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After much litigation and legal maneuvering, the Senior Secured Lenders prevailed at the auction for Philadelphia Newspapers.  The Lender’s winning bid is for approximately $139 million, and the parties expect to close on the sale by late June.  To read a summary of the sale, click here and here.

While this Blog generally focuses on bankruptcy-related issues, I thought it would be interesting to provide some of the key information about the Government’s fraud investigation into Goldman Sachs; after all, the subprime debacle caused the most severe financial collapse since the Great Depression.  There is no doubt that the Government on both sides of the aisle is looking for blood from Goldman Sachs, but more than that, the Government is currently seeking financial reform. 

Whether Goldman Sachs contributed to the financial collapse (and if so, to what extent) likely will be debated for years to come.  Information is still unfolding.  Here is a link to watch the Goldman Sachs live testimony before Congress:  Live Testimony via C-Span.   Here is SEC’s Complaint against Goldman Sachs (essentially alleged that Goldman Sachs didn’t disclose that it was shorting positions in CDOs it was selling) and here are 900 pages of the US Government’s Exhibits against Goldman Sachs, including internal emails from Goldman Sachs.  Here is a good article from the Wall Street Journal explaining the SEC charges against Goldman Sachs.

The issue for Goldman Sachs is not so much the financial cost to, or punishment that may or may not be imposed on, it, but rather the damage to its reputation.  It will be interesting to see if the Government pursues other financial institutions that were involved in the subprime crisis.  While Wall Street is an easy target, what we are watching is really less of a witch-hunt and more of a grand show to support changes in financial regulations.

In In re Erving Industries, Inc. et al., the Court held that the supply of electricity constituted the sale of goods so that the electric supplier was entitled to assert a 503(b)(9) administrative expense claim.  The Court’s opinion is very well-reasoned and its opinion along with a substantial appendix on the electric industry can be found here.   

In short, Erving Industries, Inc., along with certain of its affiliates, filed for Chapter 11 on April 20, 2009.  Constellation NewEnergy, Inc. filed an administrative expense claim under 503(b)(9) in the amount of $281,667.88 (the “Claim”).  The Debtors and NewEnergy agreed that the amount sought in the Claim accurately represented the charges for electricity supplied to the Debtors during the relevant 20 day period, but the Debtors objected to the Claim on the grounds that electricity is not a good within the meaning of 503(b)(9).  The Debtors also contended that NewEnergy was a utility provider. 

NewEnergy maintained that it did not perform the traditional service functions commonly associated with electric utilities.  It argued that while regulated utilities are responsible for the ultimate delivery of electricity to customers, NewEnergy says it has no role in the delivery and is involved solely in the sale of electricity as a “competitive supplier.” 

The Court began its analysis by defining “goods” under 503(b)(9).  The Debtors insisted that electricity is not a good because it is an intangible phenomena and devoid of physical form.  This position, according to the Debtors, is supported by the decision in In re Pilgrim’s Pride Corp., 421 B.R. 231 (Bankr. N.D. Tex 2009), where that court analogized electricity to the transmission of television programming, which is considered to be a service (here’s the Pilgrim’s Pride Opinion). 

NewEnergy argued that the term good should be defined as it is under Section 2-105 of the Uniform Commercial Code.  Section 2-105 states that a good is something that is movable at the time it is identified to the contract for sale.  NewEnergy insisted that electricity is movable, and indeed, moves along transmission lines and distribution systems from the location where it is generated, and ultimately arrives at the customer’s location after traveling along those transmission lines and distribution systems.  NewEnergy also noted that electricity is identifiable because it can be measured by a meter upon delivery.  Finally, NewEnergy argued that electricity is tangible because the touching of it can and usually does create a physical consequence (i.e., electrocution). 

After considering arguments by both the Debtors and NewEnergy, the Court analyzed the legislative history of 503(b)(9), the term “good”, the agreement between the parties, and the electric industry, and concluded that electricity is a good under section 503(b)(9).  The opinion (click here) is very well-reasoned, and will likely be persuasive authority in other jurisdictions.  In businesses that use mass amounts of electricity that is purchased from outside suppliers (i.e., not traditional utilities), debtors and debtors’ counsel will have to consider the implications of 503(b)(9) on what they previously would have viewed as just a prepetition general unsecured claim of a utility provider.

