Alerts

Second Lien Lenders Fend Off Attack on Credit Bid

January 25, 2006

The U.S. Court of Appeals for the Third Circuit on January 6, 2006, rejected an attack by unsecured creditors on a court-ordered asset sale to undersecured second lien lenders in Cohen v. KB Mezzanine Fund II, L.P. (In re SubMicron Systems Corp.), – F.3d. –, 2006 WL 27476 (3d Cir. Jan. 6, 2006). In that case, the first lien lender was paid in full; the second lien lenders ("Lenders") credit bid their secured claims in exchange for the debtor's assets; and unsecured creditors were wiped out. The unsecured creditors unsuccessfully argued that: (i) the Lenders' debt should be recharacterized as equity; (ii) their credit bid should be capped at the value of the collateral securing the second lien; and that (iii) the Lenders' secured debt should be equitably subordinated to unsecured debt. The district court (sitting as a bankruptcy court) approved the sale, and the 3d Circuit affirmed.