By Nicholas Cordova (Harvard Law School)
Although the Boy Scouts of America (BSA) is headquartered in Texas, it filed for chapter 11 in Delaware in February. That was permissible under existing bankruptcy venue rules because the BSA had created an affiliate in Delaware seventh months earlier. Unsettled by this apparent forum shopping, the Attorneys General of 40 states, the District of Columbia, and Puerto Rico sent a letter to Congress expressing their support for H.R. 4421, the Bankruptcy Venue Reform Act of 2019. It would have prevented the BSA’s conduct. Ten state Attorneys General did not sign the letter: New York, Delaware, Connecticut, Florida, Kansas, New Jersey, North Carolina, Montana, Virginia, and Wyoming.
Under the Act, a corporation could only establish venue in three places. First, the district where its “principal assets” were located for the 180 days before filing. Second, the district where it maintains its “Principal Place of Business.” Third, and only for controlled subsidiaries, any district where a case concerning an entity controlling 50 percent or more of its voting stock is pending. Changes of control or in the Principal Place of Business in the year before filing or conducted “for the purpose of establishing venue” would be disregarded. Corporations could thus no longer manufacture venue in a preferred jurisdiction by simply creating an affiliate there.
H.R. 4421 would also require the Supreme Court to promulgate rules allowing “any attorney representing a governmental unit” to appear in any chapter 11 proceeding without paying a fee or hiring local counsel. This provision likely factored heavily into the Attorneys General’s support for the Act. Their support letter emphasizes that the resulting rule would help them enforcers consumer protection and environmental laws by reducing the costs of defending their states’ interests in chapter 11 cases filed in distant jurisdictions.
The letter offered two reasons why corporations should not be able to manufacture venue in districts with seemingly favorable judges just by creating an affiliate there. First, it is costly for creditors (particularly small creditors) because they must either travel long distances or forgo face-to-face participation as well as hire local counsel in expensive legal markets. Second, it may cause the public to perceive the bankruptcy system as unfairly advantaging large corporations. H.R. 4421 would solve these problems by “ensur[ing] that bankruptcies are filed in jurisdictions where debtors have the closest connections and filings will have the largest impacts.” The letter notes the Southern District of New York and the District of Delaware as two currently attractive districts. But the Attorneys General argue that other district and bankruptcy judges have similar expertise.
Academics largely agree that 28 U.S.C. § 1408’s permissive venue rules encourage competition among bankruptcy courts to attract high profile cases, but opinion is split on whether this competition improves or degrades bankruptcy law.
Lynn LoPucki and William Whitford argue that venue choice degrades bankruptcy law by pressuring judges to exercise their discretion to favor debtors and their attorneys because these are the actors who usually choose where to file. They suggest, for example, that bankruptcy judges of the Southern District of New York misuse discretion by freely granting extensions of the 120-day exclusivity period during which only the debtor may propose a reorganization plan. Debtors can then agree to move toward confirmation of a plan in exchange for concessions from creditors.
David Skeel, on the other hand, argues that at least one of the venue choices that the proposed Bankruptcy Reform Act would eliminate—the district where the entity is incorporated—improves bankruptcy law by encouraging states to compete for incorporation fees by offering increasingly efficient bankruptcy rules in the multiple areas where federal bankruptcy law defers to state law.
On April 29, 163 current and retired bankruptcy judges sent a letter to members of the House Committee on the Judiciary expressing support for H.R. 4421’s proposed reforms. The letter stresses the preference for eliminating state of incorporation as a basis for venue.
By Andrew N. Goldman, George W. Shuster Jr., Benjamin W. Loveland, Lauren R. Lifland (Wilmerhale LLP)
Valuation is a critical and indispensable element of the Chapter 11 bankruptcy process. It drives many aspects of a Chapter 11 case, from petition to plan confirmation, in all circumstances. It may be obvious that the COVID-19 crisis has added a layer of complexity—and volatility—to bankruptcy valuation issues with respect to valuing assets, liabilities, and claims, both in and outside the Chapter 11 context. But the crisis may also change the way that courts look at valuation determinations in Chapter 11—both value itself, and the way that value is measured, may be transformed by the COVID-19 crisis. While the full extent of the pandemic’s effect on valuation issues in bankruptcy has yet to be seen, one certainty is that debtors and creditors with a nuanced and flexible approach to these issues will fare better than those who rigidly hold on to pre-crisis precedent.
