By Shana A. Elberg, Seth E. Jacobson, & George R. Howard (Skadden)
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.
On December 19, 2019, the Second Circuit issued its amended opinion in In re Tribune Company Fraudulent Conveyance Litigation, 2019 WL 6971499 (2d Cir. Dec. 19, 2019), which held the “safe harbor” provision in section 546(e) of the Bankruptcy Code covers Tribune Company’s payments made to public shareholders as Tribune constitutes a “financial institution” in pursuance with the Bankruptcy Code definition, and such definition includes the “customer” of a financial institution when the financial institution acts as the customer’s “agent or custodian…in connection with a securities contract”.
The Second Circuit’s opinion was controversial in light of the Supreme Court’s recent ruling in Merit Management Group, LP v. FTI Consulting, Inc., 138 S.Ct. 883 (2018) on the scope of safe harbor, with law firms perceiving it as moving away from the position of Merit by opening new room for application of safe harbor protection. Jones Day suggests that the Tribune’s reasoning “avoided the strictures of Merit”, while Nelson Mullins finds it “shifting the focus from the financial institution as a ‘mere conduit’ to an ‘agent’.” Kramer Levin comments that the decision represents a “dramatic, and perhaps unexpected, extension of the safe harbor from the position it occupied in the immediate aftermath of Merit.” Weil calls it throwing the 546(e) safe harbor a lifeline.
Firms also find the case paving a way to protect LBO payments from subsequent attacks. King & Spalding notes that the Second Circuit’s opinion provides protection for recipients involved in LBO transaction where the debtor is the “customer” of the intermediary financial institutions. Cadwalader believes that the decision may “narrow the impact” of Merit, as market participants could structure their transaction to involve a financial institution thereby bypassing the “mere conduit” carve-out. Skadden agrees on the likely trend of structured LBOs, highlights that the customer defense is “likely to continue gaining momentum” after the Second Circuit’s decision. Parties would ensure they meet the “financial institution” and “customer” criteria methodically articulated in Tribune. “An appropriately structured principal/agent relationship could continue to shelter transfers or distributions within the ambit of section 546(e) safe harbors,” says Weil, adding that the operative facts will be key to strengthen the position.
Finally, Gibson Dunn notes that Tribune is not binding on other circuits. It remains to be seen whether such holding will be extended to different circumstances by other courts. “Some courts may find (in contrast to the Second Circuit) that the Supreme Court in Merit could not possibly have intended that its narrowing of the section 546(e) safe harbor be so easily vitiated by an argument that the Court itself acknowledged in a footnote,” says Kramer Levin.
In a prior Roundtable post, Professor Bussel noted that a plain meaning interpretation of the term “financial institution” should not include the customers of commercial banks, thus precluding a sharp change from Merit.
By Shana A. Elberg, Amy Van Gelder, and Jason M. Liberi (Skadden, Arps, Slate, Meagher & Flom LLP)
In recent years, some courts have become critical of the doctrine of equitable mootness, a judicially created abstention doctrine — unique to the corporate bankruptcy world — that allows appellate courts to dismiss appeals from a bankruptcy court’s confirmation order if the relief sought on appeal threatens to unwind a complex debtor reorganization previously approved by the bankruptcy court. The doctrine promotes finality of confirmation orders, encourages the global consensual resolutions often crucial to complex reorganizations, and protects third parties that have justifiably relied upon the bankruptcy court’s confirmation order or transactions effectuated pursuant to that order.
Despite significant concerns expressed by courts regarding the impact of the doctrine on parties’ fundamental appellate rights, equitable mootness persists in some form within every circuit that has jurisdiction over bankruptcy appeals. Thus, plan proponents and objectors alike must be aware of its implications on contested plan confirmation proceedings and prepared to act quickly to advance their interests following plan confirmation.
This article provides a brief overview of the doctrine of equitable mootness, its application by appellate courts, and key considerations for bankruptcy and non-bankruptcy practitioners faced with contested plan confirmations and subsequent appeals.
By Seth Jacobson, Ron Meisler, Carl Tullson and Alison Wirtz (Skadden, Arps, Slate, Meagher & Flom LLP)*
Over the last several decades, the enforcement of intercreditor agreements (“ICAs”) and agreements among lenders (“AALs”) that purport to affect voting rights and the rights to receive payments of cash or other property in respect of secured claims have played an increasingly prominent role in bankruptcy cases. On certain of the more complex issues that have arisen in the context of a bankruptcy, there have been varying interpretations and rulings by the bankruptcy courts. Some courts have enforced these agreements in accordance with their terms, while others have invalidated provisions in these agreements on policy and other grounds. Still others seem to have enforced agreements with a results-oriented approach.
