USA Law and Practice Contributed by: Stelios Saffos, Dan Seale, Peter Sluka and Alfred Xue, Latham & Watkins
Second, transfers of an interest in property of the debtor may be voidable if they: • are made with actual intent to defraud or deprive creditors of value; • are made when the debtor is insolvent; or • render the debtor insolvent, in each case for which the debtor receives less than reason - ably equivalent value (ie, constituting con - structive fraud). In addition to preference and fraudulent transfer claims, a DIP or any Chapter 11 estate would have the right to pursue any claims of the debtor, including breach of fiduciary duty claims against directors and officers, such as for approving fraudulent transfers (to the extent available under the applicable law). Proceeds of avoidance actions are unencum - bered assets available for unsecured creditors. As a matter of practice, an unsecured creditors’ committee will seek to prevent a post-petition DIP lender, especially one that is a pre-petition secured creditor, from obtaining DIP liens over avoidance actions and bankruptcy judges will often side with the creditors’ committee on this point (although there are many examples of pro - ceeds of avoidance actions securing DIP financ - ings). 7.7 Set-Off Rights Section 553 of the US Bankruptcy Code pre - serves set-off rights with respect to mutual debts. 7.8 Out-of-Court v In-Court Enforcement Out-of-court restructurings are the most com - mon restructurings in private credit. While they take many forms, the most common is the lend - ers’ “taking the keys” and the private equity sponsor(s) receiving a mutual release. As part of
these restructurings, the lenders often exchange some quantum of their debt for the equity of the borrower or the holding company that owns the borrower. It is also commonplace for the lend - ers to provide new funding to the company to defray the cost of the restructuring and provide go-forward liquidity. Bankruptcies in private credit usually occur when: • the buyer of a distressed company prefers to purchase in bankruptcy because of the court ordering the sale to be “free and clear” or all liens and other encumbrances; • there are burdensome leases or other con - tracts that the lenders or the buyer wishes the company to reject; or • there is litigation that the lenders or the buyer want to leave behind. 7.9 Dissenting Lenders and Non- Consensual Restructurings Out-of-court, dissenting lenders’ rights are typi - cally limited to so-called “sacred rights” in the credit agreement. The scope of “sacred rights” is credit agreement-specific and is currently being litigated in several high-profile cases. In bankruptcies, dissenting lenders can vote to reject a bankruptcy plan and if the dissenting lenders constitute at least half of the creditors in that class, or hold more than one-third of the claims in that class, the bankruptcy plan will need to be approved under the US Bankruptcy Code’s “cram-down” procedures. If dissenting lenders constitute a smaller amount of the class, they still have rights to object under the “best interests of creditors” test, which requires that a creditor receive at least the recovery it would receive in a liquidation.
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