Senate Judiciary Committee Hearing on Bankruptcy for Banks and Proposed Chapter 14
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Financial Firms and Safe Harbors | 0

On November 13, 2018, the Senate Judiciary Committee held a hearing on “Big Bank Bankruptcy: 10 Years After Lehman Brothers,” in connection with the proposed “Taxpayer Protection and Responsible Resolution Act” (“TPRRA”). The TPRRA would add a new chapter 14 to the Bankruptcy Code, providing a recapitalization mechanism for bank holding companies or some other financial companies.

This version of chapter 14 would implement the “Single Point of Entry” financial company resolution model in bankruptcy. (The SPOE model contemplates that only a financial company’s top-level holding company would go into bankruptcy proceedings, with losses borne by its creditors, while material subsidiaries continue to operate as going concerns. For more, see here.) The bill contemplates a proceeding where the bank’s holding company would have a large amount of its long-term debt turned into equity over a 48 hour (likely weekend) period. The firm’s subsidiaries would continue to operate, but would be transferred over to a new, debt-free bridge company. The old holding company’s shareholders and creditors would have their claims handled through a bankruptcy process. The bill also included a 48 hour automatic stay on Qualified Financial Contracts (QFCs), but effectively requires their assumption by the new bridge company.

In his opening remarks, Senator Grassley noted that several similar bank bankruptcy proposals have been incorporated into bills introduced into both the Senate and House over the past several Congresses. (For Roundtable coverage of the 2016 and 2017 FIBA bills, click here, here, here, and here.) A principal difference, stressed by Senator Coons in his opening statement, was that the current bill would not affect Title II of the Dodd-Frank Act, as some prior provisions would have. The view that a special chapter 14 should complement, rather than replace the FDIC’s Orderly Liquidation Authority (OLA) is consistent with the U.S. Department of the Treasury’s report on OLA, recommending against its repeal, released earlier this year. (For Roundtable coverage of the OLA, click here and here.)

The Hearing featured testimony by Donald Bernstein (Davis Polk), Professor Mark Roe (Harvard Law School), and Stephen Hessler (Kirkland & Ellis).

Video and testimonies available here.

For previous Roundtable posts on the resolution of financial institutions, see Howell Jackson & Stephanie Massman, “The Resolution of Distressed Financial Conglomerates“; Stephen Lubben & Arthur Wilmarth, “Too Big and Unable to Fail“; Mark Roe’s “Don’t Bank on Bankruptcy”; Mark Roe & Stephen Adams, “Restructuring Failed Financial Firms in Bankruptcy: Selling Lehman’s Derivatives Portfolio”; David Skeel’s “Bankruptcy for Banks: A Tribute (and a Little Plea) for Jay Westbrook”; and, “Financial Scholars Submit Letter to Congress Opposing Repeal of Title II.”

(This post was authored by Ryan Rossner, J.D. ’19.)

Second Circuit Says Section 546 of Bankruptcy Code Preempts State Law Constructive Fraud Claims
by | posted in: Avoidance | 0

By Donald Bernstein, Elliot Moskowitz, Damian Schaible, Eli Vonnegut, Alicia Llosa Chang, and Tina Hwa Joe of Davis Polk & Wardwell LLP

On March 29, 2016, the United States Court of Appeals for the Second Circuit issued an important opinion that limits the ability of creditors to assert constructive fraudulent transfer claims in major bankruptcy cases.  In a unanimous opinion, the Circuit held that in circumstances where Section 546 of the Bankruptcy Code bars estate representatives from asserting constructive fraudulent conveyance claims under state law, the statute likewise prevents individual creditors from bringing those claims after the estate’s time to do so expires.  In several recent Chapter 11 cases, individual creditors argued that the statute should only preclude a “trustee” – the term used in the statutory text – from bringing such claims, not individual creditors.  The Circuit’s ruling in In re: Tribune Company Fraudulent Conveyance Litigation, No. 13-3992, and summary order in related case Whyte v. Barclays Bank, 13-2653, were the first decisions from a circuit court on the issue and settled a conflict among its lower courts.  In a 53-page decision, the Circuit rejected the argument that the text of the statute only bars constructive fraud claims brought by a trustee or other estate representative, instead holding that the doctrine of implied preemption protects settlement payments and swap transactions from constructive fraud claims brought by any party.  The decision may put an end to recent attempts by creditors to circumvent Section 546(e) and related provisions in bringing such claims.

