[Crypto-Bankruptcy Series] The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments

By Megan McDermott (University of Wisconsin-Madison School of Law)

Megan McDermott

Note: This post is the first post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose.  This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.

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The FTX bankruptcy isn’t just significant for its size and scope, but also for some extraordinary procedural wrinkles.  Here are a few notable developments from the first six weeks of the FTX bankruptcy:

  • Unusual delays. Most Chapter 11 bankruptcies are the products of weeks, if not months, of behind the scenes planning.  As a result, the typical debtor is able to file a flurry of first day motions that ensure a high degree of debtor control – at least during the early stages of bankruptcy, while creditors are scrambling to find representation and determine strategy.  Not so with FTX, due to the fact that current CEO John Ray took over from Sam Bankman-Fried immediately before the Chapter 11 filing.  Ray has testified that FTX’s abysmal record-keeping and absence of corporate controls have made it extremely difficult to get an accurate picture of FTX’s assets and liabilities.  As a result, the traditional first day motions were heard a week into proceedings, and second day motions were postponed to January 11. The delay makes it easier for individual creditors to organize push back to the debtors’ plans, which could in turn impact overall creditor recovery.
  • Jurisdictional squabbling. Bahamian regulators are mounting a spirited fight to retain control over the liquidation of FTX Digital Markets, one of the many entities in FTX’s global web of related businesses.  The Bahamian regulators backed off their initial strategy of asking the Southern District of New York to open a parallel Chapter 15 proceeding.  Nonetheless, they are currently arguing that the Delaware Bankruptcy Court lacks authority to halt liquidation under Bahamanian law.  Given the rumors that Bahamanian authorities encouraged (or possibly compelled) Bankman-Fried to give Bahamanian customers preferential treatment in withdrawing frozen funds, there is a lot at stake in this jurisdictional skirmish.  In his testimony to Congress, Ray mentioned this “extraordinary pushback” but expressed confidence that these efforts would be rejected in favor of the transparency and clarity that Chapter 11 promises to all stakeholders.
  • Sealed submissions. Despite this commitment to transparency, FTX has asked to file a variety of court submissions under seal, including creditor lists.  FTX’s lawyers argue that revealing creditor names would make them a target for hacking or, at the very least, poaching by competitors of FTX.  The U.S. Trustee has objected strenuously to sealing these records, on the grounds that these risks are the trade-offs of a public and transparent proceeding.  In addition, Dow Jones, Bloomberg, and other media interests have moved to intervene in order to oppose the debtor’s efforts to avoid disclosing creditor identities.  In the Celsius bankruptcy, the Southern District of New York decisively rejected efforts to keep parts of the docket under seal.  Judge Dorsey hasn’t taken a clear position yet but has agreed to keep creditor lists under seal – for now.
  • Preferential transfers. During Congressional questioning, Ray was asked about rumors of looting in the months preceding the Chapter 11 filing, as well as some dubious post-petition maneuvers.  There are also likely to be a number of insider transfers, especially since at least one of Bankman’s Fried’s parents (Stanford Law Professor Joseph Bankman) has reportedly received payments from FTX.  Transfers between FTX and Bankman-Fried and his family may be in the billions.  Expect some bombshells as FTX seeks to use Chapter 11 to avoid these transfers.
  • Property of the estate. Major stakeholders are already wrangling to have their assets returned on the ground that these assets should not be considered property of the estate.  Of particular note are two motions filed by committees representing U.S. and non-U.S. exchange customers.  The customers are arguing that they are entitled to have their crypto assets returned rather than having to wait in line for a pro rata recovery alongside other unsecured creditors.  Although some commentators have suggested that FTX’s terms of service may support these arguments, the legal authority for how to treat these assets is far from clear.  Another early mover is crypto lender BlockFi, which is staking its claim to 56 million Robinhood shares that Alameda Research had pledged as collateral shortly before FTX’s Chapter 11 filing.  These shares have lost around 40% of their value since early November, which is part of the reason BlockFi has filed its own Chapter 11 bankruptcy in the District of New Jersey.  Bankruptcy courts across the country will likely see many similar ripple effects before FTX’s creditors see any recovery.
  • Executory contracts. Given FTX’s lavish public relations spending and celebrity co-branding, many FTX partners are undoubtedly eager to extricate themselves from the now-disgraced company.  For example, the publisher of the League of Legends video game filed an early motion for relief from the automatic stay, asking the court’s permission to halt their contractual obligation to promote FTX at various events.  Right before the new year, FTX granted their wishes, moving to reject that cobranding deal alongside a long list of other executory contracts.  FTX’s motion details almost two dozen sponsorship deals, ranging from the Golden State Warriors to Berkeley Athletics to an international cricket competition.  FTX also hopes to cast aside paid celebrity endorsements from the likes of Gisele Bundchen and Shohei Otani.  In the motion, FTX explained that “the Contracts are not integral to the Debtors’ Chapter 11 efforts, are not otherwise beneficial to the Debtors’ estates and present burdensome liabilities.”  Accordingly, FTX requested that the contracts be deemed terminated immediately.  That means the Miami Heat Arena may soon be in the market for a new naming rights partner.  (See photo.)  [Editor’s Note: On January 11, 2023, the bankruptcy court approved the termination of FTX’s naming rights: https://www.nba.com/news/miami-dade-coun…]

