January 27, 2012

January 26, 2012

January 25, 2012

In a section 524(g) case, 11 USC 541(c) preempts non-settling insurers' State-law anti-assignment rights. Even if 541(c) did not expressly preempt the anti-assignment rights, such rights would be implicitly preempted, since enforcing the anti-assignment provisions would subject virtually all § 524(g) reorganizations to an insurer veto.

Although years have passed since confirmation of the the asbestos trust plan, and substantial distributions have occurred pursuant to the plan. The appeal of plan confirmation by insurers denied standing to object is not equitably moot. The insurers sought and were denied a stay pending appeal. To say that a party's claims, although diligently pursued, are equitably moot because of the passage of time, before the party had a chance to present views on appeal, would alter the doctrine to be one of "inequitable mootness." Practicalities necessarily may take center stage in a particular case, expediency does not always trump justice. If appellants have presented appellate claims that can be remedied by some reasonable means without totally dislodging the § 524(g) plan, it would be inequitable to dismiss their appeal on equitable mootness grounds merely because the reorganization has proceeded.

Because the trust has not distributed even half of the funds contemplated, there has not been substantial consummation of the plan.

In determining whether an appeal is equitably moot, the question is not whether it is possible to alter a plan such that no third party interests are affected, but whether it is possible to do so in a way that does not affect third party interests to such an extent that the change is inequitable.

The district court erred in denying insurers standing to object to confirmation on the grounds that the plan was "insurance neutral." However, the plan does affect insurers in several ways, including: (i) possible preclusive effects, (ii) responsibility for claims channeled to the trust, (iii) the fact that the trust permits direct file suits against the insurers and (iv) the fact that the plan may have economic consequences for the insurers by affecting their reinsurance with settling insurers. The plan may economically affect the insurers in substantial ways. A plan is not insurance neutral when it may have a substantial economic impact on insurers. The plan affects the insurers' contractual rights, affects their financial interests, and has the possibility of affecting their litigation rights in court. The plan potentially increases the liabilities of the insurance companies with real world economic impact, and, as such, the insurers have sufficiently alleged an injury in fact. The nonsettling insurers had a right to be heard, to present evidence, and to participate in the proceedings culminating in approval of the § 524(g) plan.

January 23, 2012

In River Road, the Circuit previously held that the requirement that a secured creditor be allowed to credit bid in a sale could not be subverted under the rubric of "indubitable equivalence." The same logic prevents a debtor from circumventing the cram down provision of 11 USC 1129(b)(2)(A)(i) (requiring that an 1111(b) lien on the debtor's property be retained) in the name of "indubitable equivalence."

The debtor proposed to exchange the secured creditor's mortgage lien in an office building for 30-year Treasury bonds, which, at maturity would putatively be worth the full amount of the creditor's claim. The creditor was undersecured. The bankruptcy court refused to allow the substitution of collateral, on the grounds that the substitution would thwart the creditor's 111(b) election. Banning substitution of collateral makes good sense when the creditor is undersecured, unlike a case in which it's oversecured, in which case the involuntary shift of his lien to substitute collateral is proper as long as it doesn't increase the risk of his becoming undersecured in the future. Substituted collateral that is more valuable and no more volatile than a creditor's current collateral would be the indubitable equivalent of that current collateral even in the case of an undersecured debt. But no rational debtor would propose such a substitution, because it would be making a gift to the secured creditor. The debtor's only motive for substitution of collateral in an 111(b) situation is that the substitute collateral is likely to be worth less than the existing collateral.

Specifically, the debtor's plan to substitute Treasury bonds for the mortgage lien would further impair the secured creditor by: (i) requiring the creditor to wait many years for full payment as opposed to the possibility of achieving full payment if the debtor defaults post-confirmation and (ii) exposing the creditor to a decline in the value of the Treasury bonds if interest rates rise during the long term of the binds, as is likely. Treasury bonds carry little default risk, but long-term Treasury bonds carry a substantial inflation risk, which might or might not be fully impounded in the current interest rate on the bonds.

The substituted collateral might turn out to be more valuable than the mortgage lien and thus provide the creditor with more security. But because of the different risk profiles of the two forms of collateral, they are not equivalents, and there is no reason why the choice between them should be made for the creditor by the debtor.