Sidney Turner Blog » Bankruptcy Alternatives

Tax dischargeable in bankruptcy.

admin — Thu, 22 Sep 2011 15:30:55 +0000

Did you know it is not uncommon for taxpayers seeking bankruptcy advice about tax liabilities to be told that taxes are not dischargeable? However, while generally they are non dischargeable such statements are incorrect. While there are a number of complex rules that need to be satisfied, taxpayers should know that Federal Income Taxes may be dischargeable if the tax liability satisfies the Bankruptcy code requirements.
Generally, taxpayers may discharge federal income taxes, depending on the age of the debt. Thus, they may be dischargeable in a Chapter 7 if ALL of the following criteria are met.

1. The tax is paid toward a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition.
2. A tax return was filed more than two years prior to the filing of the bankruptcy petition.
3. The tax was assessed more than 240 days prior to the filing of the bankruptcy petition.
4. In addition, the tax must not be due to a fraudulent tax return and the taxpayer has not attempted to evade or defeat the tax.

The taxpayer who contemplates bankruptcy should consult with a professional who understands the nuances of the dischargeability of taxes as provided under the bankruptcy code. Because there are so many timing rules that have to be complied with, the timing of filing the bankruptcy petition is crucial in order to obtain the desired fresh start through the bankruptcy process.

Sidney Turner

www.SidneyTurnerllc.com

Condo community turns to bankruptcy to remain solvent

admin — Wed, 14 Sep 2011 18:30:58 +0000

This is a great article by Daniel Vasquez a Sun Sentinel Columnist about a subject close to my heart. I have been talking about this for years. This shows how you can get an out of control situation back under control through the power of bankruptcy court. I will send more later. Enjoy Daniel’s article

Sidney Turner

www.SidneyTurnerLLC.com

Daniel Vasquez

A Palm Beach County condo community is turning to an unusual solution to deal with foreclosure-related problems that are sapping its finances: Bankruptcy court. The approach, experts say, could point the way for other condo and homeowner communities struggling with financial problems because owners can’t pay monthly assessments.

In 2010, The Spa at Sunset Isles — with 232 units in Royal Palm Beach — was facing several common problems confronting South Florida communities. It had a large number of homeowners falling into foreclosure and unable to make mortgage or maintenance payments. Banks were reluctant to take title to “underwater” properties worth less than the mortgages owed. Last year nearly half of the owners — 104 — were in foreclosure and 160 had stopped paying maintenance fees.

Last summer the community had a bank balance of about $25,000 and was $126,000 in debt to vendors and creditors. It had to raise monthly assessments from an average of about $358 per month to $400 per month — depending on size of each home — and required owners to pay special assessments.
So to get out of financial trouble, the Spa’s board decided to file for Chapter 11 bankruptcy in August 2010 in the United States Bankruptcy Court in the Southern District of Florida West Palm Beach Division, said John T. Kinsey, the association’s attorney.

Fast forward to today: The community has emerged from Chapter 11 and now has more than $490,000 in its bank accounts and the board hopes to drop monthly assessments from a current average of $400 to $251 in 2012. John Bazos, president of the condominium association, said the board also plans to make capital improvements to the property, including repairing roads and fixing a broken water fountain at the entrance.

“The community had a complete turnaround from being destitute to being prosperous,” Bazos said. “The result is increasing the real estate value because the financial strength we were able to gain via the legal avenues of Chapter 11.”

The community still faces financial difficulties because of the downturn in the market and the region’s pressing foreclosure problems. Five years ago, a two-bedroom, two bath home in the community sold for about $280,000. Today a similar home sells for around $45,000, say board members. But Kinsey said the bankruptcy filing saved the community from financial disaster.

Kinsey said the Spa’s board had to pay about $1,000 in court fees to file for bankruptcy and accrued about $50,000 in legal fees in the process.

