Williams v. FDIC (In re Positive Health Management) lender forced to return …

On October 16, 2014, the United States Court of Appeals for the Fifth Circuit entered an order requiring a real estate lender, First National Bank (the Lender), to refund certain mortgage payments it received from Protective Health Management (the Debtor), an affiliate of its borrower.1 Because the mortgage payments constituted actual fraudulent transfers, the Fifth Circuit held that the Lender could retain the payments only to the extent of the value of the Debtors continued use of the property.2 Like the Eleventh Circuits controversial ruling in the TOUSA bankruptcy, this case serves as an important reminder that lenders should monitor the source of debt payments.

Background

In 2006 the Lender made a loan to Zeigler Enterprises III, LLC (the Borrower) (an entity owned by Robert Zeigler). The loan was secured by a first lien mortgage on an office building owned by the Borrower. The Debtor (a pain management clinic also owned by Mr. Zeigler) occupied the office building, but was neither a borrower nor a guarantor under the Lenders loan. From February 2007 through March 2008, the Debtor made direct payments to the Lender on account of the loan totaling approximately$365,000; the Debtors tax returns described these payments as rent. Although the Borrower was in default, the Lender did not pursue collectionefforts or a foreclosure while the Debtor made the payments.

Beginning in 2006, the Debtor stopped paying employment tax liabilities; instead, Mr. Zeigler used the funds to maintain his own lavish lifestyle.3 Facing significant unfunded tax liabilities, the Debtor filed a voluntary petition under Chapter 11 of the Bankruptcy Code in March 2008. The case was subsequently converted to a case under Chapter 7, and a trustee was appointed.4 The trustee brought an adversary proceeding against the Lender asserting that the payments made by the Debtor to the Lender constituted fraudulent transfers under Section 548 of the Bankruptcy Code.

Bankruptcy Court Opinion

The Bankruptcy Court found that the Debtor made the transfers with the actual intent to hinder, delay, or defraud its creditors.5 Notwithstanding the Debtors actual fraudulent intent, the Lender argued that it was entitled to the affirmative defense set forth in Section 548(c) of the Bankruptcy Code, which allows a transferee that takes in good faith to retain the property transferred by the Debtor to the extent that such transferee . . . gave value to the debtor in exchange for such transfer.6

In evaluating the Lenders defense under Section 548(c), the Bankruptcy Court applied a two-pronged analysis: (a) did the Lender act in good faith; and (b) did the Lender give value in exchange for the payments? With respect to the good faith prong, the Bankruptcy Court concluded that the Lender acted in good faith because it neither knew, nor should have known, that the Debtor was making questionable transfers.7 As for value given, the Bankruptcy Court concluded that the Lender provided reasonably equivalent value in the form of the Debtors continued use of the property. The Borrower was in default, and had the Lender foreclosed, the Debtor would have been evicted. Based on testimony and evidence presented at trial, the Bankruptcy Court concluded that the value related to the Debtors continued use of the property equaled approximately $250,000, which was reasonably equivalent to the $365,000 in payments made to the Lender. Because the Lender acted in good faith and gave reasonably equivalent value, the Bankruptcy Court held that the Lender was entitled to retain the full amount of the payments.8

The Fifth Circuit Court of Appeals Opinion

On appeal, the Chapter 7 trustee argued that Section 548(c) affords an affirmative defense for good faith only to the extent that such transferee . . . gave value to the debtor in exchange for such transfer9 and that as a result, the Bankruptcy Court should have offset the value received by the Debtor ($250,000) against the payments made to the Lender ($365,000) and required the Lender to return any excess.

The Fifth Circuit observed that courts have reached different conclusions on this pointsome, like the Bankruptcy Court in this case, have held that a transferee acting in good faith escapes all liability so long as it gave reasonably equivalent value, but other courts have applied a netting approach allowing a transferee to retain payments only up to the value given to the debtor. The Fifth Circuit adopted the netting approach, concluding that [t]he last clause of the statute, beginning with lsquo;to the extent, makes clear that a transferee is entitled to keep only the amount of a fraudulent transfer that equals the amount it gave up in exchange.10 Accordingly, the Fifth Circuit held that the Chapter 7 trustee was entitled to recover approximately $115,000 (ie, the difference between the payments made to the Lender and the value related to the Debtors continued use of the property).

