Recent Developments in Bankruptcy Law October 2017

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 third quarter of 2017.

The Second Circuit adopted the use of a market rate to determine cram-down interest rates in a chapter 11 case. It also disallowed a secured lender’s make-whole, although without deciding whether a make-whole should be generally disallowed as unmatured post-petition interest. (In re MPM Silicones (Momentive)) In contrast, the Houston bankruptcy court allowed a make-whole in a solvent case, but also without reaching the post-petition interest issue. (In re Ultra Petroleum)

The Delaware bankruptcy court clarified its jurisdiction to approve a third-party release in a settlement implemented through a confirmed chapter 11 plan, holding that plan confirmation is a core proceeding, so Article III limits do not apply. (In re Millennium Lab Holdings II, LLC) The Delaware bankruptcy court also reconsidered, and disallowed, a merger agreement termination fee after termination of the agreement. (In re Energy Future Holdings, Inc.)

Bankruptcy courts increasingly approve of the idea that under section 544(b), the trustee may use the longer reachback periods of the Internal Revenue Code and the Federal Debt Collection Procedures Act (In re CVAH, In re Alpha Protective Services). And the Ninth Circuit has ruled that for the trustee to pursue an avoidance claim against the United States, section 544(b) does not require a separate sovereign immunity waiver. (In re DBSI, Inc.) 

Finally, the courts have been sympathetic to attorneys in allowing their fees. (In re Stanton; In re Hungry Horse, LLC; In re CWS Enterps., Inc.) Less so for investment bankers. (Roth Capital Partners)

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

Momentive: Law Firm Perspectives

On October 28, 2017, the United States Court of Appeals for the Second Circuit handed down its decision in In re MPM Silicones, L.L.C., holding that where an efficient market exists, the appropriate cram-down interest rate in Chapter 11 cases is the market rate, distinguishing the formula rate applied by the Supreme Court in Till v. SCS Credit Corp. in Chapter 13 cases. The Second Circuit wrote that “the market rate should be applied in Chapter 11 cases where there exists an efficient market. But where no efficient market exists for a Chapter 11 debtor, then the bankruptcy court should employ the formula approach endorsed by the Till plurality.” The Second Circuit also disallowed the senior creditors’ claim for a make-whole payment, although the Third Circuit had allowed such a claim in In re Energy Future Holdings Corp.

Law firms have so far reacted unanimously that this decision is a win for secured creditors as it ameliorates the risk that unsecured creditors could extract value from the debtor at the secured creditors’ expense. Weil writes that “it seems like the Bankruptcy Court, now freed from Till, will find that an efficient market exists, and will adjust the interest rate on the replacement notes accordingly.”

Nevertheless, some firms predict that there may still be areas future controversy. Davis Polk warns that this decision “could result in expensive litigations between debtors and secured creditors as to whether there exists an efficient market and, if so, what the efficient market rate should be.” Norton Rose Fulbright also emphasizes that the next step for secured creditors is to focus on when an efficient market exists.

Firms have also noticed the decision’s implication for debtor-side strategy. Baker McKenzie suggests the possibility that “a debtor may engage in forum shopping to file its case in a jurisdiction that applies the formula approach,” or “be even more sensitive to the potential for exit financing quotes to be used as evidence against [debtors] in establishing a market rate.”

On the issue of the make-whole premium, Davis Polk highlights that the circuit split may increase forum shopping for distressed issuers with potentially significant make-whole obligations. It expects future issuers to draft clearly around the issue of make-whole obligation to provide for future Chapter 11 cases.

(By Jianjian Ye, Harvard Law School, J.D. 2018.)