By filing for bankruptcy protection in federal court, the community obtained court orders requiring banks to begin paying monthly assessments to the association and take title of homes in foreclosure, Kinsey said. Once the banks take title to units, they are required by Florida law to pay the monthly assessments for those units. And while most people think of financial reorganization under Chapter 11 as being only for major corporations, such as automobile companies and major airlines, condo and homeowners communities are also entitled to file for bankruptcy.

Some of the Spa’s homes had been locked in foreclosure proceedings for as long as 36 months, which meant that the association was unable to collect assessments from previous owners that had defaulted on mortgages or from the banks that hold the mortgage notes.

Florida laws could not achieve the same results, Kinsey said, because the statutes do not require banks to pay assessments before they take title nor require them to foreclose on a particular deadline. But in bankruptcy court, Chief Judge Paul G. Hyman had the authority to make the banks involved start paying the association their share of monthly assessments.

That’s because bankruptcy laws allow any entity that pays to maintain a bank’s collateral to recover its costs. In this case, the board was paying to maintain the common areas of the homeowners community, which are tied contractually to home loans in a shared community and considered part of the bank’s collateral. The next step was Hyman’s order, handed down in February, which enabled the association to force the banks to take title to units independent of their mortgage foreclosure actions.

“The association had to file Chapter 11 in order to accomplish any and of this,” Kinsey said. So far one bank has complied with Hyman’s orders and the association has begun filing lien foreclosure suits against the rest, Kinsey said.

Bazos said the community’s budget and morale are in the best shape in years.

“Our owners are very happy because their properties are standing on financially sound ground and the properties are easier to sell because you don’t have an association that is in default and you have an association that is able to make improvements to the property.”

dvasquez@tribune.com or 954-356-4219 or 561-243-6686. Daniel Vasquez‘ condo column runs Wednesdays in Your Money and at SunSentinel.com/condos. Check out Daniel’s Condos & HOAs blog for news, information and tips related to life in community associations at SunSentinel.com/condoblog. You can also read his consumer column Mondays in Your Money and at sunsentinel.com/vasquez.

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Do you understand the nuances of the dischargeability of taxes?

admin — Tue, 06 Sep 2011 13:00:49 +0000

It is not uncommon for taxpayers seeking bankruptcy advice about tax liabilities to be told that taxes are not dischargeable. However, while generally they are non dischargeable such statements are incorrect . While there are a number of complex rules that need to be satisfied, taxpayers should know that Federal Income Taxes may be dischargeable if the tax liability satisfies the Bankruptcy code requirements:
There are two primary types of bankruptcy available for individuals: liquidation under Chapter 7 and Chapter 13. For individuals with significant debts above the statutory limits in these types of bankruptcy there is the availability of chapter 11. In a Chapter 7, also commonly known as “liquidation” all of taxpayers’ assets and liabilities are administered by the bankruptcy court. Except to the extent of exempt assets as provided under applicable law, all of taxpayer’s assets are liquidated and distributed to creditors pursuant to the bankruptcy code. At the end of the process, the taxpayer is allowed to keep the exempt assets and have certain debt discharged. On the other hand, in a Chapter 13, also known as “wage earner” payment plan, the bankruptcy court may require that payments be made to the IRS given its priority status as a creditor; or as a general unsecured creditor if the IRS fails to file a tax lien to “perfect” its secured interest against the taxpayer’s assets.

Generally, taxpayer may discharge federal income taxes, depending on the age of the debt. Thus, they may be dischargeable in a Chapter 7 if ALL of the following criteria are met.

1. The tax is for a year for which a tax return is due more than 3 years prior to the filing of the bankruptcy petition;
2.A tax return was filed more than two years prior to the filing of the bankruptcy petition;
3.The tax was assessed more than 240 days prior to filing of the bankruptcy petition;
4.In addition, the tax must not be due to a fraudulent tax return, nor did the taxpayer attempt to evade or defeat the tax.

Sidney Turner

www.SidneyTurnerllc.com

Little known Fact in Valuation

admin — Wed, 03 Aug 2011 17:00:10 +0000

How is the valuation of a business interest effected by the fact of lack of marketability in a closely held business, or Discount Lack Of Marketability (DLOM )?

