Success Story: $20 Million Hotel and All Jobs Saved From Collapse

In the summary below, we tell the story of how we recently saved a $20 million hotel from collapse, keeping the doors open without interruption and saving all jobs.

The Company: A hotel in Riverside, California.

The Problem: The hotel defaulted on certain terms of an approximately $20 million loan agreement with a lender.  The lender subsequently initiated state court litigation to foreclose. 

The Solution:  We filed a chapter 11 bankruptcy case for the hotel, halting the state court litigation and allowing the hotel to continue to operate without interruption.  Thereafter, we handled issues touching upon municipal bond financing, assumption of the franchise agreement, disputed easements and purchase options.  Recently, we obtained bankruptcy court confirmation of the hotel's chapter 11  plan of reorganization, which modifies the terms of the loan agreement and completely resolves all issues.

The Impact: Through a confirmed chapter 11 plan, we saved the hotel from foreclosure.  The hotel’s bankruptcy case is now closed and the hotel is operating profitably. 

- By Roxanne Bahadurji

Mortgage Modification Procedures Established in Bankruptcy Courts forNorthern District of California

Effective August 1, 2015, most bankruptcy courts adopted sweeping new mortgage modification procedures, which can be viewed here.

This impressive set of new procedures was tested in Florida and certain other jurisdictions but is entirely new to the Northern District.  Specifically, the procedures provide for monitoring and mediation of mortgage modifications based upon lender consent.  Most major lenders regularly consent and have pre-registered with the electronic documentation system, which is key to the functioning of the program.

The program applies to all open and new chapter 13 bankruptcy cases in participating courts.  It may also be applied in individual chapter 11 bankruptcy cases by special request.

The new procedures streamline the processes under HAMP, HARP, Fannie Mae, Freddie Mac, FHA, VA, private bank programs and other mortgage modification procedures.  It also eliminates several common roadblocks to mortgage modification approval and dealing with mortgage modification denials, including document completion, income and expense analysis, forbearance and balloon payments, reamortization, cure of arrears and due diligence and title problems.

A key advantage is the combination of mortgage modification with bankruptcy relief, adding opportunities for discharge of unsecured debts, reorganization of priority debts and resolution of title and lien-priority issues.  This combination is likely to provide relief for thousands of debtors who were poorly served by either process standing on its own.

Chapter 11 Reorganization Solutions to Port Strikes and Shipping Delays

A strategic chapter 11 bankruptcy case can provide crucial help to businesses facing delayed shipments of supplies and inventory resulting from the port strikes and shutdowns, including:

  •  The Automatic Stay.  A worldwide injunction goes into effect immediately, preventing creditors from suing, collecting collateral and even calling and harassing the business.  This provides a critical breathing spell.

  •  Adjust Payments to Creditors and Vendors.  Repay creditors in full or in part over time on a schedule that works in light of delayed shipments and delayed sales.

  •  Preserve and Assert Claims.  If the business holds claims against third parties on account of delayed shipments, these are preserved and can be asserted during or after the chapter 11 case.  These can be difficult or impossible to assert if the business is allowed to collapse.

  •  Obtain Operating Cash.  Lenders are reluctant to loan to a distressed company.  However, lenders - including the principals of the company - can make loans on a preferred and protected basis through court-approved DIP financing in chapter 11.

To summarize, a central purpose of chapter 11 is to solve short-term cash flow problems, and it provides good tools to do so.

By Reno Fernandez, a partner with Macdonald Fernandez LLP, a law firm focusing on business bankruptcy, reorganization and commercial litigation.  Macdonald Fernandez LLP helps businesses and individuals file for relief under the Bankruptcy Code throughout California, including Los Angeles, San Diego, the San Francisco Bay Area and the Central Valley, and the firm is a debt relief agency as defined under the Bankruptcy Code.  Advertisement.  Reno can be reached at (415) 362-0449 x 204 or reno@macfern.com.

Business Bankruptcy Basics

Learn about business bankruptcy basics and earn CLE credit valid in ten states with this video, available here.  The provider, namely LexVid, should give you one video for free.  Here is the course description:

There are a number of complex issues to consider when representing a business client in a bankruptcy.  Join Reno Fernandez, San Francisco commercial bankruptcy attorney, as he covers all the basics of a business bankruptcy case.  The program will focus mostly on corporate Chapter 11 cases, which allows the business to continue to operate with the goal or reorganizing and paying creditors.  Mr. Fernandez will also cover business Chapter 7 cases, which are an effective way to dissolve and wind up if the business does not require a reorganization.  Other topics include discharge, the automatic stay, trustees, and many more.