Finding Acceptance: Using Strategic Impairment to Satisfy 1129(a)(10)

by David L. Curry, Jr. and Ryan A. O’Connor (Okin Adams LLP; Houston, Texas)

Section 1129(a)(10) of the Bankruptcy Code – requiring acceptance of a proposed plan from at least one impaired voting class – can often pose a unique challenge for single asset real estate debtors. Finding Acceptance: Using Strategic Impairment to Satisfy 1129(a)(10) (the “Article”), explores the potential use of “strategic” or “artificial” impairment as a means of achieving plan confirmation in contested cases where consensual restructuring of the secured creditor’s claim is not obtainable.  Whether such artificial impairment is permissible remains an open question, but the Article notes a growing majority of courts finding that impairment need not be economically driven. Yet, while artificial impairment may not be prohibited by § 1129(a)(10), courts have found that plans relying upon such may be subject to heightened scrutiny under § 1129(a)(3)’s good faith requirements. Thus, the Article goes on to contrast two recent circuit court opinions – Western Real Estate Equities, L.L.C. v. Vill. At Camp Bowie I, L.P. (In re Vill. at Camp Bowie I, L.P.), 710 F.3d 239, 244 (5th Cir. 2013) and Vill. Green I, GP v. Fannie Mae (In re Vill. Green I, GP), 811 F.3d 816 (6th Cir. 2016) – and their opposing outcomes in an effort to understand what factors a court may consider when determining whether a plan has been proposed in good-faith.  Ultimately, the Article concludes that while strategic impairment of insiders or other closely related parties may give rise to an inference of bad faith, the impairment of unrelated, minor creditors should be permissible.

The full article is available to download here.

David L. Curry, Jr. is a partner, and Ryan A. O’Connor is an associate, in the Houston office of Okin Adams LLP. The views expressed in this article are those of the authors, and not Okin Adams.

 

Through Jevic’s Mirror: Orders, Fees, and Settlements

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By Nicholas L. Georgakopoulos (McKinney School of Law, Indiana University)

This article takes the United States Supreme Court’s simple “no” to nonconsensual structured dismissals in Jevic as an opportunity to study its contours. The first issue is the pending clarification on whether the right to object to a structured dismissal is an individual or a class right. An individual right would leave little space for consensual structured dismissals, whereas a class right would fit with the anti-hold-out scheme of reorganization law. Second, Jevic implies increased scrutiny on first-day orders, especially in liquidating reorganizations, pushing for additional caution and negotiation before early payments. Third is the issue of fees—latent in Jevic but burning in the academy—the tension between race-to-the-bottom and race-to-the-top views of jurisdictional competition with the Court’s silence in the foreground. Fourth is the Court’s approval of settlements (via interim orders) that violate priorities provided they promote a bankruptcy goal, as Iridium’s approval did. Fifth, the juxtaposition of the settlements in Iridium and Jevic stresses the importance of the bankruptcy court’s role in approving settlements when the parties’ incentives are biased.

The full article is available here.


The roundtable has posted previously on Jevic, including a report of the case by Melissa Jacoby & Jonathan Lipson and a roundup of law firm perspectives on the Court’s decision. For opposing views on the case leading up to oral argument, see Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. 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 referenced.

Post-Jevic, Expansive Interpretation by Bankruptcy Courts Possible

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By Andrew C. Kassner and Joseph N. Argentina, Jr. (Drinker Biddle & Reath LLP)

In Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), the Supreme Court held that structured dismissals that violate the distribution scheme set forth in the Bankruptcy Code are not permitted.  The Court distinguished such situations from other, somewhat common bankruptcy practices that also violate the Code’s distribution scheme, such as critical vendor orders, employee wage orders, and lender “roll-ups.”  Those practices, the Court noted, “enable a successful reorganization and make even the disfavored creditors better off.”  The question remained, however, how subsequent bankruptcy courts would analyze such practices in light of the Supreme Court’s decision in Jevic.

