An emerging strategy many hedge and private equity funds are pursuing is known as the "loan-to-own" investment. In this type of investment, a Fund's investors acquire debt, and sometimes certain amounts of equity or management control, such as voting power or board seats, from a lender of a distressed company. The Fund often buys the debt at a deep discount, then nudges the Company toward a bankruptcy filing where the Fund can take advantage of the economic leverage associated with the face amount of the debt it acquired to turn the debt into an equity ownership of the Company in the chapter 11 process.


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The Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 made various changes to the provisions of the Bankruptcy Code governing claims in a chapter 11 proceeding. This article examines two of these changes–new section 503(b)(9) and revised section 546(c)–and their impact on creditors in recent Chapter 11 cases.


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In recent years, the structured credit markets have created derivative instruments in which economic rights can be decoupled from their governance rights. Decoupling is a term used to describe the separation of economic rights from voting rights in various instruments. More specifically, debt decoupling is "the unbundling of the economic rights, contractual control rights, and legal and other rights normally associated with debt, through credit derivatives and securitization [sic]." The most common, and perhaps simplest, derivative instrument is the credit default swap ("CDS"). This article provides a basic understanding of the mechanics of a CDS and touches on several issues that a CDS creates in bankruptcy and in out-of-court workouts.


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In a case decided October 20, 2008, the Seventh Circuit held that a corporation formed by the debtors for the sole purpose of purchasing one of the claims in their own bankruptcy did not automatically subject the corporation's claim to equitable subordination. The case of In re Kreisler illustrates the perverse events that can unfold in the unregulated area of claims trading; that is, the buying and selling of creditors' claims in a bankruptcy proceeding. The Seventh Circuit's opinion reveals that equitable subordination will not be easily granted and that inequitable conduct, without harm to the other creditors, is not enough to deprive a scheming claimant of his "piece of the pie."


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Between the recent financial turmoil in the United States and the impending changes in Congress and the White House, the coming year may bring a host of legislation changing sections of the Bankruptcy Code or related laws. This article provides a summary of recently enacted and pending bills of interest.


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At the Fall Meeting of the ABA Section of Business Law Business Bankruptcy Committee in Scottsdale, Arizona, Michael St. Patrick Baxter, Chair of the Committee, awarded the first annual Kathryn R. Heidt Memorial Award to Los Angeles attorney Sharon Z. Weiss. Weiss is a partner with the law firm of Richardson & Patel LLP and has been active in the ABA's Section of Business Law and the Committee for many years.


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The Business Bankruptcy Committee invites you to submit articles for possible publication in future issues. The articles do not need to belong or in-depth, and it is a great way to get involved in the Business Bankruptcy Committee. Articles can survey the law nationally or locally, discuss particular business bankruptcy issues, or examine a specific case. If you are interested in submitting an article, please contact Newsletter Editor-in-Chief Kay Kress at KRESSK@pepperlaw.com or Editor Chris Alston at ALSTC@foster.com.

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