the shareholders were not protected as either immediate or mediate transferees
                      because they did not take for value.

                       B.     Tousa, Inc. v. Citicorp North America, Inc. (In re Tousa, Inc.), 422 B.R. 783 (Bankr.
                       S.D. Fla. 2009)

                               The Bankruptcy Court held that when subsidiaries took on debt and granted liens to a
                       new lender in order to settle claims that another creditor had against the subsidiaries’ affiliated
                       corporations, the obligations incurred and liens granted were fraudulent transfers. The Court
                       further held that both the new lender and the affiliates’ creditor could be liable for those
                       transfers. Finally, the Court held that the savings clauses in the loan could not be used to
                       contract around bankruptcy law or forfeit the fraudulent transfer claims of a debtor’s estate.
                               TOUSA, Inc., and one of its subsidiaries were parties to litigation regarding default on
                       debt owed to a creditor of those two corporations. To settle the litigation, TOUSA caused
                       many of its subsidiaries to borrow money from a new creditor, which debt was secured by liens
                       on substantially all of the subsidiaries’ assets. The subsidiaries at issue here were not parties


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                       to the original debt or the settled litigation. Accordingly, the committee of unsecured creditors
                       sought to avoid the transfers to both the litigation creditor whose claims were settled and to the
                       creditor on the new loans.
                               The Bankruptcy Court determined that it was appropriate to consider each subsidiaries’
                       financial health separately. Each corporation filed an independent bankruptcy, the cases were
                       not substantively consolidated, no party alleged the subsidiaries were merely alter egos of
                       TOUSA, and TOUSA was capable of separating the assets and liabilities of each corporation.
                       The Bankruptcy Court found that the subsidiaries were insolvent before the loans and were
                       more deeply insolvent following the loans.
                               The Court found that the subsidiaries had transferred property interests to a creditor for
                       the benefit of a third party without receiving reasonably equivalent value. Plaintiffs proved
                       that no direct benefits went to the subsidiaries and the defendants failed to prove that the
                       subsidiaries enjoyed any indirect benefits as a result of the transfers. The subsidiaries were not
                       debtors to the original litigation creditor and did not benefit from the settlement of those claims.
                       The indirect benefits enjoyed by the subsidiaries, such as “business ‘synergies’” with TOUSA,
                       were benefits the subsidiaries would enjoy regardless of the transfer, not as a result of the
                               The Court held that both the litigation creditor and the loan creditors were parties from
                       which the transfer could be recovered. The loan creditors had sufficient notice of the
                       subsidiaries’ insolvency and that personnel of their agent knew facts that the subsidiaries would
                       probably not receive reasonably equivalent value. The litigation creditor was a party for
                       whose benefit the transfer was made and received the loan proceeds from the subsidiaries
                       without providing reasonably equivalent value.
                               The Court rejected the defendants’ attempt to use savings clauses in the loan documents
                       to avoid liability. While the Court rejected the savings clauses for various contract law
                       reasons, the Court also held that the savings clauses were unenforceable because they were
                       agreement provisions that would divest the debtors’ estates of fraudulent transfer claims, which
                       were estate property, and therefore the clauses were unenforceable under 11 U.S.C. §
                       541(c)(1)(B). Additionally, the savings clauses were an unenforceable attempt to contract
                       around the protections of § 548.

                       C.     Contemporary Indus. Corp. v. Frost (In re Contemporary Indus. Corp.), 564 F.3d 981
                       (8th Cir. 2009)

                               The Eighth Circuit held that payments made pursuant to an leveraged buyout agreement
                       are exempt as “settlement payments” under 11 U.S.C. § 546(e) when the purchaser delivers
                       funds to a bank, which subsequently delivers the funds to the selling stockholders of a
                       privately-held corporation. Also, state law claims that would render § 546(e) meaningless and
                       frustrate the purpose of the statute must fail.
                               In December of 1995, the Defendant shareholders sold their shares to an outside
                       investment group in a leveraged buyout. The investment group borrowed funds to pay the
                       shareholders and pledged Debtor’s assets as collateral. The investment group deposited the
                       funds and the Defendants deposited their shares with First National Bank of Omaha. The
                       parties entered into an escrow agreement regarding distributions of the funds to the Defendants.
                       In February of 1998, Debtor filed its Chapter 11 petition. Debtor and its unsecured creditors’


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                       committee then filed an adversary to recover the payments to Defendants. The Bankruptcy
                       Court and the District Court held that the payments to Defendants were exempt from avoidance
                       as settlement payments. The Eighth Circuit affirmed, based on the plain language of the
                                First, the Circuit Court concluded that the phrase “settlement payment” should be
                       broadly construed and should include its definition as a term of art in the securities trade. The
                       transfer of cash or securities to complete a securities transaction, therefore, is a settlement
                       payment. The Eighth Circuit then followed opinions of the Third and Tenth Circuits that held
                       that payments made to shareholders as part of a leveraged buyout are settlement payments under
                       the plain meaning of the statute. Given the “sufficiently plain and unambiguous meaning” of §
                       546(e), the Eighth Circuit rejected the argument that because transfers of privately held stock
                       would not implicate the same public policy concerns as publicly traded stocks, those transfers
                       should be excluded from the general rule. The catchall language defining “settlement
                       payments” in 11 U.S.C. § 741(8) led the Court to conclude that the phrase should be defined
                       broadly enough to include transfers of private stocks.
                                The Eighth Circuit then determined that funds deposited with a bank and then paid to
                       shareholders qualified as settlement payments “made by or to” a financial institution, even when
                       the bank never acquired a beneficial interest in the funds. In its analysis, the Court followed
                       the Third Circuit and rejected an Eleventh Circuit decision that required the bank to obtain a
                       financial interest before payments are exemptible.
                                Finally, the Court rejected state law claims for unjust enrichment and illegal or excessive
                       shareholder distributions because those claims would permit the recovery of the payments held
                       unavoidable under § 546(e). The Court held that the Supremacy Clause provides for federal
                       law to trump state law so that federal purposes are not frustrated and so that § 546(e) is not
                       rendered meaningless.

