Bankruptcy Law

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Last news: March 13, 2008 16:54:13

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Last news: March 6, 2008 20:24:36

The Federal Reserve has offered banks another $200 billion in US currency in exchange for debt that includes mortgage securities, and includes subprime mortgage loans that they hold. Essentially, experts explain, the Fed is using the available funds to encourage confidence in these securities among investors. But should investors be buying bad debt, not to mention the Federal Reserve throwing $200 billion in US funds at these nearly worthless mortgages? - [Read more]

We all know every time the government makes a concerted effort to do anything, theres more red tape than at a marathon supply dealer trade show. The latest evidence? Rebate letters to cost $42 million And, "It doesnt include the tab for another round of mailings planned for those who didnt file tax returns last year but may still qualify for a rebate." - [Read more]

Government reports show that we lost 63,000 jobs in February. Its the largest falloff in that sector in five years. Expect bankruptcy filings to go up again. When does the word "recession" come in to play in earnest? - [Read more]

In the case of The HA2003 Liquidating Trust v. Credit Suisse Securities (USA) LLC, __ F.3d __ (7th Cir. 2008) ("HA2003"), HALO, an acquiring company, hired CSFB, an investment banker, to (i) renegotiate the economic terms of a stock acquisition of the dot-com target company, Starbelly.com, and (ii) issue a fairness opinion on behalf of HALO in connection with the acquisition.  Concluding that CSFB did not act grossly negligent in issuing the fairness opinion even though the fairness opinion was based on numbers known by HALOs management to be inaccurate, the Seventh Circuit refused to impose liability on CSFB for alleged damages suffered by HALO and its shareholders when HALO became insolvent and filed bankruptcy after the acquisition.

In 1999, HALO agreed to acquire the stock of Starbelly for between $70 to $100 million cash and $140 to $170 million in HALO stock.  However, because HALO did not have the cash on hand and would violate certain covenants in HALOs loan agreement if it consummated the proposed transaction, HALO hired CSFB to renegotiate the price and issue a fairness opinion for HALO in connection therewith.  On January 17, 2000, CSFB issued the fairness opinion, which did not indicate whether CSFB was successful in attempting to renegotiate the purchase price, and concluded that from a financial point of view, the consideration to be paid by HALO for the stock of Starbelly was fair.  Both CSFBs engagement letter and its fairness opinion stated explicitly that CSFB relied on HALOs financial projections.  CSFB did not undertake to verify the projections.  Separately, HALO hired Ernst & Young ("Ernst") as a business consultant to evaluate the accuracy of the financials and the projections. Ernst concluded that HALOs projections were unrealistic, and communicated that conclusion to HALOs CEO and board of directors.  The HA2003 opinion does not indicate whether CSFB knew of Ernsts conclusion, and if so, when CSFB learned of the conclusion.

The proxy solicitation sent to shareholders for approval of the stock acquisition included CSFBs fairness opinion, and investors approved the transaction, which then closed in May 2000.  Shortly after the transaction closed, HALO fell into financial distress as a result of the cash drain from the acquisition and Starbellys continuing losses.  HALO filed bankruptcy in July 2001, and a liquidating trust was appointed.  

Under CSFBs engagement letter with HALO, CSFB is liable only for bad faith or gross negligence. The liquidating trust sued CSFB for gross negligence based on CSFBs issuance of the fairness opinion. The arguments of the parties and Courts conclusion were as follows:

The Trusts Arguments Why CSFB Was Grossly Negligent:

·     CSFB should have relied on Ernsts conclusion, rather than HALOs projections.

·     CSFB should have withdrawn the fairness opinion, or issued a new one, after the market price for dot-com stocks began to decline.

·     After CSFB issued the fairness opinion, but before the transaction closed, "any fool" could have seen that the purchase price should have been much lower.

CSFBs Arguments Why It was Not Grossly Negligent:

·     CSFB could not predict what would happen in the market.  In fact, in mid-March 2000, two months after CSFB issued the fairness opinion, the market peaked.

·     If "any fool" could have seen that prices should be much lower, then no one could have possibly relied on the fairness opinion.

