Recent Developments at the Intersection of Bankruptcy and Environmental Law
by | posted in: 363 Sale, Chapter 11, Environmental Liabilities | 0

By Thomas Goslin (Weil, Gotshal, & Manges LLP)

Retired U.S. Bankruptcy Judge Robert E. Gerber once observed that issues as to the interplay between environmental law and bankruptcy are among the thorniest on the litigation map.  Difficulties navigating this interplay largely stem from the inherent conflict between the goals of bankruptcy and environmental laws, with the former aimed at providing debtors with a fresh start, while the latter cast a broad net to hold parties (even some innocent parties) responsible for past harm to the environment.  Despite the fact that modern environmental laws have been on the books for over 40 years, and that bankruptcy laws were first enacted in the earliest days of the Republic, relatively few courts have had occasion to opine on the treatment of a bankrupt debtor’s environmental liabilities.  As such, those stuck at the intersection of bankruptcy and environmental law often lack clarity as to how or whether a debtor’s environmental liabilities can be addressed through a restructuring.  This is particularly true when the liabilities arise from contaminated property owned by a debtor, which generally cannot be discharged in a chapter 11 case.

Two recent bankruptcy cases, however, have provided debtors and their advisors with new options for managing environmental liabilities associated with contaminated land.  As discussed in detail in the article, developments in the pending chapter 11 case of Exide Holdings Inc. have both expanded the universe of cases where an environmental trust may provide an avenue for relief, as well as provided much needed clarity on when and under what circumstances a debtor may abandon contaminated real property under section 554 of the bankruptcy code.  In a separate case, involving defense contractor Wellman Dynamics Corporation, the debtor and one of its secured creditors were able to negotiate a novel settlement with state and federal environmental regulators, which facilitated the sale of the debtor’s operations, including heavily contaminated land, under an arrangement where the buyer would fund remediation efforts based on an ability-to-pay formula tied to revenues generated from the acquired operations.  While dire circumstances in both cases no doubt contributed to the unique results, the outcomes suggest that there may be more options available for debtors seeking to address liabilities arising from contaminated real property than previously thought.         

The full article is available here.

Bankruptcy’s Cathedral: Property Rules, Liability Rules, and Distress
by | posted in: Bankruptcy Reform, Bankruptcy Roundtable Updates, Jurisprudence, Legislation | 0

By Vincent S.J. Buccola (University of Pennsylvania – The Wharton School)

What good can a corporate bankruptcy regime do in the modern economy? The question bears asking because the environment in which distressed companies find themselves is so markedly different from the environment of just twenty years ago—to say nothing of the days of the equity receiverships, of sections 77 and 77B, of Chapters X and XI. The most important changes are well known: increased depth and liquidity of financial markets and, especially, increased capacity of financial contracting to say ex ante how distress will be resolved ex post. Recent efforts to take stock of contemporary bankruptcy practice, most notably the ABI’s Chapter 11 reform project, grapple implicitly with the significance of a changing environment. But by leaving the matter implicit, they underscore a lacuna about what the law’s marginal contribution to the economic order might be.

In a forthcoming article, Bankruptcy’s Cathedral, I hazard a general answer and elaborate its implications for a few prominent uses of bankruptcy in today’s practice.

The characteristic function of bankruptcy law, I say, is to recharacterize the mode in which an investor’s relationship to a distressed firm is governed. In particular, bankruptcy frequently toggles the protection of an investor’s economic interests from a property rule, in the Calabresi and Melamed sense, to a liability rule. It swaps out the investor’s unilateral right upon default to withdraw her investment, when such a right would ordinarily prevail, in favor of a judicially mediated procedure designed to give her the official value of her right. The automatic stay furnishes an example. It extinguishes a secured creditor’s power to repossess and sell collateral, and supplies instead a right only to what the bankruptcy judge determines to be “adequate protection” of its interest in the collateral.