Balancing Debtor and Creditors’ Interests in Bankruptcy Reorganization Proceedings: Best Practices for the Procedural Design of Claims’ Classification

By Anaïs Alle (Harvard Law School, L.L.M. 2022)

Anaïs Alle

Reorganization proceedings, in contrast to liquidation sales, constitute a rather recent development in insolvency law. Embodied by Chapter 11 in the US, this trend has been further brought to light by the European Directive 2019/1023 of 20 June, 2019 on restructuring and insolvency, that requires EU Member States to set up a preventive reorganization framework. Reorganization plans typically involve complex interplays between competing stakeholders’ interests, and the classification of claims for the purpose of voting on the reorganization plan is both an illustration of these tensions and a mechanism designed to address them. Choices of European policymakers, especially in France where the classification of claims represents a major change, can offer new perspectives on best practices for modern reorganization plans. The classification of claims is an important feature of reorganization proceedings. First, it appears as a countermeasure to the debtor-in-possession and other debtor-friendly rules. Second, it promotes the adoption of a plan against hold-out problems from hostile minority or out-of-the-money creditors. Third, it provides guarantees of fairness and viability of the plan, through the consent of a representative majority of creditors.

Given the importance of claims’ classification, the design of classes has drawn a lot of attention during the implementation of the EU Directive in France. Debtor-in-possession proceedings leave the debtor with significant power over classification, with the potential for abuse through “gerrymandering”, i.e., the strategic classification of claims to create an artificially accepting impaired class, ensuring the adoption of a potentially unfair plan. Bankruptcy statutes fail to provide clear and binding criteria to restrict such strategies. Similarly, Chapter 11 case law – although precedents, notably Matter of Greystone III Joint Venture out of the 5th Circuit, have suggested a ban on gerrymandering – has been reluctant to challenge debtors’ classifications. Instead, policymakers have set protective rules for creditors, mainly the best-interest-of-creditors test and the absolute priority rule. However, these protections may be circumvented and difficult to enforce.

In this context, procedural design is suggested as a means of reconciling debtor-friendly rules with effective protections for creditors, thus ensuring a balance of interests in reorganization proceedings. First, effective judicial review over the classification of claims appears desirable and is addressed under French law with (i) the appointment of a trustee, with limited powers, assisting the debtor in possession, and (ii) an early, dedicated and fast-tracked appeal against the classification of claims, allowing the judicial resolution of disputes over classification before the adoption of the plan. A similar result may be achieved through a reinforcement of classification hearings. Second, hostile classification strategies could be avoided through prepackaged plans, in which the debtor negotiates with its creditors prior to filing for Chapter 11. French law provides for a dedicated two-stage framework through conciliation proceedings – confidential negotiations under the supervision of a court-appointed professional – followed by fast-tracked reorganization proceedings, where the plan can be adopted through a vote in classes that have been designed within the conciliation negotiations. Such proceedings are consistent with the modern negotiated, deal-approach to reorganizations while making use of insolvency mechanisms against hold-out problems, thus favoring a preventive and pragmatic solution to distressed situations.

