Legal Notes

Secured Lender, The, Jul/Aug 2007 by Helfat, Jonathan N, Kohn, Richard M

Second, the promissory notes had to satisfy the "divisibility" test. In order to satisfy this test, the notes were required to be part of a class or series of obligations (e.g., if a promissory note is but one of several series "A" notes). Noting that the eight promissory notes were identified in McNaughton's sec filings as a single class of obligations, the Court found that the promissory notes satisfied the "divisibility" test.

Third, the promissory notes had to satisfy the "functional" test. To satisfy this test, the promissory notes had to be of a type dealt in (or traded on) securities exchanges or markets. In this regard, the Court noted that industry professionals treated the promissory notes as securities and that McNaughton, when it issued the promissory notes to the Schneiders, reported the issuance to the sec. As such, the Court found that the promissory notes satisfied the "functional" test.

After finding the promissory notes satisfied all three tests, the Court held that the promissory notes qualified as "securities" under New York law. By doing so, Highland dispenses with the "writing" requirement of the NY statute of frauds for contracts to buy or sell promissory notes, at least in situations where the notes are governed by New York law. As such, when "shopping" a loan, particularly one in which the borrower has executed a promissory note, lenders should be mindful that what they say to potential purchasers may constitute an enforceable contract to sell the loan.

In re Dana Corporation, 2007 Bankr. LEXIS 1466(Bankr. S.D.N.Y. April 19,2007) (Reclamation claims asserted under section 546(c) of the Bankruptcy Code may be rendered valueless notwithstanding that the goods to be reclaimed are not liquidated in satisfaction of a pre-existing lien but rather pledged as security for postpetition loans which are used to satisfy the pre-existing lien.)

In one of the few decisions on reclamation since the Bankruptcy Abuse Prevention and Consumer Protection Act ("BAPCPA") took effect in October 2005, the United States Bankruptcy Court for the Southern District of New York valued all pending reclamation claims in Dana Corporation's Chapter 11 case at zero, effectively denying them in their entirety.

Dana Corporation filed a Chapter 11 case on March 3, 2006. As of the commencement of the Chapter 11, Dana owed approximately $381 million under its pre-petition credit facility, all of which was secured by a lien on substantially all of Dana's assets, including inventory. In connection with the Chapter 11, Dana obtained post-petition financing secured by a blanket lien on all of its assets, including inventory. A portion of the post-petition loan proceeds was used to repay the pre-petition credit facility.

Shortly after the commencement of the Chapter 11, various creditors of Dana asserted reclamation claims under section 546(c) of the Bankruptcy Code. section 546(c), as amended by the BAPCPA, gives unpaid vendors the ability to assert a reclamation claim for goods received by a debtor in the 45 days prior to the bankruptcy filing. In Dana Corporation, the reclamation claims totaled more than $297 million in the aggregate, with the largest individual reclamation claim in the amount of $9,000,000.