A DLOM’s basic premise is that shares of a closely held corporation cannot be readily sold on a public market and therefore should be discounted to reflect the additional risk factors associated with the time and difficulty of finding buyers for non-publicly traded shares.

Sidney Turner

www.SidneyTurnerllc.com

Number FOUR of the Six Major Points Series

admin — Thu, 14 Jul 2011 14:00:43 +0000

Here is Number FOUR of the Six Major Points Series

I handle corporate workouts, reorganizations and dissolutions and other types of disputes among co-owners of privately owned companies, in other words I advise clients when they are experiencing adverse business situations.

But what does it really mean to be a business lawyer handling dissolution and other types of disputes among co-owners or adverse business situations? Does it require a special temperament and skill set? Here’s my take on the answers to these questions:

It Means understanding business and the relationships that make it work.

This is the Forth of the SIX Major Points Series

Number FOUR of the Six Major Points Series

It Means Understanding Finance and Accounting Basics. Almost every business divorce case involves some degree of dispute over company finances and accounting. Many small companies involved in business litigation do not prepare any financial statements; much less do they have an outside CPA who prepares audited financial statements. The company’s tax returns may present a distorted picture of the company’s income, compensation to principals, and other expenses. A business lawyer must have a basic understanding of financial and tax accounting, including the ability to comprehend financial statements, internal reports such as QuickBooks, and (last but not least) tax returns, in order to converse intelligently with the client and the client’s accountant about financial issues that likely will take center stage in the litigation.

If you missed any please check out my other blog postings

Sidney Turner

www.SidneyTurnerllc.com

Do you know 363 Sales have increased?

admin — Sat, 02 Jul 2011 15:40:05 +0000

The surge in bankruptcies that occurred in 2008 and 2009 featured a greater number of 363 sales followed by liquidating plans than in prior bankruptcy cycles. A “363 sale” refers to the sale of any asset that is allowed by the bankruptcy court under Section 363 of the U.S. Bankruptcy Code. Typically, the term is used to describe the sale of a majority of a business’s assets as an ongoing enterprise.

In a best-case scenario, a 363 sale might take a few weeks to execute, especially when a buyer is lined up prior to the filing and, because there are no realistic alternatives, no auction is held. Such was the scenario in both the General Motors and Chrysler Chapter 11 reorganizations. More likely, however, the process will take two to four months and sometimes longer.

Once the major assets are sold, the real work of the wind-down begins. The remaining assets are liquidated; the remainder of the company is wound down; secured creditors get their collateral (or more likely the cash equivalent of their collateral up to the value of their claims); and unsecured creditors’ claims are reviewed, valued, and then paid in full or in part, generally in accordance with the priority scheme in the Bankruptcy Code.

Sidney Turner

www.SidneyTurnerllc.com

Sam Zell’s buyout ‘among the worst in American corporate history

admin — Wed, 20 Apr 2011 16:00:06 +0000

Tribune creditors allege that Sam Zell’s buyout was ‘among the worst in American corporate history.

When you get to greedy it can come back and bite you.

It would force shareholders to give back money gained from simply selling their shares into a corporate buyout offer, based on the theory that the deal was so fundamentally flawed that it amounted to a fraud that should never have happened.

Creditors are going after the shareholders under a legal concept known as “fraudulent transfer.” A similar concept the Madoff trustee is using to recover monies paid out to investors. The theory allows creditors to argue that the banks financing Tribune’s buyout and the shareholders who cashed out should have known the deal would destroy the company. As a result, the argument goes, the banks shouldn’t be allowed to recoup their loans and the shareholders should have to give back money they received.

Enjoy the Article below

Sidney Turner

www.SidneyTurnerllc.com

Sam Zell‘s top-of-the-market buyout of Tribune Co. cashed out shareholders about a year before the media company tumbled into bankruptcy protection. Now, those former holders are bracing for a possible barrage of litigation aimed at clawing back more than $8 billion in payouts.

