January 27, 2011

Usury Savings Clause Doesn't Protect Lender in Bankruptcy Case

Wilmington and Philadelphia partner Andy Kassner and associate Joseph Argentina, have co-authored an article for The Legal Intelligencer on what the year ahead may hold for chapter 11 proceedings and debt restructurings. Restructuring specialists agree that the wave of financings that closed at the peak of the economic bubble could be a source of restructuring activity. Many of those transactions included high levels of risk that involved special inducements to lenders; what remains to be seen is how these “kickers” will be treated by the courts.

Andy and Joe, both members of the firm's Corporate Restructuring Practice Group, discuss the consideration of one such transaction by the U.S. Bankruptcy Court for the District of New Jersey in In re Global Outreach S.A. They conclude that the decision points to heightened scrutiny for equity kickers in enforcement actions going forward: “lenders cannot simply depend on usury savings clauses to ensure they will get the maximum legal interest rate when they argue these kickers should be included as part of the senior secured debt and not be treated as equity.”

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