 

Click here to read the full article.

Changes and Convergence of Bankruptcy Law: Recent Experience in Brazil

By Joao Guilherme Thiesi da Silva (Cleary Gottlieb Steen & Hamilton LLP)

Joao Guilherme Thiesi da Silva

Bankruptcy regimes across the globe have been constantly changing in response to new market demands and the evolution of insolvency law principles and objectives. Part of the academic community argues that such changes may lead to a convergence of domestic bankruptcy laws, as a result of globalization and market integration. Scholars have reviewed the phenomena of changes and convergence of bankruptcy laws in Europe, East Asia and Africa. However, little attention has been given to Latin American countries, such as Brazil. This paper aims at contributing to the discussion on changes and convergence of bankruptcy law, by focusing on four recent experiences within the Brazilian legal system, namely (i) the recent adoption of the UNCITRAL Model Law on Cross-Border Insolvency, (ii) the ability of creditors to propose a competing plan of reorganization, (iii) the adoption of pre-insolvency procedures, and (iv) the recognition of bondholders’ right to vote on a plan of reorganization. This paper concludes that there are indicia of a continuous convergence of Brazilian bankruptcy law with foreign and international norms, as changes in Brazilian bankruptcy law have increasingly mirrored the law and practice of certain metropolitan nations, as well as global norms and soft laws developed by international organizations and standard setting bodies. This paper further discusses the diverse array of processes through which convergence has taken place in Brazilian bankruptcy law, as well as the main driving forces underlying this convergence, such as the increasing influence of cross-border investments and international market players.

The full article is available here.

The Cannabis Conundrum: Can Cannabis Companies File Chapter 15?

By Colin Davidson and Catherine Jun (Sheppard, Mullin, Richter & Hampton LLP)

Colin Davidson
Catherine Jun

Cannabis is now legal in 19 states and Washington D.C., driving the growth of a legal cannabis industry estimated to be valued at $33 billion this year—up 32% from 2021—and expected to reach $52 billion by 2026. This growth in the cannabis industry, of course, also means that operators and their investment partners face increased commercial risk, including insolvency. Cannabis companies have thus far been precluded from accessing federal bankruptcy protection—i.e., chapter 7 or chapter 11—largely due to the status of cannabis as an illegal substance under federal law. The legal framework used in the United States, where cannabis is illegal federally but has been legalized by many states, differs greatly from the framework in Canada. In Canada the federal Cannabis Act 2018 legalized cannabis nationwide, while the provinces maintain certain regulatory powers related to the distribution, sale and use of cannabis. This suggests that for cross-border operators one potential route to U.S. bankruptcy relief is for the company to first commence an insolvency proceeding in Canada and then seek recognition of that foreign proceeding in a U.S. bankruptcy court under chapter 15 of the Bankruptcy Code. We examine the viability of chapter 15 as an alternative avenue to the U.S. bankruptcy courts and the challenges that a cannabis company may face in an article originally published by Cannabis Business Executive.

Click here to read the full article.