The full article is available here.
By Taylor Custer (Harvard Law School)
The United States’ response to COVID-19 has led to record levels of unemployment and a severe contraction in real GDP. The economic shock has already pushed companies such as J.C. Penney and J.Crew into bankruptcy. And many more, such as AMC and Hertz, may quickly follow. If that happens, the nation’s bankruptcy courts could soon face unprecedented levels of stress. There are at least four ways to address a potential surge.
First, Congress could authorize more permanent bankruptcy judges. It has currently authorized the federal courts of appeals to appoint 316 permanent bankruptcy judges throughout the country. But three years ago, when the economy was much stronger, the Judicial Conference argued that more judges were still needed.
Second, Congress could authorize more temporary bankruptcy judges. It has currently authorized about three dozen of them. Temporary bankruptcy judgeships expire when the occupant dies, retires, resigns, or is removed from office 5 years after the seat was created or extended. The most recent extension was in 2017, so the current temporary bankruptcy judgeships will remain vacant once occupants begin to depart after 2022 if the seats are not extended.
Third, the judicial council of each federal court of appeals could recall retired bankruptcy judges to serve.
Fourth, the judicial councils for the federal courts of appeals could agree to temporarily transfer bankruptcy judges around the country. Although this would do little to alleviate stress from an absolute rise in bankruptcies, it could help manage bottlenecks in places with disproportionate bankruptcy filings—such as Delaware, New York, and Texas. Under 28 U.S.C. § 152(d), “[w]ith the approval of the Judicial Conference and of each of the judicial councils involved, a bankruptcy judge may be designated to serve in any district adjacent to or near the district for which such bankruptcy judge was appointed.” And, under 28 U.S.C. § 155(a), “[a] bankruptcy judge may be transferred to serve temporarily as a bankruptcy judge in any judicial district other than the judicial district for which such bankruptcy judge was appointed upon the approval of the judicial council of each of the circuits involved.”
An interdisciplinary group of bankruptcy scholars from the “Large Corporations Committee of the Bankruptcy & COVID-19 Working Group” recently sent an open letter to the United States Senate/House of Representatives on the potential impact of a sharp rise in bankruptcies on the bankruptcy court system. In the letter, the bankruptcy scholars pointed to the deteriorating market for corporate debt and the rising unemployment rate as likely to induce increased bankruptcies in the next months. If the economy does not prepare, the level of demand on the bankruptcy court system could become overwhelming. Accordingly, the scholars urge Congress to start planning and create additional resources to support the existing court system, such as adding temporary bankruptcy judges, recalling of retired judges, and moving judges from less-busy districts to busier districts.
The full letter can be found here.
By Gert-Jan Boon, Leiden University (The Netherlands)
The COVID-19 (corona) virus has reached pandemic status. It currently spreads over the world and is expected to infect a majority of all people within the next month(s), according to health experts. The medical urgency justifies the current extraordinary measures taken by many governments globally, measures that, at the same time, also have devastating effects on businesses and entrepreneurs as sectors slow down or are effectively closed down.
Weathering the storm: a European perspective
In Europe and beyond, strong appeals have been made to prevent bankruptcies caused by the COVID-19 crisis. The exogenous economic shock hits both financially reasonably healthy companies, which depend on a smooth inflow of liquidity, and companies with fundamentally solid business models. Many companies with a viable business model at start of 2020 would now be forced to file and possibly suffer a piecemeal liquidation in the resulting insolvency proceedings. Under the current, distressed market conditions there is a significant risk of sales at an under value.
Not surprisingly, many governments and institutions have announced economic measures to prevent an outbreak of businesses entering into liquidation proceedings. This includes the US Government with the Coronavirus Aid, Relief, and Economic Security (CARES) Act. Similarly, measures to strengthen economies have been taken by many European countries and institutions such as the World Bank, IMF and ECB.
At a European Union level, the European Commission published several communications dealing with the economic consequences of the COVID-19 crisis. In the first Communication on a coordinated economic approach the Commission announced several liquidity measures and described which complementing measures EU Member States may take that fall outside the scope of EU state aid rules. In the second Communication, the Commission announced a Temporary Framework for State Aid setting out and broadening the scope of state aid measures that fall within current EU state aid rules. Also, the Commission expressed its commitment for ‘using every available euro in every way possible to protect lives and livelihoods’. Furthermore, a bank package has been adopted to facilitate bank lending to businesses.
