Top Story

Supreme Court Says Underwater Junior Liens Survive Bankruptcy
By Lorraine McGowen

On March 30, we reported on two cases pending before the U.S. Supreme Court: Bank of America v. Caulkett^[1] and Bank of America v. Toledo-Cardona^[2]. Each involved chapter 7 bankruptcy cases in which the debtors had no equity in their homes because the houses were worth less than the amount outstanding on the senior mortgage loans—that is, the second lien-lenders were "unsecured" or totally "underwater".

In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts, but the debtor's non-exempt assets are liquidated by a bankruptcy trustee, who then distributes the proceeds to creditors. In Dewsnup v. Timm^[3], the Supreme Court held that Bankruptcy Code § 506 does not permit an individual chapter 7 debtor to reduce (or "strip down") a first-lien mortgage loan to the value of the real property where the amount owed ($119,000) is greater than the property value ($39,000). Caulkett and its companion case addressed whether the outcome should be different where the debtor seeks to void (or "strip off") a second lien mortgage that is wholly underwater.

On its decision announced on June 1, the Supreme Court found the question effectively controlled by its prior holding in Dewsnup. Noting that the debtors had not asked it to overrule Dewsnup, the Court held by unanimous decision^[4] that a debtor in a chapter 7 bankruptcy case may not void second mortgage liens under Bankruptcy Code section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral. The Court rejected respondents' attempts to limit Dewsnup's interpretation to partially underwater mortgages, concluding that there was no principled way to distinguish those from wholly underwater mortgages within the terms of the Bankruptcy Code. In Dewsnup, the Court defined an "allowed secured claim" under section 506(d) as "claim supported by a security interest in property, regardless of whether the value of that collateral would be sufficient to cover the claim". Thus, section 506(d) voids underwater liens only where the underlying debt is invalid under applicable law.  Read More.

U.S. Case Updates and Analysis

Enforceability of Oral Contracts for Loan and Claim Trades
By Raniero D'Aversa, Amy Pasacreta and Matthew Fechik

The Loan Syndications and Trading Association (the "LSTA") scored a major victory in 2002 when New York adopted LSTA-sponsored legislation designed to make oral agreements to trade bank loans and claims arising from business debts legally binding. Since then, participants in both the syndicated loan market and the claims trading market have come to rely upon the idea that trades entered over the phone are binding, so long as the parties agreed to the material terms of the trade.

A 2014 Fifth Circuit Court of Appeals decision calls this assumption into question for loan trading, and a case that is currently pending in New York state court could extend the uncertainty to business debt claim trades as well.  Read More.

Supreme Court Removes Cloud Over Bankruptcy Judges' Powers, But Creditors Need To Remain Vigilant
By Frederick Holden, Jr.

On February 23, we reported on a case pending before the U.S. Supreme Court: Wellness International Network, Limited v. Sharif. On May 26, the Supreme Court in Wellness held that parties may waive their right to have certain claims decided by a court other than a Bankruptcy Court and that the waiver need not be express. It can be implied as a result of a litigant's conduct. No. 13-935, 575 U.S. ___ (2015).  Read More.

A Battle in the Making in the Oil and Gas Sector: Second Lien vs. High Yield Debt
By Raniero D'Aversa and Peter Amend

In the oil and gas industry, there is a storm brewing between holders of second lien debt and unsecured high yield bonds. These creditor groups are finding themselves pitted against one another as oil and gas companies become increasingly leveraged in an effort to alleviate liquidity constraints.

As widely publicized, oil prices precipitously decreased in 2014 and depressed prices have continued into 2015, with prices falling from $103 per barrel a year ago to around $60 per barrel today. With this prolonged decline and period of weak oil prices, oil and gas companies are having difficulty breaking even. Therefore, it is not surprising that many industry players, particularly the upstream division (comprised of exploration and production activities), have experienced tightened liquidity. Larger and well-diversified companies are best equipped to weather the storm because they are able to rationalize liquidity by suspending new projects and future exploration, selling non-core/non-producing assets and demanding price reductions from service providers. While these measures have helped ease some financial stress, they are often not enough and companies have turned to the debt capital markets as a source of liquidity. These new financings provide companies with much needed time to either wait out this period of depressed oil prices or formulate a restructuring plan.  Read More.