                       D.            QSI Holdings, Inc. v. Alford (In re QSI Holdings, Inc.), 571 F.3d 545 (6th Cir. 2009)

                               The Sixth Circuit held that the 11 U.S.C. § 546(e) limitation on the Trustee’s avoidance
                       powers extends to transfers related to leveraged buyouts that involve privately held securities.
                               Pursuant to the leveraged buyout agreement at issue, the Plaintiff corporation merged
                       with another corporation and continued business under Plaintiff’s name. Plaintiff’s
                       shareholders were paid in cash and stocks for their equity interests. The new entity pledged its
                       assets as collateral for the loan it obtained to pay Plaintiff’s shareholders.
                               Plaintiffs filed this adversary seeking to avoid the transfers to its shareholders as
                       constructively fraudulent conveyances. Defendants asserted that the transfers were settlement
                       payments made by a financial institution and were therefore exempt from avoidance pursuant to
                       § 546(e). The Bankruptcy and District Courts both agreed with Defendants.
                               On appeal, Plaintiffs argued that the leveraged buyout transfers were not exempted from
                       avoidance because it included the purchase of non-public securities. The Sixth Circuit
                       followed the Eighth Circuit’s holding in Contemporary Indus. Corp., finding that nothing in the
                       statute suggests Congress intended to exclude privately held stocks from the definition of
                       “settlement payments.” The Court also distinguished the present case from an Eastern District
                       of New York bankruptcy case, In re Norstan Apparel Shops, Inc., 367 B.R. 68 (Bankr. E.D.N.Y.
                       2007), on the grounds that the present case involved the merger of nearly equal companies with


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                       privately held stocks of substantial value, such that unwinding this settlement would have no
                       less impact than one involving publicly traded securities. The Sixth Circuit also followed the
                       Eighth Circuit’s holding that the statute did not require the financial institution involved in the
                       transfer to have a “beneficial interest” in the transferred funds.

                       E.    Brandt v. B.A. Capital Co. LP (In re Plassein Int’l Corp.), 590 F.3d 252 (3d Cir.

                               The Third Circuit held that its prior ruling in Lowenschuss v. Resorts Int’l, Inc. (In re
                       Resorts Int’l, Inc.), 181 F.3d 505 (3d Cir. 1999) was not limited to leveraged buyouts involving
                       publicly traded securities.
                               The Debtor corporation was formed to acquire several corporations through leveraged
                       buyouts. Prior to the leveraged buyout, each of the corporations was privately-held and
                       typically had only a few shareholders. To accomplish the buyout, each acquired corporation
                       agreed to be jointly and severally liable for all the funds Debtor borrowed for all of the buyouts.
                       Each corporation, therefore, assumed debts far exceeding its assets.
                               The Trustee in Debtor’s bankruptcy sought to avoid the transfer as a fraudulent
                       conveyance. The shareholders argued that the payments were “settlement payments” protected
                       by § 546(e). The Bankruptcy Court and District Court both agreed with the shareholders and
                       the Third Circuit here affirmed those decisions.
                               The Trustee argued that the Court’s prior decision in Resorts was not controlling
                       because Resorts involved publicly traded securities. Further, the Trustee argued that the
                       Court’s definition in Resorts of “securities trade” was inappropriately broad because that term
                       should refer only to the business of buying publicly traded securities.
                               The Third Circuit rejected both of the Trustee’s arguments and confirmed that the
                       Resorts decision, holding that transfers related to leveraged buyouts were “settlement
                       payments” for the purposes of § 546(e), applied equally to publicly and privately traded

                       F.     Stanley v. US Bank National Association (In re TransTexas Gas Corp.), 597 F.3d 298
                       (5th Cir. 2010)

                              The Fifth Circuit held that severance payments made within the two years pre-petition
                       were fraudulent transfers when the recipient was an insider at the time the obligation was
                       incurred by Debtor and when Debtor did not receive reasonably equivalent value. Further, the
                       judgment requiring the recipient to repay the fraudulent transfers was restitutionary in nature
                       and therefore not a “loss” for insurance purposes.
                              The Debtor corporation filed its first bankruptcy in 1999. As part of its reorganization,
                       Debtor entered into a three-year employment agreement with Appellant, who served as Debtor’s
                       CEO. As Debtor continued to struggle financially, Debtor’s legal counsel suggested that
                       Appellant could be fired for cause. Approximately two years into the agreement, Debtor
                       decided to terminate Appellant’s employment. The parties negotiated the terms of ending
                       Appellant’s employment contract. Under the original contract, Appellant was entitled to $3
                       million in severance if he was terminated without cause and half that amount if he was
                       terminated for cause. Under the Separation Agreement, which superceded the employment