In this article, we examine three recent leading cases: Energy Future Holdings (“EFH“), Momentive, and RadioShack. These cases addressed whether the bankruptcy court was the proper forum for intercreditor disputes, the ability of junior creditors to object to a sale supported by senior creditors, and whether an agreement providing only for lien subordination restricts a junior creditor’s ability to receive distributions under a plan of reorganization.
These leading cases illustrate three trends. First, bankruptcy courts are increasingly willing to insert themselves with respect to disputes among lenders that affect a debtor’s estate, thereby establishing that the bankruptcy court is the proper forum for interpreting ICAs and AALs. Second, the courts are applying the plain language of ICAs and AALs to the facts of the case to reach their conclusions. And, finally, senior creditors appear to continue to bear the risk of agreements that do not limit junior creditors’ rights in bankruptcy using clear and unambiguous language.
*Seth Jacobson is a partner and global co-head of the banking group at Skadden, Arps, Slate, Meagher & Flom LLP. Ron Meisler is a corporate restructuring partner, Carl Tullson is a corporate restructuring associate and Alison Wirtz is a banking associate at Skadden. They are all based in the firm’s Chicago office. The opinions expressed in this article are solely the opinions of the authors and not of Skadden, Arps, Slate, Meagher & Flom LLP.
By Mark Chehi, Robert Weber and Stephen Della Penna of Skadden, Arps, Slate, Meagher & Flom LLP
The U.S. Bankruptcy Court for the Southern District of New York recently dismissed intentional fraudulent transfer claims asserted against former shareholders of Lyondell Chemical Company. Weisfelner v. Fund 1 (In re Lyondell Chemical Co.), 541 B.R. 172 (Bankr. S.D.N.Y. 2015) (“Lyondell II”). The Bankruptcy Court opinion adopts a strict view of what constitutes “intent,” and thereby tightens pleading standards applicable to complaints asserting intentional fraudulent transfers.
The intentional fraudulent transfer claims at issue focused on Basell AFSCA’s 2007 leveraged acquisition of Lyondell Chemical Company. As is typical in LBO transactions, Lyondell itself borrowed money to finance the LBO and pay its former shareholders for their Lyondell shares. Just 13 months later, Lyondell filed a voluntary chapter 11 petition.
A bankruptcy trustee subsequently asserted fraudulent transfer claims against the former Lyondell shareholders to recover the LBO payments received by them. The litigation asserted that the 2007 LBO transaction was avoidable as an intentional fraudulent transfer. The Bankruptcy Court dismissed the claims and adopted a restrictive pleading standard that requires an intentional fraudulent transfer plaintiff to plead facts that show “actual intent, as opposed to implied or presumed intent.” The plaintiff must allege some sort of “intentional action to injure creditors.” Alleging “[o]ther wrongful acts that . . . may be seriously prejudicial to creditors” – such as negligence or a breach of fiduciary duty – will not support an intentional fraudulent transfer claim.
By Jay M. Goffman, George N. Panagakis, Ken Ziman, Van C. Durrer II, John K. Lyons, Mark A. McDermott, and David M. Turetsky of Skadden, Arps Slate, Meagher & Flom LLP
The American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 recently released its Final Report recommending comprehensive reforms to Chapter 11 of the Bankruptcy Code. The report is the culmination of a three-year effort by over 200 restructuring professionals to evaluate Chapter 11 in light of the changing environment in which financially distressed companies operate. The Report is approximately 400 pages long. Skadden, Arps has prepared a comprehensive overview of the Report that condenses the salient points into a 30-page summary which can be found here. Selected recommendations for reform include:
DIP financing orders cannot impose milestones requiring the debtor to perform material tasks within the first 60 days (e.g., conduct a sale or file a plan).
No 363 sales of all or substantially all assets (“363x sales”) within the first 60 days unless the debtor demonstrates a high likelihood that the value of the debtor’s assets will decrease significantly.
363 sales must satisfy requirements similar to plan confirmation requirements.
Junior, out-of-the-money stakeholders may be entitled to receive an allocation of value from senior creditors to reflect a possible upswing in the reorganized debtor’s value.
The cost of capital for similar debt issued to companies comparable to the debtor as a reorganized entity should be used when determining the appropriate discount rate for purposes of cram down.
Eliminating the requirement of at least one impaired accepting class of creditors for plan confirmation.
No appointment of an unsecured creditors’ committee if general unsecured creditors do not need representation in the case (e.g., if their claims are out-of-the-money).