Chapter 11 Plan Cannot Treat Undersecured Claim as Fully Secured Absent Section 1111(b) Election

In In re Marlow Manor Downtown, LLC, No. AK-14-1122-JuKiKu (9th Cir. B.A.P. Feb. 6, 2015), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit (the "BAP") ruled that a chapter 11 plan of reorganization cannot classify an undersecured claim as fully secured unless the creditor itself elects to be treated as fully secured under Bankruptcy Code Section 1111(b)(2).

In Marlow Manor, the debtor proposed a chapter 11 plan treating a partially-secured lienholder, namely AHFC, as fully secured.  This allowed the debtor to classify the deficiency claim separately from general unsecured claims in order to avoid the impact of an unfavorable vote against the plan by AHFC.  The creditor moved for a determination that the classification was improper.  

The bankruptcy court granted the creditor's motion.  The debtor appealed, and the BAP affirmed.

The BAP found that the plan sought to treat AHFC’s unsecured claims as though it had made the Section 1111(b) election although it had not.  The Section 1111(b) election required the debtor to treat a partially-secured claim as fully secured and pay the full amount of the claim under a plan.

The BAP held that, under Bankruptcy Code Section 1122(a), separate classification of AHFC’s deficiency claims was improper because there was nothing to distinguish them from other general unsecured claims.  Specifically, although the existence of a guarantee may justify separate classification, in this case the guarantor was insolvent and not a source of recovery.

This opinion highlights the importance of determining the value of collateral in bankruptcy.  If the value is not estimates, and the debtor and creditor cannot agree on a value, debtors may not be able to neutralize the creditor's objections by simply paying the creditor in full.

Radio Shack Files for Chapter 11 Bankruptcy

RadioShack Corporation and Atlantic Retail Ventures, Inc. filed voluntary chapter 11 bankruptcy petitions today in the United States Bankruptcy Court for the District of Delaware.  Both companies declared assets and liabilities of more than $1 billion.  View the RadioShack Corporation petition here and the Atlantic Retail Ventures, Inc. petition here.

Cramming Down Secured Debt and the Section 1111(b) Counter-Measure

On Tuesday, February 10, 2015, the Commercial Law & Bankruptcy Section of the Bar Association of San Francisco will present a lunch program entitled "Cramming Down Secured Debt and the Section 1111(b) Counter-Measure," explaining the most significant moves a debtor can make to modify mortgages and other liens and the countermoves the credit might take.  Reno Fernandez is the Section's Immediate Past Chair.


Cramming Down Secured Debt and the Section 1111(b) Counter-Measure

Speakers

Robert G. Harris

Binder & Malter

 

Michael St. James

St. James Law

 

Topics

• The Nuts and Bolts of Cramming Down a Secured Creditor

• The (Under) Secured Creditor’s Leading Counter-Measures

• Future Value, Credit Bidding, and How it all Plays Out in Practice

Time and Place


February 10, 2015
Noon to 1:30 pm


The City Club
155 Sansome Street
San Francisco, California


RSVP HERE

Chapter 11 Bankruptcy in a Nutshell

Reno Fernandez spoke on this panel for the 2014 California State Bar Annual Meeting entitled "Chapter 11 in a Nutshell."  The video is now available here.

Viewers earn one hour of MCLE credit as well as one hour of Legal Specialization in Bankruptcy Law credit.

This program will take the mystery and confusion out of the Chapter 11 bankruptcy process.  Learn the basics of Chapter 11 from the filing of the bankruptcy petition and first day motions through confirmation of a plan of reorganization.

Too Early to Dismiss? BAP Overturns Order Dismissing Chapter 11 Case as Bad Faith Filing

In Sullivan v. Harnisch (In re Sullivan), CC-14-1225-TaDKi (9th Cir. BAP December 9, 2014), the Bankruptcy Appellate Panel of the United States Court of Appeals for the Ninth Circuit (the "BAP") reversed a bankruptcy court order dismissing a chapter 11 bankruptcy case as having been filed in bad faith. 

The case was commenced by filing a skeletal bankruptcy petition.  The debtor filed a status report eight days later.  Six days later, the debtor filed schedules and a statement of financial affairs.  The next day, the creditor (who held judgments and judgment liens) moved to dismiss the case as a bad faith filing, contending that the bankruptcy case amounted to a two-party dispute and was filed solely to delay collection attempts.  The creditor further contended that confirmation of a chapter 11 plan was unlikely because the creditor would vote against it.  

