  |
  |
  |
    
  
   |
 | |||
|
|
|
|
| |||
Holding: The court, as a matter of first impression, upheld the bankruptcy court's determination that that 11 U.S.C. 510(b) required the mandatory subordination of the debtor's former member's claim based her former equity interest. The court found "that permitting a former equity holder to recover the value of an equity-based claim on a par with general unsecured creditors is the sort of bootstrapping that § 510 mandatory subordination is designed to prevent." The court emphasized that Section 510(b) subordinates claims "for damages arising from the purchase or sale of such a security." The court reasoned that a membership interest in an LLC is substantially similar to a partnership interest in a limited partnership, thereby qualifying a membership interest in an LLC as a security under the Code. The former member argued that damages require some sort of wrongdoing, whereas the former member was simply enforcing a contract. The court found that such a narrow meaning of damages was incorrect and that the debtor's claim in the amount of her former membership interest constituted damages. Lastly, the former member argued that she withdrew well before the debtor's bankruptcy, at which point she was no longer an equity holder but rather an unsecured creditor. The court disagreed holding that the former member's award for her membership interest was "directly linked to her ownership of a membership interest in the debtor; indeed, it is nothing other than her cashing out her equity."
i. In re Residential Capital, LLC, 508 B.R. 851 (Bankr. S.D.N.Y. 2014).
Issue: Whether default interest is allowable on oversecured claim.
Holding: Mere fact that Chapter 11 debtors were insolvent and that award of postpetition interest to oversecured creditor at contract default rate would be at general unsecured creditors' expense, did not on equitable grounds preclude award of such interest at default rate, at least not from the date that maturity date of loan passed with no payment from debtors, where postpetition financing that creditor provided to debtors allowed them to continue to operate as going concerns to the benefit of unsecured creditors. However, creditor would be limited to nondefault rate prior to maturity date of loan and would not be allowed to recover default interest earlier based on provision in its contract with debtors making their bankruptcy filing an event of default.
ii. In re Stacy's, Inc., 508 B.R. 370 (Bankr. D.S.C. 2014)
Issue: Chapter 11 debtor moved for leave to use sales proceeds that were mortgage lender's cash collateral or, in alternative to surcharge sales proceeds.
Holding: (1) Chapter 11 debtor that had sold substantially all its assets, after negotiating $950,000 and $450,000 carve-outs for benefit of administrative priority and general unsecured creditors, respectively, with creditor that had security interest therein, would not be allowed, after discovering that priority tax claims were greater than it had anticipated, to use an additiona $612,528.30 of sales proceeds included in creditor's cash collateral to pay tax and other claims,
©2014 William L. Norton III