Lessons Learned

The Protective Health Management decision serves as a reminder to secured lenders that it is increasingly necessary to monitor the source of payments. A red flag should be raised anytime payment comes from a party other than the borrower. If the Debtors rent payments had gone first to the Borrower and then the Borrower used the funds to pay its obligations to the Lender, the Lender would not have faced liability for a fraudulent transfer. Understandably, most lenders are content to receive timely payments regardless of the source. However, as illustrated by this case, that approach can lead to potential fraudulent transfer liability and costly litigation.

Arcil puts Jhagdia Copper Ltd on the block

Asset Reconstruction Company of India Limited (Arcil) has invited bids for Jhagdia Copper Ltd (JCL), the largest secondary copper smelting unit in the country, located in Gujarat.

It is estimated that at current market prices, JCL may cost over Rs 1,000 crore with an implementation period lasting two years, according to Arcil sources.

Secured creditors of JCL led by Arcil have offered the unit for sale.

Arcil acquired more than 75 per cent of the secured debt of the company from various lenders. After a recent Gujarat high court order authorising Arcil to find buyers, it initiated the strategy of exploring interest to revive the unit by credible investors.

Arcil has initiated the process by inviting bids and the last date for submission of bids is December 17.

JCL has a smelting unit in Jhagadia, which falls under Bharuch district of Gujarat, with a capacity of around 50,000 tonne per annum of London Metal Exchange grade A copper cathode with proven Swedish technology.

The plant which was commissioned in 2004 produced high quality copper cathode commanding a premium in the market.

However, due to then prevailing market conditions, it could not service its loan which was eventually classified as a non-performing asset.

Located on 75 acres of land at Jhagadia in Gujarat, the unit could directly employ around 400 people if revived, and lead to indirect employment for others, besides also generate revenue for the exchequer.

In association with the Gujarat Industrial Investment Corporation (GIIC), Arcil has initiated a process on behalf of all secured lenders to find a suitable buyer for the plant.

Several players including some globally renowned players are reported to have shown interest in acquiring JCLs assets.

JCL is the largest e-waste processing unit of its type in the country and could serve as a major solution to dispose off electronic waste and produce copper cathodes as well as precious metals.

Miami throws parade for Heat

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Harbinger Fails In Attack On $1.7B LightSquared Guaranty

By Andrew Scurria

Law360, New York (October 30, 2014, 6:59 PM ET) — The New York bankruptcy judge handling LightSquared Inc.s knotty Chapter 11 case held Thursday that Harbinger Capital Partners LLC, the debtors top equity holder, cannot eliminate a guaranty on $1.7 billion in debt owed to a group of secured lenders.

Ruling from the bench, US Bankruptcy Judge Shelley C. Chapman denied Harbingers request to expunge or zero-out a guaranty claim that an ad hoc group of lenders to the debtors LightSquared LP unit have asserted against the LightSquared Inc. parent company.

The decision marks a setback…

JP Group trying to reduce debt overhang: Lenders

Lenders to the Delhi-based Jaypee Group said on Monday that the Gaur family-promoted infrastructure group was taking steps to reduce leverage in its power projects.

Representatives of about 30 lenders, including IDBI Bank and State Bank of India, had a detailed review meeting on the issue.

Jaypee Power Ventures and JP Associates together had net debt of just over Rs 97,000 crore at the end of March 2014, according to Capitaline data, compiled by the Business Standard Research Bureau.

There could be a delay of one or two months in finalising deals (for asset sales) due to market conditions. But the intent is clear and they#39;re doing efforts to manage things, said the head of corporate banking with a large public sector bank.

In September, JSW Energy and Jaiprakash Power Ventures announced a deal or the full acquisition by the former of three operational plants of the latter the 300 Mw Baspa-II hydro electric unit, the 1,091 Mw Karcham Wangtoo hydro electric unit and the 500 Mw Bina thermal power unit.

Last year, the group had sold its cement unit to UltraTech Cement. It sold Jaypee Cement Corporation, a subsidiary of Jaiprakash Associates, for Rs 3,800 crore.

