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Bankruptcy ruling locks out insiders

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A recent bankruptcy appeal tossing an Indianapolis shopping center’s reorganization plan further establishes that the control of equity in Chapter 11 cases will be subject to competitive bidding and that insiders might be out of luck.

“This is a case that will be talked about by bankruptcy lawyers for a long time,” said Alan K. Mills, a Barnes & Thornburg LLP partner who successfully represented the chief creditor before the 7th Circuit Court of Appeals in In the matter of: Castleton Plaza LP; Appeal of: EL-SNPR Notes Holdings LLC, 12-2639.
 

plaza-15col.jpg Castleton Plaza in Indianapolis is at the center of a bankruptcy case that attorneys say will have broad implications for Chapter 11 reorganizations. (IL Photo/ Perry Reichanadter)

On Feb. 14, the 7th Circuit reversed a Southern District of Indiana bankruptcy court that had approved a Chapter 11 reorganization plan in which Castleton Plaza owner George Broadbent was to transfer equity in the property to his wife Mary Clare Broadbent, who was to invest $375,000 in new equity. Under the plan, Castleton Plaza secured lender EL-SNPR would be paid $300,000 on secured debt of $10 million, and the remainder would be written down to about $8.2 million of unsecured debt.

“Not only did the equity holder decide who it was going to be sold to, he also decided what it was going to be sold for,” Mills said of the original reorganization plan. “This has been sort of a nationwide maneuver by debtors’ lawyers in single-asset bankruptcy,” he said of reorganizations relying on infusion of new equity from insiders as 11 U.S.C. §101(31) defines that term.


mills_alan.jpg Mills

Mills said the 7th Circuit’s reversal was a vindication of the absolute priority rule that generally holds that a court will not confirm a plan in which dissenting creditors are not paid in full or given an opportunity to market test the value of equity.

“Competition is essential whenever a plan of reorganization leaves an objecting creditor unpaid yet distributes an equity interest to an insider,” 7th Circuit Chief Judge Frank Easterbrook wrote in remanding Castleton Plaza to the bankruptcy court to open the reorganization plan to competitive bidding.


deignan-paul-mug.jpg Deignan

Taft Stettinius & Hollister LLP partner Paul T. Deignan represented the Broadbent Company and Castleton Plaza. He said he and his clients are reviewing the ruling and might seek an appeal.

“It is of such a serious nature that it is getting serious attention,” Deignan said. “People including myself and other bankruptcy attorneys are going to have to think about this for a while. It’s a pretty dramatic change for those of us who represent family-owned businesses.”

Deignan said there is an exception or corollary to the absolute priority rule when substantial new equity is brought to the table, as was the case in Castleton Plaza. Bankruptcy courts have long recognized that new capital from insiders can be a key to a company’s recovery, he said.

“Part of the reason this is a very significant decision is, in our part of the country at least – Indiana, Illinois, Wisconsin in the 7th Circuit – many of the Chapter 11 reorganizations are of small businesses and family-owned businesses,” Deignan said. If creditors now can require an auction for new equity ownership in bankruptcy, “a consequence of that will be not a lot of incentive for family members to step up who might be able to save the family business,” he added.


georgakopulos-nicholas-mug Georgakopoulos

But Indiana University Robert H. McKinney School of Law professor Nicholas Georgakopoulos said the 7th Circuit decided correctly based on the U.S. Supreme Court precedent in Bank of America National Trust & Savings Association v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999). That ruling held that pre-bankruptcy equity holders may not contribute new capital on an exclusive basis over the objection of impaired creditors.

“I think the Supreme Court decision in 203 North LaSalle should be seen as trying to protect lenders,” said Georgakopoulos, whose article, “New Value, Fresh Start,” was cited in the high court’s opinion. “And if the 7th Circuit were to uphold the lower court’s opinion in Castleton, they would have created a huge loophole which would allow self-dealing and would allow essentially bankruptcies of closely held corporations to avoid the requirement of 203 North LaSalle.”

Mills said the 7th Circuit decision in Castleton Plaza appears to be the first Circuit-level ruling to apply the LaSalle holding. He said the opinion goes a long way toward resolving a split among bankruptcy courts regarding whether equity owners can avoid the absolute priority rule through transfers to insiders.

He believes the ruling may have a wider impact, even if insiders are not involved in a reorganization plan. “Whenever you have an equity piece that is going to be sold, I think many bankruptcy courts after this will see if there’s a market for it to determine its true value.”

Bose McKinney & Evans LLP partner James E. Carlberg chairs the Bankruptcy and Creditors’ Rights Section of the Indiana State Bar Association. He also believes the ruling will have profound ramifications for Chapter 11 reorganizations.

