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.
By Ronit J. Berkovich and David Li (Weil, Gotshal & Manges LLP).
The U.S. Supreme Court, in U.S. Bank Nat’l Ass’n v. Village at Lakeridge, LLC, 583 U.S. ___ (2018), offered plenty of hints on an important topic while simultaneously ruling very little about it. In chapter 11, whether a creditor qualifies as an “insider” can have enormous implications on a range of issues, including plan confirmation, fraudulent transfer and preference analyses, and severance payment and employee incentive/retention plan (KEIP/KERP) approvals. Lakeridge involved a dispute as to whether the bankruptcy court properly determined in confirming a plan that the sole impaired accepting creditor (the romantic partner of one of the debtor’s officers) was not a “non-statutory” insider. If the creditor actually were such an insider, then the chapter 11 plan should not have been confirmed.
In granting cert to hear the case, the Supreme Court expressly declined the opportunity to address whether the Ninth Circuit articulated the correct legal test to determine if a person qualifies as a non-statutory insider. Instead, the Supreme Court granted cert only to answer the narrow question of whether the Ninth Circuit applied the correct standard of review to the lower court’s determination. Justice Kagan, writing for the Court, kept to that script by simply affirming the Ninth Circuit’s decision to apply a clear error standard of review. Concurrences by Justices Kennedy and Sotomayor, however, each acknowledged shortcomings in the legal test the Ninth Circuit applied and each appeared to invite lower courts to consider alternative approaches. As a whole, Lakeridge provides little binding guidance, and practitioners can expect further development in non-statutory insider law by the Courts of Appeals.
The article is available here.
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.
By Jane Rue Wittstein and Mark G. Douglas (Jones Day)
Courts disagree as to whether the amount that a bankruptcy trustee or chapter 11 debtor-in-possession can recover in fraudulent transfer avoidance litigation should be capped at the total amount of unsecured claims against the estate. The U.S. Bankruptcy Court for the District of Delaware recently weighed in on this issue in PAH Litigation Trust v. Water Street Healthcare Partners, L.P. (In re Physiotherapy Holdings, Inc.), 2017 WL 5054308 (Bankr. D. Del. Nov. 1, 2017). Noting the absence of any guidance on the question from the U.S. Court of Appeals for the Third Circuit, the bankruptcy court ruled that, unlike most state fraudulent transfer laws, which limit a creditor’s recovery to the amount of its unpaid claim against the transferor, section 550 of the Bankruptcy Code imposes no such limitation on the estate’s recovery. The ruling reinforces the idea that federal and state fraudulent transfer avoidance laws are intended to be remedial rather than punitive. Under state law, this understandably means that an avoidance recovery is limited to the amount necessary to make an injured creditor whole. Under federal bankruptcy law, recoveries must benefit the bankruptcy estate, which includes the interests of creditors and other stakeholders.
The article is available here.
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.
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.
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.
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.
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).
By Brian S. Hermann, Alan W. Kornberg, and Erica G. Weinberger (Paul, Weiss, Rifkind, Wharton & Garrison LLP).
Last month, the United States Court of Appeals for the First Circuit addressed two questions critically important to trademark licensees: (1) can a trademark licensee use section 365(n) of the Bankruptcy Code to retain licensed trademarks (and exclusive distribution rights) following a debtor-licensor’s rejection of its license and (2) if not, can a licensee otherwise continue to use the licensed trademarks post-rejection? In re Tempnology, LLC, 879 F.3d 389 (1st Cir. 2018). The Court held that section 365(n) does not apply to trademarks (or distribution rights) and, in a split (two-to-one) decision, ruled that a licensee’s right to use licensed trademarks terminates upon rejection of its license. In so ruling, the Court expressly rejected a contrary decision by the United States Court of Appeals for the Seventh Circuit in Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, 686 F.3d 372 (7th Cir. 2012), establishing a clear circuit split regarding the consequences of trademark license rejection for licensees. This Memorandum discusses the First Circuit’s decision in Tempnology, as well as the scope of section 365(n) of the Bankruptcy Code and the consequences of rejection more generally.
The First Circuit’s decision in Tempnology may not be the last word on these important trademark license issues. Given the split in Court of Appeals rulings, the Supreme Court could weigh in, if asked. If not, it remains to be seen whether other courts will adopt Tempnology or Sunbeam or craft an entirely different rule.
The full article is available here.