Supreme Court Permits Bankruptcy Courts to Issue Final Judgments with Parties’ Consent

By Harold S. Novikoff, Douglas K. Mayer, Ian Boczko, Emil A. Kleinhaus, and Alexander B. Lees of Wachtell, Lipton, Rosen & Katz

The Supreme Court’s latest decision regarding the power of bankruptcy judges to resolve claims between bankruptcy estates and their creditors is Wellness International Network, Ltd. v. Sharif, handed down on May 26, 2015. In its landmark 2011 ruling in Stern v. Marshall, the Court held that bankruptcy judges have limited authority under Article III of the Constitution to determine claims asserted by an estate against creditors. However, Stern left open the question, which has split lower courts, whether parties can nonetheless consent to bankruptcy court adjudication. In Wellness, the Supreme Court held that bankruptcy litigants may waive Article III rights, and suggested that parties may forfeit untimely objections to a bankruptcy court’s lack of authority.

For a fuller analysis and summary, click here for our memo on Wellness.

Restructuring Failed Financial Firms in Bankruptcy: Selling Lehman’s Derivatives Portfolio

By Mark J. Roe, Harvard Law School, and Stephen D. Adams, Ropes & Gray LLP

adams-stephen-200 Roe 124Lehman Brothers’ failure and bankruptcy led to the deepest part of the 2008 financial crisis. Yet, while Congress reformed financial regulation in hopes of avoiding another crisis, bankruptcy rules, such as those that governed Lehman’s failure, have persisted unchanged. When Lehman failed, it lost perhaps tens of billions of dollars of further value when its contracting counterparties terminated their financial contracts with Lehman.

Bankruptcy must be able to market salable parts of the failed institution’s financial contracts portfolio at other-than-fire-sale prices. Current law prevents this marketing, however. It allows only two polar choices: sell the entire portfolio intact (currently impossible in bankruptcy and only narrowly viable under Dodd-Frank) or allow for the liquidation of each contract, one-by-one (which worked poorly in Lehman). Bankruptcy needs authority, first, to preserve the failed firm’s overall portfolio value, and, second, to break up and sell along product lines a very large portfolio that is too large to sell intact.

Congress and the regulators favor bankruptcy for financial resolution. Yet, bankruptcy law has neither been fixed nor even updated here since the financial crisis. We here outline one critically needed fix: authorizing bankruptcy to break up a large derivatives portfolio by selling its constituent product lines, one-by-one, instead of a Lehman-style close-out of each contract, one-by-one.

This article is forthcoming in 32 Yale Journal on Regulation. A full draft of the article can be found here.

For related pieces discussing safe harbors, see here and here.

Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?

By Daniel M. Glosband, Goodwin Procter LLP, and Jay Lawrence Westbrook, The University of Texas School of Law

Glosband_M_Daniel WestbrookIn a recent case, In re Barnet, 737 F. 3d 238 (2d Cir. 2013), the Court held that section 109(a) of the Bankruptcy Code bars a foreign bankruptcy proceeding from recognition under Chapter 15 unless the debtor in the foreign proceeding also has a presence in the United States. The Court professed to use a plain meaning rule, but its plain meaning approach and its conclusion that section 109(a) applied to recognition were inappropriate for several reasons:

1) since the term “debtor”  is defined differently in Chapter 15 than in section 101(13), it cannot have a “plain” meaning for Chapter 15 purposes;

2) while it is plain that section 103(a) applies Chapter 1 to Chapter 15, the way in which section 109(a) functions in relation to Chapter 15 is not straightforward and requires a structural analysis that the Court sidestepped;  and

3) the Congressional mandate in section 1508—which requires that, in interpreting Chapter 15, courts shall consider its international origin and the need to promote an application that is consistent with the needs of international insolvency practice—requires flexibility, not rigid literalism.

Section 109(a) should not apply to recognition of a foreign proceeding. The Barnet decision represents a stubborn adherence to literal statutory interpretation when the statutory provisions at issue prima facie were not susceptible to literal interpretation and when Congress instructed courts to look beyond the statute for guidance in harmonizing Chapter 15 with the Model Law.

This is a brief summary of a much longer article forthcoming in the International Insolvency Review. For the full article see here. Copyright © 2015 INSOL International and John Wiley & Sons, Ltd.

Tender Offer Approved to Implement Classwide Debt Exchange Outside Plan of Reorganization

posted in: Workouts and Pre-Packs | 0

By Charles M. Oellermann and Mark G. Douglas, Jones Day

Debt-for-equity swaps and debt exchanges are common features of out-of-court and chapter 11 restructurings. For publicly traded securities, out-of-court restructurings in the form of “exchange offers” or “tender offers” are, absent an exemption, subject to the rules governing an issuance of new securities under the Securities Exchange Act of 1933 (the “SEA”) as well as the SEA tender offer rules. By contrast, it is generally understood that the SEA rules do not apply if an exchange or tender offer takes place as part of a restructuring under chapter 11 of the Bankruptcy Code, which provides that certain federal and state securities laws do not apply to the offer or sale of securities under a chapter 11 plan.