In what is sure to be a controversial opinion, the Third Circuit Court of Appeals (No. 09-4349) has issued an Opinion holding that the lenders in the contentious Philadelphia Newspapers’ bankruptcy case pending in the United States Bankruptcy Court for the Eastern District of Pennsylvania, No. 09-11204, may not credit bid for the sale of substantially all of the assets of Philadelphia Newspapers during a proposed auction to be conducted under Section 1129(b)(2)(A).  The Opinion affirms the decision of the District of Pennsylvania, which overruled the decision of the Bankruptcy Court.  For a good summary of the case history, click here.  The Third Circuit’s opinion is well-reasoned (using statutory construction and analysis), and even though the opinion is 2-1, it is now the law of the land (at least in the Third Circuit) and its impact on the sale process in Chapter 11 cases will be known only over time.

In an unprecedented paper entitled The Crisis, Alan Greenspan, the former Chairman of the Federal Reserve, acknowledges that the government failed to properly regulate the markets and banks under his leadership (although he also states that probably no amount of regulation could have avoided the Credit Crisis without significant and adverse effects on the economy).  Mr. Greenspan, who historically was in favor of less government regulation and deregulation, argues that regulation is necessary so that no financial institution is ever too big to fail, and states that “the primary imperative going forward has to be (1) increased regulatory capital and liquidity requirements on banks and (2) significant increases in collateral requirements for globally traded financial products.” 

He also suggests that a new bankruptcy statute should be created to handle failed financial institutions, and recommends that “we should allow large institutions to fail, and if assessed by regulators as too interconnected to liquidate quickly, be taken into a special bankruptcy facility.  Mr. Greenspan proposes that the government would have “access to taxpayer funds for debtor-in-possession financing.” He also suggests that under such a new statutory scheme, creditors would have been “subject to statutorily defined principles of discounts from par (“haircuts”) before the financial intermediary [would be] restructured … [by splitting it] up into separate units, none of which should be of a size that is too big to fail.”

The Crisis is interesting reading as it is not only reflective, but also provides an interesting perspective with recommendations for future actions by one of the most famous and powerful economist in the 20th and 21st Centuries.

On November 2, 2009, CIT Group, Inc., a leading provider of financing to small businesses and middle market companies, filed for bankruptcy in the United States Bankruptcy Court for the Southern District of New York.  Click here for a copy of the CIT Voluntary Petition

Only two of CIT’s business units filed for bankruptcy, and CIT has stated that none of its operating subsidiaries, including CIT Bank, its business segments or its international business operations, are part of the bankruptcy filing and it expects business as usual will continue throughout the reorganization process.  CIT also states that it has the liquidity to serve its customers. CIT listed $71 billion in assets and $64.9 billion in liabilities.

CIT is over 100 years old, and provides significant capital to small and middle market businesses.  CIT is huge, really huge:  its customers employ more than 90 million employees, it’s the leading provider of financing to the retail sector and to women-, minority- and veteran-owned small businesses.  An outright failure of CIT could have significant adverse effects on the US economy, which is currently in a very fragile state at best. 

So what’s the probable impact of CIT’s bankruptcy filing?  Probably none, assuming the company is able to confirm its prepack plan without any major hitches. Click here for a copy of the CIT Plan (and Disclosure Statement).  As to retailers, many of them likely have already order product for the holiday season and so are not dependant on immediate financing from CIT (nb:  restocking could be an issue).  The markets are becoming more liquid, and other companies could step up to the plate to provide financing to the middle market, like Wells Fargo.

There are those who think businesses will move away from CIT to others, but the likelihood is that businesses will continue to use CIT as long as CIT has is liquid enough to satisfy its customers needs.  However, the real test will be not the next few weeks, but rather the weeks and months after the bankruptcy.  Will CIT’s prepack plan truly put CIT on better footing for the immediate future?  Only time will tell.

The hearing on the adequacy of the disclosure statement and confirmation of the plan is scheduled for December 8, 2009.  Here is a copy of the Scheduling Order, and for other bankruptcy information, click http://www.kccllc.net/citgroup.

In a recent decision by the Delaware Bankruptcy Court, the Court held that a person holding the title of an officer, including vice president, is presumptively what he or she appears to be — an officer and, thus, an insider.  See In re: Foothills Texas, Inc. et al. (Bankr. D. Del. 09-10542)

In Foothills Texas, the Debtors are independent energy companies engaged in the acquisition, exploration, exploitation and devlopment of oil and natural gas properties, and have 10 employees.  Two of the employees have the title of Vice President, and have a prepetition employment agreement (the “Employment Agreements”) that, if the agreements were assumed by the Debtors, would provide a retention payment to each of those employees.