“What the court really said was no one knows for sure what the right to make a contribution to become the new equity owner is worth,” Carlberg said. “And in all cases that has to be put up, in essence, for bids and the creditor allowed to bid for it as well.

“What the court is saying is we should put that up for auction to safeguard against it being undervalued at the outset.”

Carlberg explained that many bankruptcies don’t involve assets earning sufficient income to service debts. That doesn’t appear to be the case with Castleton Plaza, which boasts leases with at least 20 retail tenants including such anchor stores as Sam Ash, West Marine, Dollar Tree and Formosa Seafood Buffet.

Easterbrook’s ruling made clear that when a Chapter 11 bankruptcy creditor doesn’t buy into a reorganization plan involving insiders, that plan won’t pass muster.

“This appeal presents the question whether an equity investor can evade the competitive process by arranging for the new value to be contributed by (and the new equity to go to) an ‘insider,’” Easterbrook wrote. “The bankruptcy judge answered yes; our answer is no.”•

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  1. Am I the only one who sees that the City is essentially giving away the MSA site AND giving millions to build new buildings on the site when this site would be the perfect place for the Justice Complex? Across from City-County, check; keeping it centrally located, check, etc. It's my understanding that the GM site must be purchased by the City from Motors Liquidation Company. STOP WASTING WHAT WE ALREADY HAVE AND OUR TAX DOLLARS! The Ballard Administration has not been known for it's common sense...never voted for him and never will!

  2. This guy sounds like the classic molester/manipulator.

  3. Louis D. Brandeis was born in 1856. At 9 years of age it would have been 1865. The Brandeis family did not own slaves. My source Louis D. Brandeis: A Life, by Melvin L. Urofsky.

