Bankruptcy Forum Shopping in Europe

By Wolf-Georg Ringe (University of Hamburg – Institute of Law & Economics; University of Oxford – Faculty of Law).

Over the past several years, European firms have been active in cross-border arbitrage to benefit from a more favorable bankruptcy regime. The European Insolvency Regulation (EIR), an instrument determining the competent courts and the applicable law in EU cross-border insolvency proceedings, has long sought to curb such efforts. A major reform which came into force in 2017 has the specific objective of further restricting abusive versions of forum shopping, in particular by introducing a three-month “suspension period” for forum shopping activities carried out shortly before the debtor files for insolvency.

In a recent article, I demonstrate that these efforts fail to achieve a satisfactory response to forum shopping. The key element of the reform, the suspension period, is both over-inclusive and under-inclusive in its scope of application and may, at best, be entirely without effect. The new rule will also create significant uncertainty and undermine effective ways of business restructuring.

Meanwhile, the reform does not address new variants of forum shopping, such as the use of the British “scheme of arrangement” by continental European firms. Such “procedural” forum shopping may be effected entirely without any physical relocation, as it does not come within the scope of application of the EIR.

The laudable goal of the EIR to improve the pricing of risks in cross-border insolvencies is jeopardized where the rules on jurisdiction are unclear or uncertain. The 2017 reform is a missed opportunity to improve the system by attaching substantive bankruptcy law and jurisdiction to a company’s registered office as the only clear and predictable connecting factor. Instead, the reform introduces new riddles and inconsistencies. Such steps will blur rather than improve the pricing of insolvency risk and thereby ultimately drive up the cost of capital.

The full article is available here.

Courts As Institutional Reformers: Bankruptcy and Public Law Litigation

Kathleen G. Noonan (University of Pennsylvania), Jonathan C. Lipson (Temple University—Beasley School of Law), and William H. Simon (Columbia Law School)

Wags sometimes ask: What is chapter 11 good for?

In a new paper, we show that, among other things, it provides a template that both legitimates and explicates Public Law Litigation (PLL), civil class action suits against public agencies such as police departments and prison systems. These are among the most controversial disputes that courts face; often criticized, and widely misunderstood. Analogies to chapter 11 practice show how critics err, and how PLL works.

We make three basic points. First, we show that both bankruptcy and PLL, which share roots in the federal equity receivership, are judicial responses to collective action problems that other institutional mechanisms (e.g., markets or electoral politics) cannot or will not address.

Second, we show that courts in neither context “run” the organizations in question. In both types of case, management (of the debtor or agency) remains in possession and control, subject to judicial and stakeholder (e.g., creditor or plaintiff) oversight.

Third, chapter 11 and PLL both operate at the organizational level, through “restructuring.” For chapter 11, this will usually involve a plan of reorganization. The PLL analogue is a settlement agreement in a consent decree. Like plans, consent decrees typically reflect negotiated improvements in operations designed to increase the agency’s chances of success.

Critics of PLL sometimes claim that courts commandeer public instrumentalities, exceeding their expertise and authority. But this is no truer in PLL than it is in chapter 11 reorganization. Rather, judges in both spheres facilitate consensual resolutions that seek to balance stakeholder participation against managerial discretion.

This matters because the Trump Administration has vowed to “deconstruct the administrative state,” which implies a reduction in the amount and quality of public services. Increased PLL would be a plausible response.

If that happens, courts should focus not on whether they can supervise the restructuring of public agencies, but how to do so more effectively. We show that the chapter 11 system can provide helpful guidance.

The full article is available here.

The Impact of Brexit on Debt Restructuring and Insolvency Practice

By Manuel Penades and Michael Schillig (King’s College London – The Dickson Poon School of Law).

With its flexible restructuring framework and experienced courts, England has become the foremost restructuring destination in Europe. A restructuring typically combines a scheme of arrangement with a pre-pack administration. Under the former, lenders exchange their debt for equity or new debt in a new corporate holding structure; the latter facilitates the transfer of the business to this new holding structure. The effectiveness of these restructuring measures in all EU Member States is currently guaranteed by the combined effect of the European Insolvency Regulation (EIR), the Judgments Regulation (Brussels Ibis), and the Regulation on the law applicable to contractual obligations (Rome I).

