Can low market value of debt securities render a corporation solvent for preference purposes? A surprising decision from Delaware

Article Abstract:

The district court's 1996 ruling In re Trans World Airlines may mean that a company's debt securities, if trading below market value, could render a bankrupt corporation as solvent under the traditional balance sheet test. According to the reasoning in this approach, a late unsecured debt payment might not be considered a voidable preference since the corporation is not considered insolvent. The bonds' market value is likely to become the means of determining valuation, although the TWA decision does not specify a particular methodology.

Bankruptcy Law, Other Justice, Public Order, and Safety Activities, Private Bonds & Notes, Bonds, Bonds (Securities), Valuation

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Supreme Court adopts replacement cost method of valuing collateral for Chapter 13 cram down purposes

Article Abstract:

Bankruptcy courts will have to grapple with the US Supreme Court's 1997 Rash case holding, which outlined standards for replacement collateral valuation methods in Chapter 13 bankruptcies. The lower appellate courts had been split on proper valuation methods for cram down purposes, with some using retail or replacement cost as the standard, and others using average differences between wholesale and retail. The Supreme Court opted for a simple rule based on replacement value.

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Expiration of letter of credit after payment leaves creditor vulnerable to preference risk

Article Abstract:

The Powerline case ruling implies a letter of credit expiring after payment of debt can leave a creditor open to preference risk, if no provision is made for recourse against issuer when the creditor-beneficiary must disgorge payment as a voidable preference. Creditor-beneficiaries of any type of third-party surety arrangements should realize that if issuers' contingent reimbursement rights become less secured, they may have to repay part of the debtor's payment.

Cases, Letters of credit, Debtor and creditor, Suretyship and guaranty, Guarantees, Sureties

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