This article summarizes two early post-Jevic decisions and concludes that at least some courts will read the Jevic holding expansively into areas of chapter 11 practice other than structured dismissals.  In In re Fryar, 2017 Bankr. LEXIS 1123 (Apr. 25, 2017), the Bankruptcy Court for the Eastern District of Tennessee would not approve a settlement agreement and § 363 sale that provided payment to a lender on account of its prepetition claims.  In In re Pioneer Health Servs., 2017 Bankr. LEXIS 939 (Apr. 4, 2017), the Bankruptcy Court for the Southern District of Mississippi would not permit a hospital debtor to pay three physicians as “critical vendors.”  These courts concluded that Jevic required additional scrutiny of distribution-violating proposals other than structured dismissals.

The full article is available here.

Andrew C. Kassner is the chairman and chief executive officer of Drinker Biddle & Reath, and former chair of its corporate restructuring group. Joseph N. Argentina Jr. is an associate in the firm’s corporate restructuring practice group in the Philadelphia and Wilmington offices. The views expressed in the article are those of Mr. Kassner and Mr. Argentina, and not of Drinker Biddle & Reath.


The roundtable has posted previously on Jevic, including a report of the case by Melissa Jacoby & Jonathan Lipson and a roundup of law firm perspectives on the Court’s decision. For opposing views on the case leading up to oral argument, see Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. For other Roundtable posts related to priority, see Casey & Morrison, “Beyond Options”; Baird, “Priority Matters”; and Roe & Tung, “Breaking Bankruptcy Priority,” an article referred to in the Jevic opinion.

Recent Trends In Enforcement of Intercreditor Agreements and Agreements Among Lenders in Bankruptcy

By Seth Jacobson, Ron Meisler, Carl Tullson and Alison Wirtz (Skadden, Arps, Slate, Meagher & Flom LLP)*

Over the last several decades, the enforcement of intercreditor agreements (“ICAs”) and agreements among lenders (“AALs”) that purport to affect voting rights and the rights to receive payments of cash or other property in respect of secured claims have played an increasingly prominent role in bankruptcy cases. On certain of the more complex issues that have arisen in the context of a bankruptcy, there have been varying interpretations and rulings by the bankruptcy courts. Some courts have enforced these agreements in accordance with their terms, while others have invalidated provisions in these agreements on policy and other grounds. Still others seem to have enforced agreements with a results-oriented approach.

In this article, we examine three recent leading cases: Energy Future Holdings (“EFH“), Momentive, and RadioShack. These cases addressed whether the bankruptcy court was the proper forum for intercreditor disputes, the ability of junior creditors to object to a sale supported by senior creditors, and whether an agreement providing only for lien subordination restricts a junior creditor’s ability to receive distributions under a plan of reorganization.

These leading cases illustrate three trends. First, bankruptcy courts are increasingly willing to insert themselves with respect to disputes among lenders that affect a debtor’s estate, thereby establishing that the bankruptcy court is the proper forum for interpreting ICAs and AALs. Second, the courts are applying the plain language of ICAs and AALs to the facts of the case to reach their conclusions. And, finally, senior creditors appear to continue to bear the risk of agreements that do not limit junior creditors’ rights in bankruptcy using clear and unambiguous language.

The full article is available here.

*Seth Jacobson is a partner and global co-head of the banking group at Skadden, Arps, Slate, Meagher & Flom LLP. Ron Meisler is a corporate restructuring partner, Carl Tullson is a corporate restructuring associate and Alison Wirtz is a banking associate at Skadden. They are all based in the firm’s Chicago office. The opinions expressed in this article are solely the opinions of the authors and not of Skadden, Arps, Slate, Meagher & Flom LLP.

Jevic: Law Firm Perspectives

On March 22, the Supreme Court decided Czyzewski v. Jevic Holding Corp., holding that bankruptcy courts may not approve structured dismissals that provide for distributions that deviate from ordinary priority rules without the affected creditors’ consent. According to the Court, Chapter 11 contemplates three possibilities: (1) a confirmed plan; (2) conversion to Chapter 7; or (3) dismissal. Absent an affirmative indication of congressional intent, the Court was unwilling to endorse a departure from the Code’s priority scheme; thus, it rejected the Third Circuit’s “rare cases” exception allowing courts to disregard priority in structured dismissals for “sufficient reasons.”

