Distressed Investors

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On May 22, 2020, amidst the deepest possible gloom about COVID-19’s impact on travel, the car rental giant, Hertz Global, filed for Chapter 11. According to reporting by Barrons,[1] during the reorganization, Hertz drastically cut the size of its fleet and closed locations. Like most shareholders of bankrupt companies, Hertz owners were likely to…

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?

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

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

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

Introduction

Creditors of an insolvent debtor may avoid certain transfers as fraudulent conveyances under state or federal law. A fraudulent conveyance is a transfer made without the transferor receiving adequate consideration and which satisfies one of three insolvency conditions: 1) the transferor was insolvent when the transfer was made; 2) the transferor was rendered insolvent by the transfer; or 3) the transferor was left with unreasonably small capital to carry on his/her or its business.[1]
Continue Reading S.D.N.Y. Bankruptcy Court Holds that Allegedly Fraudulent Conveyances are Safe Harbored Under Section 546(e) and Provides a New Avenue of Defense

The general rule is that when a corporation or other business entity buys the assets of another entity, it does not assume the liabilities of the seller. But in New Nello Operating Co., LLC v. CompressAir, 19A-CC-603 (Ind. Ct. App. March 2, 2020), the court applied the de facto merger exception and held the buyer company (“New Nello”), which had acquired the assets through a foreclosure under the Uniform Commercial Code (“UCC”), responsible for the seller’s (“Old Nello”) debt. The facts illustrate why the court imposed liability on New Nello and provide guidance on how to avoid this result.
Continue Reading Distress Buyer in UCC Foreclosure Sale Held Liable for Seller’s Debts Under De Facto Merger Doctrine

Introduction

The First Circuit recently ruled in Sun Capital Partners III, LP v. New England Teamsters & Trucking Ind. Pension Fund that two investment funds controlled by private equity firm Sun Capital were not part of a “controlled group” with a former portfolio company, Scott Brass, Inc. (“Scott Brass”), and therefore not liable for Scott Brass’s withdrawal liability from a multi-employer pension plan.[1] While this decision ends the decade-long attempt by the New England Teamsters pension fund to hold the Sun Capital funds liable, the opinion is not a repudiation of the principle that private equity funds may constitute a “controlled group” for purposes of pension plan withdrawal liability. Rather, it signals that each case will have to be evaluated on its own facts. So, while the ruling is good news for Sun Capital, the message for investors is that they need to be mindful of pension plan withdrawal liability in structuring private equity acquisitions.
Continue Reading First Circuit Rules that Sun Capital Funds Not Part of “Controlled Group” and Not Liable for Pension Plan Withdrawal Liability