Anglogold puts mines up for sale as CEO seeks to reduce debt

By Kevin Crowley

Anglogold Ashanti Ltd. put mines up for sale as the world’s third-largest gold producer cuts debt after shareholders balked at a $2.1 billion share sale in September.

The company plans to cut borrowing through “self-help measures,” such as reducing operating expenses and increasing output, AngloGold Chief Executive Officer Srinivasan Venkatakrishnan said today on a conference call from Johannesburg. Its depositary receipts rose the most in almost six years in New York.

“We may also consider a sale or joint venture of an operating asset for value,” he said. “People ask us ‘what do you mean for value?’ It basically means the shop isn’t open for bargain hunters.”

Venkatakrishnan, known as Venkat, is beginning a strategic fight-back after investors rejected a plan to split AngloGold’s South African and international mines, a move that would have required the company to raise $2.1 billion, or a third of its then market value. He wants to reduce net debt by $1 billion, a third of the total, over the next three years.

AngloGold’s American Depositary Receipts rose 22 percent to $10.12 at the close in New York. Earlier they posted the biggest intraday gain since Nov. 21, 2008. In Johannesburg, the shares jumped 12 percent to close at 104.37 rand.

True Potential

Before today’s rebound, AngloGold had declined 45 percent since it announced the plan to split on Sept. 10. Gold has since dropped 6.6 percent to $1,169.80 an ounce as investor demand for safe-haven assets has weakened with signs of an improving US economy and the prospect of tighter monetary policy.

“The share doesn’t reflect what the true potential of the value of the business is and our potential to deliver returns over the longer term,” Venkat said.

The potential sales are in addition to the company seeking joint ventures for its Obuasi mine in Ghana and Colombian assets, which have received numerous expressions of interest, he said. The CEO declined to name assets, saying he didn’t want to “box ourselves in.”

AngloGold had $3 billion of net debt, a ratio of 1.64 times earnings before interest, taxes, depreciation and amortization at Sept. 30, it said today in a statement. That’s higher than South African rivals Gold Fields Ltd. and Harmony Gold Mining Co. but lower than Barrick Gold Corp. and Newmont Mining Corp., the world’s biggest gold miners, the company said, citing data from HSBC Holdings Plc and Bloomberg.

Cutting Costs

The company’s adjusted headline earnings, which exclude one-time items, were $2 million in the three months ended Sept. 30, compared with a loss of $4 million in the previous quarter, the company said. Production increased 2.7 percent to 1.13 million ounces. All-in sustaining costs, which include all operating expenses, fell 2.3 percent to $1,036 an ounce, 10 percent less than a year ago.

AngloGold announced a “significant maiden resource” at Neuvo Chaquiro in Colombia, with a contained metal content of 3.95 million tons of copper, 6.13 million ounces of gold and 85.2 million ounces of silver. It holds 88.5 percent of the project with the remainder owned by Vancouver-based B2Gold Corp.

AngloGold estimates full-year production of 4.35 million ounces to 4.45 million ounces, at the top end of its previous forecast, while all-in sustaining costs are seen at $1,025 an ounce to $1,075 an ounce.

Egypt to Reduce Debt On the Back of New Project

Dana Gas Egypt has concluded a Gas Production Enhancement Agreement (GPEA) with the Egyptian Natural Gas Holding Company (EGAS) and the Egyptian General Petroleum Company (EGPC).

The deal calls for a seven year work programme which will produce about 270 billion cubic feet of natural gas, 8 to 9 million barrels of condensate and 450,000 tons of LPG.

Peak production is expected to occur in 2017 with incremental daily production of over 160 million standard cubic feet of gas and 5,600 barrels of condensate.

The deal was announced at a press conference in Cairo with Sharif Ismail, Egyptian Petroleum Minister, and the Chairman of EGAS, Eng. Khalid Al-Badie, and attended by the Vice-Chairman of Dana Gas, Dr.Tawfeeq Al-Moayed, members of the Dana Gas Board, Mr. Hamid Jafar, Mr.MajidJafar and Mr. Rashid Al-Jarwan as well as the senior management of Dana Gas Egypt led by General Manager, Mark Fenton.