Dechert warns the decision could short-circuit “creative solutions to difficult and unique issues” and impose a “real economic cost” on debtors, creditors, and the courts. PretiFlaherty speculates that Jevic might give additional leverage to priority claimholders who know that debtors and secured creditors now “have one less arrow in their quiver.” More generally, Winston & Strawn predicts bankruptcy professionals will “look to Jevic for insight” when developing exit strategies in difficult cases.

Foley & Lardner highlights the Court’s basic commitment to absolute priority, while noting the Court’s careful distinction between final distributions, which must follow absolute priority, and interim distributions, which may break from priority to serve the Code’s ultimate objectives.

DrinkerBiddle emphasizes that Jevic provides “support for employee wage orders, critical vendor orders, and roll-ups,” a “shot in the arm for the sub rosa plan doctrine,” and “fodder for objections to class-skipping gift plans.” Duane Morris agrees, noting that Jevic may be “cited in unexpected ways” in battles about gift plans, critical vendor payments, and the like.

Sheppard Mullin wonders how consent will be determined in structured dismissals and whether features of plan confirmation other than absolute priority — for instance, cramdown, the bests interest test, and bad faith — will be imported into the structured dismissal context as well.

(By David Beylik, Harvard Law School, J.D. 2018.)


The roundtable has posted previously on Jevic, including a report of the case by Melissa Jacoby & Jonathan Lipson. For opposing views on the case leading up to oral argument, see Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. 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 referenced.

Jevic: SCOTUS Holds That Priority Rules Apply in Structured Dismissals

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By Jonathan C. Lipson (Temple University-Beasley School of Law) and Melissa B. Jacoby (University of North Carolina – Chapel Hill School of Law)

The U.S. Supreme Court decided Czyzewski v. Jevic Holding Corp., in which we coauthored a brief for amici curiae law professors in support of Petitioners, truck drivers whom Jevic terminated shortly before it filed for bankruptcy. Holding about $8.3 million in priority wage claims, these workers objected to a settlement that Jevic’s shareholders and senior lenders reached with the creditors’ committee. The settlement denied the workers their priority payment, dismissed the bankruptcy, and foreclosed the workers’ rights to challenge under state law the leveraged buyout that led to the bankruptcy. The Third Circuit concluded that such a settlement was permissible in “rare” circumstances. The Supreme Court disagreed, holding that structured dismissals must comply with priority rules absent consent of the affected parties.

Justice Breyer’s majority opinion is notable for at least two reasons. First, it recognizes what was ultimately at stake: the integrity and efficiency of the chapter 11 process. The consequences of failing to reverse, the Court explains, “are potentially serious,” and include “risks of collusion,” “making settlement more difficult to achieve,” and eroding procedural protections that “Congress granted particular classes of creditors,” such as unpaid workers. The Court found no basis in bankruptcy law to allow for exceptions to priority rules in “rare” cases, and seemed to doubt that Jevic was such a case in any event.

Second, consider what Justice Breyer’s decision does not do. It does not, contrary to some reports, prohibit all structured dismissals: “We express no view about the legality of structured dismissals in general,” Justice Breyer noted. The decision also distinguishes the impermissible final distribution in Jevic from interim distributions, such as critical vendor orders, which might deviate from bankruptcy’s priority rules temporarily, but serve other fundamental objectives. By contrast, the Court in Jevic could not find “any significant offsetting bankruptcy-related justification.” The opinion also avoided related issues, such as the propriety of “gift plans” or third-party releases. It shows, however, that Justice Breyer may be the best Justice for the job, if or when the Court chooses to tackle those questions.

The Court’s opinion is available here, and our brief is available here.