If successful, any litigation would represent an unprecedented legal development, some lawyers said. It would force shareholders to give back money gained from simply selling their shares into a corporate buyout offer, based on the theory that the deal was so fundamentally flawed that it amounted to a fraud that should never have happened. Under the best-case scenario, creditors likely would get back only between $2 billion and $3 billion, the amount necessary to make unsecured creditors whole.

While most lawyers said such cases are difficult to prove, former shareholders are girding for the worst, in some instances talking with lawyers and investors about plans to sock away money in anticipation of any litigation.

Creditors are going after the shareholders under a legal concept known as “fraudulent transfer.” The theory allows creditors to argue that the banks financing Tribune’s buyout and the shareholders who cashed out should have known the deal would destroy the company. As a result, the argument goes, the banks shouldn’t be allowed to recoup their loans and the shareholders should have to give back money they received.

In certain instances, merely demonstrating a company was insolvent at the time of a leveraged buyout can leave deal participants exposed.

Hedge fund Stark Investments, one of Tribune’s biggest investors prior to the 2007 buyout, already has begun setting aside money in anticipation of a settlement or judgment, said people familiar with the matter.

Others on Wall Street are hunting for new ways to profit from it.

Prime-brokerage executives at Deutsche Bank AG are in discussions about setting up an operation through the distressed-debt trading desk that would match buyers and sellers of bankruptcy claims related to the shareholder litigation, said a person familiar with the matter. While banks have set up such market-making operations for creditors’ claims, the possibility that shareholders could have to cough up payments expands the market for trading claims.

Deutsche Bank’s prime-brokerage business caters to dozens of hedge funds that could want to bet on the probability that claims against shareholders will succeed, an opportunity one bank executive called “creative thinking” by the bank.

In the lawsuit filed in Delaware bankruptcy court last year, Tribune creditors allege that Mr. Zell’s buyout was “among the worst in American corporate history.” The creditors’ complaint said an unnamed engineer of the deal likened it to “carrying a fat person up [Mount] Everest, hopefully it doesn’t kill us.” The lawsuit was filed by Tribune’s official committee of unsecured creditors, which serves as a watchdog in the bankruptcy case and represents bondholders and a variety of other creditors.

Tribune declined to comment. Jon Wasserman, general counsel for Mr. Zell’s Equity Group Investments, said the bankruptcy examiner found no evidence that Mr. Zell acted in bad faith.

Hedge funds, mutual funds, former Tribune executives and even family trusts and a large foundation are ensnared in the suit. The deal swelled the company’s debt to roughly $13 billion before Tribune was forced to seek bankruptcy protection.

Aurelius Capital Management LP, a large Tribune bondholder, recently said in bankruptcy court that it also could go after shareholders in state courts to disgorge payouts from the deal.

“Former Tribune shareholders likely face a daunting task in defending their receipt of proceeds from the mountain of debt used to finance this deal,” said Bill Welnhofer, managing director and head of restructuring at investment bank Robert W. Baird & Co. in Chicago. “The company’s business model had already started showing signs of weakening.”

The owner of the Chicago Tribune, Los Angeles Times, Baltimore Sun and several television stations used more than $11 billion in debt financing from several Wall Street banks to back the deal and pay off existing shareholders, money some creditors believe belongs to them.

A bankruptcy-court examiner last summer found it “highly likely” that Tribune was “rendered insolvent and without adequate capital” as a result of the deal. The examiner, Kenneth Klee, said some financial projections made by Tribune management as the deal neared closing were too rosy and bore the “earmarks of a conscious effort” to make the company’s financial condition appear better so the buyout could be completed. The examiner found Mr. Zell didn’t act in bad faith.

Tribune’s reorganization plan would shield the lending banks, including J.P. Morgan Chase & Co., Citigroup Inc., Bank of America Corp. and the former Merrill Lynch & Co., which is now owned by BofA, from any future litigation. In exchange, the banks have agreed to pay money to bondholders that those creditors wouldn’t normally receive in a bankruptcy. Shareholders and some former Tribune executives, though, remain exposed. The banks declined to comment.

