Third Circuit holds Sec. 1113 of the Bankruptcy Code applicable to already-expired CBAs

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By Mark A. Salzberg and Jill S. Kirila of Squire Patton Boggs

The Bankruptcy Code prohibits a debtor from unilaterally rejecting a collective bargaining agreement (CBA). Instead, in order for a debtor employer to be able to reject a CBA, the debtor must comply with the procedural and substantive requirements of Sec. 1113 of the Bankruptcy Code and then obtain authority from the Bankruptcy Court. What is less clear is whether Sec. 1113 applies to a CBA that has already expired by its own terms. This is a crucial question since, under the National Labor Relations Act, an employer cannot unilaterally change the terms and conditions of a CBA even after its expiration. Instead, the employer must continue to perform in accordance with the expired CBA until a new CBA is negotiated or an impasse is reached.

Earlier this year, the Third Circuit Court of Appeals became the first circuit level court to address the question of whether Sec. 1113 is applicable to an already-expired CBA. The Court ruled in favor of the employer, Trump Entertainment Resorts, Inc., and held that Sec. 1113 applied to expired CBAs and that Trump Entertainment could reject the CBA because it had complied with the requirements of Sec. 1113. This ruling is certain to have a significant effect on labor issues arising in Chapter 11 bankruptcy cases.

The full memo is available here: Third Circuit holds Sec. 1113 of the Bankruptcy Code applicable to already-expired CBAs

External and Internal Asset Partitioning: Corporations and Their Subsidiaries

By Henry Hansmann, Yale Law School, and Richard Squire, Fordham University School of Law

In our book chapter “External and Internal Asset Partitioning: Corporations and Their Subsidiaries,” forthcoming in The Oxford Handbook of Corporate Law and Governance, we analyze the economic consequences of external and internal asset partitioning, and we consider implications of our analysis for creditor remedies that disregard partitions between corporate entities. “Asset partitioning” is the use of standard-form legal entities, such as the business corporation, to set boundaries on creditor recovery rights. “External” partitioning refers to the legal boundaries between business firms and their equity investors, while “internal” partitioning refers to the legal boundaries among the constituent entities (parents and subsidiaries) within corporate groups.

The chapter begins by cataloguing the economic benefits and costs of corporate partitioning. The benefits identified include reduced equityholder monitoring costs, liquid shares, shareholder diversification, reduced creditor information costs, correction of debt overhang, liquidation protection, and bankruptcy simplification. The costs of corporate partitioning are accounting costs and the agency costs of debt. We compare the economics of external and internal partitioning, and we find that internal partitioning provides fewer potential benefits while often generating higher costs. Corporate subsidiaries do, however, also provide non-partitioning benefits such as tax advantages, regulatory compliance, and the preservation of transferable bundles of contracts.

The final part of the chapter considers whether cost-benefit analysis predicts how courts actually apply de-partitioning remedies, with particular emphasis on veil piercing and enterprise liability. We conclude that courts should employ the distinction between external and internal partitioning when applying creditor remedies that disregard corporate partitions, and we identify factors — in addition to whether a partition is internal or external — that courts should consider when deciding whether to de-partition. For example, we argue that the presence of guarantees which pierce corporate partitions on behalf of select creditors militates in favor of the use of de-partitioning remedies for general creditors.

The full chapter is available here: External and Internal Asset Partitioning: Corporations and Their Subsidiaries.

S.D.N.Y. Holds that Avoidance Powers Can be Applied Extraterritorially

By Fredric Sosnick, Douglas P. Bartner, Joel Moss, Solomon J. Noh and Ned S. Schodek of Shearman & Sterling LLP

On January 4, 2016, in one of the recent decisions In re Lyondell Chemical Company, et al., the U. S. Bankruptcy Court for the Southern District of New York deviated from S.D.N.Y. precedent and held that, despite the absence of clear Congressional intent, the avoidance powers provided for under Section 548 of the Bankruptcy Code can be applied extraterritorially. As a result, a fraudulent transfer of property of a debtor’s estate that occurs outside of the United States can be recovered under Sec. 550 of the Bankruptcy Code.

The lack of clear Congressional intent that avoidance powers apply to foreign transactions was the basis for prior decisions in the S. D. N. Y., which took the opposite view and held that the avoidance powers only apply domestically.  Those courts reasoned that if Congress intended for the avoidance powers to have extraterritorial reach, it could have so stated either the relevant statutory provisions governing avoidance actions under the Bankruptcy Code or in Sec. 541 itself.  In the current decision In re Lyondell, judge Gerber expressed his respectful disagreement to the extent that his decision is inconsistent with prior decisions recognizing the general presumption against extraterritoriality absent explicit language to the contrary. This ruling furthers uncertainty in the S. D. N. Y. as to whether transfers that occur abroad may be avoided in a Chapter 7 or 11 case.

The full memo is available here.

Second Circuit Says Section 546 of Bankruptcy Code Preempts State Law Constructive Fraud Claims

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By Donald Bernstein, Elliot Moskowitz, Damian Schaible, Eli Vonnegut, Alicia Llosa Chang, and Tina Hwa Joe of Davis Polk & Wardwell LLP

On March 29, 2016, the United States Court of Appeals for the Second Circuit issued an important opinion that limits the ability of creditors to assert constructive fraudulent transfer claims in major bankruptcy cases.  In a unanimous opinion, the Circuit held that in circumstances where Section 546 of the Bankruptcy Code bars estate representatives from asserting constructive fraudulent conveyance claims under state law, the statute likewise prevents individual creditors from bringing those claims after the estate’s time to do so expires.  In several recent Chapter 11 cases, individual creditors argued that the statute should only preclude a “trustee” – the term used in the statutory text – from bringing such claims, not individual creditors.  The Circuit’s ruling in In re: Tribune Company Fraudulent Conveyance Litigation, No. 13-3992, and summary order in related case Whyte v. Barclays Bank, 13-2653, were the first decisions from a circuit court on the issue and settled a conflict among its lower courts.  In a 53-page decision, the Circuit rejected the argument that the text of the statute only bars constructive fraud claims brought by a trustee or other estate representative, instead holding that the doctrine of implied preemption protects settlement payments and swap transactions from constructive fraud claims brought by any party.  The decision may put an end to recent attempts by creditors to circumvent Section 546(e) and related provisions in bringing such claims.

The full memo is available here.