The hearing on dismissal was scheduled simultaneously with a scheduling conference as well as the debtor’s motions to employ counsel and approve a budget.  The bankruptcy court called the motion to dismiss first.  After argument, but without testimony or other evidence, the court took the motion under submission and continued the remaining hearings. Thereafter, the court dismissed the case, finding bad faith and no possibility of confirming a plan.  The debtor appealed.

The BAP ruled that the bankruptcy court abused its discretion by considering to consider the interests of the creditor who moved for dismissal and not the best interests of creditors in general.  It is also important to note the speed of the proceedings and the fact that dismissal came before the first steps of the case.  

Creditors and bankruptcy judges favor early dismissal if a case was clearly files in bad faith as delay causes harm.  However, in future cases, bankruptcy judges and attorneys may ask themselves:  "Is it too soon for dismissal?"

Reno Fernandez Speaking on Chapter 11 Bankruptcy at State Bar Annual Meeting

We are proud to announce that Reno Fernandez will be speaking on chapter 11 bankruptcy cases tomorrow, kicking off the 87th Annual Meeting of the State Bar of California with its first program, namely "Chapter 11 in a Nutshell."

AnchorBank's Holding Company Tries New Bankruptcy Strategy

A bank holding company typically files bankruptcy after the FDIC takes over its bank subsidiary, when the only task left is to marshal assets and liquidate. Anchor BanCorp, holder of AnchorBank, is trying something new.

Specifically, Anchor BanCorp filed a chapter 11 bankruptcy petition on August 12, 2013, before a takeover of AnchorBank, which may be avoided in light of the bankruptcy.  Anchor BanCorp proposes a genuine restructuring in which it would pay off more than $180 million in debt owed to other banks for just $49 million; it could convert the U.S. Treasury’s preferred stock into an equity stake worth about $6 million (the bank received $100 million in TARP funds); and it would recapitalize by canceling its existing shares and sell the remaining new equity to investors.  The bankruptcy court approved the plan last week, but regulators still need to sign off.

If successful, Anchor BanCorp could provide a model for other struggling regional banks to get ahead of the FDIC and take control of their own restructuring.

Bankruptcy Court May Handle Compensation for Victims in Lac-Magantic Train Crash

Montreal, Maine and Atlantic Railway, owner of the runaway freight train that crashed in Lac-Megantic, Quebec, killing 47 people, filed for Chapter 11 bankruptcy protection in Bangor, Maine, and Canada on August 7, 2013.  Last month, the railway asked Bankruptcy Judge Louis Kornrich to appoint a committee to represent wrongful death and personal injury claimants, seeking to avoid the burdens of handling dozens of individual lawsuits. The estates of 33 of the victims joined in supporting the motion.  The railway is likely to be sold in the course of bankruptcy proceedings, reported the Maine Sun Journal.

Fifth Circuit Rules "Till" Not Mandatory, Reviews for Clear Error

In Wells Fargo Bank, N.A. v. Texas Grand Prairie Hotel Realty, LLC, No. 11-11109 (5th Cir. Mar. 1, 2013), the United States  Court of Appeals for the Fifth Circuit reviewed a bankruptcy court's determination of the "cram down" rate, which is the rate of interest paid after confirmation of a chapter 11 plan on account of a non-consenting secured claim, for clear error.  Wells Fargo Bank had argued that the appellate panel should conduct de novo review.  Although the parties agreed that the "prime-plus" formula established for all chapter 13 cases in Till v. SCS Credit Corp., 541 U.S. 465 (2004) should apply (in which the court starts with the prime rate and adjusts for risk factors), the Fifth Circuit declined to adopt a uniform standard for chapter 11 cases.  The Ninth Circuit has not ruled on the appropriate standard and whether it should be applied uniformly.

Orchard Supply Hardware Files Chapter 11 Bankruptcy

Orchard Supply Hardware Stores Corp. has commenced a chapter 11 bankruptcy case in Delaware (Case No. 13-11565).  The company spun off from Sears Holdings Corp. in 2011, and blames burdensome payments owed to Sears as the reason for reorganizing.  Lowe's is set to serve as stalking horse bidder to buy 60 of OSH's 91 California stores with a bid of $205 million.

http://mobile.reuters.com/article/idUSL5N0ET07620130617?irpc=932

Judgment Awarding Value of Withdrawing Member's Interest in an LLC Subordinated

In O'Donnell v. Tristar Esperanza Properties, LLC, BAP No. CC-12-1340-KIPaDu (9th Cir. BAP Mar. 8, 2013), the Ninth Circuit Bankruptcy Appellate Panel held that a judgment awarding the value of a withdrawing member's interest in a limited liability company is vulnerable to mandatory subordination under Bankruptcy Code Section 510(b) as damages arising from the purchase or sale of a security.

