TMT Procurement – Dip Lender Did Not Meet 'Good Faith' Requirement

The Fifth Circuit recently held that a debtor-in-possession (DIP) lender did not qualify as a "good faith" lender, overturning orders of the United States District Court and Bankruptcy Court for the Southern District of Texas, including a final order approving DIP financing. In re TMT Procurement Corp., 764 F.3d 512 (5th Cir. 2014). Notably, the court held that because the DIP lender knew that collateral securing its loan was subject to adverse claims by a third-party in an unrelated proceeding, the DIP lender was not a "good faith" lender. As a result, challenges to the lower courts' orders were not moot under sections 363(m) and 364(e) of the Bankruptcy Code (as the lender and debtor had asserted), and the court proceeded to hear the merits of the appeal and ultimately vacated the lower courts' orders. The decision underscores the importance of the "good faith" requirement, particularly for DIP lenders relying on collateral that is not property of the estate.

Background

Vantage Drilling Company ("Vantage"), an offshore drilling company, entered agreements with companies owned by Hsin-Chi Su ("Su") for the acquisition of offshore drilling rigs and ships. As part of the arrangement, Vantage issued 100 million shares of its stock to F3 Capital, an entity solely owned and controlled by Su. After business disputes arose, in 2012, Vantage sued Su in Texas on several theories, fraud, negligent misrepresentation and unjust enrichment (the "Vantage Litigation"). Vantage sought a constructive trust on all profits or benefits obtained by Su — including the Vantage stock issued to F3 Capital.

Meanwhile, in 2013, 23 foreign marine shipping companies Su owned (the "Debtors") filed for chapter 11 bankruptcy in the United States Bankruptcy Court for the Southern District of Texas. The Bankruptcy Court granted several creditors' motion to dismiss as to two of the companies, and denied the motions as to the remaining 21, but required those companies to pledge certain non-estate "Good Faith" property to ensure compliance with court orders, pay sanctions, serve as collateral for capital loans and satisfy any amounts arising under section 507 of the Bankruptcy Code. Ultimately, the Debtors agreed to an escrow agreement pursuant to which it would pledge more than 25 million shares of F3's Vantage stock (the "Vantage Shares") to the Bankruptcy Court to be held in custodia legis for the benefit of the debtors. In doing so, both F3 Capital and Su represented and...