 

A Russian Sovereign Debt Default? No Longer Improbable

By Dennis Hranitzky, Richard East, Liesl Fichardt, Epaminontas Triantafilou, Yasseen Gailani, and Rupert Goodway (Quinn Emmanuel Urquhart & Sullivan, LLP)

The article summarizes the likelihood and implications of a sovereign bond default by the Russian Federation. It first discusses the economic sanctions imposed on the Russian Federation, their impact on Russia’s ability to access gold and foreign currency reserves and the consequences of sanctions on Russia’s ability to satisfy its obligations under the approximately $40 billion in UK law bonds. Noting that a payment default will likely lead to litigation arbitration, the article analyzes key provisions of the bonds, noting that atypical of sovereign bonds, they include no choice of law or venue provisions or waiver of sovereign immunity. The article explores anticipated litigation hurdles in both the US and the UK, with a focus on sovereign immunity and forum non conveniens defenses that may be available to Russia, including the particular difficulties that may be faced by litigants in enforcing a judgment from a US or UK court in the absence of a sovereign immunity waiver. The analysis of sovereign immunity necessarily includes consideration of the commercial activity exception and the article analyzes the US and UK interpretation of this exception. The availability of judgment enforcement discovery is also addressed, noting that broad written and sworn deposition discovery of both the debtor and third parties is the norm in the US and also potentially available in the UK. The article concludes with a recommendation that holders of Russian bonds organize themselves and seek advice on their options prior to the occurrence of a default.

The full article is available here.

The Importance of Being Bound: Bondholders’ Vote and Workouts in the U.S. and in Italy

By Francesca Prenestini (Bocconi University, Milan)

Francesca Prenestini

Most legal systems follow one of two rules for regulating the capacity of an issuer to renegotiate the terms of the bond loan to avoid insolvency or to accommodate changing capital needs. The first rule requires the individual consent of every bondholder while the second one permits the proposed agreement to be approved upon a majority decision which also binds dissenting bondholders.

This article analyzes the desirability of adopting a regulatory approach that allows a binding vote of bondholders on amendments of the core terms of the loan and other restructuring measures, including the conversion of bonds into shares. In doing so, this article examines the drawbacks of the prohibitive approach, which requires consent from all bondholders, with particular regard to the judicial cases and business practices of two major legal systems (the U.S. and Italy).

In the U.S., the Marblegate and Caesars cases have reignited the debate on out-of-bankruptcy restructurings of bond issues. In 2015, the U.S. District Court for the Southern District of New York reaffirmed that coercive exit consent transactions which force bondholders into questionable restructurings are prohibited by § 316(b) of the Trust Indenture Act of 1939 (“TIA”). Then, in January 2017, the U.S. Court of Appeal for the Second Circuit adopted a narrower interpretation, holding that § 316(b) only prohibits formal non-consensual modifications of an indenture’s core payment terms.
The district court’s interpretation, though broad, is more coherent with the text, the legislative history, and the purpose of the TIA. Section 316(b) provides that the individual right of each bondholder to receive payment of the principal of and interest on their indenture security on the due dates cannot (with a few minor exceptions) be impaired without the bondholder’s consent. This section was enacted to protect bondholders from insider abuses by giving individual bondholders the power to veto proposed amendments in an out-of-court restructuring. However, this individual veto power often precludes even fair renegotiation agreements between the issuer and the bondholders.

Under Italian law, the meeting of bondholders may approve “amendments of the terms of the loan” by majority vote. Nevertheless, in the light of quite restrictive interpretations of such a rule, those modifications may not change the structural characteristics of the bond loan.

This article suggests that governments should adopt rules that allow a majority bondholders’ vote to accept out-of-bankruptcy restructurings of bond issues. Currently two different solutions may be implemented in the U.S. and Italy: in the U.S., until § 316(b) can be reformed, the Securities and Exchange Commission could exercise its power to grant exemptions to authorize transactions and agreements otherwise banned; and in Italy, in the absence of a statutory prohibition, the contract governing the loan could include a provision allowing the meeting of bondholders to vote upon amendments of the core terms of the loan and other restructuring measures, such as the conversion of bonds into shares.

This article first examines the two different approaches to bond loans restructuring in various legal systems and in the context of sovereign debt, and considers why allowing a binding vote of the bondholders in workouts is so important given the rationales for and against this rule. Then it focuses on the U.S. legal system, and discusses the statutory provision that bans the majority rule, how the jurisprudence and business practices have evolved, and recent proposals for reform. The article also considers the Italian system, its rules and business practices, and how to overcome its limits. In the end, this article suggests an alternative rule and proposes interim solutions to the problem while awaiting statutory reform.

