Finding Acceptance: Using Strategic Impairment to Satisfy 1129(a)(10)

by David L. Curry, Jr. and Ryan A. O’Connor (Okin Adams LLP; Houston, Texas)

Section 1129(a)(10) of the Bankruptcy Code – requiring acceptance of a proposed plan from at least one impaired voting class – can often pose a unique challenge for single asset real estate debtors. Finding Acceptance: Using Strategic Impairment to Satisfy 1129(a)(10) (the “Article”), explores the potential use of “strategic” or “artificial” impairment as a means of achieving plan confirmation in contested cases where consensual restructuring of the secured creditor’s claim is not obtainable.  Whether such artificial impairment is permissible remains an open question, but the Article notes a growing majority of courts finding that impairment need not be economically driven. Yet, while artificial impairment may not be prohibited by § 1129(a)(10), courts have found that plans relying upon such may be subject to heightened scrutiny under § 1129(a)(3)’s good faith requirements. Thus, the Article goes on to contrast two recent circuit court opinions – Western Real Estate Equities, L.L.C. v. Vill. At Camp Bowie I, L.P. (In re Vill. at Camp Bowie I, L.P.), 710 F.3d 239, 244 (5th Cir. 2013) and Vill. Green I, GP v. Fannie Mae (In re Vill. Green I, GP), 811 F.3d 816 (6th Cir. 2016) – and their opposing outcomes in an effort to understand what factors a court may consider when determining whether a plan has been proposed in good-faith.  Ultimately, the Article concludes that while strategic impairment of insiders or other closely related parties may give rise to an inference of bad faith, the impairment of unrelated, minor creditors should be permissible.

The full article is available to download here.

David L. Curry, Jr. is a partner, and Ryan A. O’Connor is an associate, in the Houston office of Okin Adams LLP. The views expressed in this article are those of the authors, and not Okin Adams.

 

Debt Structure as a Strategic Bargaining Tool

By Yue Qiu, University of Minnesota (will join Temple University as Assistant Professor of Finance on August 1st, 2017)

In this paper, I study the strategic role of debt structure in improving the bargaining position of a firm’s management relative to its non-financial stakeholders. Debt structure is essential for strategic bargaining between management and non-financial stakeholders because it affects the ease of renegotiating debt contracts and thus the credibility of bankruptcy threats. Debt structure, not necessarily debt level, is shown to be adjusted as a response to an increase in non-financial stakeholders’ negotiation power.

Using NLRB labor union elections as a laboratory setting and employing a regression discontinuity design, I find that passing a labor union election leads to larger creditor dispersion in a firm’s outstanding debt. In particular, union certification leads to an increase in the ratio of public debt to total assets and a decrease in the ratio of bank debt to total assets in the following three years after elections, whereas there is no significant change in the level of total debt. Moreover, the syndication size of newly issued bank loans increases while creditor ownership concentration decreases once the vote share for unions passes the winning threshold.

Further analyses confirm that the debt structure adjustments after union certification are more likely driven by strategic concerns of management rather than more constrained access to bank loans. Finally, I also show that the degree of wage concessions is strongly related to a firm’s debt structure using the airline industry as an empirical setting.

The full paper is available here.