Courts have generally held that shareholders aren’t liable in leveraged buyouts that later collapse unless the case involves actual fraud with evidence that shows clear intent, said Richard Levin, a bankruptcy lawyer at Cravath, Swaine & Moore LLP.

“It’s tough to prove actual intent because there usually is not a smoking gun,” he said. “Usually, these deals are driven by an intent to make a good business deal, not harm existing creditors.”

For Stark, the potential litigation exacerbates an already precarious position. In 2007, Stark managed $13 billion for investors. But it suffered investment losses in 2008 and some of the worst client withdrawals in the industry, leaving it with $3 billion now, with investors still waiting for several hundred million dollars more in redemptions that haven’t yet been paid, said people close to the matter.

Stark has told clients that the Tribune bankruptcy “could get messier,” and the hedge-fund firm is being conservative by holding back money, said one person familiar with the matter.

Other large former shareholders targeted by Tribune creditors include the Chandler family, among Tribune’s largest owners at the time of the buyout, and the McCormick and Cantigy foundations. The trio held at least a third of Tribune’s shares and reaped more than $2 billion in the buyout, according to creditors.

Tribune’s former chief executive, Dennis FitzSimons, also is targeted.

Representatives for the Chandlers didn’t respond to requests for comment. The foundations declined to comment. Mr. FitzSimons, also the McCormick foundation’s board chairman, declined to comment.

Write to Mike Spector at mike.spector@wsj.com, Jenny Strasburg atjenny.strasburg@wsj.com and Shira Ovide at shira.ovide@wsj.com

Philadelphia Orchestra Makes Bankruptcy Move

admin — Mon, 18 Apr 2011 22:36:42 +0000

The troubled Philadelphia Orchestra said on contemplating Chapter 11

“It gives us a better chance of raising the investment funds that are needed to revitalize this orchestra over the next five years,” Richard Worley, the board chairman, said of a Chapter 11 filing. “We need a fresh start. We need to escape contractual entanglements that we cannot possibly afford.”

This is a clear view and appreciation of the scope a chapter 11 reorganization can accomplish in untangling a business model that once may have worked but no longer does.

Enjoy the Article below

Sidney Turner

Philadelphia Orchestra Makes Bankruptcy Move

By DANIEL J. WAKIN and FLOYD NORRIS

Published: April 17, 2011

PHILADELPHIA — A humbled Philadelphia Orchestra drew a prolonged ovation on Saturday evening after the final strains of Mahler’s Symphony No. 4, one of his sunniest works. Just hours earlier, its board of directors had voted to send the orchestra to bankruptcy court, declaring the move the only way to survive financial disaster.

The vigorous applause was certainly for Mahler, but it also seemed to be a vote of support for a beleaguered hometown team.

Philadelphia is not New York, with its abundance of musical organizations, said Mindy Pressel of Cherry Hill, N.J., who was in the audience: “This is what we have here for concerts.” Some in the audience took out their frustrations on orchestra executives. “They’re in trouble because of poor management,” said Edward Neifeld of Maple Glen, Pa., who wore a red Phillies sweatshirt.

Inside the orchestra’s Kimmel Center home, there were many empty seats — possibly the result of a thunderstorm, though also indicative of a reason the orchestra is having financial trouble. In a program insert given to the audience on Saturday, management also blamed its eroded endowment, not enough donations, “operational costs,” the expense of financing its musicians’ pensions and the cost of vendor contracts.

It praised the musicians for their sacrifices, pleaded for donations and urged the audience to buy tickets. “If you care, please do not abandon our orchestra now — embrace us,” the handout said.

The decision to file Chapter 11 bankruptcy has sent ripples through the country’s major orchestras, many of which are struggling with money. Several, like Philadelphia, are also facing contract negotiations with their musicians. Allison Vulgamore, the Philadelphia Orchestra’s president and chief executive, sent a memo last week to executives of other major orchestras alerting them to Saturday’s vote.

While orchestras have resorted to bankruptcy court in the past, none have been of the caliber of the Fabulous Philadelphians — an internationally famous ensemble that was the first American orchestra to visit China and counts Leopold Stokowski and Eugene Ormandy as past music directors. It is as much a national treasure as a local one.

