Co-written by Rick Antonoff
As reported in our January 29, 2001 memorandum, the Court in the LTV bankruptcy case entered an order (the "Interim Order") permitting LTV to use as cash collateral the proceeds of inventory and receivables that were transferred to special purpose corporations ("SPVs") as part of securitization transactions prior to the bankruptcy. One of the securitization lenders filed an objection to the Interim Order asserting, among other things, that because the inventory and receivables were transferred as "true sales" in the securitization transactions, the cash collateral is not property of LTV’s bankruptcy estate. The objection sought to modify the Interim Order in a manner that would maintain the securitization structure notwithstanding the bankruptcy filing. As we reported in our previous memorandum, the Court set a hearing on March 7, 2001 to determine the ultimate issue of whether the transfers constitute "true sales".
On February 5, 2001, the Bankruptcy Court issued a memorandum opinion denying the lender’s emergency motion to modify the Interim Order (the "Memorandum Opinion"). While noting that the true sale issue is set for a final hearing and that the parties have been afforded an opportunity to conduct discovery on the issue, the Memorandum Opinion specifically addresses the lender’s argument that the receivables and inventory are not property of LTV’s bankruptcy estate.
In determining to continue the status quo pending a final hearing, the Court noted that without the use of cash collateral, LTV would be forced to cease operating. The Court also stated that the true sale question was fact intensive, and that the facts would not be before the Court until the March 7 hearing. The Court did, however, go on the state,
[T]here seems to be an element of sophistry to suggest that Debtor does not retain at least an equitable interest in the property that is subject to the interim order. Debtor’s business requires it to purchase, melt, mold and cast various metal products. To suggest that Debtor lacks some ownership interest in products that it creates with its own labor, as well as the proceeds to be derived from that labor, is difficult to accept. Accordingly the Court concludes that Debtor has at least some equitable interest in the inventory and receivables, and that this interest is property of the Debtor’s estate. This equitable interest is sufficient to support the entry of the interim cash collateral order.
While an ultimate ruling on true sale will follow the March 7, 2001 hearing, the Court’s suggestion that LTV has an "equitable interest" in the receivables and inventory which is property of the bankruptcy estate may be an indication of the Court’s thinking on the ultimate issue.
Cadwalader is continuing to monitor this case. We will continue to keep our clients and friends apprised of developments as they occur.
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