Prevent unnecessary bankruptcies
The extraordinary economic situation raised by the COVID-19 outbreak requires legislators to undertake extraordinary measures. This extends also to insolvency legislation in order to prevent unnecessary bankruptcies. Insolvency legislation which is effective under normal market conditions may prove insufficient or ineffective in the current situation. Measures in these times should be effective without too many formalities, especially when courts and public authorities may not be fully available due to lockdown measures.
The Executive of the Conference on European Restructuring and Insolvency Law (CERIL) — an independent non-profit organisation of European lawyers and other restructuring and insolvency practitioners, law professors and (insolvency) judges — also considers that existing insolvency legislation in Europe may not provide adequate responses to the situation in which many businesses currently find themselves. In a statement published in March 2020, the Executive calls upon EU and European national legislators to take immediate action to adapt insolvency legislation to prevent unnecessary corona bankruptcies. Although prepared for the European context, these recommendations may also be an inspiration for legislators in other parts of the world.
Adapting insolvency legislation
CERIL suggests that two steps should be taken immediately by European national legislators. First, the duty to file for insolvency proceedings based on over-indebtedness should be suspended. Such duties exist in several EU Member States, for instance Austria, Germany, Greece, Italy, Latvia, Poland and Spain. The current economic uncertainty hampers the effectiveness of this duty which is aimed at selecting non-viable businesses. In recent days, some countries have suspended (Germany) or extended (Austria) this duty. Second, in response to a (partial) shutdown of businesses for a number of weeks or months, urgent measures are required addressing the illiquidity of businesses.
In addition, the CERIL statement recommends that EU and national legislators consider further measures. In urgently adapting insolvency legislation, they should include measures to make available interim (crisis) finance, suspend the duty to file based on inability to pay, provide for ‘hibernation’ (going into winter sleep) of (small) businesses by means of a general moratorium or deferral of payments, and provide support for the livelihood of entrepreneurs and their employees.
The CERIL Executive Statement on COVID-19 and insolvency legislation is available here.
This is an amended version of the blog that appeared before on the Oxford Business Law Blog.
* Gert-Jan Boon is Researcher and Lecturer in insolvency law at Leiden University.
By Ben Iverson (Brigham Young University), Mark Roe (Harvard Law School)
The COVID-19 pandemic looks likely to cause a surge in bankruptcies in the United States—conceivably a surge as rapid and as substantial as the U.S. court system has ever experienced. A significant and rapid increase in judicial capacity to manage the flood of cases is more than appropriate, we argued in a recent op-ed.
Bankruptcy filings in the United States have historically peaked several months after a surge in unemployment. And American unemployment is now rising at an unprecedented rate, with more than 30 million claims filed in the last six weeks. If historical patterns hold, the bankruptcy surge would be on track to be the largest the American bankruptcy system has experienced.
Bankruptcy works well enough and quickly enough in normal times, particularly for restructuring large public firms. But it cannot work as well, and the economy will suffer, if the bankruptcy system is overloaded. Delays in critical vendor orders, DIP loan approvals, pre-packaged bankruptcy confirmations and the like could all slow commerce unnecessarily.
The full op-ed is available HERE.
By Franklin H. Top III, Stephen R. Tetro, Richard F. Klein, James M. Heiser (Chapman and Cutler LLP)
Hundreds of billions of dollars are invested in aircraft equipment in the United States. With the airline industry suffering devastating losses resulting from the COVID-19 pandemic, Chapman and Cutler LLP recently released its Bankruptcy and Aircraft Finance Handbook. The handbook aims to help aircraft investors navigate the numerous challenges typically faced in airline bankruptcies. The handbook seeks to provide an understanding of the unique aspects of § 1110 of the Bankruptcy Code and other related provisions that govern the treatment of claims in bankruptcy involving aircraft. It also outlines the state law remedies available to aircraft investors outside of bankruptcy.
In addition, the handbook seeks to demystify the complex structures behind these investments, including secured loans, sale/leasebacks, operating leases, pass-through certificates, leveraged leases and public debt, including equipment trust certificates or enhanced equipment trust certificates. Each structure can present its own unique challenges in bankruptcy.
