Legal Notes

Secured Lender, The, May/Jun 2007 by Helfat, Jonathan N, Kohn, Richard M

When applying its new rule to the case at hand, the second Circuit found that established settlement factors favored approval of the JPMorgan settlement, but that the record was silent on the grounds for distributing excess funds in the litigation trust outside the order of bankruptcy priority. As a result, the matter was returned to the bankruptcy court to give the Committee an opportunity to defend this aspect of the settlement.

While Iridium does not go as far as it could have, the second Circuit has still narrowed the ways in which secured lenders can settle objections to their claims in chapter 11 cases. As was the case in Indium, an active creditors' committee will often identify a basis for attacking part of a prepetition lender's collateral package. The Iridium decision erodes a secured lender's ability to rely on a settlement of such a challenge because other parties now have a clear basis on which to object and try to modify the settlement: violation of the absolute priority rule. As a result, prudent lenders with chapter 11 settlement options should be wary of proposals that make distributions available to junior claims or interests before intervening claims are paid in full. Settlements that do not strictly honor the bankruptcy priority scheme will be subject to greater scrutiny and risk of failure.

by

Jonathan N. Helfat,

partner,

Otterbourg Steindler

Houston & Rosen, PC

and

Richard M. Kohn,

senior partner,

Goldberg Kohn Bell Black

Rosenbloom & Moritz, Ltd.