This regime currently ensures the availability of English-law pre-pack administration and other insolvency procedures to many EU debtors. The EIR ties exclusive jurisdiction and applicable insolvency law to the debtor’s Centre of Main Interests (COMI). Insolvency measures issued by the opening court are automatically recognised and enforced throughout the EU. Subject to a COMI transfer to England, any debtor can benefit from English insolvency and restructuring mechanisms (including pre-pack administration) and their automatic EU-wide effect.

Post-Brexit, the EIR will cease to apply in the UK and insolvencies opened therein will lose their automatic EU effect. English domestic law alone will be insufficient to achieve this result. Only a new international instrument, probably in the form of a convention, could maintain the effectiveness of the current practice.

By contrast, schemes of arrangement are not covered by the EIR and their enforceability across the EU is currently ensured by Brussels Ibis and/or Rome I. The UK will be able to retain the Rome I regime through a unilateral instrument, but not the Brussels Ibis, which requires reciprocity, like the EIR.

Given that schemes and insolvency procedures are usually combined, absent new international instruments, Brexit is likely to result in significant uncertainty and disruption for European restructuring practice.

The article is available here.

The Year in Bankruptcy: 2017

by Charles M. Oellermann and Mark G. Douglas (Jones Day).

In their annual chronicle of business bankruptcy, financial, economic, and related developments in the U.S., Charles M. Oellermann and Mark G. Douglas of Jones Day review the most significant events of 2017, including business bankruptcy filing statistics and industry trends; newsworthy developments regarding sovereign and commonwealth debt; the top 10 public-company bankruptcies of the year; notable private and cross-border bankruptcy cases; significant business bankruptcy and U.S. Supreme Court bankruptcy rulings; bankruptcy-related legislative and regulatory developments; noteworthy chapter 11 plan confirmations and exits from bankruptcy; and more.

The article is available here.

Practice Makes Perfect: Judge Experience and Bankruptcy Outcomes

By Benjamin Charles Iverson (Brigham Young University), Joshua Madsen (University of Minnesota, Twin Cities, Carlson School of Management), Wei Wang (Queen’s School of Business), and Qiping Xu (University of Notre Dame, Department of Finance).

Prior studies document the influence of bankruptcy judges’ discretion on restructuring outcomes, yet we know little about how judicial experience affects the bankruptcy process. We study how the accumulation of job-specific human capital influences judges’ efficiency in handling large corporate bankruptcy filings, using 1,310 Chapter 11 filings by large U.S. public firms overseen by 309 unique bankruptcy judges in 75 bankruptcy courts between 1980 and 2012.

Using random assignment of judges to cases for empirical identification, we show that cases assigned to a judge with twice as much time on the bench realize a 5.5% decrease in time spent in reorganization. This reduced time in court translates into savings of approximately $2 million in legal fees alone for a typical case in our sample. Judges’ time on the bench is associated with higher probability of emergence but not higher recidivism. The combined evidence suggests that more experienced judges are overall more efficient. We also find that it takes up to four years for a new judge to become efficient and that judges who see a higher volume of business filings and a greater diversity of cases by size and industry early in their tenure become efficient faster than those who don’t. We find little evidence that judges’ general experience and personal attributes consistently affect case outcomes.

Our analyses highlight a potential benefit of allowing firms to file in courts with more experienced judges. Restricting this flexibility (e.g., through the proposed Bankruptcy Venue Reform Act of 2017) may impose a cost on firms by forcing them to file in courts with less experienced judges.

The full article is available here.


The Roundtable has previously posted on potential Bankruptcy venue reforms, including a summary of the Bankruptcy Venue Reform Act of 2018 introduced by Senators John Cornyn, R-TX, and Elizabeth Warren, D-MA. For a critique of current venue rules—and a possible solution—see Prof. Lynn LoPucki, “Venue Reform Can Save Companies.” For a defense of the current system, see the Roundtable’s summary of the Wall Street Journal’s “Examiners” Panel on venue reform.