We also provide a checklist of considerations for aircraft investors drawn from over 30 years of experience, and identify some of the common challenges that investors face in airline bankruptcies. We provide investors with an understanding of the legal protections available in the event an aircraft investment heads south, as well as share lessons learned from prior airline bankruptcies from the 1990s to the present
The full article is available here.
By Samir D. Parikh (Lewis & Clark Law School)
For the last decade, the European Union has been reconceptualizing its corporate restructuring framework with the hope of bolstering capital markets and improving cross-border lending. Unfortunately, the system remains plagued by two intractable problems: divergent substantive law at the Member State level and jurists unaccustomed to guiding reorganization cases. The result is a system beset by uncertainty and disparate treatment. The EU is intent on addressing these problems, but progress has been elusive. The EU must work through recommendations and directives to encourage Member States to align substantive restructuring law with policy design. But Member States have been unresponsive to the EU’s recent efforts. The prospect of addressing these intractable problems in the foreseeable future is grim. Therefore, this Article breaks with current scholarship and urges the EU to adopt a radical alternative. The EU should consider making legal and structural changes that will facilitate bankruptcy tourism. I argue that affording corporations increased discretion as to the location of restructuring cases will aid in creating judicial hubs of optimal law and experienced jurists. The EU has the power to adopt my recommendations by simply modifying its own law and procedure, which should accelerate implementation timelines.
Ultimately, economists foresee an impending financial correction. The EU’s restructuring framework is unprepared to offer predictable and comprehensive reorganization outcomes for the next wave of distressed corporations. This Article proposes a novel vantage point from which to assess policy alignment.
For previous Roundtable posts on for bankruptcy tourism, see Wolf-Georg Ringe, “Bankruptcy Forum Shopping in Europe.”
The full article is available here. Forthcoming in the University of Pennsylvania Journal of International Law.
By Jonathan C. Lipson (Temple University Beasley School of Law), Norman M. Powell (Young Conaway Stargatt & Taylor, LLP)
As we write, the COVID-19 pandemic is having a profound, and profoundly unpredictable, effect on the economy. We profess no knowledge as to what lies ahead, or the timetable on which it will unfold. Indeed, this unknowing is precisely what led us to produce a model standstill and tolling agreement which you can access here in an annotated version and here in a version without annotations.
The current uncertainty will lead businesses to conserve cash if they have it or to miss scheduled rent or other payments if they don’t, resulting in what could be massive cascades of defaults. Some, perhaps many, will be tempted to take legal action, whether in the form of collection suits, bankruptcy or a combination.
We believe that negotiated resolutions are in most cases preferable to those that are litigated. At the same time, we believe it is particularly unlikely that parties will divine, let alone agree upon, optimal resolutions until they can look to the future with greater certainty.
We’ve prepared a model standstill and tolling agreement that is intended to be a template for businesses facing problems of performance under contracts, including payment or collection, which may soon be overwhelming to the parties, and to the legal system. It provides a balanced way for businesses to place a legal “freeze” on their commercial relationship while the economy stabilizes. This model agreement is, needless to say, neither intended as nor a substitute for legal advice. All users are encouraged to retain counsel when possible.
The full article is available here.
By Himani Singh (New York University School of Law)
Corporate rescue is used as a pre-cursor to bankruptcy filing to provide the creditor classes of a stressed debtor with necessary means to formulate a plan of reorganization to recover their dues and make the business of the debtor sustainable again. A prepackaged bankruptcy commonly referred to as “Pre-packs”, is a form of corporate rescue which may involve any element or combination of restructuring methods to be undertaken in respect of a debtor.
Pre-packaged bankruptcy finds its roots in United States and United Kingdom; but is yet to be formally integrated in the Indian bankruptcy regime. While the latest Insolvency and Bankruptcy Code, 2016 has been helpful in improving the stressed asset statistics, the statute is still undergoing teething troubles and has scope for bringing in many improvements such as introducing Pre-packs. The concept of Pre-packs however is niche in India and its viability has been extensively debated. There have been apprehensions that the Indian market is not developed enough to allow out of court of restructuring, but some of the recent decisions by the National Company Law Tribunals have indicated a different trend.
In this backdrop, this term paper discusses the basic features of Indian insolvency structure and how Pre-packs will fare in the market given the current regulatory regime. The paper analyses the corporate insolvency resolution process in India, highlights specific challenges to introduction of Pre-packs and presents a holistic overview of the benefits as well as disadvantages that Pre-packs would bring along with them.
The full article is available here.