Amicus Brief on the Scope of the Bankruptcy Safe Harbor for Securities Settlement Payments Filed in Merit Mgmt. v. FTI Consulting
by | posted in: Avoidance, Bankruptcy Roundtable Updates, Financial Firms and Safe Harbors | 0

By Ralph Brubaker (University of Illinois College of Law), Bruce A. Markell (Northwestern University Pritzker School of Law), Charles W. Mooney, Jr. (University of Pennsylvania Law School), and Mark Roe (Harvard Law School).

Bankruptcy Code § 546(e) contains a safe harbor that prevents avoidance of a securities settlement payment, e.g. as a preferential or constructively fraudulent transfer. This amicus brief was filed in Merit Management Group, LP v. FTI Consulting, Inc., No. 16-784 (U.S.). The brief explains how § 546(e) rationally constrains its scope via the statutory specification that the safe harbor only applies (because it need only apply) if the “transfer” sought to be avoided was allegedly “made by or to (or for the benefit of)” a protected securities market intermediary, such as a stockbroker or a financial institution.

Ascertaining the meaning and function of that determinative scope language requires an understanding of (1) the concept of a “transfer” as the fundamental analytical transaction unit throughout the Code’s avoidance provisions, and (2) the relationship between that avoidable “transfer” concept and the inextricably interrelated concepts of who that “transfer” is “made by or to (or for the benefit of).” By its express terms, § 546(e) only shields a challenged “transfer” from avoidance if (1) that transfer was “made by” a debtor-transferor who was a qualifying intermediary, “or” (2) a party with potential liability—because the challenged transfer allegedly was made “to or for the benefit of” that party—was a protected intermediary. Thus, the transfer of cash to a stock seller and of the stock back to the buyer is not safe-harbored. The delivery of the cash (and the stock) through financial intermediaries, however, is.

The full amicus brief may be found here.

Oral argument took place on November 6, 2017. The transcript is available here. The roundtable previously posted an article by Ralph Brubaker on the meaning of § 546(e) and a roundup of law firm perspectives on the Seventh Circuit’s decision in FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016). The Supreme Court granted certiorari to review the decision on May 1, 2017. Petitioner Merit Management Group, LP’s opening brief was subsequently filed, along with the Respondent’s brief, and Petitioner’s reply. Additional amicus curiae briefs were filed by Opportunity Partners, L.P., Various Former Tribune and Lyondell Shareholders, Tribune Company Retirees and Noteholders, and the National Association of Bankruptcy Trustees.

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
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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.

Understanding the Scope of the § 546(e) Securities Safe Harbor Through the Concept of the “Transfer” Sought to Be Avoided
by | posted in: Bankruptcy Roundtable Updates, Financial Firms and Safe Harbors | 0

By Ralph Brubaker (University of Illinois College of Law)

Bankruptcy Code § 546(e) contains a safe harbor that prevents avoidance of a securities settlement payment. To date, pleas for sane limits on the scope of the § 546(e) safe harbor have focused upon what kinds of transactions should be considered a “settlement payment.” That language, however, is not the primary means by which § 546(e) both reveals its manifest object and correspondingly limits its reach thereto. Section 546(e) rationally constrains its scope via the statutory specification (the meaning of which the Supreme Court will consider in the pending case of Merit Management Group v. FTI Consulting) that the safe harbor only applies (because it need only apply) if the “transfer” sought to be avoided was allegedly “made by or to (or for the benefit of)” a protected securities market intermediary, such as a stockbroker or a financial institution.

Ascertaining the meaning and function of that determinative scope language requires an understanding of (1) the concept of a “transfer” as the fundamental analytical transaction unit throughout the Code’s avoidance provisions, and (2) the relationship between that avoidable “transfer” concept and the inextricably interrelated concepts of who that “transfer” is “made by or to (or for the benefit of).” By its express terms, § 546(e) only shields a challenged “transfer” from avoidance if (1) that transfer was “made by” a debtor-transferor who was a qualifying intermediary, “or” (2) a party with potential liability—because the challenged transfer allegedly was made “to or for the benefit of” that party—was a protected intermediary.

The full article is available for download here.

The roundtable previously posted a roundup of law perspectives on the Seventh Circuit’s decision in FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d 690 (7th Cir. 2016). The Supreme Court granted certiorari to review that decision on May 1, 2017. Petitioner Merit Management Group, LP has filed its opening brief, and amicus curiae briefs have been filed by Opportunity Partners, L.P. and Various Former Tribune and Lyondell Shareholders. Argument has been scheduled for November 6, 2017.

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.

