Stephen Selbst is the co-chair of Herrick's Restructuring & Finance Litigation Group. He has more than 30 years of experience representing debtors, creditors, official committees, distressed investors and asset purchasers in bankruptcies and out-of-court restructurings. Stephen advises clients from a wide range of industries, including financial services, telecommunications, government agencies and real estate. A skilled commercial litigator, Stephen also has significant experience in district and state courts, where he regularly represents clients in separate litigation arising out of bankruptcy.  He also advises clients on structured finance and derivative transactions.

He is a frequent lecturer on bankruptcy and restructuring topics and has published articles and book chapters on bankruptcy-related topics. He has been frequently quoted in newspaper articles on insolvency related topics and has appeared on CNBC.

In a recent appeal to the Second Circuit, Bronx Miracle Gospel Tabernacle Word of Faith (the “Church”), asks the Second Circuit for relief from the sale of its property by a bankruptcy trustee. The Church’s action seeks damages against the trustee and her counsel and the bankruptcy judge who approved the sale. The action claims that the Church’s religious rights under the Religious Freedom Restoration Act (“RFRA”) and the Constitution have been violated in the bankruptcy court. The Church’s appeal is the latest installment in a foreclosure battle that began with a mortgage loan in 2008. Although the Church has been largely unsuccessful in its years of litigation against its lender, this is nevertheless a cautionary tale about how a determined borrower can take advantage of the legal system to fight on for years to recycle previously dismissed claims and to promote claims of misconduct which lack substantiating evidence.
Continue Reading Bronx Miracle Gospel Tabernacle: Lender’s Nightmare Continues

The Great Atlantic and Pacific Tea Company, better known as A&P, recently moved for approval of a structured dismissal of its most recent chapter 11 case. Debtors seek structured dismissal of their chapter 11 cases when they cannot confirm a chapter 11 plan. In this case, the A&P estate is massively administratively insolvent, meaning that it can’t pay expenses that became due after the bankruptcy filing.

In theory, the bankruptcy judge, the United States trustee and the creditors committee monitor the case to prevent administrative insolvency; if a case becomes administratively insolvent, the case should be converted to chapter 7. But there is often an enormous reservoir of inertia among the case professionals to resist conversion, particularly in big cases, even where administrative insolvency is clear. The costs of that inertia are asymmetrical. Typically, the professionals receive all or most of their fees, while administrative creditors are involuntarily exposed to loss.
Continue Reading A&P Liquidation Will Pay Administrative Creditors Just $.20 on the Dollar: Is There a Better Way?

The Outlook

A recent string of high-visibility hotel chapter 11 filings  has led investors and lenders to wonder what to expect for 2021. Recent filings include:

  • Martinique Hotel, a 165-key property in Brooklyn – September 2020
  • Tillary Hotel, Brooklyn, a 174-key boutique property in Brooklyn – December 2020
  • Holiday Inn Resort Orlando Suites, a 777-key property in Orlando, Florida – January 2021
  • Wardman Park Hotel, a 1,152-key property in Washington, D.C. – January 2021
  • Eagle Hospitality REIT, filed chapter 11 petitions for 18 properties, including the Queen Mary Hotel in Long Beach, California – January 2021

In New York City, there have been many hotel closures in addition to bankruptcy filings. According to the New York Post, 2020 data released by the Department of City Planning showed 146 of the city’s 705 hotels have closed —20%. The closures account for 42,030 of the city’s 128,000 hotel rooms. Analysts cited by the Post said the hotel industry won’t fully recover to pre-pandemic levels until 2025.
Continue Reading Hotels 2021: Restructurings on the Horizon?

On January 15, 2021, the Supreme Court unanimously ruled in City of Chicago v. Fulton that a secured party in possession of a debtor’s collateral does not violate the automatic stay by passively retaining possession after a debtor commences a bankruptcy case. When a debtor files a bankruptcy case, the Bankruptcy Code protects the debtor by imposing an automatic stay on efforts to collect prepetition debts or “any act . . . to exercise control over property” of the bankruptcy estate.
Continue Reading Recent Supreme Court Ruling Provides Important Protection for Secured Creditors

Herrick congratulates its Restructuring & Finance Litigation Group on the success it has enjoyed over the last two years. The team, which now has 18 members and counting, has grown substantially while taking on a variety of complex litigation matters and Chapter 11 Restructurings. Below is a small sampling of our recent work.
Continue Reading Herrick’s Restructuring & Finance Litigation: 2019-2020 In Review