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                       agreement, Appellant would be paid $3 million and he would resign. Debtor also covered
                       Appellant under an executive and organization liability insurance policy. Appellant received
                       just over $2 million before Debtor filed its second bankruptcy in November of 2002. The
                       liquidating trustee sought to avoid the severance payments as fraudulent transfers and as
                       unlawful preferences. The District Court held that the payments were fraudulent transfers, but
                       not unlawful preferences. In a separate action, the insurance provider sought a declaratory
                       judgment that any judgment against Appellant would not be covered by the policy. The
                       District Court there held that the judgment against Appellant was not covered by the policy.
                       The Fifth Circuit considered both issues on appeal here and affirmed both District Court
                               As to the fraudulent transfer claim, the Fifth Circuit held that Appellant was an insider
                       when Debtor incurred its obligation to him and therefore he was an insider for purposes of 11
                       U.S.C. § 548 even if he was not an insider at the time of the transfers. Next the Court adopted
                       the Bankruptcy Court’s findings that Debtor had not received reasonably equivalent value for
                       the transfers when the net effect on the estate was to make $2 million inaccessible to other
                       creditors and when there was a dispute regarding whether Appellant could have been terminated
                       for cause. The Court adopted that finding despite the fact that the Bankruptcy Court found that
                       Debtor did incur a debt of $3 million to Appellant when it decided to terminate his employment;
                       that finding merely determined that an obligation was incurred and did not show that the
                       obligation was proportionate to what was legally owed. The Court rejected Appellant’s
                       argument that his agreement to “go quietly” was sufficient benefit to Debtor; the Court
                       considered that Appellant could have been fired for cause and paid only $1.5 million under the
                       original agreement, which meant that Appellant’s resignation would have to be worth the
                       remaining $1.5 million. The Court also rejected the argument that Debtor failed to provide lay
                       or expert testimony regarding the value of Appellant’s agreement to resign. The Fifth Circuit
                       finally held that, because the relevant transfer was for the benefit of an insider under an
                       employment contract and not in the ordinary course of business, it was not necessary that the
                       transfer have been made when Debtor was insolvent. Having determined that the transfers
                       were avoidable as fraudulent transfers under § 548, the Court did not address whether the
                       transfers were also unlawful preferences.
                               With regard to the insurance provider’s liability for the judgment against Appellant, the
                       Court found that Appellant’s repayment of a fraudulent transfer was akin to returning
                       wrongly-acquired profits to their rightful owner. For that reason, the Court categorized the
                       judgment as restitutionary in nature and held that Appellant had not suffered a “loss” within the
                       meaning of the insurance contract. Therefore, Debtor could not recover the funds owed by
                       Appellant from the insurance provider.
                               The Court considered that Appellant may have been entitled to some severance payment
                       less than $3 million. Because the statute says the entire transfer is fraudulent, and not just the
                       amount by which it exceeds the value for which it was exchanged, the Court held that the entire
                       amount was subject to disgorgement. No party provided legal authority for dividing the
                       transfer into fraudulent and non-fraudulent portions. Thus Appellant had to return the entire
                       amount and the entire amount was beyond the scope of the insurance agreement.

                       III.          PONZI SCHEMES


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                       A.            U.S. v. Dreier, --- F. Supp. 2d --- , 2010 WL 424706 (S.D.N.Y. 2010)

                               The District Court for the Southern District of New York approved settlement
                       agreements and stipulations between the U.S. Government, the Chapter 7 Trustee, and the
                       Chapter 11 Trustee regarding assets at issue in the criminal action against Marc Dreier, the
                       bankruptcy proceedings for Dreier’s estate and the estate of his law firm Dreier LLP, and the
                       civil enforcement proceeding brought by the SEC.
                               The settlement agreements were the result of a joint hearing convened by the three
                       judges overseeing the above proceedings. The judges urged the parties to reach resolutions.
                       Various parties reached a global settlement composed of proposed agreements and orders and
                       the courts held a joint hearing on the proposed settlement so that affected parties could appear.
                       One party did object to the settlements between the Government and the bankruptcy trustees.
                       The District Court approved the settlements over those objections.
                               The first agreement at issue is the Coordination Agreement between the Government
                       and the Chapter 11 Trustee. The agreement provides that the Government will not seek
                       forfeiture of recoveries that result from avoidance actions brought by the Chapter 11 Trustee
                       and that the Government will release to the 11 Trustee artwork that the Government cannot
                       trace to proceeds of Dreier’s offenses. The Trustee, in return, will not contest forfeiture of
                       properties listed in a prior District Court order. With regard to funds related to GSO Capital
                       Partners, the Trustee also agrees not to contest the forfeiture of funds disgorged pursuant to a
                       proposed consent order and the Government will forego forfeiture of other funds presently
                       under restraint because of a connection to Dreier’s fraud. The Coordination Agreement will
                       not take effect unless the Bankruptcy Court approves several additional agreements. Those
                       agreements arrange for payments by GSO Capital Partners and its affiliates to the Chapter 11
                       and Chapter 7 Trustees. In exchange, the Trustees promise not to litigate claims against GSO
                       and the Bankruptcy Court will enter a Bar Order enjoining other parties from seeking recovery
                       of funds from GSO.
                               A second agreement before the District Court is between the Government and the
                       Chapter 7 Trustee, which provides that the 7 Trustee can sell certain real estate and the
                       Government will release 10% of the proceeds to the Chapter 7 estate. Finally, the District
                       Court considered an agreement between the Government and Fortress Investment Group LLC,
                       (“Fortress”) who received fraud proceeds but also lost a significant investment.
                               Fortress and other hedge funds objected to turnover of property proposed in the
                       Coordination Agreement. The hedge funds did not, however, object to the Government’s
                       agreement not to seek further forfeiture from GSO or Fortress. Given that the Chapter 11
                       Trustee’s claims being settled in the Coordination Agreement were not frivolous, and that the
                       hedge funds were not seeking to maximize the Government’s recovery in all instances, the
                       Court found the settlement reasonable and questioned whether the hedge funds were seeking
                       merely to reduce their risk of avoidance actions in the Chapter 11 case. Finally, the Court held
                       that the hedge funds had sufficient notice of and could have participated in the settlement
                       negotiations and that the Government had no duty to seek their approval when entering into the
                               As a final matter, the Court determined that a pro rata distribution among all of Dreier’s
                       victims was the fairest approach. In so holding, the Court rejected an argument to treat
                       individuals (or “client” victims) differently from institutional investors (or “note fraud” victims)