Jevic: SCOTUS Holds That Priority Rules Apply in Structured Dismissals
by | posted in: Cramdown and Priority | 0

By Jonathan C. Lipson (Temple University-Beasley School of Law) and Melissa B. Jacoby (University of North Carolina – Chapel Hill School of Law)

The U.S. Supreme Court decided Czyzewski v. Jevic Holding Corp., in which we coauthored a brief for amici curiae law professors in support of Petitioners, truck drivers whom Jevic terminated shortly before it filed for bankruptcy. Holding about $8.3 million in priority wage claims, these workers objected to a settlement that Jevic’s shareholders and senior lenders reached with the creditors’ committee. The settlement denied the workers their priority payment, dismissed the bankruptcy, and foreclosed the workers’ rights to challenge under state law the leveraged buyout that led to the bankruptcy. The Third Circuit concluded that such a settlement was permissible in “rare” circumstances. The Supreme Court disagreed, holding that structured dismissals must comply with priority rules absent consent of the affected parties.

Justice Breyer’s majority opinion is notable for at least two reasons. First, it recognizes what was ultimately at stake: the integrity and efficiency of the chapter 11 process. The consequences of failing to reverse, the Court explains, “are potentially serious,” and include “risks of collusion,” “making settlement more difficult to achieve,” and eroding procedural protections that “Congress granted particular classes of creditors,” such as unpaid workers. The Court found no basis in bankruptcy law to allow for exceptions to priority rules in “rare” cases, and seemed to doubt that Jevic was such a case in any event.

Second, consider what Justice Breyer’s decision does not do. It does not, contrary to some reports, prohibit all structured dismissals: “We express no view about the legality of structured dismissals in general,” Justice Breyer noted. The decision also distinguishes the impermissible final distribution in Jevic from interim distributions, such as critical vendor orders, which might deviate from bankruptcy’s priority rules temporarily, but serve other fundamental objectives. By contrast, the Court in Jevic could not find “any significant offsetting bankruptcy-related justification.” The opinion also avoided related issues, such as the propriety of “gift plans” or third-party releases. It shows, however, that Justice Breyer may be the best Justice for the job, if or when the Court chooses to tackle those questions.

The Court’s opinion is available here, and our brief is available here.

The Roundtable posted opposing views on Jevic leading up to oral argument in the case see. 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 was referenced in the Jevic opinion.

Bankruptcy and the U.S. Supreme Court
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By Ronald J. Mann (Columbia Law School)

The continuing struggle of the United States to emerge from the Great Recession gives policy responses to financial distress an immediacy they have lacked for 75 years. The Constitution directly grants Congress a broadly worded Bankruptcy Power, which Congress exercised with vigor in its 1978 enactment of the Bankruptcy Code. But the Code has played little or no role in mitigating the dislocation of the Great Recession. The slight rise in filings under the Code during the early years of financial distress contrasts markedly with the unprecedented rise in foreclosures, to say nothing of the more general social and economic turmoil of the last decade.

My forthcoming book, Bankruptcy and the U.S. Supreme Court, considers the role that the Supreme Court has played in the relatively anemic bankruptcy regime of the 21st century. The book’s main point is that the Supreme Court’s 82 decisions evaluating the Code systematically have taken a narrow interpretive approach that has left the Code much less effective than it might have been. The book includes some quantitative analysis. It is interesting, for example, that only 32 of the 82 decisions (39%) have come down in favor of a broad application of the Code. If you look at close cases (those with three or more dissenting votes), the results are even more stark, with only 5 of the 19 decisions (26%) applying the Code expansively.

But the bulk of the book is a series of case studies of nine of the close cases in the early days of the Code. Because the case studies focus much more on the process of the Court’s decision making than on the doctrinal results, they rely heavily on the internal papers of the Justices. Probably the single most important thing that the case studies demonstrate is the Justices’ attention to these cases. Many readers doubtless think of the bankruptcy cases as the “dogs” that the Justices turn to only after they’ve devoted their attention to the exciting constitutional and civil rights cases. But what you find when you go back to look the Justices’ papers is a great deal of back and forth in the crafting of opinions. In one case (Midlantic v. New Jersey Dep’t of Environmental Protection), Justice Powell’s majority opinion originally was crafted as a dissent; it became a majority when Justice Stevens switched his vote. Similarly, in Bildisco v. NLRB, Justice Rehnquist managed to get a court for his opinion only after months of negotiation that eventually led to the removal and rewriting of a large portion of the original opinion.

If you want to know more about how the Court goes about deciding these cases, then I encourage you to look at the book when it comes out from Cambridge University Press this spring.

