Jonathan Feldman Advises on Lending to Distressed Companies

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Jonathan Feldman of Greenwich, a top investor and manager for investment funds, warned his clients to be wary of lending to distressed companies and provided critical advice on how to go about it.

Feldman says the new ruling by the Ninth Circuit Court of Appeals strengthens the authority of lower courts to recharacterize their debts as equity, and to a lower priority, even though there may have been no inequitable conduct.

Today, Jonathan Feldman of Greenwich, a top investor in private placement and manager for investment funds told his clients to watch out on lending to distressed companies and provided critical advice on how to go about it. Feldman spoke in light of the recent ruling of the Ninth U.S. Circuit Court of Appeals In re Fitness Holdings International, Inc, (No. 11-56677, D.C.No. 2:10-cv-00647-AG ) (http://cdn.ca9.uscourts.gov/datastore/opinions/2013/04/30/11-56677.pdf) and also the current controversies and attempts to change bankruptcy laws as highlighted in an American Bankruptcy Institute Commission held on May 21.

“In a nutshell,” said Feldman, “the legalities surrounding lending to distressed entities, and recovery of money, is something that needs to be done with expert knowledge, because good faith or honest intention is not considered by estate trustees in recovery actions, or by the court when setting preference.”

Jonathan believes that it is a critical situation when small or big businesses find a good client in distressed conditions – there’s reason to continue to support the client, otherwise bankruptcy of the client would be swifter without any chances of recovery, and then again after losing money on a client gone bankrupt, you might again have to face recovery claims from trustees – leading to double loss.

Jonathan says the new ruling by the Ninth Circuit Court of Appeals, in essence, strengthens the authority of lower courts to recharacterize their debts as equity, and to a lower priority, even though there may have been no inequitable conduct. The Ninth Circuit stated clearly that “a court may recharacterize an obligation that does not constitute ‘debt’ under state law.”

And this adds to the mess portrayed by Valerie Venable, the Director of Credit Ascend Performance Materials, LLC, when testifying before the ABI Commission to Study the Reform of Chapter 11. http://commission.abi.org/sites/default/files/statements/21may2013/ValVenable_Testimony.pdf In her testimony, Venable says, the current state of bankruptcy law “has given birth to an entire industry focused on extracting additional funds from the creditors who supported the debtor while they struggled and tried to survive.”

Speaking emphatically before the bankruptcy reform commission of ABI, Venable said, “generally speaking, the only parties who benefit from preference recoveries are the professionals handling those matters. In all of the cases I have been involved in, or those where I have closely watched through the filings, I have never seen any of the trade credit preference recoveries going into the unsecured creditor’s pool for distribution. Of the near $3 million I returned in one case, I didn’t see three dollars.”

Under the situation, Feldman says, unsecure lenders need to charge a higher premium, diligently identify non-recoverable accounts and adjust sale prices considering non-recoverable accounts as part of the overall sales costs. Relying on court actions has become unreliable due to conflicting opinions and views on the same issues of bankruptcy law and especially with relation to preferential recovery.

About
Jonathan Feldman of Millennium Drilling is a well known investor from Greenwich, CT, who is currently engaged in managing and making investments in bankruptcy claims trading, real estate, assisted living facilities for the elderly, and private placements like private placement life insurance.

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