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                       B.     Securities Investor Protection Corporation v. Bernard L. Madoff Investment
                       Securities LLC (In re Bernard L. Madoff Investment Securities LLC), 424 B.R. 122 (Bankr.
                       S.D.N.Y. 2010)

                                The Bankruptcy Court determined that the net equity positions of victims of the Madoff
                       Ponzi scheme should be evaluated under the net investment approach, not by looking at the last
                       monthly statement that victims received.
                                The Trustee charged with the Securities Investor Protection Act (SIPA) liquidation of
                       Madoff’s Ponzi scheme sought the Bankruptcy Court’s approval of his method for determining
                       the net equity of the scheme’s victims. The statutory framework of SIPA provides for
                       customers to share pro rata in customer property to the extent of their net equities. Related to
                       SIPA is the SIPC, which establishes a fund to advance money to the SIPA Trustee. The SIPC
                       fund pays customers’ net equity up to $500,000 each. Payments to victims would therefore
                       come from two sources: customer property, which was insufficient to cover all deposits; and the
                       SIPC fund, which would only cover the amount by which a victim’s net equity exceeds his
                       ratable share of the customer property.
                                In Madoff’s Ponzi scheme, the victims’ money was never invested. Instead, their
                       deposits were placed in a bank account and any withdrawals made by victims came from the
                       same account. Regardless of the type of investment the victims thought they were making, the
                       Madoff corporation used recent stock market activity to prepare fictional monthly statements
                       that reflected the promised rates of return. The statements were never based on actual
                       transactions and never reflected real time risks in the stock market; they were merely retroactive
                       calculations. At times, the stocks reported did not actually exist. Because the account
                       statements were never based on real trades and the returns were never subject to actual
                       fluctuation in the market, the statements never bore any relation to the securities market. The
                       only verifiable transactions on the statements were the deposits and withdrawals made by the
                                Due to the imaginary nature of the monthly account statements, the Trustee sought to
                       evaluate victims’ net equity as the amount deposited minus the amount withdrawn by each
                       victim. This system created three categories of victims: net winners who had withdrawn more
                       than they deposited; net losers with deposits of more than $500,000; and net losers with deposits
                       of less than $500,000. Net winners would receive no return from the funds the Trustee had to
                       disburse. The net losers would receive advances from the SIPC, with additional returns from
                       the customer property to the extent that their net equity claims were not fully satisfied by the
                       SIPC advances. The Trustee’s determination of pro rata shares affects the amount available
                       from the SIPC fund. Therefore, increasing one party’s pro rata share of the customer property
                       would decrease the funds remaining to pay other parties’ claims. Some of the victims,
                       particularly the net winners, objected to the Trustee’s scheme. The objecting parties argued
                       that their net equity should be based on the latest account statements the victims received.
                                The Bankruptcy Court found that the plain language of the SIPA statute supported the
                       Trustee’s method. The objectors argued that the purpose of SIPA is to protect investors’
                       expectations and that their expectations were based on their account statements. The
                       Bankruptcy Court held that when, as here, those expectations are based on entirely fictitious
                       accounts and would give rise to absurd results, those expectations are not relevant to the


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                       determination of net equity. Instead, providing the parties with claims for securities based on
                       the verifiable data regarding deposits and withdrawals was proper satifaction of the victims’
                       expectations. The Court also found that the Trustee’s method was consistent with the
                       Trustee’s avoidance powers. Numerous prior Ponzi scheme cases held that transfers of
                       fictitious profits are avoidable. In keeping with those powers, the Trustee’s method would
                       unwind, rather than legitimate, the fraudulent scheme.
                                The Court interpreted recent Second Circuit opinions, New Times I and New Times II, as
                       supporting the Trustee’s method. The Second Circuit opinions focused on the fact that
                       account statements were arbitrary and not based on reality, such that reliance on those
                       statements would lead to the absurdity of some victims reaping windfalls. Where, as here, the
                       account statements were entirely fictional, it is inappropriate to rely on those statements to
                       determine net equities.
                                Finally, the Court found that equity and practicality supported the Trustee’s method.
                       The Court found that using the account statements prepared by Madoff would further perpetuate
                       the Ponzi scheme. Since victims’ money was never invested, the customer property pool was
                       funded entirely with victims’ deposits. Because some of that money had been
                       misappropriated, there was not enough to refund each victim’s entire deposit. The only way to
                       pay the expected returns of a party who had already withdrawn his entire deposit would be to
                       use money deposited by other victims who had withdrawn less than they had deposited.
                       Instead, the net equity should be determined based on the deposits and withdrawals that had
                       actually occurred, not the fictitious returns shown on fabricated account statements.