The orchestra said that it had cash to pay the bills for only two more months and that the gap this season between what it has to pay to operate and what it earns is $13 million. Emergency fund-raising is expected to bring that down to $5 million, management officials said, but that would cover only this season.

The trustees voted overwhelmingly in favor of a filing, with only the five musicians on the board opposing. The musicians contend that management is exaggerating the situation and that filing for bankruptcy will undermine the orchestra’s quality and discourage donors.

After the vote, Ms. Vulgamore said the board felt heavily the weight of tradition. “But we also talked about wanting to see our future and taking the necessary steps to get there to it.”

She said the musicians would still be paid and concerts would continue, but the orchestra would review all contracts with its business partners — especially the Kimmel Center, where it pays rent. It will come up with a reorganization plan to be approved by a bankruptcy judge and will continue to negotiate with the musicians over a new contract.

Richard Worley, the board’s chairman, said in an interview that the orchestra hoped to emerge from Chapter 11 “by later this year.” He said the atmosphere during the vote was emotional. “Not every eye was dry throughout the morning.”

John Koen, a cellist and chairman of the players committee, spoke from the stage on Saturday, thanking the audience members for their support and announcing that the musicians would offer a special expression of gratitude: the heart-warming “Nimrod” movement from Elgar’s “Enigma” Variations. Its mood reflected a more hopeful outcome than another work on the program — music from Berg’s opera “Lulu,” in which the protagonist dies a tawdry death at the hands of Jack the Ripper.

Mr. Norris contributed reporting from Philadelphia and Mr. Wakin from New York.

Sale of a debtor’s business as a going concern under section 363.

sturner — Fri, 25 Mar 2011 16:10:36 +0000

Almost every bankruptcy expert agrees that the expedited bankruptcies of General Motors and Chrysler diverted from traditional restructuring practice because of the government’s role in those corporations and the danger that their liquidation might have posed to the broader economy. (Please see my blog on this subject dated )

However their opinions diverge on whether the automotive makers’ cases set a meaningful legal precedent for the future. It has been said by a bankruptcy expert at UCLA Law School that “What happened in GM and Chrysler is so outrageous and so illegal that until March of this year, nobody even conceptualized it,”. Is there any reason all debtors cannot propose to do what GM and Chrysler have now done?

We seem to have the answer; once considered the exception to restructurings involving confirmed plans and quick sales, the sale of a debtor’s business and assets as a going concern under section 363 is increasingly becoming the vehicle of choice for bankruptcies. Section 363 sales are fundamentally different than reorganization from traditional bankruptcy. For example, orderly section 363 sales are often completed within 60 days of the petition date. In contrast pre-negotiated plans often take two to three times as long to confirm.

Due to the liquidity crisis over the past two years, the lack of available financing in bankruptcy cases has left many debtors with no meaningful alternative to affect the prompt, orderly sale of their businesses and assets than section 363 of the U.S. Bankruptcy Code. This often leads to a bankruptcy without any distribution or compensation for unsecured creditors while sales that take place under section 363 also lack the usual rights and protections afforded to creditors in the confirmation process.

In addition when DIP financing is available in the current market it increasingly comes from private investment funds that have already invested in the debtor’s pre-bankruptcy capital structure, rather than traditional bank lenders. Such funds often use the provision of DIP financing to influence the timeline and outcome of the chapter 11 case.

In many cases a stalking-horse-bidder increasingly emerges from the ranks of the debtor’s existing lenders and seeks to credit bid the secured claims it holds in a proposed sale of a debtor’s assets under section 363, rather than making cash bids. Often these stalking-horse-bidders have invested in the debtor with the expectation that they will be able to bid for their assets in bankruptcy, the so-called “loan-to-own” approach.

