Germany Poised for Big Step Towards Corporate Restructuring Best Practice

By Sacha Luerken (Kirkland & Ellis)

Sacha Luerken

Germany’s insolvency law has only in very few cases – around 1% of filings – been used for a Chapter 11-style going concern restructuring of a debtor company. Initiatives to introduce processes like the scheme of arrangement, an English procedure that was also commonly used to restructure non-English companies and is capable of Chapter 15 recognition in the U.S., were not successful, even though recoveries for unsecured creditors in Germany are remarkably low compared to other jurisdictions.

A paradigm shift occurred when the EU in June 2019 passed its directive 2019/1023 on preventive restructuring frameworks, which requires all EU member states to introduce a restructuring process for companies in financial difficulties, but before an actual insolvency. On September 18, 2020, a draft law was presented to introduce a scheme-like procedure in Germany, which provides for a restructuring of selected liabilities with 75% majority by amount in class, a cross-class cram-down subject to tests similar as in a U.S. Chapter 11 proceeding, a court-approved stay on enforcement and collateral realization, and even a rejection of onerous contracts by the court.

The draft law has been welcomed as a big step towards a restructuring culture in Germany by many advisors and practitioners, and as a potential blueprint for the implementation of the EU directive in other European jurisdictions.

The full article is available here.

Reprinted with permission from the October 06, 2020 edition of the Law.com International 2020 ALM Media Properties, LLC. All rights reserved. Further duplication without permission is prohibited, contact 877-257-3382 or reprints@alm.com.

Special Considerations for Protecting Interests under Water Agreements in Bankruptcy

By Rahul D. Vashi, Anna G. Rotman, Chris Heasley, Shubi Arora, Kenneth A. Young, Fraser F. Wayne, and John C. Elkins (Kirkland & Ellis)

Rahul D. Vashi
Anna G. Rotman
Chris Heasley
Shubi Arora
Kenneth A. Young
Fraser F. Wayne
John C. Elkins

Midstream service providers in the oil and gas space typically expend substantial upfront capital investment to build pipeline systems to gather and transport hydrocarbons and produced water for oil and gas producers, and rely on the fee structures in their service contracts to recoup their investments. One common method used by midstream companies to protect their investments is to create (or attempt to create) in their service contracts a dedication of production from the oil and gas producer structured as a covenant that runs with the land.

Beginning with Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In re Sabine Oil & Gas Corp.), 567 B.R. 869 (S.D.N.Y. 2017), bankruptcy courts have delivered divided opinions on whether midstream gathering and transportation contracts can be rejected, resulting in substantial uncertainty about whether midstream service providers can rely on their contractual terms. The major decisions regarding the treatment of midstream contracts in bankruptcy have focused on contracts for the gathering and transportation of hydrocarbons, and whether the contracts should not be rejectable because the oil and gas producer properly granted to the midstream company a covenant running with the land in its oil and gas properties.

Providers of produced water gathering and transportation services have typically relied on the same contractual protections as those that provide hydrocarbon gathering and transportation services. However, to date, midstream water contracts purporting to contain covenants running with the land have not been tested, and there is reason to believe that such agreements may be treated differently than their oil and gas counterparts. This article discusses certain issues and considerations that are specific to midstream water agreements and may affect whether such agreements are determined to be rejectable under the Bankruptcy Code.

The full article is available here.

When Arbitration Meets Bankruptcy: Considering Arbitration Options in the Wake of a Growing Rise in Corporate Insolvencies

By Shana A. Elberg, Christine A. Okike, & Jennifer Permesly (Skadden)