·     When the transaction closed, the market was at the same level as when the deal between HALO and Starbelly had been negotiated.

·     HALO and CSFB had agreed that CSFB would issue one fairness opinion, as of a certain date, not multiple or revised opinions.  Moreover, CSFB could not distinguish between short-term and long-term reverses in the market.  Carrying the Trusts argument to its logical conclusion, CSFB would have been required to issue a new opinion every time the market shifted.

·     In April 2000, a major HALO shareholder asked HALO management to seek a new valuation of Starbelly and an update of the fairness opinion.  HALO management chose not to do so.

·     The engagement letter between CSFB and HALO required CSFB to use the information provided by HALO. This was consistent with the industry norm.

·     CSFB told HALO to hire someone to check the numbers.

·     It was HALO that chose to go forward undaunted after receiving Ernsts conclusion.  HALO cannot blame that on CSFB just because CSFB is a deep pocket.

The Seventh Circuit, adopting CSFBs arguments, ruled in favor of CSFB, concluding that CSFB had not acted grossly negligent.  

The Seventh Circuits opinion did not indicate if and when CSFB learned about Ernsts opinion, which arguably is a significant fact.  While the court was probably correct that it makes sense to have different entities verify the numbers (Ernst) and crunch the numbers (CSFB) because specialists should "do what they are best at", it probably also makes sense to have those entities communicate with each other so that everyone has full information.  If CSFB learned of Ernsts conclusion before CSFB issued its fairness opinion, such fact might warrant a different outcome. While CSFB might not have been required to verify the numbers, it seems that if CSFB knew the numbers were suspect, it should not be able to ignore that fact.  On the other hand, the HA2003 opinion implies that anyone deciding to invest in or approve the transaction should have known that HALOs projections were speculative, suggesting that Ernsts conclusion may not have provided information that people could not figure out for themselves.  In other words, anyone investing in or voting to approve such a transaction inherently must assume the business risks associated with that transaction.

Written by: Theodore A. Cohen

Second mortgages are often unsecured loans, just like home equity loans; this means that when home prices have plunged, the owner is stuck with a loan thats not backed up by any tangible asset. Unsecured debts like this can be eliminated in Chapter 13 bankruptcy, which strips any excess unsecured debt that exceeds the actual value of your home. Your second mortgage would exceed the actual value of your home, and therefore that debt would function like any other debt (credit card, etc). - [Read more]

Julian Delasantellis reviews a years worth of articles on the subprime crisis for Asia Times, and tosses out a few (admittedly unrealistic) solutions for the subprime iceberg. Heres the crux: The reason the problem keeps getting worse all the time... - [Read more]

By Order, dated January 14, 2008, United States Bankruptcy Judge Martin Glenn for the United States Bankruptcy Court for the Southern District of New York, granted the motion (the "Motion") filed by a group of creditors seeking transfer of venue of the Dunmore Homes, Inc. (the "Debtor") bankruptcy case from the United States Bankruptcy Court for the Southern District of New York (the "Court") to the Eastern District of California, Sacramento Division.  A number of other creditors and the Official Unsecured Creditors Committee joined in the Motion.  The Motion was opposed by the Debtor, bondholders and two bank creditors.

Background

Dunmore California, a California corporation which was wholly owned by Sidney Dunmore, a California resident, and predecessor to the Debtor, was in the business of, among other things, land development and construction of single family homes throughout Northern and Central California.  The financial condition of Dunmore California began to deteriorate in September 2005, and by August 1, 2007, Dunmore California and its subsidiaries had halted nearly all home construction, land development operations and sales.  Shortly thereafter, Dunmore California sold all of its assets to the Debtor.  As part of that transaction, the Debtor also assumed virtually all of the liabilities of Dunmore California.  Fifty-nine days after the sale, on November 8, 2007, the newly formed Debtor, Dunmore Homes filed for bankruptcy relief under chapter 11 in the Southern District of New York.

