Where Past is Prologue: Applying Lessons from the Past to Protect ABL Lenders in a World of Future Distress

By Shana A. Elberg, Seth E. Jacobson, & George R. Howard (Skadden)

Shana A. Elberg
Seth E. Jacobson
George R. Howard

Today, U.S. borrowers are more indebted than ever before. Borrowers have become increasingly aggressive in using secured leverage, and in taking advantage of “cov-lite” loan documents to engage in creative (and sometimes controversial) transactions to transfer assets beyond the reach of existing secured lenders by way of distributions to shareholders or contributions to unrestricted subsidiaries and then utilize those assets to raise additional secured financing. While the debt levels and cov-lite structures of leveraged loans may create risks for many stakeholders, lenders under asset-based loan facilities (“ABL facilities”) should be well-positioned to weather any storm. ABL facilities typically offer lenders greater protections in a liquidation scenario. In addition, ABL facilities often are a critical lynchpin of debtor-in-possession financing facilities when borrowers are looking to effectuate comprehensive restructurings through chapter 11. There are several tools available to ABL lenders to protect their credit position in the event that a borrower finds itself in a distressed situation. Lenders should position themselves to understand and use the chapter 11 process to ensure their debt claims retain, and even gain, protections in bankruptcy.

The full article is available here.

Bankruptcy Claim Dischargeability and Public Externalities: Evidence from a Natural Experiment

By Michael Ohlrogge (New York University School of Law)

Michael Ohlrogge

In 2009, the Seventh Circuit ruled in U.S. v. Apex Oil that certain types of injunctions requiring firms to clean up previously released toxic chemicals were not dischargeable in bankruptcy.  The result of this was to expose lenders, even those with security interests, to larger losses in the event a firm they extended credit to entered bankruptcy with significant outstanding environmental cleanup obligations. I document that lenders tightened the covenants on loans they extended to firms impacted the decision. In particular, lenders added new requirements that borrowers’ facilities and operations be inspected by outside environmental engineering firms in order to assess the safety with which they handle toxic chemicals.

Using an array of statistical tests and data from federal environmental agencies, I show that firms impacted by the decision responded to these new pressures from lenders by taking meaningful steps to reduce their risks of causing catastrophic pollution spills. In particular, firms reduced volume of toxic chemicals they release on-site by approximately 15%. In place of these releases, firms substituted off-site treatment by specialized facilities generally considered to be safer for the environment.  These results point to important ways in which bankruptcy law and other legal rules that impact recovery for firms’ creditors can work to shape the positive or negative externalities those firms generate.

The full article is available here.

Covenant of Good Faith and Fair Dealing Examined: La Paloma

By Ronit J. Berkovich and Fraser Andrews (Weil)

Ronit J. Berkovich
Fraser Andrews

On January 13, 2020, the United States Bankruptcy Court for the District of Delaware issued an opinion in In re La Paloma Generating Company, LLC., Case No. 16-12700 [Adv. Pro. No.19-50110], which examined the implied covenant of good faith and fair dealing in the context of an intercreditor agreement (ICA) governing the relationship between the First Lien Lender (First Lien Lender) and the Second Lien Lenders (Second Lien Lenders) to the Debtors.  The bankruptcy court held a party cannot be in breach of the covenant of good faith and fair dealing under New York law when merely enforcing a contractual right, in this case the First Lien Lender enforcing the ICA.

The full article is available here.

More Clarity on What Constitutes a Final, Appealable Order in Bankruptcy After Ritzen Group Inc. v. Jackson Masonry, LLC

By Charles Tabb and Carly Everhardt (Foley & Lardner)

Charles Tabb
Carly Everhardt

In Ritzen Group Inc. v. Jackson Masonry, LLC, the Supreme Court unanimously held that a bankruptcy court’s order denying relief from the automatic stay constituted a final order, and thus that order may­—and must—immediately be appealed if so desired.  The holding regarding finality is important, because parties normally only have an absolute right to appeal when an order is final, not when an order is interlocutory.  In Ritzen, the Court announced a clear blueprint for gauging the finality of any bankruptcy order.

