Third Circuit Upholds Secured Creditor’s "Gift" to Unsecured Creditors in Process Pioneered by CLLA Leader
By Louis Robin
Law Offices of Louis S. Robin
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.