The Debtor, a New York corporation, is wholly owned by Michael Kane, a California resident, and has no offices, employees or bank accounts in New York.  All of its subsidiaries (none of which has filed for protection under the Bankruptcy Code) are located in California.  The Debtors only connection to New York was its incorporation in New York fifty-nine days before the bankruptcy filing.

Among other debts, the Debtor had significant indirect liabilities resulting from its assumed obligations as guarantor or co-borrower on the secured debt of its various California subsidiaries, which totaled approximately $195 million as of the date of filing.  The security for this debt is California real property owned at the subsidiary level.  Moreover, twenty-four of the Debtors top thirty creditors are located in California, seven of whom joined the Motion and represent approximately $23,578,998.46 of the Debtors debt.  The two bank creditors who opposed the Motion represent about $56,700,000 of the Debtors debt.  It was undisputed that the vast majority of creditors below the top thirty are trade creditors located in California.

Motion for Change of Venue

The motion for change of venue sought transfer based on consideration of the interests of justice under 28 U.S.C. § 1412, and not that venue was improper under 28 U.S.C. § 1408, which entitles the Debtor to file its petition in the Southern District of New York because it is "domiciled" in New York.  Since the  issue of whether venue was proper under 28 U.S.C. § 1408 was only raised in a reply brief by one of the movants, the Court would not consider the issue and assumed venue was proper under 28 U.S.C. § 1408.  Under section 1412, the Court has discretionary power to transfer a case if the transfer would be in the best interest of justice or for the convenience of the parties.

In considering whether the case should be transferred in the interest of justice, the court considers whether (i) transfer would promote economic and efficient administration of the bankruptcy estate, (ii) the interests of judicial economy would be served by the transfer, (iii) the parties would be able to receive a fair trial in each of the possible venues, (iv) either forum has an interest in having the controversy decided within its borders, (v) the enforceability of any judgment would be affected by the transfer and (vi) the debtors original choice of forum should be disturbed.  In considering the convenience of the parties, the court looks at six factors: (i) proximity of creditors of every kind to the court, (ii) proximity of the debtor, (iii) proximity of witnesses necessary to the administration of the estate, (iv) location of the assets, (v) economic administration of the estate and (vi) necessity for ancillary administration if liquidation should result.

After a careful analysis of all of those factors, the Court found that a transfer of venue was appropriate because, among other things, "the thin nexus of the Debtor to the Southern District of New York, and the overwhelming contacts between the Debtor and Eastern District of California, combined with no overriding factors making it substantially more likely that the Debtors prospects for a successful reorganization would be enhanced if this Court were to retain jurisdiction, raise serious questions whether the Court would abuse its discretion if it denied the motion to transfer venue in the interests of justice."  In re Dunmore Homes, Inc., No. 07-13533 (MG), slip op. at 20 (S.D. N.Y. Jan. 14, 2008).

The Court found that where the Debtors connections, including the majority of a Debtors creditors and contacts, were in California, which could create, among other things, geographical hardships on the parties involved, the Court would exercise its discretion to grant the Motion and transfer the bankruptcy case to California.

By: Mary Johnson

The US Federal Reserve Bank announced a lowering of the interest rate for federal funds, meaning the rate banks charge one another for overnight loans. The rate will be lowered from 4.25 to 3.5. This is the third interest rate cut since last September, when the bank cut the interest rate by a half-point, and then quarter-points in October and December. The decision, made in an emergency phone meeting of board directors, comes on the heels of a dramatic drop in stock markets worldwide on the slowdown of the US economy and fears over continuing losses there. The rate was cut before the stock market opened today in hopes of halting or at least slowing this worldwide plunge. - [Read more]

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A California foreclosure rescue scam involved one company fraudulently using the Better Business Bureaus logo on their publications. - [Read more]

Countrywide Financial Corporation, formerly one of the nations biggest subprime lenders, has admitted to fabricating documents in a Pennsylvania womans bankruptcy case. The implementation of the so-called recreated letters took bankruptcy attorneys and judges by surprise. - [Read more]

The renegade comic strip "Brewster Rockit" puts a sardonic twist on the subprime mortgage crisis. - [Read more]

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