Thursday, February 28, 2013

Ninth Circuit Holds SEC Cannot Be Sued For Alleged
Negligence in Madoff Ponzi-Scheme Investigations

On January 28, 2013, the Ninth Circuit weighed in on the travesty that is the Madoff Ponzi scheme by upholding a district court ruling that dismissed with prejudice a lawsuit by Madoff investors against the Security and Exchange Commission (“SEC”)  in Dichter-Mad Family Partners v. United States, Case No. 11-55577 (9th Cir. 2013).  The district court held that the “discretionary function” of the Federal Tort Claims Act (“FTCA”) precluded suits against the SEC for actions (or omissions) in the investigation and ultimate prosecution of the Madoff Ponzi scheme.  In large part, the Ninth Circuit simply adopted the extensive and detailed ruling of the district court.

Four investors of Madoff filed suit in the Central District of California alleging negligence by the SEC in the investigation of Madoff.  The plaintiffs asserted that the SEC was negligent in its investigation of the Madoff Ponzi scheme.  The heart of the plaintiffs’ complaint is that the SEC could have discovered the Madoff fraud as early as 1992 had the SEC conducted a proper investigation.  Accordingly, the plaintiffs asserted the SEC was liable for their losses in the Madoff Ponzi Scheme.

Wednesday, February 27, 2013

Restructuring Support Agreement Not an
Improper Solicitation, Consent to Third Party
Releases Can Be Inferred From Failure to Act

On January 31, 2013 the United States Bankruptcy Court for the District of Delaware, Judge Shannon presiding, issued an important confirmation decision, In re Indianapolis Downs LLC. Two aspects of the decision are of unique importance.

When Indianapolis Downs, a racino in Indiana, filed bankruptcy, it had first lien debt of $98,000,000, second lien debt of $375,000,000 and third lien debt of $78,000,000.  Following the filing of the Debtor’s bankruptcy petition, the Debtor, the holder of the third lien and an Ad Hoc Committee of second lien holders (the “Ad Hoc Committee”) engaged in a process of litigation and negotiation that culminated in a Restructuring Support Agreement pursuant to which the Debtor agreed to pursue a parallel path to either sell or recapitalize the business.  The Restructuring Support Agreement set forth the details of the parallel path, prohibited the parties from supporting opposing plans and required them to vote “yes” for a plan that conformed to the Restructuring Support Agreement.  Thereafter, the Debtor filed its Plan and Disclosure Statement (both of which thoroughly described the Restructuring Support Agreement, which was also filed with the court) and as part of the Debtor’s effort to sell the business, received a bid in excess of $500,000,000 for its assets.

Friday, February 22, 2013

“New Value” Auctions Extended to Insiders

In Bank of America National Trust and Savings Ass’n v. 203 North LaSalle Street Partnership, 526 U.S. 434 (1999), the Supreme Court held that the absolute priority rule, which provides that equity cannot participate in the reorganization if senior creditors have not been paid in full, could not be circumvented by equity investors contributing “new value” unless other parties were permitted to compete to provide new value.  The theory was that equity could divert the value from, for example, secured creditors, by undervaluing the secured creditor’s interest in the property and obtaining more actual value than the amount of new value they contributed.

In Castleton Plaza LP, the United States Court of Appeals for the Seventh Circuit was confronted with a new value plan that had been confirmed by the Bankruptcy Court where the new value was contributed by an insider relative of old equity, rather than old equity itself.  The Bankruptcy Court had held that such a plan would not be subject to the auction requirements of 203 North LaSalle.