Last week, we reported notes from the Beard Group's 18th annual Distressed Investing Conference. Distressed Debt Investing contributor Josh Nahas, Principal of Wolf Capital Advisors, a Philadelphia based investment advisory firm focused on distressed debt and corporate restructuring, was in attendance. Here is more notes from the conference:

Baggage & Benefits: Current Issues in the Ownership of Distressed Debt and Bankruptcy Claims





Panelist:

Paul N. Silverstein, Panel Moderator, Partner/Co-Chair Bankruptcy & Restructuring Practice, ANDREWS KURTH LLP

Geoffrey A. Richards, Group Head, Special Situations and Restructuring, WILLIAM BLAIR & COMPANY L.L.C.

Jane Sullivan, Executive Vice President, EPIQ BANKRUPTCY SOLUTIONS

The first topic discussed was credit bidding and the Philly News and Palco decisions and how those decisions were unfavorable to secured creditors who, prior to those rulings, had always assumed to have an absolute right to credit bid except in the case of malfeasance. Section 363(k)of the bankruptcy code allows for credit bidding except for “cause” which the 3rd circuit in Philly News went to define broadly, not just a bad act.





However, in In re River Road Hotel Partners LLC the 7th Circuit affirmed the bankruptcy court’s ruling, rejecting the debtor’s bid procedures motion on the grounds that it precluded credit bidding. In that case, the court took the same approach as the dissenting opinion of Judge Ambro in Philly News which was based on the principles of statutory construction. There is now a split between the 7th Circuit and the 3rd and 5th Circuits and the appellate circuits as to the interpretation of Section 1129(b)(2)(A)’s “fair and equitable” standard. River Road along with another debtor in a similar case RadLax have appealed the decision to the Supreme Court.





Issues relating to the risks of trading with Plan Support Agreements ("PSA") were discussed. One result is that creditor will be required to disclose exact amount of holdings. Counter parties need to know whether they actually hold title to instruments (assignment vs participation) and whether the securities are held currently or out on loan. It was recommended that if you sign a PSA it is best not to sit on the UCC because of potential conflicts in your fiduciary duties.





Next, the panel tacked the issue related to WAMU and post-petition interest. The panel viewed as a troubling and unsound decision where a ruling by Jude Walrath of the US Bankruptcy Court in Delaware held that creditors with a contract rate of interest (bondholders) of a solvent debtor were only entitled to Federal Judgment Rate on post-petition interest. In the opinion, she admittedly disavowed her previous statements in In re Quorum Healthcare Corp where she had upheld post-petition interest at the contract rate. She did uphold a contractual subordination clause between the Sr and Junior lenders that will require the junior lender to turn over their recovery to the senior lenders until the senior lenders have recovered their post-petition interest.





The panel all agreed that as a result, investors should be modeling base case recovery waterfalls in solvent debtor case assuming judgment rate not contract rate, at least for cases in Delaware until there is more clarity on the issue.





Perhaps the most disturbing and far reaching decision for distressed investors is Judge Walrath’s findings with regards to potential insider trading claims. In her ruling, Judge Walrath found in favor of the equity committee having a “colorable” claim of insider trading against members of a steering committee which had formed to negotiate a settlement with the debtor. The 4 fund group had established provisions for cleansing of inside information, and lifting of trading restrictions when negotiations had closed. The panel believed that this decision may significantly impact the ability and willingness of creditors to actively participate in negotiations with debtors. This could increase the time it takes to get a deal done in bankruptcy, as well increase the amount of money spent litigating, rather than negotiating.





The last issue the panel briefly touched on was Judge Kevin J. Carey’s decision to reject both plans in the Tribune bankruptcy. Carey said neither plan was confirmable but appeared to favor Tribune’s plan, labeling the competing plan as “speculative.” The issue surrounds Fraudulent Conveyance claims against those who financed the 2007 LBO of the company. There are questions surrounding the ability of the creditors to step into the debtor’s shoes and pursue the claims, since fraudulent conveyance actions are prosecuted by the debtor on behalf of the estate.