The full article is available here.

For previous Roundtable posts on § 316(b) of the TIA and Marblegate, see William W. Bratton, The New Bond Workouts; Out-of-Court Restructurings After Marblegate: Trust Indenture Act Section 316(b) and Beyond; Benjamin Liu, Exit Consents in Debt Restructurings; Second Circuit Rules on § 316(b) in Marblegate; Mark Roe, The Trust Indenture Act of 1939 in Congress and the Courts in 2016: Bringing the SEC to the Table; National Bankruptcy Conference Proposed Amendments to Bankruptcy Code to Facilitate Restructuring of Bond and Credit Agreement Debt; David A. Brittenham, Matthew E. Kaplan, M. Natasha Labovitz, Peter J. Loughran, Jeffrey E. Ross, and My Chi To, 28 Law Firms Publish White Paper Addressing Trust Indenture Act Complications In Debt Restructurings; Carlos Berdejó, Revisiting the Voting Prohibition in Bond Workouts (providing evidence related to argument made in Mark Roe, The Voting Prohibition in Bond Workouts, 97 Yale L.J. 232 (1987)).

Creditor Rights, Corporate Leverage and Investments, and the Firm Type

By Aras Canipek (University of Konstanz), Axel H. Kind (University of Konstanz), and Sabine Wende (University of Cologne – Faculty of Management, Economics and Social Sciences)

Aras Canipek
Axel Kind
Sabine Wende

Stronger creditor rights reduce credit costs and thus may allow firms to increase leverage and investments, but also increase distress costs and thus may prompt firms to lower leverage and undertake risk-reducing but unprofitable investments. Using a German bankruptcy reform, we find evidence on average consistent with the latter hypothesis. We also hypothesize and find evidence that the effect of creditor rights on corporate leverage and investments depends on the firm type, as it influences the effect creditor rights have on credit costs and distress costs and thus which effect dominates. For example, our findings suggest that stronger creditor rights are costly for large firms, for which the effect of creditor rights on distress costs should outweigh the effect on credit costs, but beneficial for small firms, for which the effect on credit costs should outweigh the effect on distress costs. Our understanding not only reconciles the mixed empirical evidence of existing studies, but also has important implications for optimal bankruptcy design. In particular, our findings are contrary to a widely held opinion that bankruptcy law should be uniform and balance the effect of creditor rights on credit costs and distress costs. Rather, they point to a menu of procedures in which a debtor-friendly and creditor-friendly procedure co-exist and thus allow different types of firms to utilize the procedure that suits them best. If such a menu is not possible, our analysis suggests that countries should choose a debtor-friendly or creditor-friendly procedure, depending on the most important firm type in the country.

The full article is available here.

Viability Assessment in Corporate Debt Restructuring: Optimizing the Filtration Effect of the European Directive on Restructuring and Insolvency

By Lydia Tsioli (King’s College London)

Lydia Tsioli

Despite being pivotal in corporate debt restructuring, viability, an intricate notion with double meaning and double role, has not been systematically examined in Europe. Against this background, and especially given that the new European directive on restructuring and insolvency (the “Directive”) is currently under transposition and restructuring law is making its first steps as a harmonized field across Europe, my recent paper, published in Norton Journal of Bankruptcy Law and Practice, undertakes a doctrinal, comparative [USA, UK] and economic analysis of law examination of viability with the aim of putting forward suggestions that will make viability the linchpin of the Directive, thus optimizing its filtration effect as defined below. 

In doing so, the paper first analyses and distinguishes the two different meanings of viability, namely financial viability and economic viability, and clarifies what the precise role of law is within the viability-related discourse. Such role consists in providing indicators of viability and incorporating appropriate “filtering mechanisms”, a term of art introduced by the paper, which refers to mechanisms filtering non-viable debtors out of the restructuring procedure, hence contributing towards satisfaction of restructuring’s overall goal of saving viable debtors only. 