                       IV.           SECTION 363 ASSET SALES
                       A.            Sub Rosa Plans
                                     1.    In re Chrysler LLC, 576 F.3d 108 (2d Cir. 2009), judgment vacated and
                                           dismissed as moot, In re Chrysler, LLC, 592 F. 3d 370 (2d Cir. 2010)

                                     This is an appeal from an Order of the District Court, which affirmed the Bankruptcy
                                     Court Order authorizing the sale of substantially all the assets of Chrysler LLC to New
                                     CarCo Acquisition LLC. The Second Circuit granted a stay of the underlying Order
                                     and considered the matter on an expedited basis.

                                     Debtor filed a “pre-packaged” Chapter 11 case on April 30, 2009. The key element of
                                     the Chapter 11 was a sale of substantially all of Debtor’s operating assets under § 363 of
                                     the Bankruptcy Code to New Chrysler in exchange for the assumption of certain
                                     liabilities and $2 billion cash. DIP and sale financing would come from the United
                                     States Treasury and Export Development Canada. The purchaser was to be owned
                                     55% by an employee benefit entity created by the United Auto Workers, 20% by Fiat,
                                     8% by the US Treasury and 2% by Canada. The sale was approved by the Court.

                                     The Sale Order is challenged on four grounds: (1) the sale is impermissible as a “sub
                                     rosa” plan; (2) the sale violates the rights of the Indiana Pensioners who hold a portion
                                     of the secured debt of Debtor; (3) the use of TARP funds to finance the sale is
                                     unconstitutional; and (4) the sale impermissibly extinguishes the rights of certain tort


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                                     claimants.   The Circuit Court rejects these challenges and affirms the Bankruptcy

                                     Sub Rosa Plan. The Court traces the history of § 363 sales to the Bankruptcy Act of
                                     1867, by which sale of debtor’s perishable assets was permitted on an expedited basis.
                                     This has developed into what the Lionel court dubbed the “melting ice cube” theory and
                                     now is considered routinely under the “good business reason” standard. The Court
                                     notes that in the twenty-five years since Lionel, § 363 sales have become common
                                     practice in large-scale corporate bankruptcies. This use of sales outside of a plan is
                                     driven by efficiency from the perspectives of sellers and buyers alike. The term “sub
                                     rosa” plan derives from the Fifth Circuit’s decision in Braniff. The Court there rejected
                                     a proposed sale, in large part, because the terms of the sale agreement specifically
                                     attempted to dictate the terms of a future reorganization plan. Here, the Indiana
                                     pensioners argue that the sale is a “sub rosa” plan because it gives value to unsecured
                                     creditors (the unions) without paying secured debt in full and without complying with
                                     the procedural requirements of Chapter 11. The Court rejects the argument. The
                                     Bankruptcy Court found that the lienholders’ interests attached to all of the proceeds of
                                     the sale and that the equity stakes in the purchaser were all the result of new value
                                     contributions to the purchaser. It is critical that the Bankruptcy Court found that the
                                     only alternative to the sale would result in less value to all parties.

                                     Section 363(f) issues. The sale was authorized under § 363(f)(2). The Pensioners
                                     argued that they had not consented to the sale. The Court found that the Trustee under
                                     the Collateral Trust Agreement had the authority to consent on their behalf and rejected
                                     this argument.

                                     TARP Issues. The Pensioners argued that TARP funds could only be used for the
                                     financial institutions. The Second Circuit did not reach this issue. The Pensioners
                                     lacked standing to raise the issue because they did not suffer an injury in fact because
                                     the evidence was that they would not receive anything more in the liquidation.

                                     Tort Claims. With respect to existing product liability claimants, the issue was whether
                                     a sale “free and clear of all interests” encompassed personal injury claims. The District
                                     Court relied on the Third Circuit’s opinion in In re Trans World Airlines, Inc., 322 F. 3d
                                     282 (3d Cir. 2003) for a broad reading of “interests” in § 363(f). The claimants
                                     contrasted the language of § 1141(c), which specifies that property dealt with by a plan
                                     is free and clear of all “claims and interests,” with §363's language of “liens and
                                     interests.” The Court did not find this distinction meaningful because § 363(f) is
                                     limited to specific classes of property. The Court adopted the TWA analysis that “any
                                     interest in property” encompasses those claims that arise from the property being sold.
                                     Since the product liability claimants’ claims arose from the Debtor’s property, the
                                     Court’s Order authorized a sale free and clear of these claims. With respect to future
                                     claims, the Court affirmed the authority of the Bankruptcy Court to extinguish the right
                                     to pursue claims “on any theory of successor or transferee liability” but declined to
                                     specify the scope of the authority to extinguish future claims until an actual claim arises.


