Debt Dialogue: July 2017

This month’s issue of Debt Dialogue addresses recent developments and recurring issues that debt-focused investors commonly encounter in connection with enforcement of rights, interpretation of documentation and other relevant matters.

Topics covered in this issue include:

• A New Millennium: Bankruptcy Courts May Lack Constitutional Authority to Approve Nonconsensual Plan Releases 
  While nonconsensual third party releases are inherently difficult to obtain as part of a confirmation order, a recent decision by the Delaware district court in Millennium Lab Holdings sets another roadblock to the bankruptcy court’s authority to approve nonconsensual third-party releases. The district court, relying on the Supreme Court’s decision in Stern v. Marshall, found that even where a bankruptcy court has jurisdiction to approve plan-based third-party releases, it may lack constitutional authority to approve those releases on a nonconsensual basis. The remand of the district court’s decision was recently heard by Judge Silverstein of the Delaware bankruptcy court, and a decision is forthcoming.
• Non-consolidation and True Sale Issues for Insurance Company Sponsors — Part One
  In many transactions involving a new or special-purpose entity (SPE) and/or a conveyance of financial assets with some recourse back to the seller, “nonconsolidation” and “true sale” issues are among the most sensitive. Principals and counsel must assess the risk that an SPE could be equitably consolidated into the future insolvency estate of a sponsor and/or the risk that a conveyance could be recharacterized by a court as a secured loan.
  
  Part one of a two-part article discusses key differences between traditional “veil-piercing” analysis when the sponsoring entity is bankruptcy-eligible and insurance-law factors that may be present when an insurance company is the sponsoring or transferring entity.
• Non-consolidation and True Sale Issues for Insurance Company Sponsors — Part Two
  Part two of the two-part non-con and true sale article explores in more detail legal variables arising under insurance law and insurance regulations that affect veil-piercing risk in an insurance company transaction and ways in which these risks can be mitigated, including by means of third-party legal opinions.
• When Claims Travel With the Debt: a Review of NY GOL §13-107
  Section 13-107 of the New York General Obligations Law provides that a transfer of a bond “vests in the transferee all claims or demands of the transferrer.” Section 13-107 extends to all claims, whether in contract or in tort, including fraud. However, it is limited to claims against obligors and certain other direct actors. The recent New York State Supreme Court case of One Williams Street Capital Management LP v. U.S. Education Loan Trust IV, LLC affords a useful opportunity to review this important statute.
• Challenging Indenture Reserves
  Indentures often contain a series of reserves whose funding takes precedence over payments to noteholders. A recent Southern District of New York case, UMB National Association v. Airplanes Limited, found reserves to be mischaracterized and inflated. The case is instructive for noteholders seeking to challenge what they regard as abuses in the maintenance of reserves.
• How to Interpret a DIP Order
  Unlike an opinion, an order of the court is often not from the pen of the judge but is submitted to the judge after negotiation among the parties. In the recent case of Outer Harbor Terminal LLC, Judge Laurie Silverstein of the District of Delaware bankruptcy court interpreted her own DIP order utilizing contract law principles. The case is instructive, particularly in the bankruptcy context, regarding a court’s approach to enforcement of its orders and the pitfalls of what the court referred to as “ritualistic” provisions.