Shana A. Elberg
Christine A. Okike
Jennifer Permesly

The economic hardships brought about by the COVID-19 pandemic have impacted companies globally, leading many to consider both in-court and out-of-court restructurings. This trend will likely continue as the long-term effects of COVID-19 play out, and companies with arbitration clauses in their commercial agreements may wish to consider the impact of insolvency on their options for pursuing pending or future arbitrations. Under bankruptcy law, the initiation of insolvency proceedings results in an automatic stay of all civil proceedings brought against the debtor, including claims brought in arbitration. An arbitration counterparty may ask a bankruptcy court to lift the stay, which the court is permitted to do under the Bankruptcy Code “for cause.” The decision to lift the stay is ultimately a matter of the bankruptcy court’s discretion, though federal circuit courts have held that a stay of an arbitration involving a noncore matter generally must be lifted. The balance is particularly weighted in favor of arbitration in the international context.   Although the stay of arbitration is intended to apply extraterritorially, it is not always clear that arbitration tribunals seated outside the US, or counterparties located outside the US and not subject to the bankruptcy court’s jurisdiction, will consider themselves bound by the stay.  Companies considering their options for pursuing cross-border arbitrations against an insolvent debtor must therefore consider the relevant laws in at least three regimes: the seat of the arbitration, the place in which the debtor has declared insolvency and any countries in which enforcement of the award may ultimately be sought.

The full article is available here.

The New Mass Torts Bargain

By Samir D. Parikh (Lewis & Clark Law School)

Samir D. Parikh

Mass torts create a unique scale of harm and liabilities. Corporate tortfeasors are desperate to settle claims but condition settlement upon resolution of substantially all claims at a known price—commonly referred to as a global settlement. Without this, corporate tortfeasors are willing to continue with protracted and fragmented litigation across jurisdictions. Global settlements can be elusive in these cases. Mass torts are oftentimes characterized by non-homogenous victim groups that include both current victims and unknown, future victims—individuals whose harm has not yet manifested and may not do so for years. Despite this incongruence, the claims of these future victims must be aggregated as part of any global settlement. This is the tragedy of the mass tort anticommons: without unanimity, victim groups are unable to access settlement resources in a timely or meaningful way, but actual coordination across the group can be impossible.

Current resolution structures have proven ill-equipped to efficiently and equitably address the novel challenges posed by mass torts. Many cases cannot satisfy Rule 23’s requirements for class action certification. Multidistrict litigation is the most frequently invoked resolution structure, but the MDL process is distorted. The process was initially designed for one district court to streamline pretrial procedures before remanding cases for adjudication. Instead, MDL courts have turned into captive settlement negotiations. In response, a new strategy for resolving modern mass torts has emerged. Corporate tortfeasors—including Purdue Pharma, Boy Scouts of America, and USA Gymnastics—have started filing for bankruptcy. These mass restructurings automatically halt the affected MDL cases and transfer proceedings to a bankruptcy court—a process I describe as bankruptcy preemption. Unfortunately, bankruptcy preemption replaces one deficient structure with another. Mass restructuring debtors are exploiting statutory gaps in the bankruptcy code in order to bind victims through an unpredictable, ad hoc structure. The new bargain creates myriad risks, including insolvent settlement trusts and disparate treatment across victim classes.

This Article is the first to attempt a reconceptualization of how modern mass torts should be resolved and delivers an unprecedented normative construct focused on addressing anticommons dynamics through statutory amendments to the Bankruptcy Code. These changes, coupled with an evolved perspective on fundamental structural anomalies, are designed to improve predictability, efficiency, and victim recoveries. More broadly, this Article attempts to animate scholarly debate of this new, non-class aggregate litigation strategy that will reshape the field.

The full article is available here.

Independence and Impartiality of Resolution Professionals Under Indian Law: Filling the Gaps or Creating Law?

By Sanjay Kumar Yadav, Syamantak Sen, and Vivek Badkur (National Law Institute University, Bhopal, India)

Sanjay Kumar Yadav
Syamantak Sen
Vivek Badkur

Under Indian Insolvency Law, any person may be designated as a resolution professional (“RP”), provided he is enrolled with an insolvency professional agency and registered with the Insolvency and Bankruptcy Board of India. The role of an RP, under Indian Insolvency Law, is similar to that of a private trustee under Chapter 11 of the US Bankruptcy Code.