The Roundtable posted opposing views on Jevic leading up to oral argument in the case see. See Melissa Jacoby & Jonathan Lipson on their amicus brief and Bruce Grohsgal making the case for structured dismissals. For other Roundtable posts related to priority, see Casey & Morrison, “Beyond Options”; Baird, “Priority Matters”; and Roe & Tung, “Breaking Bankruptcy Priority,” an article that was referenced in the Jevic opinion.

Fair Equivalents and Market Prices: Bankruptcy Cramdown Interest Rates

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By Bruce A. Markell (Northwestern University Law School)

Cramdown is the confirmation of a plan of reorganization over the dissent of an entire class of creditors. Bankruptcy’s absolute priority rule permits such confirmation only if the dissenting class is paid in full, or if no junior class receives anything. “Paid in full,” however, does not require payment in cash. It can consist of intangible promises to pay money that banks, investors, and markets regularly value.

Whether this market value can precisely be transferred to cramdown has vexed many. This Article, “Fair Equivalents and Market Prices,” surveys the doctrinal background of such valuations and devises three short apothegms that can synthesize the history and doctrine under these phrases: “don’t pay too little”; “don’t pay too much”; and “don’t expect precision.”

Against this background, debates arose recently when a New York bankruptcy court applied a chapter 13 case, Till v. SCS Credit Corp., to a large corporate cramdown in In re MPM Silicones, LLC (“Momentive”). Given the legislative history and precedents in the cramdown area, the Article takes the position that Momentive was correct, that it is compatible with the doctrinal roots of cramdown, and that in the future, courts should resist using pure market-based valuations in cramdown calculations.


This article recently appeared in the Emory Bankruptcy Developments Journal (2016). The Roundtable has also recently posted Anthony Casey’s related article from the same issue, “Bankruptcy’s Endowment Effect.”

Bankruptcy’s Endowment Effect

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By Anthony J. Casey (University of Chicago Law School)

The notion of endowments and entitlements has a powerful effect on corporate bankruptcy policy. Scholars and lawyers generally assume a creditor endowed with a right outside the bankruptcy system must receive the equivalent of that right when its debtor is within the bankruptcy system. Proponents of this idea often assert that the result is required by the foundational theory of bankruptcy.

In a forthcoming essay, “Bankruptcy’s Endowment Effect,” I demonstrate that this is false. The idea of sacred creditor endowments is an untenable position that misunderstands the fundamental principles of bankruptcy. Corporate bankruptcy is, at its core, a system that alters nonbankruptcy endowments according to a hypothetical bargain that all creditors of a firm would have entered if bargaining were costless. The entire point of that hypothetical bargain is to suspend and alter some nonbankruptcy endowments to maximize the value of the bankruptcy estate and the firm as a whole. Indeed, if every stakeholder retained all of its nonbankruptcy endowments, the Bankruptcy Code would have no provisions at all.

Of course, altering nonbankruptcy endowments can impose costs. Foremost among those costs is the risk of opportunistic behavior that is costly for the estate as a whole. Bankruptcy policy will, therefore, be designed to maximize estate value while minimizing opportunistic bankruptcy behavior. Thus, the guiding principle for optimal bankruptcy design should be not the preservation of nonbankruptcy rights but rather the minimization of opportunistic behavior that reduces the net value of a firm.

With that principle in hand, we can resolve many difficult questions of bankruptcy policy. In the essay, I focus on applying the principle to the debate over what interest rate a senior creditor should get in a chapter 11 cramdown. In particular, I analyze the dispute in In re MPM Silicones, LLC (“Momentive”), where the bankruptcy court mistakenly reached its final decision by importing a creditor-endowment framework from consumer bankruptcy law (where the framework might make more sense). I show that an optimal rule for corporate bankruptcy supports a cramdown interest rate based on the prevailing market rates for similar loans, which reduces the risk of opportunistic behavior by both debtor and creditor.

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