Ninth Circuit Holds That Impaired Accepting Class Requirement Applies to Plan Confirmation on a “Per-Plan” Rather Than a “Per Debtor” Basis

By James L. Bromley, Lisa M. Schweitzer, Sean A. O’Neal, Luka A. Barefoot, and Daniel K. Soltman (Cleary Gottlieb).

On January 25, 2018, the United States Court of Appeals of the Ninth Circuit held that section 1129(a)(10) of the Bankruptcy Code, which requires cramdown plans to have at least one impaired accepting class, applies on a “per-plan” basis, rather than a “per-debtor” basis. In re Transwest Resort Properties Inc., Case No. 16-16221 (9th Cir. Jan. 25, 2018). Under the “per-plan” rule, multiple debtors with a single plan of reorganization may cram down a plan on any creditor class with the support of only one impaired accepting class, even where the impaired accepting class has claims against a different debtor than the crammed down class that has rejected the plan. The Ninth Circuit is the first circuit court to address the “per-debtor” versus “per-plan” issue, and previous decisions were split between the Southern District of New York (adopting the “per-plan” approach) and the District of Delaware (adopting the “per-debtor” approach). Transwest will likely have a significant impact on how debtors and creditors within the Ninth Circuit and elsewhere consider their relative options prior to and during bankruptcy.

The remainder of this article will discuss the Transwest case background and the Ninth Circuit’s decision, and the expected impact of the decision, both inside and outside of the Ninth Circuit. The article is available here.

For earlier Roundtable coverage of 1129(a)(10), please see our recent post on strategic impairment in cramdowns.

Applying Jevic: How Courts Are Interpreting and Applying the Supreme Court’s Ruling on Structured Dismissals and Priority Skipping

By Shane G. Ramsey and John T. Baxter (Nelson Mullins).

The U.S. Supreme Court in Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973 (2017), addressed the issue of chapter 11 debtors using structured dismissals to end-run the statutory priority rules. The Court’s ruling preserved the priority system, holding that the bankruptcy court could not approve a structured dismissal of a chapter 11 case that provided for distributions that failed to follow the standard priority rules unless the affected creditors consented to such treatment. Although the Bankruptcy Code does not expressly apply its priority distribution scheme to a structured dismissal, the Court clarified that courts should do so.

As a way to track how bankruptcy courts across the country are applying the ruling in Jevic, the Nelson Mullins Bankruptcy Protector has introduced a new periodic series: the Jevic Files. As of February 19, 2018, the Jevic Files has collected and summarized thirteen cases across twelve jurisdictions. While the majority of the cases involved structured dismissals in the context of a chapter 11 case, courts have also applied the ruling in Jevic to the dismissal of chapter 13 plans; the priority of trustee payments in a chapter 7 case; and even a state court foreclosure hearing that came on the heels of a dismissed chapter 11 case. As Jevic continues to be interpreted and applied in bankruptcy (and other) courts throughout the country, we will continue to keep an updated summary of cases through the Jevic Files.

The article is available here.

The Roundtable has posted on Jevic before, including a report of the case by Melissa Jacoby & Jonathan Lipson and a roundup of law firm perspectives on the Court’s decision and an initial scholarly take on the opinion from Nicholas L. Georgakopoulos. For other Roundtable posts related to priority, see Casey & Morrison, “Beyond Options”; Baird, “Priority Matters”; and Roe & Tung, “Breaking Bankruptcy Priority,” an article that the Jevic opinion referred to.

Third Circuit Dismisses Crystallex’s Fraudulent Transfer Claim But Potential Liability Remains for PDVSA

By Richard J. Cooper and Boaz S. Morag (Cleary Gottlieb Steen & Hamilton, LLP).