Any person is eligible to be appointed as an RP, provided he is independent of the corporate debtor and no further eligibility criterions have been prescribed, under Indian Insolvency Law. However in a surprising turn of events, the National Company Law Appellate Tribunal in State Bank of India v. Metenere Ltd. (May 22, 2020), directed substitution of an Interim RP, based on him being a former employee of the financial creditor.

This raises concerns as it is prevalent in India for retired bankers to be appointed RPs and may therefore alter such practice, besides potentially disqualifying all former employees from acting as RPs, where the employer is involved. In this article, we discuss whether such substitution is founded in law and its consequent impact on the Indian insolvency jurisprudence, with respect to appointment of RPs.

The full article is available here.

Big Data Meets Bankruptcy

By Carl Wedoff (Jenner & Block), David P. Saunders (Jenner & Block)

Carl Wedoff
David P. Saunders

For as long as there have been consumer businesses, they have collected consumer data. But in recent years, the volume and value of consumer data collection has increased exponentially, becoming a multibillion-dollar industry of its own. At the same time, consumer privacy laws are on the rise at the state level and are under consideration at the federal level. The value of data can create substantial friction for a business with respect to maintaining consumer interests and complying with privacy laws and regulations while maximizing the usefulness of consumer data to the business itself.

Bankruptcy courts routinely deal with the sale of consumer data, often in retail bankruptcies, but to date, “big data” issues have rarely, if ever, surfaced. However, this could change with the anticipated surge of corporate bankruptcy resulting from the recent COVID-19 pandemic.

As a result, bankruptcy judges and “consumer privacy ombudsmen,” or CPOs, need to evaluate more now than ever whether the transfer of consumer data is both permissible and in the best interests of all parties involved, including the consumers to whom the information relates.

This article explores the current framework for the sale of consumer data in bankruptcies and the potential changes in how bankruptcy courts may approach consumer data privacy issues in the future.

The full article can be found here.

Oversecured Creditor’s Right to Contractual Default-Rate Interest Allowed Under State Law

By Stacey L. Corr-Irvine and Mark G. Douglas (Jones Day)

Stacey L. Corr-Irvine
Mark G. Douglas

It is generally well understood that an “oversecured” creditor is entitled to interest and, to the extent provided for under a loan agreement, related fees and charges as part of its secured claim in a bankruptcy case. Although section 506(b) of the Bankruptcy Code provides that fees, costs or charges allowed as part of a secured claim must be “reasonable,” the provision does not expressly impose any restrictions on the amount or nature of interest allowable as part of a secured claim. A Bankruptcy Appellate Panel for the Eighth Circuit recently considered whether a secured creditor is entitled to contractual default-rate interest under section 506(b).

In In re Family Pharmacy, Inc., 614 B.R. 58 (B.A.P. 8th Cir. 2020), the panel reversed a bankruptcy court’s order disallowing a secured creditor’s claim for interest at the default rate under the parties’ contract using a penalty-type analysis generally applied to liquidated damages provisions. According to the panel, such an analysis cannot be applied to default interest provisions. The panel also held that the bankruptcy court erred when it held that the default interest rate was unenforceable based on “equitable considerations.”

The full article is available here.

Second Circuit Affirms Enforceability of Swaps’ Flip Provisions

By Shmuel Vasser (Dechert)

Shmuel Vasser

Swaps, like other financial contracts (repurchase agreements, securities contracts, commodities contracts, forward agreements and master netting agreements), receive special treatment under the Bankruptcy Code.  Their acceleration, liquidation and termination is not prohibited as an ipso facto clause and the exercise of setoff rights is not subject to the automatic stay.  Transfers made in connection with these contracts are also exempt from avoidance as preferences and constructive fraudulent transfers as well as actual fraudulent transfer under state law.  But their scope is not always free from doubt.  Are provisions that modify the debtor’s priority of payment upon bankruptcy protected as well?  Are provisions that the swap incorporates by reference protected?  Must the swap counterparty itself exercise the right to liquidate, terminate and accelerate the swap?  The Second Circuit just answered these questions.

The full article is available here.