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                                     2.     In re General Motors Corp., 407 B.R. 463 (Bankr. S.D.N.Y. 2009)

                                     The Bankruptcy Court considers the approval of the sale of the bulk of the assets of
                                     General Motors Corporation to Vehicle Acquisitions Holdings LLC, a purchaser
                                     sponsored by the U.S. Treasury, the assignment of executory contracts, and a
                                     settlement with the United Auto Workers. Objections to the sale were filed by a small
                                     minority of unsecured bondholders, tort litigants, asbestos claimants and non-UAW
                                     unions. These objections included the contention that the sale was a sub rosa plan,
                                     that the court could not authorize a sale free and clear of successor liability claims, and
                                     that the debtor has failed to comply with § 1114. The Court overruled the objections
                                     and approved the sale.

                                     The Court’s findings of fact included: (1) the only alternative to a sale was liquidation;
                                     (2) GM was insolvent and no unsecured creditor would receive any distribution in a
                                     liquidation; (3) thousands of dealerships and thousands of suppliers depend upon GM
                                     for survival; and (4) the government’s loan to GM was not an equity contribution.

                                     The structure of the § 363 sale was for the purchaser to acquire all of GM’s assets except
                                     for the equity interests in Saturn, certain real and personal property, avoidance actions,
                                     certain employee benefit plans, and certain cash and receivables. The liabilities to be
                                     assumed by the Purchaser were limited to product liability claims arising out of products
                                     delivered at or after the Sale (later revised to include all product liability claims arising
                                     from the operation of GM vehicles occurring after the closing of the transaction without
                                     regard to manufacture date), warranty and recall obligations, and all employment related
                                     obligations under any assumed employee benefit plans. The value to be received by
                                     Old GM is $45 billion, including a credit bid by US Treasury of its DIP and pre-petition
                                     loan facilities, a wind-down facility, and certain equity interests in New GM.

                                     New GM will be owned: 60.8% by U.S. Treasury, 11.7% by EDC (Canadian entity),
                                     17.5% by an employee benefit trust, and, if a Chapter 11 Plan is implemented as
                                     contemplated, 10% by Old GM. New GM will hire all non-union employees and all
                                     UAW-represented employees. Substantially all supply contracts will be assumed and
                                     assigned. The sale Order that is requested would cut off all successor liability claims
                                     not expressly assumed.

                                     Sub Rosa Plan. The Court first reviews the standard for approval of a sale under § 363
                                     and notes that the language of the section does not limit its breadth. Rather,
                                     Court-developed principles make § 363 an appropriate vehicle in lieu of a plan when
                                     there is an articulated business justification. The factors to consider are the value of the
                                     assets sold as a portion of the estate, the elapsed time, the likelihood of a plan, the effect
                                     of the sale on any future plan, and whether the asset is increasing or decreasing in value.
                                     The court also notes that the liquidity of the debtor and whether the sale opportunity
                                     would still exist at plan confirmation are relevant. Here, the evidence is undisputed that
                                     liquidation would follow a denial of the sale. The objectors ask the court to call the


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                                     government’s bluff in representing that it will not continue to fund GM . The Court
                                     will not accept the premise of this argument and risk losing this transaction. The
                                     proposed sale does not place restrictions on any creditor’s rights to vote on a plan. The
                                     real objection is to the decisions made by the purchaser, not by the sale itself. Caselaw
                                     makes clear that a sale is not objectionable because the purchaser will assume some, but
                                     not all of the contracts or liabilities. Similarly, the allocation of value in the purchaser
                                     entity does not affect the debtor’s interest.

                                     Successor Liability. As a general rule, a purchaser does not assume the liabilities of
                                     the seller unless the purchaser expressly agrees to do so or an exception to the rule
                                     exists. The Court first determines that successor liability claims are interests which are
                                     encompassed within § 363(f). As the Court did in Chrysler, the Court distinguishes the
                                     “free and clear” language of § 1141(c) and finds the Second Circuit affirmance in
                                     Chrysler to be controlling precedent to call the sale free and clear of successor liability.
                                     With respect to future claimants in the asbestos area, the Court finds that current
                                     asbestos claimants have no standing to raise claims of future claimants and the court’s
                                     injunction in this area will issue only “to the extent constitutionally permissible.”

                                     §1114 Issues. The non-UAW unions object to the sale on the grounds that GM has not
                                     complied with § 1114, which requires a debtor to negotiate with a union prior to seeking
                                     court modification of retiree benefits.         Section 1114 applies before seeking
                                     modification, but does not require compliance before effecting a § 363 sale. The real
                                     objection is that the purchaser is not complying with the statute. Of course, a purchaser
                                     is not bound by § 1114. While the non-UAW unions are receiving a worse result in the
                                     sale, the treatment is in accordance with the business judgment of the parties and is not
                                     subject to second guessing by the Court.

