Developments in Bankruptcy Law: Recent Cases at the Intersection of Real Estate Lending and Bankruptcy

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1 THE UNIVERSITY OF TEXAS SCHOOL OF LAW Presented: 48th Annual William W. Gibson, Jr. Mortgage Lending Institute September 18-19, 2014, AT&T Conference Center, Austin, Tex. October 2-3, 2014, Cityplace Conference Center, Dallas,Tex. Developments in Bankruptcy Law: Recent Cases at the Intersection of Real Estate Lending and Bankruptcy Mark C. Taylor Christopher G. Bradley Author contact information: Mark C. Taylor Austin, TX Christopher G. Bradley U.S. Bankruptcy Court, W.D. Tex. (through August 2014) (as of November 2014) Austin, TX Continuing Legal Education

2 Mark C. Taylor 100 Congress Ave. Suite 1800 Austin, TX Mark Taylor was born in Houston and practiced law with a large Texas-based firm in Dallas before moving to Austin to join Hohmann, Taube & Summers in Mark s practice emphasizes bankruptcy, creditors rights, and business litigation. He has also written and lectured on various bankruptcy and bankruptcy-litigation topics. Mark has received the AV rating from Martindale-Hubbell, reflecting overall experience, expertise, integrity and professional excellence. Mark has also been named to the Thomson Reuters Super Lawyers list of Best Lawyers in Business Bankruptcy each year since EDUCATION University of Texas, J.D. (1987) The Review of Litigation, Articles Editor (1986), Member (1985) Rice University, Bachelor of Arts (1984) Omicron Delta Epsilon Economics Honor Society ADMISSIONS State Bar of Texas (1987) United States Supreme Court United States Court of Appeals for the Third and Fifth Circuits United States District Court for the Northern, Eastern, Southern, and Western Districts of Texas AFFILIATIONS State Bar of Texas American Bar Association American Bankruptcy Institute Austin Bar Association Austin Bankruptcy Lawyers Association (President , Council Member 2012-present) Western District of Texas Bankruptcy Court Liaison Committee 2008-present

3 Christopher G. Bradley (After November 2014) 100 Congress Ave. Suite 1800 Austin, TX (Through August 2014) Chambers of Hon. Tony M. Davis U.S. Bankruptcy Court for the Western District of Texas Homer Thornberry Judicial Building 903 San Jacinto Blvd., Suite 332 Austin, Texas Christopher Bradley completes a term clerkship with Judge Tony M. Davis of the United States Bankruptcy Court for the Western District of Texas in August. In November, he will take a position with, in Austin, Texas, practicing business litigation and bankruptcy. His experience includes a year as law clerk to Hon. Patrick E. Higginbotham of the United States Court of Appeals for the Fifth Circuit, and several years practicing commercial and bankruptcy litigation with the law firm of Weil, Gotshal & Manges, in Houston, Texas. He holds a J.D., magna cum laude, from the NYU School of Law, an LL.M. in International Law from the NYU School of Law, a doctorate in English Literature from the University of Oxford, and a bachelor s degree, summa cum laude, from Princeton University. He has been inducted into the Order of the Coif and Phi Beta Kappa. He has presented at numerous conferences on issues related to bankruptcy law and litigation strategy. In his free time, Chris enjoys exploring Austin s outdoor spaces with his wife and their young daughter.

4 Developments in Bankruptcy Law: Recent Cases at the Intersection of Real Estate Lending and Bankruptcy Christopher G. Bradley * August 2014 This presentation highlights recent bankruptcy law developments that affect the mortgage lending world. We will work through cases on sales and credit bidding; interest rates and cram downs ; lien-stripping and liens riding through bankruptcy ; artificial impairment; foreclosures; and recovery of costs, attorneys fees, and prepayment premiums. The focus is on Fifth Circuit law, although we will survey cases of interest from outside the Fifth Circuit. This paper provides case summaries, and the presentation will focus on overarching themes and strategic considerations. * Law clerk to Hon. Tony M. Davis, U.S. Bankruptcy Court for the Western District of Texas (through August 2014); associate, Hohmann, Taube and Summers, LLP (after November 2014). This paper represents my views alone and not those of Judge Davis, or of Hohmann, Taube and Summers. Parts of this text are drawn from the written materials accompanying the presentation of Hon. Tony M. David, Leif Clark, and Christopher Bradley, 363 Sales and Credit Bidding, 2014 Bankruptcy Bench-Bar Conference of the Western District of Texas (June 12, 2014). 1