Secured Creditor’s “Net Economic Damages” Estimate of Disputed Claims “Plainly Insufficient” to Establish Collateral Value

By Paul M. Green and Mark G. Douglas (Jones Day)

Paul M. Green
Mark G. Douglas

Valuation is a critical and indispensable part of the bankruptcy process. How collateral and other estate assets (and even creditor claims) are valued will determine a wide range of issues, from a secured creditor’s right to adequate protection, postpetition interest, or relief from the automatic stay to a proposed chapter 11 plan’s satisfaction of the “best interests” test or whether a “cram-down” plan can be confirmed despite the objections of dissenting creditors. Depending on the context, bankruptcy courts rely on a wide variety of standards to value estate assets, including retail, wholesale, liquidation, forced sale, going-concern, or reorganization value. Certain assets, however, may be especially difficult to value because valuation depends on factors that may be difficult to quantify, such as the likelihood of success in litigating estate causes of action.

The U.S. Court of Appeals for the First Circuit recently addressed this issue in In re Montreal, Maine & Atlantic Railway, Ltd., 956 F.3d 1 (1st Cir. 2020) (“MMA Railway”). The First Circuit affirmed a ruling that a secured creditor failed to satisfy its burden of establishing that collateral in the form of indemnification claims settled by the estate had any value entitled to adequate protection. According to the court, with respect to a disputed claim, a showing of possible damages is not enough. Instead, the creditor must establish the likely validity of the claim and the likelihood of recovery.

MMA Railway is a cautionary tale for secured creditors. Creditors bear the ultimate burden of proof in establishing the value of their collateral under section 506(a) of the Bankruptcy Code—a determination that has important consequences in many contexts in a bankruptcy case. The First Circuit’s ruling highlights the importance of building a strong evidentiary record to support valuation. It also indicates that certain types of collateral (e.g., disputed litigation claims) are more difficult to value than others.

The full article is available here.

Update on Corporate Bankruptcy Tax Refund Litigation

By Michael L. Cook (Schulte Roth & Zabel)

Michael L. Cook

Federal courts regularly resolve consolidated corporate tax refund disputes in bankruptcy cases.  In the current economic downturn, the ownership of a large tax refund paid to an affiliated group of corporate debtors can be significant.  See, e.g., FDIC v. AmFin Corp., 757 F.3d 530, 532 (6th Cir. 2014) ($170 million refund).  If a corporate debtor’s parent owns the refund, it is part of the parent’s bankruptcy estate, and the subsidiary may be an unsecured creditor for any claimed benefits.  But if the debtor parent is an agent or trustee for its affiliates, the parent cannot use the refund to repay its creditors.

Corporate parents and their subsidiaries often file a consolidated tax return.  That enables affiliates to offset their losses against each other so as to reduce the group’s overall tax liability.  Because only the corporate parent may file a consolidated return, any refund is also paid to the parent, not to individual affiliates.  Affiliated groups, therefore, usually enter into tax sharing or allocation agreements.  These agreements – or their absence – have generated a spate of litigation.

The Circuit Courts of Appeals had been sharply split on how to resolve tax refund ownership issues until the U.S. Supreme Court resolved the issue this past February in Rodriguez v. FDIC (In re Western Bancorp, Inc.), 589 U.S. ___, 140 S. Ct. 713 (Feb. 25, 2020).  Without deciding the merits, the Court remanded the case to the Tenth Circuit, directing it to apply state law to resolve the refund ownership dispute between the parent’s bankruptcy trustee and a subsidiary.  The Supreme Court also rejected a purported federal default rule promulgated by the Ninth Circuit in 1973 that had been adopted by a few other Circuits, describing it as inappropriate federal “common lawmaking.”  On May 26, 2020, following the Supreme Court’s remand, the Tenth Circuit, applied Colorado law, construed the relevant group tax sharing agreement, and held for the subsidiary bank, now in the hands of a FDIC receiver.

This article describes relevant issues litigated over the past fifty years.  It also notes open issues that will continue to be litigated following the Rodriguez decision.

The full article is available here.

1 2 3 4 17