ILNews

Bankruptcy ruling locks out insiders

Back to TopCommentsE-mailPrintBookmark and Share

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.”•

ADVERTISEMENT

Post a comment to this story

COMMENTS POLICY
We reserve the right to remove any post that we feel is obscene, profane, vulgar, racist, sexually explicit, abusive, or hateful.
 
You are legally responsible for what you post and your anonymity is not guaranteed.
 
Posts that insult, defame, threaten, harass or abuse other readers or people mentioned in Indiana Lawyer editorial content are also subject to removal. Please respect the privacy of individuals and refrain from posting personal information.
 
No solicitations, spamming or advertisements are allowed. Readers may post links to other informational websites that are relevant to the topic at hand, but please do not link to objectionable material.
 
We may remove messages that are unrelated to the topic, encourage illegal activity, use all capital letters or are unreadable.
 

Messages that are flagged by readers as objectionable will be reviewed and may or may not be removed. Please do not flag a post simply because you disagree with it.

Sponsored by

facebook - twitter on Facebook & Twitter

Indiana State Bar Association

Indianapolis Bar Association

Evansville Bar Association

Allen County Bar Association

Indiana Lawyer on Facebook

facebook
ADVERTISEMENT
Subscribe to Indiana Lawyer
  1. It is amazing how selectively courts can read cases and how two very similar factpatterns can result in quite different renderings. I cited this very same argument in Brown v. Bowman, lost. I guess it is panel, panel, panel when one is on appeal. Sad thing is, I had Sykes. Same argument, she went the opposite. Her Rooker-Feldman jurisprudence is now decidedly unintelligible.

  2. November, 2014, I was charged with OWI/Endangering a person. I was not given a Breathalyzer test and the arresting officer did not believe that alcohol was in any way involved. I was self-overmedicated with prescription medications. I was taken to local hospital for blood draw to be sent to State Tox Lab. My attorney gave me a cookie-cutter plea which amounts to an ALCOHOL-related charge. Totally unacceptable!! HOW can I get my TOX report from the state lab???

  3. My mother got temporary guardianship of my children in 2012. my husband and I got divorced 2015 the judge ordered me to have full custody of all my children. Does this mean the temporary guardianship is over? I'm confused because my divorce papers say I have custody and he gets visits and i get to claim the kids every year on my taxes. So just wondered since I have in black and white that I have custody if I can go get my kids from my moms and not go to jail?

  4. Someone off their meds? C'mon John, it is called the politics of Empire. Get with the program, will ya? How can we build one world under secularist ideals without breaking a few eggs? Of course, once it is fully built, is the American public who will feel the deadly grip of the velvet glove. One cannot lay down with dogs without getting fleas. The cup of wrath is nearly full, John Smith, nearly full. Oops, there I go, almost sounding as alarmist as Smith. Guess he and I both need to listen to this again: https://www.youtube.com/watch?v=CRnQ65J02XA

  5. Charles Rice was one of the greatest of the so-called great generation in America. I was privileged to count him among my mentors. He stood firm for Christ and Christ's Church in the Spirit of Thomas More, always quick to be a good servant of the King, but always God's first. I had Rice come speak to 700 in Fort Wayne as Obama took office. Rice was concerned that this rise of aggressive secularism and militant Islam were dual threats to Christendom,er, please forgive, I meant to say "Western Civilization". RIP Charlie. You are safe at home.

ADVERTISEMENT