On January 3, 2018, the United States Court of Appeals for the Third Circuit dealt a significant blow to Crystallex International Corporation’s long-running effort to recover its $1.2 billion arbitral award and judgment against the Republic of Venezuela for appropriating Crystallex’s rights to the Las Cristinas gold mine. In a 2-1 decision, the Third Circuit reversed a decision of the Delaware district court that had allowed Crystallex to allege a Delaware fraudulent transfer claim against a Delaware corporation wholly owned by the Venezuelan state-owned oil company PDVSA. Instead, the Third Circuit decided that a non-debtor transferor cannot be liable for a fraudulent transfer under the Delaware Uniform Fraudulent Transfer Act (“DUFTA”).

For PDVSA’s secured 2020 bondholders, the decision is welcome news, and makes the chances of any of those transactions being unwound, and the liens granted to 2020 bondholders set aside, even more remote. While Crystallex’s chance at a recovery against PDVSA remains alive if it is successful in its alter ego claims, PDVSA 2020 bondholders can rest easier knowing that they will retain their liens and priority to any proceeds from a sale of their collateral ahead of Crystallex or similar claimants even if such claimants successfully pursue alter ego claims against PDVSA. For other Republic creditors considering a similar strategy to Crystallex, the chances of jumping ahead of the 2020 secured PDVSA bonds or even debt below PDV Holding are now less likely, and with each passing day of litigation, the challenge of collecting any award from the cash-strapped nation only increases.

The article is available here.

The First Circuit Joins Several Other Circuit Courts in Finding That Creditors’ Committees Have an Unconditional Right to Intervene in Adversary Proceedings

By Todd E. Phillips, Kevin C. Mackley and Sally J. Sullivan (Caplin & Drysdale).

In September, the First Circuit Court of Appeals joined several other Circuits in holding that section 1109(b) of the Bankruptcy Code provides an official creditors’ committee with an “unconditional right to intervene” in an adversary proceeding related to a bankruptcy. The case, Promesa Financial Oversight and Management Board, was the appeal of an order from the District Court for the District of Puerto Rico, which had denied an intervention motion in a debt adjustment case brought under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). The First Circuit reversed the order, distinguishing the case from the First Circuit’s own precedent In re Thompson upon which the District Court had relied.  The Promesa Financial Oversight and Management Board decision aligns the First Circuit with the Second and Third Circuits and evidences a growing Circuit trend toward recognizing the unconditional right of a creditors’ committee to intervene, rejecting the Fifth Circuit’s contrary analysis in the Fuel Oil case, which had previously represented the prevailing view for many years.

The full paper can be found here.

 

Recent Developments in Bankruptcy Law, February 2018

By Richard Levin (Jenner & Block LLP)

The bankruptcy courts and their appellate courts continue to explore issues of interest to practitioners and academics. This quarterly summary of recent developments in bankruptcy law covers cases reported during the fourth quarter of 2017.

The Eleventh Circuit was particularly noteworthy, holding that an individual debtor may recover attorneys’ fees for litigating a damages claim for a stay violation, including fees on appeal (Mantiply v. Horne) and, perhaps more ominously, that a chapter 13 confirmation order is not binding on a creditor who does not object to confirmation but has filed a stay relief motion and that state forfeiture laws may remove property from the estate while the case is pending (Title Max v. Northington). A rehearing motion has been filed in the latter case.

The First Circuit has diverged from the Seventh Circuit, holding that rejection of a trademark license deprives the licensee of future use of the license. (Tempnology)

The Delaware bankruptcy court reaffirmed what should have been clear that a trustee’s avoiding power and recovery claim is not limited to the amount of creditor claims, because section 550 speaks to benefit of the estate, not of creditors. (Physiotherapy Holdings)

Two bankruptcy courts have clarified the prerequisites for and the scope of third party releases and their jurisdiction to issue them, limiting releases by non-voting creditors and of non-indemnified insiders or professionals (New York: SunEdison) and prohibiting a “purchase” of a release solely by making a contribution to the estate. (Colorado: Midway Gold

The full memo, discussing these and other cases, is available here, and the full (900-page) compilation of all prior editions is available here.

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