The way in which such filtering mechanisms are triggered depends on who plays the role of the “ultimate viability assessor” within a restructuring framework, for example an Insolvency Practitioner (“IP”) or a court. Depending on this, the paper distinguishes between IP-centered and Non-IP – centered models of viability assessment and identifies the Directive as standing closer to the Non-IP – centered one. 

What the paper suggests though, is that, what ultimately matters is the appropriateness of filtering mechanisms in any chosen model of viability assessment. Such mechanisms can be most characteristically found under Chapter 11, Title 11 of US Bankruptcy Code and are the conversion/dismissal of a Chapter 11 case and stay relief under section 362. The paper examines them extensively and demonstrates how the existence or inexistence of viability in its double meaning, constitutes the “litmus test” for the triggering of Chapter 11’s filtering mechanisms. 

In light of these comparative findings, the paper finally turns to the European directive and identifies its filtering mechanisms. The paper subsequently, and most importantly, makes suggestions on how the filtration effect of the Directive’s existing mechanisms can be optimized through appropriate interpretation, transposition, judicial practice or future reform. Through these suggestions, it is aspired that first, the Directive will properly reflect the notion of viability and consequently achieve an effective filtering of viable debtors from non-viable ones, and second, viability will ultimately become the primary point of focus and linchpin of European corporate debt restructuring overall.

The paper, entitled “Viability Assessment in Corporate Debt Restructuring: Optimizing the Filtration Effect of the European Directive on Restructuring and Insolvency” is available here.

Reprinted from Norton Journal of Bankruptcy Law and Practice, Vol. 30 No. 5 (October 2021), with permission of Thomson Reuters. Copyright © 2021. Further use without the permission of Thomson Reuters is prohibited. For further information about this publication, please visit https://legal.thomsonreuters.com/en/products/law-books or call 800.328.9352.

The paper has been awarded the 2021 Silver Medal in the International Insolvency Institute’s “Prize in International Insolvency Studies”.

The Case for Bankruptcy Court Discretion to Shift Attorney’s Fees

By Daniel J. Bussel (Professor of Law, UCLA School of Law)

Daniel J. Bussel

Neither the “American Rule” (each party pays its own attorney) nor the “English Rule” (loser pays both parties’ attorneys) is the baseline principle in insolvency cases.  Most major parties do not bear their own attorney’s fees, win or lose.  Fee-shifting is pervasive; the bankruptcy court is directly involved in reviewing the fees; sometimes it’s almost impossible to figure who actually foots the bills.  This is true in US courts, which still generally purport to follow the “American Rule,” and courts in the UK, which generally purport to follow the “English Rule.”  In both countries, theory notwithstanding, equitable principles, born in England’s ancient chancery courts, permit discretionary fee-shifting in light of the collective nature of insolvency proceedings.

Unfortunately, some US courts, including the Supreme Court, disregarding this history and practice, anomalously cling to the American Rule, creating perverse incentives that disrupt the efficient functioning of the reorganization process.  Two leading examples are the Supreme Court’s decisions in Baker & Botts and Midland Funding, both critiqued in my paper, Fee-Shifting in Bankruptcy.  In Baker & Botts, the American Rule denies full compensation to the prevailing debtor’s attorney from any source, disincentivizing the pursuit of meritorious estate claims.  In Midland Funding, the American Rule rewards strategic manipulation by the holder of meritless claims, disincentivizing clearly valid objections.         

Abandoning the American Rule and authorizing a discretionary version of the English Rule as the default rule in bankruptcy for recovery of attorney’s fees is no radical step.  Empirical work is limited, but supports the conclusion that shifting from the American Rule to a discretionary version of the English Rule will have only a modest impact. In bankruptcy cases, an enormous amount of explicit and implicit fee shifting already occurs.  The bankruptcy courts have a well-developed set of procedures for regulating and allowing reasonable attorney’s fees.  They are well-positioned to exercise discretion in awarding attorney’s fees to control bullying and holdout tactics calculated to confer leverage by pressing weak claims and imposing costs on others.  