5 CASES 363 Sales and Credit Bidding RadLAX Gateway Hotel LLC v. Amalgamated Bank, 132 S.Ct (2012). In re Fisker Automotive Holdings, No , 2014 WL (Bankr. D. Del. Jan. 17, 2014). In re Free Lance-Star Publishing Co., No , 2014 Bankr. LEXIS 1611 (Bankr. E.D. Va. Apr. 14, 2014). In re Charles Street African Methodist Episcopal Church, No , 2014 Bankr. LEXIS 2264 (Bankr. D. Mass. May 14, 2014). In re L.L. Murphrey Co., No , 2013 WL (Bankr. E.D.N.C. June 6, 2013). Cramdown/Interest Rates Till v. SCS Credit Corp., 541 U.S. 465 (2004). Wells Fargo Bank Nat l Assoc. v. Tex. Grand Prairie Hotel Realty, L.L.C. (In re Texas Grand Prairie Hotel Realty, L.L.C.), 710 F.3d 324 (5th Cir. 2013). In re LMR, LLC, 496 B.R. 410 (Bankr. W.D. Tex. 2013). In re SCC Kyle Partners, Ltd., No HCM, 2013 WL (Bankr. W.D. Tex. 2013). In re J.C. Householder Land Trust #1, 501 B.R. 441 (Bankr. M.D. Fla. 2013). Lien-Stripping and Liens Riding Through Bankruptcy Acceptance Loan Co. v. S. White Transportation, Inc. (In re S. White Transportation, Inc.), 725 F.3d 494 (5th Cir. 2013) Shelton v. Citimortgage, Inc. (In re Shelton), 735 F.3d 747 (8th Cir. 2013). In re Batista-Sanechez, 502 B.R. 227 (Bankr. N.D. Ill. 2013). In re B.R. Brookfield Commons No. 1 LLC, 735 F.3d 596 (7th Cir. 2013). Artificial Impairment W. Real Estate Equities v. Village at Camp Bowie I, L.P. (In re Village at Camp Bowie I, L.P.), 710 F.3d 329 (5th Cir. 2013). In re RAMZ Real Estate, 510 B.R. 712 (Bankr. S.D.N.Y. 2013). Foreclosures In re AMRCO, No , 2013 WL (Bankr. W.D. Tex. July 29, 2013). In re Grason, 486 B.R. 448 (Bankr. C.D. Ill. 2013). Fees, Costs, and Prepayment Premiums Wells Fargo Bank, N.A. v. 804 Congress, L.L.C. (In re 804 Congress, L.L.C.), 756 F.3d 368, 2014 WL WL (5th Cir. 2014). Bank of N.Y. Mellon v. GC Merch. Mart, L.L.C. (In re Denver Merch. Mart, Inc.), 740 F.3d 1052 (5th Cir. 2014). Law v. Siegel, 132 S.Ct (2014). 2

6 363 Sales and Credit Bidding RadLAX Gateway Hotel LLC v. Amalgamated Bank, 132 S.Ct (2012). In RadLAX, the Supreme Court found that if a Chapter 11 plan includes an asset sale, it must allow a secured creditor its right to credit bid the amount of its secured indebtedness. The debtor had sought to confirm a plan providing for a sale of assets without giving the secured creditor a right to credit bid at the sale. Because the secured creditor had not accepted the plan, the plan had to meet the requirements of 1129(b), which deals with the cramdown of a non-consenting creditor. The debtor argued that the credit bidding rights of 1129(b)(2)(A)(ii) need not be provided because it had provided the creditor with the indubitable equivalent of its claim under 1129(b)(2)(A)(iii) instead. The unanimous Court rejected this hyperliteral interpretation of 1129(b) as contrary to common sense as well as to the well established canon of statutory interpretation... that the specific governs the general. 132 S.Ct. at The specific requirement of 1129(b)(2)(A)(ii) cannot be escaped merely by proceeding under the more general sub-section (iii) instead. In addition to providing this textual support for its ruling in favor of credit bidding, the Court articulated policy reasons for the guarantee of credit bidding: The ability to credit-bid helps to protect a creditor against the risk that its collateral will be sold at a depressed price. It enables the creditor to purchase the collateral for what it considers the fair market price (up to the amount of its security interest) without committing additional cash to protect the loan. Id. at 2070 n. 2. Seeking to guarantee a fair market price for the assets, whether for the benefit of the secured creditor or the estate, is a consistent theme in the law of asset sales in bankruptcy. 3

7 In re Fisker Automotive Holdings, No , 2014 WL (Bankr. D. Del. Jan. 17, 2014). In Fisker, a Delaware bankruptcy court denied a motion to sell substantially all of the debtor s assets to a secured creditor, Hybrid Tech Holdings, for a credit bid of $75 million. Instead, the court decided to hold an auction and it found cause to cap the secured creditor s credit bidding rights at the auction to $25 million (which was the price the secured creditor had paid, about a month prior to the filing, for senior secured claims totaling over $168 million). 1 An aspect of Fisker that has not been sufficiently appreciated is that the court leaned heavily on highly significant stipulations reached between the debtor and the committee of unsecured creditors WL , at *4. These arguably left the court with little choice to rule other than it did. The debtor and committee stipulated, in pertinent part, that if credit bidding were not capped, there was no realistic possibility of an auction, and alternatively, that with a cap of $25 million, there was a strong likelihood that auction would have a material chance of creating material value for the estate ; that capping the credit bid would likely foster and facilitate a competitive bidding environment ; that the assets should be auctioned as an entirety ; and that while some of the assets were properly perfected, others were not, or would raise a dispute concerning perfection not likely subject to quick or easy resolution. Id. at *2-*4. Citing case law on cause, in particular In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3d Cir. 2010), and the express and unrebutted evidence that without a cap, bidding would not just be chilled but totally frozen, the court capped credit bidding at $25 million, the amount that according to the stipulations would allow for a healthy auction. Id. at *4-*5. In doing so, the court disagreed with the secured creditor s argument that only inequitable conduct could furnish the basis for capping of credit bid rights. 1 For a brief but helpful discussion of Fisker, see Oscar N. Pinkas & Joseph G. Selby, Is Fisker Automotive Holdings a New Limit on Credit-Bidding?, Am. Bank. Inst. J., Apr