In Del. Trust Co. v. Energy Future Intermediate Holdings, LLC (In re Energy Future Holding Corp.), 2015 BL 44121 (D. Del. Feb. 19, 2015), Judge Andrews affirmed a bankruptcy court order approving a settlement between debtors and certain secured noteholders where the vehicle was a postpetition tender offer (of old notes for new notes to be issued under a debtor-in-possession facility). The district court ruled that a tender offer may be used to implement a classwide debt exchange in bankruptcy outside a plan of reorganization. It also held that the Bankruptcy Code’s confirmation requirements do not apply to a pre-confirmation settlement and that the settlement at issue did not constitute a sub rosa chapter 11 plan.

The full-length article discussing the ruling can be found here.

The Problem With Preferences

posted in: Avoidance | 0

By Daniel J. Bussel, UCLA School of Law

BusselBrook Gotberg in Conflicting Preferences does a great service in lucidly identifying the problem with preference law as currently configured. But she errs in diagnosing the cause and prescribing the treatment. As to cause, preference law is not and should not be a single-minded pursuit of equality of distribution without consideration of complementary, and even countervailing policies. To the contrary, the recent arc of preference law is strongly driven by refocusing on culpable opt-out behavior, and the goal of ratable distribution has been sharply subordinated to other objectives.

Repealing preference law in Chapter 11 would be counterproductive. Blanket repeal of preference law in Chapter 11, while simultaneously enhancing preference recovery in Chapter 7, insulates, indeed rewards, affirmative pre-bankruptcy opt-out behavior by insiders and creditors with superior knowledge or leverage, while undermining the reorganization objectives of Chapter 11. It will encourage, and in some instances require, liquidations that would not otherwise be necessary or desirable. Raising (not abandoning) the floor on preference recovery, bolstering (not eliminating) trade creditors’ ordinary course and new value defenses, and limiting or eliminating the safe harbors for financial contracts, all without discriminating between Code chapters, would reduce arbitrariness and unfairness in preference law. These more modest reforms would enable preference law to continue to police the most extreme forms of opt-out behavior, while fostering reorganizations where such reorganizations remain viable and desirable notwithstanding eve-of-bankruptcy opt-out actions by creditors and insiders.

For the full article see The Problem With Preferences, 100 Iowa L. Rev. Bull. 11, available here.

Conflicting Preferences: Avoiding Proceedings in Bankruptcy Liquidation and Reorganization

posted in: Avoidance | 0

By Brook Gotberg, J. Reuben Clark Law School, Brigham Young University

GotbergThe law of preferential transfers permits the trustee of a bankruptcy estate to avoid transfers made by the debtor to a creditor on account of a prior debt in the 90 days leading up to the bankruptcy proceeding.  The standard for avoiding these preferential transfers is one of strict liability, on the rationale that preference actions exist to ensure that all general creditors of the bankruptcy estate recover the same proportional amount, regardless of the debtor’s intent to favor any one creditor or the creditor’s intent to be so favored.  But preference law also permits certain exceptions to strict preference liability and gives the estate trustee discretion in pursuing preference actions. This undermines the policy of equal distribution by permitting some creditors to fare better than others in the bankruptcy distribution.  However, these practices are arguably necessary to promote the conflicting bankruptcy policies that seek to maximize the value of the estate for the benefit of creditors and also encourage the survival of struggling businesses.

As a result, the law of preferences is internally inconsistent and controversial, attempting unsuccessfully to serve multiple policy masters simultaneously.  Much of the analysis on preferences up to now has proposed amending preference law generally in an attempt to satisfy these often conflicting demands.  This article recommends a more dramatic approach; returning preference law to a mechanism of equal distribution in liquidation proceedings (Chapter 7) by eliminating true exceptions to the rule, and doing away with preference law in the context of bankruptcy reorganization (Chapter 11).

For the full article see here.

Next week we will be featuring another article on this topic, Professor Daniel J. Bussel’s The Problem with Preferences.

Statutory Erosion of Secured Creditors’ Rights: Some Insights from the United Kingdom

By Adrian Walters, IIT Chicago-Kent School of Law

The prevailing wisdom is that Chapter 11 bankruptcy proceedings have been captured by secured creditors with the consequence that many Chapter 11s are little more than glorified nationwide federal foreclosures through which secured creditors exit by means of a section 363 sale.  Some scholars worry that secured creditor capture of Chapter 11 leads to asset deployment decisions that do not produce welfare-maximizing outcomes for creditors as a whole.

In an article forthcoming in the 2015 University of Illinois Law Review, I do not question this prevailing wisdom.  Instead, I seek to argue, by reference to experience in the United Kingdom, that if we are serious about curbing secured creditors’ control of bankruptcy proceedings through bankruptcy law reform, we have to acknowledge and understand the ways in which secured creditors respond to reforms that are adverse to their interests.