This toggling function can be useful, Property rules are often more efficient during a company’s financial health than during distress. A state-contingent meta rule that switches between the two thus might be optimal. But what about financial contracting? Why can’t investors stipulate state-contingent meta rules if indeed they can maximize surplus by doing so? The short answer is that in some cases contract is sufficient, but in other cases legal or practical impediments are insuperable. The marginal contribution of bankruptcy law, then, is to supply toggling rules where investors cannot practically do so on their own.

One implication of my approach is to index the justifiable scope of bankruptcy to contingent facts about the efficacy of financial contracting. In environments where it is difficult for investors to specify state-contingent toggling rules, whether because of legal prohibition or practical impossibility, the compass for bankruptcy law is wider. As contract becomes more efficacious, bankruptcy’s brief grows correspondingly shorter.

This normative schema can be used to assess one-by-one the many actual interventions of bankruptcy laws. I scrutinize three uses of bankruptcy that are important in today’s practice: to confirm prepackaged plans, to effect going-concern sales, and to take advantage of the automatic stay. I find plausible justifications for a legal institution to bind holdout creditors and to extinguish in rem claims against a debtor’s assets. The automatic stay, on the other hand, is harder to justify. (The curious must read within to find out why.) More generally, though, my approach shows how one can weigh the contributions of a bankruptcy regime against its redundant or even counterproductive in light of contracting innovations.

The complete article is available for download here.

Bankruptcy Sales: Is A Public Auction Required to Assure That Property Is Sold for The Highest and Best Price?
by | posted in: 363 Sale, Bankruptcy Roundtable Updates, Fiduciary Duties, Valuation | 0

By Vicki R. Harding (Vicki R. Harding, PLLC)

A buyer negotiating acquisition of commercial real estate from a Chapter 7 trustee or a Chapter 11 debtor-in-possession will almost always hear the mantra: “I have a fiduciary duty to maximize value for the benefit of the bankruptcy estate” – which the seller insists means the property must be sold through a public auction. The potential buyer may be designated as the stalking horse (e.g. its offer will be treated as an opening bid), and it may have input on the bidding procedures (bidder qualifications, minimum overbid, purchase price payment terms, etc.). But at the end of the day it runs a risk that after investing time and money in pursuing the acquisition someone else may be selected as having made a “higher and better” offer.

However, that is not always the case.  In re 160 Royal Palm, LLC, 600 B.R. 119 (S.D. Fla. 2019) presents an interesting case study. As discussed in Bankruptcy Sales: Highest Is Not Always Best, the bankruptcy court allowed a debtor to withdraw property from a previously authorized public auction and to proceed with a private sale to a designated buyer, subject only to an overbid by the stalking horse from the public auction. The court approved the private sale over the objection of a third party that claimed that in a public auction it would bid at least $1 million more than the private sale purchase price.

The full article is available here.

Junior Creditors Could Share In 363 Bankruptcy Sales
by | posted in: 363 Sale, Priority, Valuation | 0

By Charles Tabb and Tamar Dolcourt (Foley & Lardner LLP).

In July, the Seventh Circuit Court of Appeals issued a decision that appeared to upend the long-held understanding that an underwater secured creditor was entitled to all of the proceeds of a sale under Section 363 of the Bankruptcy Code. In our new article, we analyzed the decision in Illinois Department of Revenue v. Hanmi Bank in which the Seventh Circuit opened the door to a potential recovery for out-of-the-money junior creditors based on the theory that a free and clear sale under the Bankruptcy Code created a premium for the assets that the junior creditor may be entitled to share. Though Hanmi dealt explicitly with a state taxing authority and its particular rights under Illinois state law, there is nothing in the opinion which limits it to those facts or that type of creditor. Furthermore, even though the court ultimately valued the interest that the Illinois Department of Revenue was forced to give up through the free and clear sale at zero, that was simply a failure of proof in the particular case. We also consider the long-term ramifications of this opinion and its likely effect on future sales under Section 363, including the possibility of increased costs and delays of negotiating these sales with recalcitrant junior creditors.

The article may be found at Law 360:  the original publication.

