Three Provocative Business Bankruptcy Decisions of 2018

By Michael L. Cook (Schulte, Roth & Zabel LLP).

The appellate courts have issued at least three provocative, if not questionable, business bankruptcy decisions in the past six months.

Lakeridge:  In March, 2018, the U.S. Supreme Court avoided the substantive merits of a 2016 split decision by the Ninth Circuit that had permitted a Chapter 11 debtor to manipulate the reorganization plan process.  Despite the Court’s narrow holding approving the Ninth Circuit’s “clear error” standard for reviewing a bankruptcy court’s fact findings, four Justices wrote two separate opinions challenging the Court’s limited review of the Ninth Circuit’s stunning decision in the face of a powerful dissent.

In re Anderson:  The Second Circuit, on March 7, 2018, held that an asserted bankruptcy discharge violation was not arbitrable due to a conflict between the Federal Arbitration Act and the Bankruptcy Code.  Two months later, though, the Supreme Court stressed that it had rejected every effort to “conjure” conflicts between the Arbitration Act and a raft of other Federal statutes.

In re Temptnology:  the First Circuit, on January 12, 2018, in a split decision, wiped out the rights of a trademark licensee, explicitly rejecting a 2012 decision by the Seventh Circuit.  The First Circuit’s majority opinion relied on a heavily criticized 1985 Fourth Circuit decision, premising its  holding on the primacy of Federal bankruptcy law over Federal trademark law and distinguishing between a statutory breach and a common law breach.

The losing parties in the First and Second Circuit cases filed petitions for certiorari in June, 2018.  Given the Circuit split in one case and the later Supreme Court arbitration ruling in the other, both cases warrant Supreme Court review.

The full article is available here.


We at the Bankruptcy Roundtable will take a break from posting this August and hope that you too will be able to get away from your desk at work. We’ll be back after Labor Day.

Inequality and Equity in Bankruptcy Reorganization

Richard M. Hynes and Steven D. Walt (University of Virginia School of Law).

Courts have developed a series of controversial doctrines that allow a debtor to depart from bankruptcy’s standard priority rules.  In a recent decision, the Supreme Court signaled tolerance of one type of departure, the critical vendor payment, as long as it occurs early in the case and is what an economist would call a strict Pareto improvement: a payment that makes all creditors better off.  This essay demonstrates that Pareto improvements appear in the stated tests governing other departures, including roll-ups and substantive consolidations.  Some scholars, and a few courts, would apply much more permissive tests similar to economists’ Kaldor-Hicks standard and allow deviations as long as the winners gain more than the losers lose.  Still other courts would do away with these doctrines entirely and allow departures only with the consent of the disfavored.  Defending the judicial use of the Pareto standard in reorganizations, the essay further discusses some of the normative considerations in the choice between a Pareto standard, a Kaldor-Hicks standard, and an absolute prohibition.

The full article can be found 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.

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.

Justice Scalia’s Bankruptcy Jurisprudence: The Right Judicial Philosophy for the Modern Bankruptcy Code?

By Megan McDermott (Lecturer, University of Wisconsin School of Law).

The late Justice Scalia is best known among mainstream audiences for his originalist approach to the Constitution, as well as his polarizing views on various civil rights issues. But anyone who has cracked open a bankruptcy casebook also knows Justice Scalia for his many contributions to the bankruptcy field — both through sturdy majority opinions in interpretive cases like Timbers, Nextwave, and Radlax, and through his biting dissents and concurrences in watershed decisions like Dewsnup and Stern.

My recent article, Justice Scalia’s Bankruptcy Jurisprudence: The Right Judicial Philosophy for the Modern Bankruptcy Code?, seeks to both quantify and qualify Justice Scalia’s contributions to bankruptcy law. I show that during his three decades on the Court, Justice Scalia wrote in more bankruptcy cases than any other justice (followed closely by Justices Stevens and Thomas).

I also identify four predominant themes that emerge from Justice Scalia’s bankruptcy oeuvre: (1) a holistic approach to the Bankruptcy Code; (2) a commitment to textualism, regardless of outcome; (3) disdain for legislative history; and (4) a desire for clear boundaries regarding the scope and authority of bankruptcy courts.

Finally, the article explores the impact of his jurisprudential legacy on the bankruptcy field. Of particular note are the ways in which Justice Scalia’s approach often favored ordinary consumers over creditor interests. I conclude that while Justice Scalia did not always live up to the ideals that he advocated, he nonetheless offered a unifying vision that fits well with both the purpose and the design of the Bankruptcy Code.

The full article is available here.

Merit Management v. FTI: Law Firm Perspectives

On February 27, the Supreme Court decided Merit Management Group, LP v. FTI Consulting, Inc., holding unanimously that the § 546(e) safe harbor does not protect allegedly fraudulent transfers “in which financial institutions served as mere conduits.” The Court’s decision resolves a circuit split on the reach of § 546(e). In reaching its conclusion, the Court focused on the “end-to-end transfer” that the trustee seeks to avoid, rather than any “component parts of the overarching transfer.” In FTI, because the overarching transfer was made between two parties not otherwise shielded by the safe harbor, the transfer will now fall outside the safe harbor.

As many law firms recognize, this decision will have wide-ranging implications on the finality of securities transactions effected through financial institutions, especially leveraged buyouts. Mayer Brown notes that as the decision enhances a trustee’s ability to recover fraudulent transfers, it also increases the bankruptcy estate’s leverage against recipients of pre-petition transfers. Cleary observes that “debtors or trustees may strategically frame avoidance actions in order to limit the scope of the safe harbor.” Mayer Brown concludes that the decision may also expose investors, investment funds and similar entities to fraudulent transfer litigation risks.

The bottom line, as Davis Polk notes, is that the § 546(e) safe harbor is no longer a blanket safe harbor for the recipients of transactions that pass through financial institutions. But the safe harbor will still shield financial institutions operating as escrow agents or clearinghouses, as the Court expressly stated that a financial institution under § 546(e) is protected whether the institution acts as a principal or as an intermediary.

Firms have noted that the decision also left open some ambiguities. First, Schulte Roth & Zabel writes that the Court leaves open possible arguments that any “customer” of a “financial institution” is also itself a “financial institution” under § 546(e). Second, Mayer Brown points out that the Court did not address whether the transaction at issue actually qualified as a transfer that is a “settlement payment” or made in connection with a “securities contract” under § 546(e). These ambiguities will draw the attention of defendants in future fraudulent transfer litigation.

Finally, Weil notes that the decision raises the question of how the preemption of state-law creditor remedies under § 546(e) will be applied in light of the Supreme Court’s now-narrow construction of the safe harbor.

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

The roundtable has posted on FTI before. Some of those posts are: an analysis of the FTI oral argument, the Amici Curiae Brief of Bankruptcy Law Professors, an article by Ralph Brubaker on the meaning of § 546(e), and a roundup of law firm perspectives on the Seventh Circuit’s decision in FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016).