The creditor who makes an investment through the purchase of debt or a pre/post-petition loan is often the driving force behind the debtor’s bankruptcy filing. The investor will sometimes maneuver the debtor so that a chapter 11 filing is the debtor’s best, or only, remaining option to maximize value for creditors through a section 363 sale of the debtor’s assets. The ability to credit bid its debt claims in any such sale often gives the investor a significant advantage over other bidders making cash offers.

In Big 10 Tire Stores Inc. (In re BT Tires Group Holding, LLC, No. 09-11173-css (Bankr. D. Del. filed April 2, 2009) (cases consolidated into that of parent holding company) private equity firm Sun Capital Partners Inc. both owned the equity and had made pre and post-petition secured loans to the debtor. Sun Capital served as the stalking-horse bidder for the debtor’s assets, and in the ensuing section 363 sale proposed credit bidding its secured debt in the amount of $27.89 million and offered to assume certain liabilities, effectively thwarting the other bidders. A planned auction was canceled after no other bids were submitted, and Sun Capital acquired the debtor’s assets. Recently, in another case, In re Innovative Resource Alliance, Inc., Case No. 08-23071-BKC-PGH (Bankr. SDFL) a creditor with both pre and post-petition secured claims in excess of $10 million credit bid less than $1 million at auction for the assets of the debtor.

Investor driven sales are not without their detractors. Bankruptcy Courts and other interested parties have suggested that in some cases investors may unduly influence the sale process or constrain a company’s ability to obtain new credit, leaving the company with no alternative to filing for bankruptcy protection. Some argue that an investor who holds debt and equity interests in the debtor’s business often has greater access and insight into their records than potential third party buyers. Given the shortened timetable for effecting most 363 sales (e.g., less than 60 days), other potential bidders may come to believe that they cannot overcome this perceived disadvantage, and tailor their bids accordingly. Another common complaint is that the investor acquires the debtor’s most valuable assets using debt claims which are often purchased at a substantial discount while shedding many liabilities through the 363 process at the expense of unsecured creditors, who frequently receive little or no compensation as a result of the proposed sale. Given the relative advantages enjoyed by investors, some have wondered whether bankruptcy courts are inadvertently providing their stamp of approval to insider deals by approving these transactions

Sidney Turner

www.SidneyTurnerLLC.com

Property Lender Files For Chapter 11

admin — Tue, 03 Nov 2009 17:06:20 +0000

CIT’s Bankruptcy Filing Expected in Days, the U.S.Government Infusion of $2.3 Billion at Risk. Financial firms such as CIT have historically been sold off or wound down after a Chapter 11 filing; for fear that customers will cause a run on the bank. But CIT expects to have enough creditor support to complete a prepackaged reorganization by year-end, a relatively short period for a bankruptcy case of its size.

This is a classic example of how planning ahead and in particular how you are going to finance the restructuring of your capital structure is an imperative to a successful reorganization. CIT has been working on this specific issue for months.

CIT is preparing a sweeping exchange offer that would eliminate 30% to 40% of its more than $30 billion in debt outstanding, said people familiar with the matter. The plan would offer bondholders new debt secured by CIT assets, as well as nearly all of the equity in a restructured firm. The new debt would mature later than current debt, the impending maturity of which has posed a problem for CIT.

The plan sets up a potential showdown between bondholders with debt coming due soon and those whose debt does not come due for years. If the company doesn’t receive enough bondholder support, it plans to execute the restructuring in bankruptcy court, the people familiar with the situation said.

In a move smoothing its restructuring, the company recently said that it had persuaded billionaire investor Carl Icahn to support its prepackaged bankruptcy plan. Mr. Icahn, who wanted to push CIT into liquidation, failed to persuade other bondholders to derail CIT’s restructuring plan. Please see the link provided to the WSJ article.

One loser from a bankruptcy would be the U.S. Treasury. Late last year it injected $2.3 billion of funds from the Troubled Asset Relief Program to help stabilize the lender, which was weighed down by billions of dollars of bad student loans and subprime mortgages. The government investment is likely to be wiped out, said people familiar with the matter. Common shares would likely drop to zero, too, these people said. To learn more, read the article by the Wall Street Journal or read the article posted on the New York Times website.