                                     3.     In re Gulf Coast Oil Corp., 404 B.R. 407 (Bankr. S.D. Texas 2009)

                                     Debtors were engaged in oil and gas exploration and production. Debtors had one
                                     secured creditor whose claim was secured by all of Debtors’ assets. While Debtors
                                     dispute the precise amount of the Creditor’s claim, they stipulated that it was not less
                                     than $66 million. Debtors filed a Chapter 11 plan, but it was withdrawn before
                                     confirmation because the plunging prices for oil and gas created cash flow problems.
                                     Debtors then filed a motion to sell substantially all their assets pursuant to § 363 in an
                                     auction process. The parties anticipated that there would be no purchasers at the
                                     auction other than the lone secured creditor, and that there would be no cash proceeds
                                     and no remaining assets. As such, the case would then be dismissed or converted to
                                     Chapter 7. In the interim, the secured creditor would continue to employ some of the
                                     employees and do business with some of the vendors. The anticipated sales transaction
                                     would leave the estate administratively insolvent.

                                     In declining to approve the sale, the Court first traced the history of § 363 sales law in
                                     the Fifth Circuit. The Court summarizes the standard set forth by In re Braniff


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                                     Airways, Inc., 700 F.2d 935 (5th Cir. 1983): “When the court order approving the sale
                                     expands to affect other parties in a significant way, when it ‘short circuits the
                                     requirements of Chapter 11 [plan] by establishing the terms of a sub rosa’, or when it
                                     includes unauthorized releases, the transaction cannot be authorized by § 363.” The
                                     Fifth Circuit in Braniff declined to hold that a sale of substantially all the assets was per
                                     so improper. The Court then moved on to summarize the holding from In re
                                     Continental Air Lines, 780 F.2d 1223 (5th Cir. 1986): an objecting party to a proposed
                                     sale must specify the Chapter 11 protection that is being denied. In Babcock and
                                     Wilcox, the Circuit cautioned that § 363 does “not allow a debtor to gut the bankruptcy
                                     estate before reorganization or to change the fundamental nature of the estate’s assets in
                                     such a way that limits a future plan of reorganization.” The Court then summarized the
                                     standard for §363 sales as provided by the leading bankruptcy treatises as requiring the
                                     proponent to demonstrate a sound business justification for conducting a sale, in good
                                     faith and for a fair price, before confirmation. The Court then provided a survey of the
                                     competing commentary on § 363 sales, including praise for its efficiency and concern of
                                     its potential for abuse.

                                     Following the summary of the law and related commentary, the Court stated that “[i]t
                                     would be very helpful if the Fifth Circuit were to take another look at the boundaries of
                                     § 363(b) sales to provide more guidance . . . .” Considering the following factors, the
                                     sale was not approved:
                                            (1) evidence of the need for speed; (2) business justification; (3) maturity of the
                                            case; (4) whether the asset purchase agreement facilitates competitive bids; (5)
                                            degree to which the assets have been marketed; (6) disinterestedness of
                                            fiduciaries of debtor; (7) assets remaining after sale; (8) extraordinary protections
                                            given to purchaser; (9) how burdensome proposing a Plan of Reorganization
                                            would be; (10) who benefits from the sale; and (11) special procedures that can
                                            protect other interests.

                                     Specifically, the Court noted that the proposed sale is a foreclosure supplemented by a
                                     release, the assignment of certain contracts, a federal court order eliminating any
                                     successor liability, and the preservation of the going concern. The Court explained that
                                     Congress provided these benefits to the secured creditor, as proposed purchaser under
                                     the sale, when confirmation requirements under § 1129 are satisfied. The Court also
                                     noted that the proposed sale could not be confirmed because (1) it failed to comply with
                                     § 1129(a)(9)’s payment of administrative expenses, (2) raised questions with respect to
                                     equal treatment of similarly situated creditors under § 1129(a)(1), and (3) failed to
                                     provide the information needed for the Court to make a § 1129(a)(5) determination,
                                     including whether the entities controlling the corporation have a conflict of interest in
                                     the sale negotiation.

                       B.            Mootness

                                     1.     Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (B.A.P.
                                            9th 2008)


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                                     The bankruptcy court approved the sale of estate property in a single asset real estate
                                     chapter 11 case from the senior lienholder’s credit bid. The bankruptcy court also
                                     approved the sale free and clear of a junior lien pursuant to § 363(f)(3) and (f)(5). The
                                     junior lienholder appealed. No stay was obtained by the junior lienholder.

                                     The BAP determined that the junior lienholder’s appeal was not constitutionally,
                                     equitably, or statutorily moot. While § 363(m) rendered a challenge to the sale of
                                     property moot, the lien stripping appeal was not equitably moot because effective relief
                                     could be fashioned and § 363(m) was inapplicable. In its statutory mootness analysis,
                                     the panel used a plain language approach and held that § 363(m) was inapplicable
                                     because § 363(m) protection applies only to the portion of the sale order issued under §
                                     363(b) or (c) but did not extend to the free and clear relief under § 363(f).

                                     2.     Official Committee of Unsecured Creditors v. Anderson Senior Living
                                            Property, LLC (In re Nashville Senior Living, LLC), 407 B.R. 222 (B.A.P. 6th
                                            Cir. 2009)

                                     The Committee appealed the bankruptcy court’s approval of the sale of real property
                                     under both § 363(b) and § 363(h). The sale involved properties that were owned by
                                     Debtors at 60% and the remaining 40% was owned by investors. The investors
                                     acquired their partial interest as tenants in common. The Sale Order explicitly noted
                                     that Debtors had satisfied the requirements of § 363(h), in addition to § 363(b).