Several factors can appropriately guide court discretion to award fees in insolvency cases, including: 

  1. Whether the prevailing party or its adversary has a right to recover fees in nonbankruptcy litigation over the same issues. 
  2. Whether the bankruptcy code expressly contemplates recovery of fees as a component of damages. 
  3. The amount of fees and whether the stakes justify them. 
  4. The strength of the prevailing party’s merits case.
  5. Whether the nonprevailing party played the part of bully, holdout, or squeaky wheel. 
  6. Whether a systemic asymmetry exists between the parties allowing one party to implicitly shift fees whether it prevails or not and regardless of the court’s fee award. 
  7. Whether the prevailing party’s success in litigation will economically benefit others similarly situated or creditors generally. 
  8. Whether a fee award will advance the public interest in equitable administration of bankruptcy cases. 
  9. The extent to which a given fee award may be so onerous to the non-prevailing party that it would unreasonably deter access to the courts.
  10. Vexatious and unreasonable conduct by either (or both) of the litigants. 
  11. The extent to which the prevailing party incurred fees for considerations apart from the case at bar because of its status as a repeat player. 
  12. The extent to which the party seeking recovery of fees practically prevailed in the litigation.
  13. Whether the prevailing party is a natural person, a minor private party, a major party, the bankruptcy estate, or a governmental entity.
  14. Whether the non-prevailing party is a natural person, a minor private party, a major party, the bankruptcy estate, or a governmental entity.
  15. Assessing the practical economic incidence of fees initially borne by the estate.

The UK, starting from the English Rule, has created a discretionary fee-shifting regime in insolvency cases resembling the discretionary approach advocated here.  The English cases exhibit a continuing push-pull among (i) the desire to socialize costs of reorganizations that benefit third parties; (ii) concern about unduly discouraging participation by all affected constituents; and (iii) the problems posed by hold-outs, bullies and excessive litigiousness. See Matter of Virgin Active Holdings Ltd (Snowden, J.).  The realities of insolvency practice are impelling both the English and American systems towards court-supervised discretionary fee-shifting.

The damage done by the American Rule is limited by how pervasive fee-shifting already is in bankruptcy.  Fully embracing discretionary fee-shifting in favor of prevailing parties, however, is low-hanging fruit we can promptly gather in to facilitate sound administration of insolvent estates.

The full paper is available here.

Restructuring Sovereign Debt and Rebuilding a National Economy for a Failing State: The Case of Venezuela

By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)

Steven T. Kargman

Venezuela is facing a veritable perform storm: a major humanitarian crisis, a collapsing economy, a sovereign debt crisis, and a political stalemate between the ruling Maduro regime and the opposition.  Yet, if and when Venezuela tries to come to terms with these very serious challenges (probably under the auspices of a new Venezuelan government), Venezuela will first and foremost need to address the pressing social needs of the Venezuelan people, but it will also need to undertake the monumental task of rebuilding its national economy and restructuring its sovereign debt that has been estimated to be $150 billion or more.

In a new article entitled “Venezuela: Prospects for Restructuring Sovereign Debt and Rebuilding a National Economy Against the Backdrop of a Failing State,” I discuss the prospects for a sovereign debt restructuring as well as the major legal and policy challenges associated with a program of sovereign debt restructuring and national economic reconstruction.  For any future sovereign debt restructuring, Venezuela will need to consider employing a broad range of restructuring tools, both old and new.  Further, for any future economic reconstruction effort, Venezuela will need to consider strategies for rebuilding its national oil industry as well as strategies for diversification of its economy.

The article originally appeared in AIRA Journal, Vol. 34, No. 2 (May 2021) and is reprinted with the permission of its publisher, the Association of Insolvency & Restructuring Advisors (AIRA).  The article can be found here.  (The article was first posted on the CLS Blue Sky Blog of Columbia Law School (May 18, 2021) and is cross-posted here with the permission of the CLS Blue Sky Blog.)

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