The article identifies four ways in which lenders may be expected to adjust to “adverse” bankruptcy reform: (i) meta bargaining; (ii) adjustments to pre-bankruptcy behaviour; (iii) transactional innovation; and (iv) shape shifting. The article then illustrates how lenders in England and Wales have successfully adjusted to sustained statutory attempts to undermine their bankruptcy priority by carving value out of their collateral, and to erode their control rights by abolishing their right to appoint an administrative receiver over floating charge collateral.

Click here to read more.

Indenture Trustees in Out-of-Court Restructuring Transactions: Proceed with Caution

posted in: Workouts and Pre-Packs | 0

By Howard Seife and Marian Baldwin Fuerst of Chadbourne & Parke LLP

BaldwinFuerstMarian_WEB SeifeHoward_WEB

The recent decision of the United States District Court for the Southern District of New York (the “S.D.N.Y.”) concerning the restructuring efforts of Caesars Entertainment Operating Company, Inc. (“OpCo”), the large United States casino operator which is currently in bankruptcy, should be on all indenture trustees’ radars.  See MeehanCombs Global Opportunity Funds, LP v. Caesars Entertainment Corp., 14- cv-7091, 2015 WL 221055 (S.D.N.Y. Jan. 15, 2015). The case arises from an August 2014 transaction, in which OpCo restructured certain of its unsecured obligations resulting in the elimination of guarantees by OpCo’s parent, Caesars Entertainment Corporation (the “Parent,” together with OpCo, “Caesars”). Caesars moved to dismiss a lawsuit brought forth by certain OpCo unsecured noteholders. After heavily scrutinizing the August 2014 transaction, US District Court Judge Scheindlin held that the noteholders could proceed with a majority of their claims for breaches of the Trust Indenture Act of 1939, as amended (the “TIA”), and state law. The court’s decision, entered right on the heels of a December S.D.N.Y. decision addressing a similar situation, establishes a clear precedent that out-of-court restructurings eliminating parent guarantees are disfavored in this influential District. The decision cautions indenture trustees to closely review any changes to core terms even when acting under the direction of noteholders.

To read more, click here.

For two related pieces discussing the Trust Indenture Act, see here and here.

Corporate Bankruptcy Tourists

By Oscar Couwenberg & Stephen J. Lubben

Insolvency procedures are not designed for corporate group, but for individual debtor corporations. This becomes an especially important issue when corporations have international operations.

When such a corporate group becomes financially distressed, then different national insolvency procedures will claim jurisdiction over assets and debts of the corporation, the consequence of which is an uncoordinated wealth-destroying piecemeal sale of assets. The obvious solution is to look for a single forum that can address an entire firm’s financial distress.

In this paper we argue that chapter 11 of the United States Bankruptcy Code, and to a lesser extent also the UK scheme of arrangement under the Companies Act 2006, can be considered such bankruptcy havens for corporate bankruptcy tourists.

We construct a database of foreign debtors initiating a chapter 11 case over the period 2005 to 2012. In total our dataset includes 316 corporate debtors, organized in 49 corporate groups.

What we find is that corporations with mobile assets, with subsidiaries in many jurisdictions, or both, are the most frequent tourists in chapter 11. We further discuss why chapter 11 and its competitor in the UK render a trans-national insolvency system superfluous. We expect these two jurisdictions to see increasing amounts of “tourist” activity as Europe moves from its traditional reliance on bank financing to more frequent use of North American style high yield bond markets.

The full version of this article is available here.

The New Corporate Web: Tailored Entity Partitions and Creditors’ Selective Enforcement

posted in: Cramdown and Priority | 0

By Anthony J. Casey, University of Chicago Law School

Casey, Anthony_0 (1)Firms often separate assets into distinct entities that have their own legal identity but are commonly owned and together form a large corporate group. While the law-and-economics literature has viewed these legal partitions as either all or nothing, firms have developed sophisticated legal mechanisms to create precisely tailored partitions. The result is a complex corporate web of interconnected legal affiliates.

For example, an asset that is placed in one legal entity may serve as collateral guaranteeing the debts of another legal entity within the corporate group. The assets of the two entities are separate for some purposes but integrated for others. Conventional theories of corporate groups cannot explain the tailored partitions in this corporate web. This article develops a new theory of selective enforcement to fill that gap.

When a debtor defaults on a loan, that default may signal a failure across the entire firm or it may signal a project-specific failure. Tailored partitions provide monitoring creditors with a valuable option to choose between project-specific and firm-wide enforcement depending on the information signal provided. Thus, firm-wide risks and failures can be addressed globally while the effects of project-specific risks and failures can be locally contained when necessary.

These concepts of selective enforcement and tailored partitions reveal important implications for theory and practice. They provide a cohesive justification for the web of entity partitioning and cross liabilities that characterize much of corporate structure today and inform the analysis of holding-company equity guarantees, fraudulent transfers, and ipso facto clauses.

The full version of this article is available here.

1 14 15 16 17 18 19 20