Bankruptcy Court Rules OID Generated in Fair Market Value Debt Exchange Should Be Allowed

21 November 2013
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  • Judge Glenn of the Bankruptcy Court for the Southern District of New York recently held that original issue discount (“OID”) created in a prepetition “fair market value” debt exchange is not disallowable in bankruptcy. This noteworthy ruling provides important and long-awaited guidance for the investing community on the question left open by the Second Circuit’s 1992 ruling in LTV Corp. v. Valley Fidelity Bank & Trust Co. (In re Chateaugay Corp.), which held that face value exchanges of debt do not generate disallowable OID.
  • Judge Glenn, in applying Chateaugay to fair market value exchanges, found that that there was no reason to distinguish fair market exchanges from face value exchanges. This decision emphasizes the strong bankruptcy policy favoring out-of-court consensual restructuring.
  • Judge Glenn’s decision recognizes the importance of fair market value debt exchanges as a restructuring strategy for distressed companies and their investors and provides much-needed guidance on a significant issue in this market.