Authors: Thomas Jackson & David Skeel
A striking feature of the recent economic crisis was the long period of subpar economic growth that continued even after the crisis had officially ended. Although discussion about how to spur economic recovery has focused on the efficacy of Keynesian stimulus spending, this is only one of many factors that might plausibly encourage growth. For a book entitled “Financial Restructuring to Sustain Recovery,” published by the Brookings Institution, we were asked to discuss the role that bankruptcy policy plays, or might play, in economic recovery.
After summarizing how bankruptcy posits a collective solution to a common pool problem of individual creditors and thereby improves the efficient use of assets, we consider two obstacles to its effectiveness. The first is that bankruptcy proceedings often seem to begin too late. The increased influence of debtors’ principal lenders probably counteracts this problem in part, but we suspect not fully. We consider a wide range of strategies that lawmakers might use to encourage timely filing, some of which are fairly simple, while others are more speculative.
The second major issue is the relationship between bankruptcy and jobs. The question whether bankruptcy should be used to protect jobs is a recurring theme that came to the fore most recently when the government used bankruptcy to bail out Chrysler, justifying its intervention as preserving jobs. We caution that distorting the standard bankruptcy rules—focused on efficient use of assets—to save jobs in the short run may have more problematic effects overall.
The full-length article can be found here.
Author: Nelly Almeida, Weil Gotshal & Manges LLP
On January 10, 2014, the United States Bankruptcy Court for the District of Delaware in In re Fisker Automotive Holdings, Inc., et al., capped a secured lender’s right to credit bid its $168 million claim at $25 million (the amount it paid to purchase the claim). While the court noted that its decision was non-precedential, it may still have serious implications for the future of credit bidding.
Credit bidding has long been considered a fundamental protection afforded to secured creditors by section 363(k) of the Bankruptcy Code. Under section 363(k), at a sale of its assets, a secured creditor may “credit bid” the amount of its secured claim in lieu of cash unless the court “for cause” orders otherwise. The Fisker decision highlights the uncertainty surrounding what constitutes sufficient “cause” for a court to limit or abrogate a lender’s right to credit bid. In almost all cases where courts have found “cause,” the focus has been on whether there is a clearly defined existing dispute to a claim or lien. In Fisker, however, the court emphasized other “fairness” factors, such as the expedited nature of the proposed sale and the interest of promoting a fair auction, even though the opinion suggests that questions existed as to whether the potential credit bidder’s claims were secured. Thus, Fisker leaves us to wonder whether these “additional factors” would have been enough standing alone; indeed, what would have been enough?
A full length blog post discussing the decision and its implications can be found here.
EDITOR’S UPDATE: On February 20th, the US District for Delaware denied the secured creditor’s emergency motion for direct appeal to the Third Circuit. Nelly Almeida’s description of the decision and the resulting auction can be found here.