The opinion comes just a few years after the Supreme Court decided Bullard v. Blue Hills Bank, in which the Court held that an order denying confirmation of a plan was not final, because the plan confirmation process could continue notwithstanding the denial.  In Ritzen, the Court distinguished Bullard, explaining that the stay relief proceeding constituted its own complete procedural unit, separate and apart from any claims resolution issues.  Ritzen puts to rest the view that Bullard signaled relaxed finality in the context of bankruptcy.

The article analyzes Ritzen and how it will impact strategic decisions by creditors regarding stay relief and other forms of bankruptcy litigation.  The article considers open questions left by the Court, including the impact on the finality of an order which states it was entered “without prejudice,” and whether res judicata may apply in cases where creditors make multiple requests for relief.

The full article is available here.

Congress is ignoring the best solution for troubled companies: bankruptcy

By Jared A. Ellias (University of California Hastings College of the Law), George Triantis (Stanford Law School)

Jared A. Ellias
George Triantis

During the COVID-19 pandemic, Congress has moved quickly to get trillions of dollars of emergency relief to consumers, small businesses, and large firms. These efforts aim to rescue millions of American consumers and businesses from insolvency.

It is troubling, though, that the federal government is ignoring the law that already exists for cushioning the blows associated with financial distress: the bankruptcy system. In its strategy to provide relief and stimulus, the government is in effect offering roadside emergency assistance when the infrastructure and expertise of a hospital is easily accessible.

Because the bankruptcy system entails a detailed restructuring process, it forces companies to think hard about how they’ve been doing things and whether it makes sense to continue doing them that way. Cash infusions from programs like those in the CARES Act, on the other hand, are only designed to keep businesses’ heads above water. That’s all that some companies need, but for others that were already struggling before the crisis hit, such as J.Crew and Neiman Marcus, bankruptcy can encourage them to focus on their long-term health.

Our existing bankruptcy system isn’t only crucial for helping companies move past their immediate crisis of zero revenue and illiquidity, it will also be essential in helping entire industries adapt to a prolonged period of uncertainty created by the coronavirus pandemic.

For the full opinion piece, click here.

For other Roundtable posts relating to the Covid-19 crisis, see Andrew N. Goldman, George W. Shuster Jr., Benjamin W. Loveland, Lauren R. Lifland, “COVID-19: Rethinking Chapter 11 Bankruptcy Valuation Issues in the Crisis.”

COVID-19: Rethinking Chapter 11 Bankruptcy Valuation Issues in the Crisis

By Andrew N. Goldman, George W. Shuster Jr., Benjamin W. Loveland, Lauren R. Lifland (Wilmerhale LLP)

Andrew N. Goldman
George W. Shuster Jr.
Benjamin W. Loveland
Lauren R. Lifland

 

 

 

 

 

 

 

Valuation is a critical and indispensable element of the Chapter 11 bankruptcy process. It drives many aspects of a Chapter 11 case, from petition to plan confirmation, in all circumstances. It may be obvious that the COVID-19 crisis has added a layer of complexity—and volatility—to bankruptcy valuation issues with respect to valuing assets, liabilities, and claims, both in and outside the Chapter 11 context.  But the crisis may also change the way that courts look at valuation determinations in Chapter 11—both value itself, and the way that value is measured, may be transformed by the COVID-19 crisis.  While the full extent of the pandemic’s effect on valuation issues in bankruptcy has yet to be seen, one certainty is that debtors and creditors with a nuanced and flexible approach to these issues will fare better than those who rigidly hold on to pre-crisis precedent.

The full article is available here.

COVID-19 and the Bankruptcy Court Workload

By Taylor Custer (Harvard Law School)

Taylor Custer

The United States’ response to COVID-19 has led to record levels of unemployment and a severe contraction in real GDP. The economic shock has already pushed companies such as J.C. Penney and J.Crew into bankruptcy. And many more, such as AMC and Hertz, may quickly follow. If that happens, the nation’s bankruptcy courts could soon face unprecedented levels of stress. There are at least four ways to address a potential surge.

First, Congress could authorize more permanent bankruptcy judges. It has currently authorized the federal courts of appeals to appoint 316 permanent bankruptcy judges throughout the country. But three years ago, when the economy was much stronger, the Judicial Conference argued that more judges were still needed.