The full memo is available here.

Momentive Ruling May Pave the Road for Below-Market “Takeback Paper” Cramdowns of Secured Creditors
by | posted in: Cramdown and Priority | 0

By Donald S. Bernstein, Davis Polk & Wardwell LLP

bernstein In a lengthy and widely discussed bench ruling delivered on August 26, 2014, Judge Robert D. Drain of the United States Bankruptcy Court for the Southern District of New York held that Momentive Performance Materials could satisfy the cramdown standard of Section 1129(b) of the Bankruptcy Code as to its oversecured creditors by distributing to them replacement notes paying a below-market interest rate, under the reasoning of the Supreme Court’s Till opinion. Rejecting arguments made by the objecting creditors that a market rate of interest was required, Judge Drain approved the use of a rate computed by reference to the prime rate, with an additional margin to compensate the creditors for the risk of non-payment, reasoning that the Bankruptcy Code does not require an interest rate that covers creditors’ costs or provides them with a profit. We note that, if followed, Judge Drain’s ruling may shift the leverage in future Chapter 11 cases in favor of debtors and unsecured creditors, potentially enabling them to satisfy secured creditors with long-term replacement notes at below-market rates, which could incentivize some debtors to avoid the use of market-rate takeout exit financing and potentially provide additional value for unsecured creditors at the expense of secured creditors.

For more analysis, navigate here for PDF download.

Practitioners, Academics, and a Judge Testify about Safe Harbors before Congress
by | posted in: Financial Firms and Safe Harbors | 0

Author: Stephen D. Adams

The House Judiciary Subcommittee on Regulatory Reform, Commercial, and Antitrust Law has held two sets of hearings in recent months on the bankruptcy safe harbors for repos and derivatives from the automatic stay, from preference and fraudulent conveyance law, and from the limitations on ipso facto clauses.

This past Wednesday, March 26, Judge Christopher Sontchi, Seth Grosshandler, Jane Vris, Thomas Jackson, and Michelle Harner testified. Last December, Jeffrey Lacker, Donald Bernstein, and Mark Roe testified.

Judge Sontchi argued that the 546(e)’s exception for all settlement transactions is too broad and also urged Congress to narrow the safe harbors for repos. Seth Grosshandler, of Cleary Gottlieb, reported on the work of the ABI safe harbors advisory committee (which includes both Judge Sontchi and Prof. Roe) and warned that the safe harbors are complex and potentially costly to alter.  Jane Vris, representing the National Bankruptcy Conference (NBC), and Thomas Jackson, professor at the University of Rochester, testified on bankruptcy of SIFIs as an alternative to Dodd Frank resolution of bail-out.  Michelle Harner, professor at University of Maryland School of Law, testified in her role as the Reporter to the ABI Commission on Bankruptcy Reform about the Commission.

Mark Roe, professor at Harvard Law School, testified that the safe harbors facilitate excessive short-term funding of financial institutions and impede effective resolution of large financial failures, like that of Lehman in 2008.  Donald Bernstein, of Davis Polk, a member of the ABI bankruptcy commission, testified about the bankruptcy adjustments needed to adapt bankruptcy law to the FDIC’s Single Point of Entry resolution mechanisms.  Jeffrey Lacker, president of the Federal Reserve Bank of Richmond, testified about the importance of bankruptcy reform to reduce the problem of too-big-to-fail and reduce reliance on short-term debt.

The written testimonies are linked above, and the video of the oral testimonies for the March 26th hearing will be found here once it has been posted, and is here for the December 3rd hearing.

For more on the bankruptcy safe harbors for derivatives and repurchase agreements, please see the post by Steven L. Schwarcz and Ori Sharon summarizing their recent paper, The Bankruptcy-Law Safe Harbor for Derivatives: A Path-Dependence Analysis, and the post by Kathryn Borgeson, Mark Ellenberg, Lary Stromfeld, and John Thompson, entitled Lehman Bankruptcy Court Issues Safe Harbor Decision, summarizing a recent Lehman case decision on the safe harbors, both published Tuesday.