Proposed Bill: Bankruptcy Venue Reform Act of 2018

posted in: Bankruptcy Reform, Legislation | 0

Earlier this month, Senators John Cornyn, R-TX, and Elizabeth Warren, D-MA, introduced the Bankruptcy Venue Reform Act of 2018. With the aim of “prevent[ing] big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation’s bankruptcy laws,” the Act would amend §1408 of the Bankruptcy Act to require debtors to file in the district “in which the principal assets or principal place of business” are located. It would also bar debtors from tag-along filings in jurisdictions where their affiliates have ongoing bankruptcy proceedings unless that affiliate “owns, controls, is the general partner, or holds 50 percent or more of the outstanding voting securities” of the debtor. In short, the proposed Act would eliminate the domicile venue option and the affiliate option that allows larger parent companies to file in the same venue as a smaller subsidiary.

Significantly, the Act would oust Delaware from its position of bankruptcy venue of choice for the many businesses that do not operate in Delaware but are domiciled in Delaware by virtue of having incorporated there. The bankruptcy court in Delaware is the venue now chosen by many public firms that file to reorganize in chapter 11.

In response to the bill’s introduction, Delaware’s Governor and congressional delegation issued a joint statement:

Many American companies, large and small, choose to incorporate in Delaware because of the expertise and experience of our judges, attorneys, and business leaders. Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole. This is a misguided policy, and we strongly oppose it.

Senator Coons later published an additional statement emphasizing that the “Cornyn-Warren bill is bad for businesses everywhere, but it would be a disaster for Delaware.”

Bankruptcy venue reform was proposed, but not passed, in 2005 (S.314) and again in 2011 (H.R.2533). In seeking to remove the domicile and affiliate bankruptcy venue options, the Cornyn-Warren bill most closely mirrors the 2011 bill, H.R.2533, which Professor David Skeel has stated “would [have] overturn[ed] a long history of bankruptcy practice; it would undermine the effectiveness of our corporate bankruptcy system; it would increase the administrative costs of the system; and it would not help the very parties the proposal is ostensibly designed to help.”

If passed, the Act would require a major change in bankruptcy strategy for many businesses, but it remains to be seen whether the Act will gain traction in Congress.

(By Harold King, Harvard Law School, J.D. 2019.)

Mandatory Contractual Stay Requirements for Qualified Financial Contracts

By Erika D. White and Donald S. Bernstein of Davis Polk & Wardwell LLP.

The U.S. banking agencies have issued rules that require U.S. G-SIBs and the U.S. operations of foreign G-SIBs to amend their swaps, repurchase agreements and other qualified financial contracts (QFCs) to include certain provisions designed to mitigate the risk of destabilizing close-outs of QFCs in the event the G-SIB enters resolution. The rules are part of a package of reforms implemented by the industry, Congress and the U.S. banking agencies since the financial crisis in an attempt to ensure that the largest financial institutions can be resolved in an orderly manner. Specifically, the rules seek to (1) mitigate the risk that the FDIC’s stay-and-transfer powers with respect to QFCs under Title II of the Dodd-Frank Act and the Federal Deposit Insurance Act may not be recognized and given effect outside of the United States and (2) improve the likelihood of success of a single-point-of entry resolution strategy under the Bankruptcy Code by limiting the ability of counterparties to terminate their QFCs with a solvent and performing operating entity based on cross-defaults triggered by the bankruptcy of the operating entity’s parent or other affiliate. The QFC Stay Rules do not, however, affect the rights of counterparties to terminate QFCs under the safe harbor provisions of the Bankruptcy Code in the event the operating subsidiary itself were to enter bankruptcy proceedings.

 

The full visual memo is available here.

How to Restructure Venezuelan Debt

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP) & G. Mitu Gulati (Duke University School of Law).

There is a growing consensus that Venezuela will not be able to persist for much longer with its policy of full external debt service. The social costs are just too great. This implies a debt restructuring of some kind. Venezuela, principally through its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”), has extensive commercial contacts with the United States. Not since Mexico in the 1980s has an emerging market country with this level of commercial contacts attempted to restructure its New York law-governed sovereign debt. Holdout creditors in a restructuring of Venezuelan sovereign debt will therefore present a serious, potentially a debilitating, legal risk. The prime directive for the architects of a restructuring of Venezuelan debt will be to neutralize this risk.

The full article is available here.

Deterring Holdout Creditors in a Restructuring of PDVSA Bonds and Promissory Notes

By Lee C. Buchheit (Cleary Gottlieb Steen & Hamilton LLP) & G. Mitu Gulati (Duke University School of Law).

Probably the main reason why the Maduro administration has not attempted to restructure Venezuelan sovereign debt is the potential mischief that may be caused by holdout creditors. The next administration in Venezuela — whenever and however it may arrive — will not want for suggestions about how to minimize or neutralize this holdout creditor threat. One option, before a generalized debt restructuring of some kind affecting all outstanding bonds, is for Venezuela to acknowledge that there really is only one public sector credit risk in the country and that the distinction between Republic bonds and its state-owned oil company, Petróleos de Venezuela, S.A. (“PDVSA”) bonds is artificial, and then to offer to exchange PDVSA bonds for new Republic bonds at par. The question will be, as it always is, how to discourage PDVSA creditors from declining to participate in such an exchange offer.

We suggest that one method might be for PDVSA to pledge all of its assets to the Republic in consideration for the Republic’s assumption of PDVSA’s indebtedness under its outstanding bonds and promissory notes. This is a step expressly permitted by PDVSA’s bonds and promissory notes. Existing PDVSA creditors would be perfectly free to decline to exchange their exposure for new Republic bonds, but they would face the prospect that a senior lienholder (the Republic) would have a first priority claim over any PDVSA assets that the holdout may attempt to attach to satisfy a judgment against PDVSA. That realization should make them think twice about the wisdom of holding out.

The full article is available here.

Debt Priority Structure, Market Discipline and Bank Conduct

By Piotr Danisewicz (University of Bristol), Danny McGowan (University of Nottingham), Enrico Onali (Aston University; University of Wales System – Bangor University), and Klaus Schaeck (University of Bristol).

This article explores how changes in debt priority structure affect banks’ funding costs and soundness. We exploit the staggered introduction of depositor preference laws across 15 U.S. states between 1983 and 1993 which confer priority to deposit claims in case of bank liquidation. The laws are exogenous with respect to the outcomes of interest and apply to state-chartered banks but not to nationally-chartered banks, allowing us to isolate causality using difference-in-difference methods.

We document changes in monitoring intensity by various creditors depending on whether creditors move up or down the priority ladder. Enactment of depositor preference reduces deposit interest rates, consistent with the fact that deposit claims are protected in case of bankruptcy thereby reducing depositors’ monitoring incentives. However, non-deposit interest rates increase as these creditors are exposed to greater losses in bankruptcy which leads them to more intensively monitor banks’ conditions.

Subordinating non-depositor claims also reduces banks’ risk-taking and leverage, consistent with market discipline. For example, non-depositors who receive negative signals about project returns may refuse to roll over funds which motivates banks to improve soundness to maintain access to key funding sources such as Fed Funds.

These insights highlight a role for debt priority structure in the regulatory framework, and support recent innovations in banking regulation that reallocate monitoring incentives towards non-depositors.

The full paper can be found here.