A recent decision by a U.S. bankruptcy appeals panel may make it harder for companies in bankruptcy to sell assets.

Many companies in Chapter 11 bankruptcy try to sell assets before a plan of reorganization is approved to get the best price and thus strengthen their continuing operations. Debtors and their bankruptcy trustees use what is called a "363 sale process" under the bankruptcy law to sell property and other assets to a senior secured creditor while removing the liens of junior creditors.

The case in question pitted communications behemoth Clear Channel, a junior secured creditor, against a hedge fund that held a senior secured interest on real estate owned by a debtor. When the hedge fund bought the property from the bankrupt debtor, leaving Clear Channel with nothing, Clear Channel objected to the sale.

In what could be a landmark decision, the Bankruptcy Appellate Panel for the 9th Circuit decided that the sale of the property to the hedge fund was valid but that Clear Channel's lien would remain on the property. If followed by other bankruptcy courts, this decision means that senior secured creditors cannot acquire assets free and clear of junior liens by buying assets of bankrupt debtors except in a sale via an approved reorganization plan.

While it does not sound like much of a change, it could make it much harder for troubled companies to continue operating. The result may be that more companies end up liquidating instead of reorganizing through bankruptcy into viable business operations.

--

-- Joshua Farber,
Meyer Unkovic & Scott, jmf@muslaw.com

The American Recovery and Reinvestment Act provides a government subsidy for assistance-eligible individuals, which for nine months will cover 65 percent of the cost of group health plan continuation coverage under the Consolidated Omnibus Budget Reconciliation Act and similar state laws (collectively referred to as "COBRA coverage").

Eligible individuals include employees who become eligible for COBRA coverage as a result of an involuntary termination of employment between Sept. 1, 2008, and Dec. 31, 2009, and their covered spouses and dependents.

The government subsidy is equal to 65 percent of the amount charged by the employer for COBRA coverage. For example, if the employer charges $1,000 per month for COBRA coverage, the government subsidy will be $650. In this example, the employer would bill the employee $350 and subtract $650 from its payroll tax deposits. If the employer already subsidizes COBRA coverage for some or all former employees, the cost charged to those employees will be lower, and the government subsidy will be worth less. Therefore, employers who subsidize COBRA coverage may want to re-evaluate their policies in light of the new government subsidy.

Enhanced COBRA enrollment notices describing the subsidy must be distributed to all individuals who become eligible to elect COBRA coverage under the employer's plan between Sept. 1, 2008, and Dec. 31, 2009. This means that some individuals who declined COBRA coverage when it was initially offered, dropped COBRA coverage due to a failure to pay premiums, or chose to participate in a retiree medical plan instead of COBRA before the subsidy went into effect will get a second chance to make a COBRA election.

Employers are encouraged to contact their COBRA administrators and payroll administrators as soon as possible to begin implementing the new rules.

--

-- Lauren Licastro,
llicastro@morganlewis.com, Morgan Lewis & Bockius LLP