The Year in Bankruptcy: 2017
by | posted in: Avoidance, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Cramdown and Priority, Legislation, Supreme Court, Valuation, Workouts and Pre-Packs | 0

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.

Selling Innovation in Bankruptcy
by | posted in: 363 Sale, Valuation | 0

By Song Ma (Yale School of Management), (Joy) Tianjiao Tong (Duke University, Fuqua School of Business), and Wei Wang (Queen’s School of Business).

The past decades have witnessed the emergence of patent sales in corporate bankruptcies. Yet we know little about the facts and rationales of these important economic transactions.

In this working paper, we assemble a comprehensive data set of US Chapter 11 filings, USPTO patent transaction documents, and court records on assets sales from the past three decades. We document three stylized facts on patent sales in bankruptcy. First, patent sales are pervasive — more than 40% of bankrupt firms sell at least one patent, and on average they sell 18% of their patent portfolios. Second, patent transactions occur immediately after bankruptcy filing — concentrating largely within the first two quarters after filing. Third, patents are frontloaded in general asset sales in bankruptcy — firms sell a disproportionately large quantity of patents in asset sales during the early period of reorganization.

Why do firms sell patents during bankruptcy? We design a set of empirical tests to study the economic decisions behind patent sales based on the two economic views on assets reallocation in bankruptcy, namely asset restructuring and financing through asset sales. Our results show that bankrupt firms reallocate patents that are more redeployable and trade in a more liquid market . We find no evidence that they sell underexploited or underperforming patents. This pattern of selling more liquid patents holds stronger in firms with financial distress, firms undergoing poor industry conditions, and firms lacking external financing. The combined evidence lends support to the view that firms sell innovation during bankruptcy for financing purposes rather than for asset restructuring. Additionally, we find that bankrupt firms try to retain the inventors of sold patents and continue to cite sold patents after their sale. The evidence overall suggests that a firm’s imminent financing needs interact with its intent to avoid bankruptcy costs in shaping a firm’s decision to sell patents in bankruptcy.

The full paper is available here.

 

The Roundtable will be off for the holidays. We’ll be back early after the New Year.

Through Jevic’s Mirror: Orders, Fees, and Settlements
by | posted in: Cramdown and Priority | 0

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
by | posted in: Cramdown and Priority | 0

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.

Jevic: Law Firm Perspectives
by | posted in: Bankruptcy Roundtable Updates, Cramdown and Priority | 0

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.

United States: In GM, Second Circuit Takes a Wrong Turn on Its Treatment of Unknown Claims
by | posted in: 363 Sale | 0

By Debra A. Dandeneau (Baker & McKenzie)

Elliott v. General Motors LLC (In re Motors Liquidation Co.), 829 F.3d 135 (2d Cir. 2016), addresses General Motors’ attempt to sell substantially all of its assets to “New GM” free and clear of certain claims of vehicle owners under the Bankruptcy Code.

“New GM” acquired GM’s assets in a bankruptcy court-approved sale. New GM assumed liability for claims arising from any accidents occurring after the closing date and for any express vehicle warranties. Three classes of vehicle purchasers were not covered:

– prepetition purchasers with prepetition injuries from the “ignition switch defect,”

– prepetition purchasers with economic damages as a result of defects not covered by an express warranty, and

– postpetition purchasers of used GM vehicles who claimed economic damages as a result of defects.

The Second Circuit held that a debtor may sell free and clear of successor liability claims, but independent claims against New GM were not covered by the “free and clear” sale.

The court applied a variation of the “relationship test,” which requires prepetition conduct by the debtor plus some minimum contact or relationship with the claimant, to determine whether the purchasers held “claims.” Both pre-closing accident claims and economic loss claims by prepetition purchasers constituted “claims,” but postpetition purchasers of used vehicles did not have “claims.”

To determine whether the holders of prepetition claims received sufficient notice, the Second Circuit focused on GM’s knowledge of the claims instead of its knowledge of the identity of the creditors.

The full client alert is available here.

1 2