April 01, 2020

MONTH-IN-BRIEF: Bankruptcy & Finance

Janet M. Nadile, Taryn Darling

Bankruptcy Law

Release Of Liens Supported Contemporaneous Exchange Defense

By Michael Enright

Secured lenders in workout scenarios often are faced with the problem of a junior secured creditor or lienholder who is “out of the money” but holds a position that would otherwise prevent a consensual resolution. Motivated by the desire to avoid a liquidation that may yield a lower recovery than a workout, the senior creditor could decide to take a partial recovery and leave something for the junior creditor, to facilitate the release of the junior liens and achieve an exit.  If the junior creditor is the beneficiary of such a deal, and waives its security interests in exchange for a partial payment in the workout, can it subsequently shelter that payment from a bankruptcy trustee on the basis that the waiver of its security interest was a contemporaneous exchange for new value under Section 547(c)(1) of the Bankruptcy Code, and therefore not recoverable as a preference?  The court in Lauter v. Wells Fargo Bank, N.A. (In re Gas-Mart USA, Inc.), Case No 19-6013 (B.A.P. 8th Cir. March 19, 2020) ruled in favor of the junior secured creditor, upholding the bankruptcy court’s determination that the junior secured creditor’s waiver in such a situation did comprise new value. Despite the trustee’s advocacy that the court should consider the reality that the collateral was insufficient to provide for a recovery to the junior secured creditor, such that its lien waiver should not be attributed any value, the court saw the “reality of the situation” differently, and expressly held that “[w]hen, as in this case, a senior secured lender voluntarily releases its liens for less than full payment and a junior secured creditor releases its liens, the requirement for providing new value under §547(c)(1) by the junior creditor is satisfied.” Junior secured creditors will find some comfort in this decision when they contemplate releasing their liens in exchange for payment in a workout where the senior secured creditor is willing to take less than payment in full to get the deal done.

Janet M. Nadile

Counsel; Simpson, Thacher & Bartlett LLP

Janet M. Nadile is Counsel at Simpson, Thacher & Bartlett LLP.  Her practice focuses on a broad array of commercial law with an emphasis on issues regarding Articles 8 and 9 of the Uniform Commercial Code.  She advises lenders and borrowers on all aspects of drafting and negotiating collateral security documents in a wide variety of secured transactions, including credit facilities, asset based lending, secured bond transactions, project finance and funds finance.  She also advises on all matters involving collateral subject to the UCC and other statutes, frequently for the technology, media, telecommunications, automotive, healthcare and natural resources industries.  Janet created and conducts the Firm-wide CLE seminars on various aspects of secured lending.

Taryn Darling

Board Member, William H. Dwyer Inns of Court

Taryn began her career as a bankruptcy lawyer almost ten years ago. Her practice includes reorganization, insolvency, receivership, work-outs, and bankruptcy and all related litigation. Taryn has litigated at the trial level and appellate level on behalf of her clients in a number of adversary proceedings and in consumer protection litigation. Taryn’s clients include individuals, business owners, and closely held corporations and businesses. Her breadth of experience in the area of bankruptcy and insolvency enables her to take a preventive approach when clients come to her at the outset of a problem. Taryn develops creative solutions to mitigate the impact or consequences when it becomes clear that a bankruptcy or receivership is the best course of action.