Introduction

In In re VP Williams Trans, LLC,[1] Judge Michael Wiles of the United States Bankruptcy Court for the Southern District of New York confirmed that a secured creditor may make an election under section 1111(b) of the United States Bankruptcy Code (the “Bankruptcy Code”) in a proceeding under subchapter V of the Bankruptcy Code for small business debtors. Judge Wiles’s decision appears to be the first decision on this issue in this Circuit since subchapter V of the Bankruptcy Code came into effect this year.
Continue Reading Bankruptcy Court Affirms Availability of 1111(b) Election in Subchapter V Cases

On August 11, 2020, the Second Circuit addressed the long-standing question of whether flip clauses are enforceable in bankruptcy. Affirming a Southern District of New York decision, the Court found in Lehman Brothers Special Financing Inc. v. Bank of America N.A. that flip clauses are protected under the safe harbor and therefore enforceable in bankruptcy.[1] Investors should take comfort that this decision puts the final nail in the coffin of the earlier controversial decisions in the Lehman Brothers chapter 11 proceedings that had ruled such provisions unenforceable.
Continue Reading Second Circuit Does Not Flip Flop on Enforceability of Flip Clauses

Dan Kamensky, the founder and principal of the prominent hedge fund, Marble Ridge Capital LP and Marble Ridge Master Fund LP (“Marble Ridge”), was arrested on Thursday, September 3, 2020, by the FBI, the most recent development in a dramatic chain of events in the Chapter 11 proceedings of retailer Neiman Marcus. According to the U.S. Attorney’s Office for the Southern District of New York, Kamensky’s criminal charges stem from his attempt to pressure a rival bidder to abandon its higher bid for assets in the Neiman Marcus bankruptcy – which would have allowed Marble Ridge to purchase the assets at a lower price – and then pressuring the rival to cover up the scheme.[1] Mr. Kamensky faces one count each of securities fraud, wire fraud, extortion, and obstruction of justice.[2] If convicted, Mr. Kamensky faces up to 50 years in prison. Also on September 3, the Securities and Exchange Commission filed a civil complaint against Mr. Kamensky alleging violations of the federal securities laws and seeking permanent injunctive relief and civil money penalties.[3] Mr. Kamensky appeared in federal court yesterday afternoon, at which the terms of his pretrial release were set, including a $250,000 bond. At the time of this article, a spokesman for Mr. Kamensky has declined to comment.
Continue Reading Hedge Fund Founder Faces Criminal and SEC Charges Based on Alleged Misconduct in Neiman Marcus Bankruptcy

In In re Pace Industries, LLC, Judge Mary Walrath of the United States Bankruptcy Court for the District of Delaware denied a motion to dismiss a chapter 11 where the debtor circumvented a preferred stockholder’s blocking rights by filing bankruptcy petitions without the preferred stockholder’s consent.[1] Judge Walrath ruled, in a decision that has not yet been published, that she was “prepared to be the first court” to find a stockholder’s blocking rights were invalid. Judge Walrath held that use of a blocking right to preclude access to bankruptcy relief was against public policy, and that a stockholder in possession of such a right has a fiduciary duty to act in the best interests of the corporation, and not its own interests. This decision suggests that blocking rights, which are commonly used in structured finance and real estate transactions to prohibit voluntary bankruptcy filings, may not always be effective.
Continue Reading Delaware Bankruptcy Court Voids Preferred Stockholder’s Right to Block Bankruptcy Filing

Introduction:

New York bankruptcy courts have long adhered to the 2007 ruling by the Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) in In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007) (“Enron”), which held that Section 502(d) “disallowance taint” – the possibility that a bankruptcy claim may be disallowed if the claimholder received an avoidable, yet unpaid transfer – would not follow a claim that was sold, rather than assigned. However, an April 22, 2020 ruling by Judge Sean H. Lane in the case In re Firestar Diamond, Inc., 615 B.R. 161 (“Firestar Diamond”) reverses course, holding that a debtor could assert defenses against buyers of claims to the same extent that it had claims or defenses against the original owner of the claim.[1] Holding that disallowance taint travels with the claim, Judge Lane’s opinion effectively puts the onus on a would-be buyer to conduct diligence into the potential for a claim’s reduction, compensate for the risk in negotiating the purchase price for the claim, prepare for a future indemnity claim against the original seller, or otherwise protect its purchase.
Continue Reading S.D.N.Y. Bankruptcy Court Pivots from Enron; Holds “Disallowance Taint” Transfers With Purchased Claim in Firestar Diamond Case