Second, Congress could authorize more temporary bankruptcy judges. It has currently authorized about three dozen of them. Temporary bankruptcy judgeships expire when the occupant dies, retires, resigns, or is removed from office 5 years after the seat was created or extended. The most recent extension was in 2017, so the current temporary bankruptcy judgeships will remain vacant once occupants begin to depart after 2022 if the seats are not extended.

Third, the judicial council of each federal court of appeals could recall retired bankruptcy judges to serve.

Fourth, the judicial councils for the federal courts of appeals could agree to temporarily transfer bankruptcy judges around the country. Although this would do little to alleviate stress from an absolute rise in bankruptcies, it could help manage bottlenecks in places with disproportionate bankruptcy filings—such as Delaware, New York, and Texas. Under 28 U.S.C. § 152(d), “[w]ith the approval of the Judicial Conference and of each of the judicial councils involved, a bankruptcy judge may be designated to serve in any district adjacent to or near the district for which such bankruptcy judge was appointed.” And, under 28 U.S.C. § 155(a), “[a] bankruptcy judge may be transferred to serve temporarily as a bankruptcy judge in any judicial district other than the judicial district for which such bankruptcy judge was appointed upon the approval of the judicial council of each of the circuits involved.”

Planning for an American Bankruptcy Epidemic

By Ben Iverson (Brigham Young University), Mark Roe (Harvard Law School)

Ben Iverson
Mark Roe

The COVID-19 pandemic looks likely to cause a surge in bankruptcies in the United States—conceivably a surge as rapid and as substantial as the U.S. court system has ever experienced. A significant and rapid increase in judicial capacity to manage the flood of cases is more than appropriate, we argued in a recent op-ed.

Bankruptcy filings in the United States have historically peaked several months after a surge in unemployment. And American unemployment is now rising at an unprecedented rate, with more than 30 million claims filed in the last six weeks. If historical patterns hold, the bankruptcy surge would be on track to be the largest the American bankruptcy system has experienced.

Bankruptcy works well enough and quickly enough in normal times, particularly for restructuring large public firms. But it cannot work as well, and the economy will suffer, if the bankruptcy system is overloaded. Delays in critical vendor orders, DIP loan approvals, pre-packaged bankruptcy confirmations and the like could all slow commerce unnecessarily.

The full op-ed is available HERE.

Bankruptcy and Aircraft Finance

By Franklin H. Top III, Stephen R. Tetro, Richard F. Klein, James M. Heiser (Chapman and Cutler LLP)

Franklin H. Top III
Stephen R. Tetro
Richard F. Klein
James M. Heiser

Hundreds of billions of dollars are invested in aircraft equipment in the United States. With the airline industry suffering devastating losses resulting from the COVID-19 pandemic, Chapman and Cutler LLP recently released its Bankruptcy and Aircraft Finance Handbook. The handbook aims to help aircraft investors navigate the numerous challenges typically faced in airline bankruptcies. The handbook seeks to provide an understanding of the unique aspects of § 1110 of the Bankruptcy Code and other related provisions that govern the treatment of claims in bankruptcy involving aircraft. It also outlines the state law remedies available to aircraft investors outside of bankruptcy.

In addition, the handbook seeks to demystify the complex structures behind these investments, including secured loans, sale/leasebacks, operating leases, pass-through certificates, leveraged leases and public debt, including equipment trust certificates or enhanced equipment trust certificates. Each structure can present its own unique challenges in bankruptcy.

We also provide a checklist of considerations for aircraft investors drawn from over 30 years of experience, and identify some of the common challenges that investors face in airline bankruptcies. We provide investors with an understanding of the legal protections available in the event an aircraft investment heads south, as well as share lessons learned from prior airline bankruptcies from the 1990s to the present

The full article is available here.

COVID-19 Impacts on Landlords of Retail Debtors

By Scott K. Charles, Amy R. Wolf, Michael H. Cassel (Wachtell)

Scott K. Charles
Amy R. Wolf
Michael H. Cassel

This memorandum addresses one of the impacts of COVID-19 on retail bankruptcies. Several retailers in chapter 11 have sought to suspend their cases given the inability to operate or conduct going out of business sales during the pandemic. Courts in some cases have granted requests for extraordinary relief, which have included excusing the payment of rent notwithstanding the requirements of the Bankruptcy Code that nonresidential leases of real property be paid on a current basis.

The full article is available here.

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