Supreme Court Permits Bankruptcy Courts to Issue Final Judgments with Parties’ Consent
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By Harold S. Novikoff, Douglas K. Mayer, Ian Boczko, Emil A. Kleinhaus, and Alexander B. Lees of Wachtell, Lipton, Rosen & Katz

The Supreme Court’s latest decision regarding the power of bankruptcy judges to resolve claims between bankruptcy estates and their creditors is Wellness International Network, Ltd. v. Sharif, handed down on May 26, 2015. In its landmark 2011 ruling in Stern v. Marshall, the Court held that bankruptcy judges have limited authority under Article III of the Constitution to determine claims asserted by an estate against creditors. However, Stern left open the question, which has split lower courts, whether parties can nonetheless consent to bankruptcy court adjudication. In Wellness, the Supreme Court held that bankruptcy litigants may waive Article III rights, and suggested that parties may forfeit untimely objections to a bankruptcy court’s lack of authority.

For a fuller analysis and summary, click here for our memo on Wellness.

Mind the Gap: Supreme Court Partially Resolves Procedural Uncertainty Created by Stern v. Marshall
by | posted in: Bankruptcy Administration and Jurisdiction | 0

By Paul Hessler, Aaron Javian, and Robert Trust, Linklaters LLP

 On June 9, 2014, in a highly anticipated decision Executive Benefits Ins. Agency v. Arkison, Chapter 7 Trustee of Estate of Bellingham Ins. Agency, Inc., the U.S. Supreme Court partially resolved the procedural uncertainty created by the Court’s decision in Stern v. Marshall. In Stern, the Supreme Court analyzed the constitutionality of 28 U.S.C. § 157, which in relevant part defines certain matters as “core” or “non-core,” and authorizes bankruptcy courts to finally adjudicate “core” matters, but only to issue findings and conclusions subject to de novo review in “non-core” matters. The Stern Court held that Article III of the U.S. Constitution prohibits Congress from vesting bankruptcy judges with the authority to finally adjudicate certain claims that it had statutorily designated as Javian, AaronLinklaters LLP“core,” such as state law avoidance claims. The Stern Court did not, however, address how bankruptcy courts should proceed in such cases. The Supreme Court considered that procedural question in Executive Benefits and held that with respect to “core” claims that a bankruptcy judge is statutorily authorized but prohibited from finally adjudicating as a constitutional matter, the courts should deal with such claims as they would in “non-core” proceedings; that is, by issuing findings and conclusions subject to de novo review by district courts.

The Supreme Court’s holding makes clear that a wide-range of bankruptcy-related disputes that were previously heard and decided by bankruptcy courts must now be submitted for de novo review by district Trust, RobertLinklaters LLPcourts. This additional layer of judicial involvement could make bankruptcy litigation more cumbersome and casts doubt on the well-established expectation of the bankruptcy court system as the single, consolidated venue for adjudication of all matters related to a debtor’s bankruptcy case. Importantly, the Supreme Court did not decide, and it remains to be seen, whether parties can consent to a bankruptcy court’s final adjudication of core matters that otherwise fall outside of a bankruptcy court’s constitutional authority under Stern. The full memo can be read here.

Reports of Equity’s Death Have Been Greatly Exaggerated
by | posted in: Cramdown and Priority | 0

By Adam J. Levitin, Georgetown University Law Center

Mark Berman is veryLevitin Headshot kind to take notice of my article in his recent analysis of Law v. Siegel, posted on the HLS Bankruptcy Roundtable, here.  We agree on a great deal about the case and scope of equity practice.  A question persists about the scope of Law v. Siegel, though, and what it is proscribing when it reiterates the view that “whatever equitable powers remain in the bankruptcy courts must and can only be exercised within the confines of the Bankruptcy Code.”  The question, then, is which non-Code practices are properly characterized as “equity”.  My own view is that very little of modern bankruptcy practice is in fact “equity.”

Law v. Siegel, for example, should not affect such important non-Code practices as judicial interpretation of Bankruptcy Code statutory terms or judicially-created doctrines like substantial consolidation, which are sometimes mistakenly listed among the bankruptcy court’s “equitable powers”.  As I wrote earlier, though, because such practices are interstitial and formed as broad principles, they are, in my view, better understood as part of a federal common law of bankruptcy, and distinguished from equitable powers, which are based on case-by-case specifics, as in Law v. Siegel.  As interstitial powers, these lie outside any widening or narrowing of bankruptcy court’s equitable powers.

Moreover, the uncertainties about when actual equitable practices contradict statutes will continue.  In cases of clear contradiction, the interpretive result will be easy. But cases where it is unclear whether a conflict truly exists will continue to invite negotiation between and among the parties because of the cost and uncertainty of litigation.  Despite the Supreme Court’s best efforts, consideration of the equities will likely remain a part of our bankruptcy system.

For a fuller treatment of this subject, please continue here.

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