Calculation of Secured Claims

When I was a law student the rule I learned about secured claims was that they accrue post-petition interest and attorneys' fees (if provided for by contract or statute) up to the amount of the value of the collateral that exceeds their claims, but then nothing further once they are fully secured.  That was an easy enough rule to apply.

But then the Supreme Court's ruled in Travelers v. PG&E (2007) that the standard basis for disallowing the excess attorneys' fees—the Fobian rule—was no longer valid. SCOTUS expressly left open the possibility of other arguments for limiting attorneys' fees, but none have been successful in the courts of appeals so far. 

So this brings up a question:  If post-petition interest is capped by the collateral cushion, but post-petition attorneys' fees are not so capped and can therefore spillover into an unsecured claim, what is the order in which the collateral cushion is applied?  That is, what is the correct order of operations?  Is the collateral cushion applied first to post-petition interest and then to attorneys' fees or vice-versa or are they applied as they accrue? 

I'm curious for readers' thoughts on the right answer to this problem, or at least how it is handled in practice.  I'm also curious for thoughts on why the issue hasn't arisen in any reported decision. The problem seems akin to that of how adequate protection payments are applied to reduce a claim and collateral value, where there is a little bit of caselaw.  

LTL 2.0: The Largest Fraudulent Transfer in History

[Updated 4.12.23 to reflect the transcript of the first day hearing with much more detailed analysis of LTL's arguments regarding fraudulent transfer allegations.]

Today was the first day hearing for LTL 2.0. An ad hoc committee of talc claimants (most of the members of the Official Committee from LTL 1.0) weighed in with an informational brief that blasted the bankruptcy filing as being in bad faith and premised on what is, without hyperbole, the largest fraudulent transfer in history, weighing in a jaw-dropping $52.6 billion.

LTL, Part Deux (now with even more fraudulent transfers!)

This post is a joint post by Hon. Judith K. Fitzgerald (ret.)[*] and Adam Levitin

Here we go again. Precisely one hour and thirty-nine minutes after the dismissal of the bankruptcy filing of LTL, Johnson & Johnson’s artificially created talc-liability subsidiary, the company was right back at it again with the filing of a new chapter 11 case in New Jersey, again assigned to Judge Kaplan.

It took some fast work from our friends at Jones Day to get a second complex chapter 11 case out the door, albeit without any schedules! With the filing came, inter alia, a declaration, a statement by the Debtor regarding its second filing, and a new Adversary Proceeding that seeks the same preliminary injunctive relief for the benefit of some 700 J&J affiliates and favored customers that was achieved in the first LTL case.

The new case is supposedly engineered to comply with the strictures of the Third Circuit’s decision dismissing the original filing for not being in good faith on account of the debtor not being in financial distress. To recall, LTL found itself hoist on its own petard before the Third Circuit, which noted that its assets included a $62 billion funding agreement, vitiating any claim of financial distress.

To this end, what has changed in LTL 2.0 is the design of the funding agreement. The funding agreement in LTL 1.0 was for up to $62 billion, and the funding was to come from both LTL’s HoldCo (New JJCI) and J&J. Now in LTL 2.0, the funding agreement is just from HoldCo, and it is for only $8.9 billion. There is a proposed backstop from J&J, but that will require bankruptcy court approval, so LTL claims that it is not part of the good faith analysis. LTL’s thinking is that Judge Kaplan previously found that the HoldCo (or at least its predecessor) was in financial distress, so it must be so now, particularly because in January of this year it transferred most of its assets—the entire J&J consumer business!—to the J&J parent. The idea is that the new funding agreemen tisn’t really so valuable, so LTL must be in financial distress.

There are (at least) three flies in J&J's ointment.

CFPB Details "Abusive" in Policy Statement and Speech

In a few hours, I'll have the pleasure of hosting CFPB Director Rohit Chopra for a virtual talk at UCI Law (today at 12pm PDT, 3pm PDT). You can still join us by registering for the Zoom link here.

Director Chopra will be discussing the new policy statement on the CFPB's "abusive" authority that the Bureau issued a few minutes ago. The statement "summarizes precedent and establishes a framework to help federal and state enforcers identify when companies engage in abusive conduct."

The full policy statement is available here and will be published in the Federal Register with a 90-day comment period that closes on July 3. I imagine we might be talking more about it and its implications here on CreditSlips in the coming days.