  4. My name is Matthew Lucas Major, I recently went through a jury trial in Bloomington , In. It was the week of Feb 19-21. Although I have been incarcerated since August 5, 2014. The reason I 'am writing to you sir is on the 21 of February the jury came in with a very excessive and wrongful verdict of guilty on 6 child molesting charges against my daughter who was 9 at the time I was accused. I also had 2 other Felonies one of Intimidation and 1 of Sexual Vicarious Gratification. Judge Marc Kellam on the second day of trial gave me a not guilty on those 2 felonies. The jury was sent out during that time and when brought back Judge Kellam told them to not concern themselves with the 2 Felonies that he ruled on them. They were told to not let evidence they had already heard influence there verdicts. I never in my life touched any child sexually and definitely not with my own daughter. When I was arrested Detective Shawn Karr told me I would be convicted guilty just on my daughters word even without evidence. That's just what happened. my public defender did me so wrong he never once proved to the court and jury all the lies the child told, and Jeremy Noel my public defender could of proven the lies easily. The stories in Serenity's depositions and Forensic interview changed and were not consistent as Prosecutor Darcie Fawcett claimed they were. Yet my attorney never mentioned that. The facts that the child accused me of full penetration in her vagina and rectum was proven lies. Doctor Roberta Hibbard of Riley hospital in Indianapolis confirmed Serenity's hymen intact, no scars, no tearing, no signs of rape to her. Yet my attorney didn't use that knowledge . the DNA was all in my favor. I tell you I will spend my entire life in prison going through rape and beatings etc. even Judge Kellam abused his authority by telling the jurors to listen and believe what the prosecutors side in evidence like my daughters testimony. In one interview with the detectives my daughter got flustered with her mom and said on camera " I'm saying what you told me to mom"!! Yet Mr. Noel said nor did anything to even resemble a defense attorney. Judge Kellam allowed edited version of a taped conversation between the child and her mother. Also Judge Kellam allowed the Prosecutor too bring in to my case a knife found under my seat, the knife wasn't part of my case. She was allowed by my attorney and the judge to put a huge picture of it on the screen and huge picture of my naked privates in a full courtroom and open court. Ms. Fawcett says to jury see how easy Mr. Major could reach the knife and cut his Childs throat. Even though I had no weapons charge against these cases. This gave the jurors prejudice thought against me thinking I threatened her with that knife and how scared she would of been knowing i could get it and kill her. On my sentencing court March 19, 2014 my public defender told Judge Kellam he wish to resign from being my attorney and wished for the court to give me outside council to file a error to trial or appeal. We were denied. Now after openly knowing my public defender don't want to represent me he has to. Well when as parents we make our kids clean a room when they really don't wish to, well the child will but don't mean she will do a good job, that's where I'm at with Mr. Noel. please dont ignore mine and my families pleas for your help . we have all the legal proof you could need to prove Im innocent. Please dont make my spend years in prison innocent when you can fix this wrong. Im not saying Im a perfect man or that I was a perfect dad to my 2 children none of us are. Ive made some bad choices in life and I paid for them. But I didnt ever touch or rape my daughter . I love my children with all my heart. And now through needing attention and a ex-wife who told my granny several times she wish she could put me in prison to get me out of their lives. Well my ex finally accomplished her goal. Sad part is she is destroying our daughter with all this horrific lies and things she taught my daughter to say. My daughter will need therapist to ever hope for a chance of a normal life after what she had done to her by her mom and their side of the family. My daughter told everyone even on stand she had a dream months before i supposedly molested her in this dream I was molesting her and when I finally did it matched her dream perfectly. She admitted to watching movies about little girls being molested and watching U-Tube videos about child molesting all before it happened supposedly to her. Doesn't that sound very unusual that a non molested 9 yr old would need to know so much about being molested? The only reason I could think a 9 year old would need so much information is to be prepared to know what to say and be able to say how it felt what took place etc.. So when questioned by authorities she would be prepared. And there again sir if a parent is pre grooming a 9 year old child she would need intimate details . Like telling her daughter about a couple moles on my private area. The child admitted to sneaking my cell and looking many many times at nudes of me and my girlfriend even one where my penis was entering my girlfriends vagina. In that picture my moles are obvious. Yet when prosecutor showed everyone in court my privates and pictures of the moles she said the only way the child would know about them is if she saw them for herself. My attorney once again said nothing about the pictures my child saw. Or could a ex-wife be able to describe my moles to help her case against getting rid of me? I beg you help me. This is my very existence. Ive lost everything , a good job, a wonderful girlfriend, my freedom, but worse thing Ive lost is my children. They were my reason to get up every morning and strive to be better. The wonderful bond I had with my Serenity is gone. After this I would be afraid to even hug her for fear of what next can they do to me. I'm not afraid to tell you I sit here in this cell and try to hold back my tears. Everyone knows you cant show weakness in prison. My life has already been threatened here at Wabash Valley Prison. After only 3 days of arrival. I was tricked into signing a waiver now Im in G Block General Population with 6 child molesting felony charges. Mrs. Hart as a 18 year old I almost died hooked to machines in hospital almost 1 month and now I know that fear was childish compared to this . I cant help but put emotions in this, after all Mrs. Hart Im human and God help Me I never been more afraid in my life. I didnt hurt my little girl I didnt touch her sexually. As much as it shreds me and fills my mind what Im facing I worry more about my mom and granny because of their great love for me mam they are suffering so deeply. I aint done this things but my loved ones suffering right along beside me and If you take my case you will be in essence freeing them also. I sent momma this letter and asked her to email it to you. I'm scared I have been done so unjustly by our legal system and I need you to fix this and give me freedom. I ask you please don't just ignore my pleas. Here in America its nice to be able to trust our legal justice system, well they destroyed my and my loved ones trust in our justice system . And I'm trusting in You !!! My entire family is suffering this nightmare with me. My 77 year old granny had a stroke and isn't doing so well. My single mother that raised 3 kids alone is dying from Lupus and since my arrest has stayed so sick and weary. Our lives torn to peices by a government I was taught I could trust in. my momma has tried so many innocent project and wrongfully accused and cant get anywhere. please please help me. A quote from the late Nelson Mandela: To be free is not merely to cast off ones chains, But to live in a way that respects and enhances The Freedom Of Others. I have Faith in you and your clinic to cast my chains off and give me freedom I do deserve as a wrongfully accused Man, son, brother, father, friend. Matthew Major DOC# 246179 Cause # : 53c02-1308-FA-000779 God Bless you. Please contact me with your decision so I know you made a life changing decision for me , just please at least write me so I know you care enough about your citizens to respond to cries for your help. You can speak openly with my mother Charlotte Spain (828) 476-0406: 71 Lakeview Dr. Canton, NC 28716 Thank You Matthew Major I know yall get thousands of request and inmates claiming innocence, and each person who are innocent deserve to have organizations like yours willing to fight for them and I give yall so much Thanks and I thank God everyday yall are out there caring enough to help free the innocents. Since discovering firsthand how easily lives and families can be destroyed by Poor Defense attorneys not doing their job . And Prosecutors allowed to do as they please in court

  5. Frankly, it is tragic that you are even considering going to an expensive, unaccredited "law school." It is extremely difficult to get a job with a degree from a real school. If you are going to make the investment of time, money, and tears into law school, it should not be to a place that won't actually enable you to practice law when you graduate.

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