Jane O'Donnell withdrew her 14% membership interest in Tristar Esperanza Properties, LLC.  Pursuant to the operating  agreement, O'Donnell hired an appraiser, who estimated the value of her interest to be $399,918.  Tristar objected; O'Donnell brought an arbitration and obtained an award for $399,918 less $60,000 previously received.  The award was confirmed and a judgment was entered.

Tristar filed a chapter 11 bankruptcy case  and an adversary proceeding to subordinate O'Donnell's claim.  The debtor prevailed, and the BAP affirmed.

Although a membership interets in an LLC is not among the enumerated examples of a "security" under Bankruptcy Code Section 101(49), the BAP reasoned that it is analogous to "the interest of a limited partner in a limited liability partnership."  The BAP also analyzed the legislative history of Section 510(b) and prior cases, and held that O'Donnell's withdrawal was "nothing other than her cashing out her equity (at a value that the Debtor insists is highly inflated)."

The scope of the BAP's broad view of what constitutes a claim arising from the purchase or sale of a debtor's securities. Any claim with a nexus or causal relationship with a transaction involving securities may be subject to mandatory subordination.

Kodak Chapter 11 Reorganization Plan Faces Challenges, Requests forAppointment of Retiree and Shareholder Committees

A shareholder in Eastman Kodak Co. has filed a significant objection to the company's chapter 11 reorganization plan, which provides for the effective elimination of the company's stock.  Shareholder Matthew Glassman argues that equity holders need representation in the case and that the reorganization plan “is a blatant attempt to rob both the shareholders and unsecured debt and bond holders of money and shares that are rightfully theirs.” Kodak is also facing challenges by retirees, and the bankruptcy court has set a hearing for June 20, 2013, to consider creating an official committee of retirees in connection with unfunded retirement programs Kodak eliminated when it filed for bankruptcy.  Read more here.

Borders Files Chapter 11

Mega book retailer Borders Group, Inc. commenced a chapter 11 bankruptcy case today in the United States Bankruptcy Court for the Southern District of New York (Case No. 11-10614).  The company disclosed $1.29 billion in debt and $1.27 billion in assets.  Borders owes $41.1 million to Penguin Group , $36.9 million to Hachette Book Group and $33.8 million to Simon & Schuster, all of which are book publishers.  Prior to filing, Borders secured $505 million in financing from GE Capital and other sources to assist in the reorganization.



Borders cited reduced customer spending and lack of liquidity among the reasons for filing chapter 11.  Borders President Mike Edwards said the company "does not have the capital resources it needs to be a viable competitor and which are essential for it to move forward with its business strategy to reposition itself successfully for the long term."  Borders plans to close approximately 200 of its 642 stores, 35 of which are in California, and lay off about 6,000 of its 19,000 employees.  Copies of the bankruptcy petition and first day motions can be found here. - Reno Fernandez

Anchor Blue Files Chapter 11

Today, Anchor Blue Holding Corp. and Anchor Blue, Inc. commenced a chapter 11 bankruptcy case in Delaware.  Anchor Blue is a clothing retailer known for its denim wear.  The company is based in Corona, California, and operates 117 stores and employs approximately 1446 employees in Arizona, California, Colorado, New Mexico, Oregon, Texas, Utah and Washington. - Reno Fernandez

Holiday Reading

The holidays are approaching, so why not treat yourself to an education in the history of American bankruptcy law?  Last Christmas, my wife Laura gave me a copy of David A. Skeel, Jr.'s Debt's Dominion:  A History of Bankruptcy Law in America (Princeton University Press, 2001).  Skeel's book explores the development of bankruptcy law from the 1800's to the reforms proposed in the early 2000's, some of which were incorporated in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.  Debt's Domion gives a particularly enlightening treatment of railroad receiverships, which ultimately developed into modern Chapter 11 practice, and William Douglas' mid-century crack-down on the Wall Street reorganization bar.  We had the honor of hearing the author give a lecture as the keynote speaker at the California Bankruptcy Forum last May, and his insights into contemporary bankruptcy law and his preductions for the future were fascinating. - Reno Fernandez