By Louis Robin
Law Offices of Louis
S. Robin
Longmeadow, MA
The Third
Circuit recently entered a decision regarding sales of assets and payment of
funds to unsecured creditors over other priority creditors. It provides additional support for these sales,
and enhances the possibility of unsecured creditors gleaning some return for
its claims in an otherwise hopeless situation.
It also has some personal significance for me and others as it forces us
to revisit an old friend of the CLLA who recently passed.
In In re ICL Holding Company, Inc. No. 14-2709, (3rd Cir. 9/14/15), the
Third Circuit reviewed the decision of the Bankruptcy Court approving a sale
for substantially all the debtor's assets for $320 million to the secured
creditor who was owed at least $350 million (the purchase was a credit
bid). There were two objections: first,
by the creditors' committee which was resolved when it agreed to accept $3.5
million to be paid into a trust for the benefit of unsecured creditors; and,
second, by the U.S. Government which maintained that the funds being paid to
the unsecured creditors avoided the priority position of the IRS as the IRS was
entitled to an administrative claim based upon capital gains incurred as a
result of the sale.
There were various technical and
substantive arguments made and discussed.
In short, the Third Circuit, after resolving the technical arguments,
resolved the substantive issues by relying on the structure of the payment to
the trust for the benefit of unsecured creditors – these funds were from the
secured creditor, not the bankruptcy estate.
This case
provides a path for unsecured creditors in otherwise hopelessly under-secured
cases. True, the amount may be minor – I
would estimate the return in ICL could be less than 5% (and maybe less)
– I have had two such cases in the past, one with a dividend of less than 5%
and one that may have exceeded 40%. The
later I would consider an anomaly, although garnering anything should be
considered a small victory in such cases.
In the
First Circuit, these cases are common.
They were pioneered by Eugene Berman, a past president of the CLLA, in In
re SPM Manufacturing Corp., 984 F.2d 1305 (1st Cir. 1993). This was a novel concept, accepted by no
courts at the time. Indeed, the
Bankruptcy Court and District Court rejected the proposed distribution scheme,
which made the Circuit Court decision even more of an accomplishment. Eugene passed away on September 14, 2015, the
day that the Third Circuit issued its decision.
Eugene would have taken great pride that the Third Circuit adopted the
concept and procedure that he spearheaded.
Eugene was
an attorney with an immense personality and perseverance. He accumulated many accomplishments as a
creditors’ attorney and as a leader in the CLLA. Over the years I have heard many accolades
for him, although it should not be ignored that he had his share of detractors
(something he would have taken pride in also).
I
understand that Eugene last words were “Massachusetts should enact a judicial
foreclosure statute, and that they should name it the 'Eugene Berman Judicial
Foreclosure Act'”. That Eugene, anew, focused
on this new issue in the last seven years speaks volumes for his intellect,
perspective, and personality. And I
understand that this issue is not over in the Commonwealth of Massachusetts, as
some will continue this fight – I hope that I (with my debtor's counsel's hat
on) can provide some assistance, although I would add that there is much for
both sides to work together to benefit debtors, mortgage holders, and commerce
if both sides take a fresh perspective.
