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.

The Janus Faces of Reorganization Law

By Vincent S. J. Buccola (University of Pennsylvania – The Wharton School – Legal Studies & Business Ethics Department).

In Czyzewski v. Jevic Holding Corporation, 137 S. Ct. 973 (2017), the Supreme Court held that bankruptcy courts lack authority to implement structured dismissals that sidestep the absolute priority rule. The bankruptcy judge’s power to resolve cases by dismissal, a power the Bankruptcy Code grants explicitly, is implicitly limited by the norm of waterfall distribution—or so in any case the majority reasoned. The Court’s decision rested on an interpretive default rule. Because distributional priorities are so important to bankruptcy, the Code will be understood to bar departures absent a clear statement. At the same time, however, the Jevic majority went out of its way to distinguish (and seemingly bless) what it called “interim distributions” such as critical vendor orders, notwithstanding their capacity to undermine priorities and their dubious textual basis.

This article argues that this seeming inconsistency in Jevic is no misstep, but that there might be some sense to the conflicting interpretive approaches after all. Two distinctive paradigms now color interpretation of the Bankruptcy Code. One paradigm governs during the early stages of a case and is oriented toward the importance of debtor and judicial discretion to use estate assets for the general welfare. The other paradigm governs a bankruptcy’s conclusion and is oriented toward the sanctity of creditors’ bargained-for distributional entitlements. In combination, they produce what appears to be policy incoherence. But, at least in a world of robust senior creditor influence, a rule under which judicial discretion diminishes over the course of a case—discretion giving way to entitlements—may in fact tend to maximize creditor recoveries.

The full article is available here.

Secured Transactions and Financial Stability: Regulatory Challenges

By Steven L. Schwarcz (Duke University School of Law)

Secured transactions traditionally are regulated to protect transacting parties and to increase transactional efficiency. This essay argues they should also be regulated to protect the stability of the financial system. This raises numerous challenges.

In our increasingly complex financial system, for example, regulation to control moral hazard in the originate-to-distribute model of secured loan origination faces the challenge that the relevant market failure is less likely to be asymmetric information than mutual misinformation—neither the originator (i.e., seller) of the loans nor the buyer may fully understand the risks. Non-traditional secured transactions, including securitization and other forms of structured finance, exacerbate the challenges of complexity and the limits of disclosure.

The regulation of collateralization levels and interconnectedness faces fundamentally different challenges than those underlying the (technically) analogous post-Depression regulation of “margin” lending to acquire publicly traded stock. The Fed’s Regulation U then required that stock pledged as collateral be worth at least twice the loan amount. Requiring overcollateralization of home-mortgage lending, however, could be highly regressive.

The potential for the widening gap between the rich and the poor to undermine stability also raises the challenge of whether to recognize de facto rights, in order to enable the poor to use their homes as collateral to raise capital. This challenge is itself partly informed by the Uniform Commercial Code’s innovative disentanglement of commercial and property law, which articulates the former to reflect commercial realities rather than the arbitrary shifting of rights based on property. Innovating secured transactions law to recognize those de facto rights could help to unlock a worldwide entrepreneurial potential.

The full paper can be found here.

Bankruptcy Court Rules That It Has Constitutional Authority to Grant Nonconsensual Releases in Chapter 11 Plan

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

Many chapter 11 plans include nonconsensual third-party releases that preclude certain non-debtors from pursuing claims against other non-debtors as part of a restructuring deal in which such releases are a quid pro quo for financial contributions made by prepetition lenders or old equity holders. However, bankruptcy and appellate courts disagree as to whether such non-consensual plan releases should be permitted due, among other things, to concerns regarding the scope of a bankruptcy court’s subject matter jurisdiction and constitutional authority. Several court rulings handed down in 2017 addressed these concerns.

For example, In In re Midway Gold US, Inc., 575 B.R. 475 (Bankr. D. Colo. 2017), the court held that, although Tenth Circuit law does not categorically forbid third-party releases in chapter 11 plans, it lacked jurisdiction to “adjudicate” plan releases of claims against non-debtors because the underlying claims should not be considered as part of the proceedings to confirm the plan and were not within either its “core” or “related to” jurisdiction. In addition, in In re SunEdison, Inc., 2017 BL 401968 (Bankr. S.D.N.Y. Nov. 8, 2017), the court ruled that, as a matter of contract law, merely implied consent for plan releases is insufficient, and it lacked subject matter jurisdiction to approve releases that were overly broad.

By contrast, in In re Millennium Lab Holdings II, LLC,  2017 WL 4417562 (Bankr. D. Del. Oct. 3, 2017), the court held that it had the constitutional jurisdiction to authorize nonconsensual releases, despite the existence of litigation in another forum to adjudicate one of the claims to be released. A discussion of the court’s ruling in Millennium is available here.

Fiduciary Duties in Bankruptcy and Insolvency

By John A. E. Pottow (University of Michigan Law School).

Although discussed nowhere in the U.S. Bankruptcy Code, fiduciary duties play a central role in guiding the administration of an insolvent debtor’s assets. Regulatory oversight of trustees is only loosely circumscribed by statute, but significant lacunae exist regarding specification of the duties of loyalty.  In assessing what fiduciary obligations are owed to secured creditors, unsecured creditors, and debtors, some courts build upon the general principle that the trustee’s fiduciary duty of loyalty flows to all creditors. Other courts, though, work from the premise that secured creditors are better situated to look after themselves and that a trustee’s primary obligation is to unsecured creditors, perhaps especially non-priority general creditors. The Supreme Court has also weighed in, stating that a DIP’s fiduciary duties run directly (if somewhat delphically) to “the corporation.” How then does a trustee choose between beneficiaries of the estate, and what remedies are there for losing parties disappointed with this allegiance decision?  This book chapter explores the fiduciary obligations of trustees (including DIPs) under both statute and common law. There is a special focus on the intrinsic conflicts that arise within the “menagerie of heterogeneous creditors” that constitute the claimants of a bankruptcy estate.  A single normative theory seems unlikely to explain the results (so much for the “residual fiduciary beneficiary”!).  What does seem clear is that trustees are “more fiduciary” for some constituencies than for others.  Fortunately, U.S. bankruptcy courts are accustomed to shifting allegiances and disalignments of interest. Thus, the bankruptcy system may be well-suited to handle the endemic conflicts of interest between corporate constituencies through various bankruptcy-specific mechanisms, such as the institution of the Creditors Committee and the norm of engaged judicial oversight.

The full article is available here.

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