The Debtors sought to assume the Employment Agreements, but the United States Trustee objected on the grounds that (i) the employees are insiders, (ii) the payments to be made under the Employment Agreement, if assumed, would be retention payments, and thus, (iii) the Debtors need to satisfy Section 503(c)(1) of the Code.  Section 503(c)(1) prohibits the payment to an retention payment to an insider unless a debtor proves that (A) the individual has a bona fide job offer from another business at the same or greater compensation; (B) the services of the individual are essential to the survival of the debtor’s business; and (C) either (i) the payment is not greater than 10 times the amount of the mean payment to nonmanagement; or (ii) if no payments made to nonmanagement employees, then no more than 25% of the amount paid to such insider.  In practice, this is a very difficult standard to satisfy, and, Section 503(c)(1)(A) has proven virtually impossible for debtors to meet. 

The Debtors argued, among other things, that the employees, despite their title of vice president, are not officers, and thus, not insiders, and thus, the more liberal standard of Section 503(c)(3) (i.e., payments made outside the ordinary course of business for the benefit of officers, managers and consultants) is applicable.  [NB:  Payment made to insiders that are incentive payments are permitted -- see In re Nellson Nutraceutical, 369 B.R. 787 (Bankr. D. Del. 2007).]

The Court analyzed the plain meaning of the word officer and concluded that a vice president is presumptively an officer, and thus, an insider; however, the presumption can be rebutted by evidence sufficient to establish that the “officer” does not, in fact, participate in the management of the debtor.  However, in Foothills Texas, the Court focused on the job responsibilities of the two employees:  both had positions of broad responsibility that focused on the core essence of the Debtors’ existence — that is, compliance with state and federal laws and regulation, oil and gases leases and production, evaluation of reserves, technical reporting and development of capital spending projects.  The Court also noted that both of these employees reported directly to the Debtors’ President.  Based on the evidence, the Court found that the Debtors were unable to rebut the presuption that the two employees were officers, and thus, insiders, and subject to the more difficult standard of 503(c)(1).  

The Court also held that obtaining authority to make retention payments that are prohibited by Section 503(c)(1) is not a responable exercise of the Debtors’ business judgment to assume the agreements (and make the payments).  Accordingly, the Court denied the Debtors’ motion, and consequently, the vice presidents, because they were deemed to be officers, didn’t get the money they would have received had the company not been in bankruptcy.    

Would this case have turned out differently if the employees did not have a title or were merely referred to as managers?  Perhaps, but in all likelihood the Court would still have focused on the specific facts of the case and looked beyond the titles of the employees.  That said, keep in mind that there may be a cost (albeit possibly and, indeed, probably unknown) to having an officer’s title for those working for a company in distress.

Under the GM deal reached with the Obama Administration, the US Government will own 60% of New GM — that is, the “leaner and meaner” GM (of course, only time will tell if that becomes the case).  The problem for the Obama Administration is that the US, between Chrysler and GM, has now ventured into ownership of private companies.  There are numerous interesting questions to ponder:  what will the US do if, in the most unlikely event, another bidder bids on the assets of the GM (I realize this is a virtual improbability)?  In such a case, would the Government enter into competitive bidding?  Would the answer to this question change if such a fantasy bidder is a foreign or sovereign entity compared to a private entity?  Assume the US is the successful bidder, which it will be, what happens if the US sells its 60% share shortly after New GM is formed — the US will likely take a substantial hit leaving the taxpayers out of the money (which will create a difficult political situation for the Obama Administration)?  On the other hand, if the Government does not sell its majority interest in New GM, will it start telling New GM (and Chrysler) what type of cars to make (no doubt they will be told to make small, “green” cars)?  Will it provide tax credits to those buying New GM (and Chrysler) cars?  Will it provide subsidies like China does for Chinese companies so that New GM and Chrysler appear profitable?  If the US Government attempts to alter the market either through subsidies, company specific policy creation/enforcement, or company specific tax policy, it will alter the fundamentals of American economics and capitalism by creating a form of American socialism (a very scary thought!).  The questions go on and on…  Click here to read an interesting NY Times article addressing some of these issues.  One thing is for sure:  the answers to these questions will truly reveal Obamanomics.

GM filed for Chapter 11 bankruptcy protection today in the United States Banrkuptcy Court for the Southern District of New York at 09-50026.  A copy of the petition is here, and a copy of the GM press release describing the bankruptcy proceedings are here.  To read a good discussion about the bankruptcy proceedings, click here.

According to Bloomberg.com, U.S. Treasury and some of GM’s bondholders reached a deal today that will permit GM to file for bankruptcy on Monday, June 1, 2009 (Of course, notwithstanding this “deal”, GM would likely have filed by then anyway, but that’s all speculation now).   The deal will provide the bondholders 10% equity of new GM with warrants to purchase up to 15% more.  The union health trust will get 17.5% of the new equity and the US Government will get up to 72.5%.   The details of the deal and proposed DIP financing are set forth in GM’s 8-K that was filed today.

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