                                     The appealing Committee asserts that the approval of the sale was not proper under §
                                     363(h). Debtors sought dismissal of the appeal as moot since the sale was not stayed.
                                     The Committee relied on the statutory language of 363(m) to assert that the application
                                     of 363(m)’s mootness is limited to sales under 363(b) and (c). The Committee cites
                                     Ninth Circuit’s Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC) to support of
                                     this statutory argument.

                                     The BAP rejected the reasoning of Clear Channel, which held that mootness could not
                                     apply to the “free and clear” aspect of a sale authorized under section 363(f) as “an
                                     aberration in well-settled bankruptcy jurisprudence.” The panel emphasized that no
                                     case law was cited by the Ninth Circuit Bankruptcy Appellate Panel in support of its
                                     statutory interpretation, and emphasized the weight of authority that applies § 363's
                                     mootness in a more board manner. The panel specifically noted that the First Circuit
                                     and the Sixth Circuit have even extended § 363(m)’s protection to assignments of leases
                                     under § 365 included in a sale. The panel noted this extension despite the language of
                                     § 363(m). The panel explained that applying § 363(m) to sales promotes the finality of
                                     bankruptcy sales and codifies Congress’s strong preference for finality and efficiency of
                                     bankruptcy, particularly where third parties are involved. The BAP stated, “To provide
                                     for an exception to statutory mootness where a portion of the overall sale required
                                     authorization under § 363(h) would “undermine § 363's role in protecting the finality of
                                     a sale in bankruptcy.”


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                                     The BAP also distinguishes this sale under 363(h) from the Clear Channel 363(f) sale,
                                     noting that an essential element of the sale was the ability to sell the co-owners’ interest.
                                     Although § 363(m) does not explicitly refer to a sale authorized under subsection h, the
                                     panel noted that authority for such a sale “is derived from subsection (b).” The
                                     Committee’s appeal was dismissed as moot.

                       C.            Break-up Fees

                                     1.     In re Reliant Energy Channelview LP, 594 F.3d 200 (3d Cir. 2010)

                                     The Third Circuit affirmed the bankruptcy court’s denial of an unsuccessful bidder’s
                                     (Kelson) break-up fee. Debtor engaged in a substantial marketing process to sell its
                                     largest asset, a power plant, and had 12 bidders. Some bids were contingent on
                                     securing financing. Kelson’s bid was not and it entered into an APA with the Debtor.
                                     The terms of the APA included that Debtor would seek orders from the Court for (1)
                                     allowing the sale without an auction and (2) approving bid protections and procedures,
                                     including $5million min bid increments from Kelson’s bid and a $15million break-up
                                     fee (approximately 3% of its bid) plus reimbursement of expenses. Based on the
                                     objection of a bidder, who previously submitted a lower bid and was trying to securing
                                     financing to compete with Kelson’s bid, to slow the sale, the Court delayed the sale and
                                     determined an auction was required to approve the sale. A hearing on the motion to
                                     approve bidding procedures was held, and the objecting bidder (“Fortistar”) asserted that
                                     the break-up fee was a deterrent to it asserting a higher and better bid at auction. The
                                     bankruptcy court denied the break-up fee because it was not convinced that the break-up
                                     fee was necessary to enhance the bidding since Fortistar had already established that it
                                     would enter a competing bid. The Court approved the $5 overbid requirement and
                                     reimbursement of Kelson’s expenses up to $2million. A sale to Fortistar was

                                     Kelson appealed the order denying the $15million break-up fee. The Third Circuit
                                     reiterated the standard it established for break-up fees in Calpine Corp. v. O’Brien
                                     Environmental Energy, Inc. (In re O’Brien Environmental Energy, Inc.), 181 F.3d 527
                                     (3d Cir. 1999). The Third Circuit previously held that courts do not have the authority
                                     to create new ways to authorize the payments of fees from a bankruptcy estate and are
                                     limited to the Bankruptcy Code. Break-up fees are assessed under § 503(b), which
                                     allows for post-petition administrative expenses for “actual, necessary costs and
                                     expenses of preserving the estate.” Specifically with respect to break-up fees, O’Brien
                                     noted that a break-up fee was not necessary if the bidder would have made the same bid
                                     without the fee, but a fee could be permissible if it didn’t give an advantage to the
                                     favored purchaser over other bidders by increasing the cost of the target acquisition.

                                     Applying O’Brien to this case, the Third Circuit found that the fee was not necessary to
                                     induce Kelson’s bid because Kelson did not condition its bid on the presence of the


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                                     break-up fee, only on Debtor’s promise to seek authority to pay the fee. Since Kelson
                                     made the bid without the assurance of a break-up fee, Kelson’s argument that the fee
                                     was needed to induce its bid is hollow. The Third Circuit found that the Bankruptcy
                                     Court had not abused its discretion by determining that the fee was not needed to
                                     preserve the estate. Based on Fortistar’s planned bid, the terms of the APA with
                                     Kelson, and “logical belief that Kelson would not abandon a fully negotiated agreement
                                     if no other bidder materialized, the decision to deny the break-up fee was affirmed.

                                     The Third Circuit additionally held that the absence of objection to fees is not the
                                     standard for awards under § 503(b). Kelson argued that none of Debtors’ creditors or
                                     equity holders objected to the request for the break-up fee.


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