WSJ Examiners — Insider Pay in Bankruptcy

The Wall Street Journal’s Bankruptcy Beat recently focused on the ever-controversial topic of executive pay. Reflecting on a number of recent bankruptcy cases that involved the “redaction” of key employee names or compensation figures, the question for the Examiners was this: when it comes to pre-bankruptcy insider pay, how much disclosure is enough?

As Brett Miller points out, the answer to this question will depend on who you are in relation to the bankruptcy process. He advocates balancing competing interests on a case-by-case basis.

Practitioners Sharon Levine, Shaunna Jones, and Richard Chesley point out the quid pro quo nature of enhanced disclosure, describing it as a cost that firms must pay in order to access the benefits of bankruptcy protection. As Ms. Jones puts it, the benefits of the bankruptcy process “are not without a price, and one cost is the requirement that the debtor be transparent about how it uses its assets”.

Ms. Levine, along with Lisa Donohue, voiced concerns that a lack of transparency breeds mistrust and will make negotiations more difficult, conflicting with the consensual objectives inherent in the Chapter 11 procedure. Anders Maxwell makes the analogous point that disclosures are needed to “more adequately inform an ongoing debate” on executive pay generally which, if “left unaddressed, has the potential to sap public confidence in business and markets.”

Mark Roe also considers the wider context of Chapter 11 practice and history, particularly in relation to Key Employee Retention Plans (“KERPs”) and fraudulent conveyances. Ultimately, he says, disclosure is “a matter for judicial decision, not executive discretion.” J. Scott Victor makes the further point that unilateral redaction “unfairly benefits large debtors while requiring other debtors to follow the rules.”

Businesspeople who commented—Jack Butler and Marc Leder—sounded a contrary note, pointing out that the debate focuses only on public disclosure, as parties in the case generally have access to the business’ financial information. Mr. Butler highlights the risk of harassment that executives might face, while Mr. Leder states, in concurrence with Perry Mandarino, that “compensation data without any context can cause outside observers . . . to leap to uninformed and incorrect assumptions”.

(This post was drafted by Samuel Parsons, L.L.M. ’16.)

Restructuring the European Business Enterprise: The EU Commission Recommendation on a New Approach to Business Failure and Insolvency

By Horst Eidenmueller and Kristin van Zwieten, University of Oxford

In 2014, the European Commission issued a recommendation on the design of restructuring laws in EU Member States (the “Restructuring Recommendation,” or RR). It was followed in 2015 by the enactment of a recast version of the European Insolvency Regulation (EIR). These initiatives were intended to be complementary: the former was designed to improve the procedures available under national law for the restructuring of business debtor liabilities; the latter to improve the efficacy of these procedures in cross-border cases. Both initiatives have been driven by the view that the existing legal infrastructure for (cross-border) business restructurings in Europe is inadequate.

In this paper, we critically review the RR and put it into the context of the reform of the EIR. We find that although the two initiatives were intended to be complementary, they do not dovetail perfectly: procedures of the kind contemplated in the RR will not necessarily be eligible to fall within the scope of the recast EIR, so as to benefit from its rules on recognition and enforcement in cross-border cases.

In relation to the RR, we find that the Commission is right to push towards some level of harmonisation in Member States’ restructuring laws – regulatory competition is not a sensible regulatory alternative. However, we criticise both the methodology and scope of the RR, which leaves significant room for residual diversity in Member States’ laws, and ignores the complicated interaction between Member States’ existing insolvency laws and the restructuring procedures contemplated by the Commission.

We also take issue with some of the substantive recommendations made for the design of such procedures, arguing that the Commission wrongly requires evidence of financial difficulties or a likelihood of insolvency as the entry test, and that the process it contemplates is susceptible to abuse by sophisticated financial creditors at the expense of outside creditors and/or the debtor. We propose an efficient debtor-in-possession (DIP) regime as an alternative that could be initiated regardless of a firm’s solvency provided that it is economically viable and that the filing is not abusive.

For the full article see here.

The Trouble with Unneeded Bankruptcy Reform: The LSTA’s Response to the ABI Chapter 11 Commission Report

[Editors’ Note: The post below from the Loan Syndications and Trading Association (LSTA), summarizes their Report responding to the ABI Commission Report and Recommendation on the Reform of Chapter 11, released in December of 2014; for our previous post on the ABI report see here.]

The LSTA Report argues that:

  • The Commission Report is based on the “perception” that the system has failed. But that perception is not supported by reliable empirical evidence. The data that do exist generally support the conclusion that the system is functioning well.
  • The principal objective of current bankruptcy law is the maximization of value for all stakeholders. With few exceptions, it respects principles of non-bankruptcy law regarding the distribution of that value, as reflected in bankruptcy’s “absolute-priority” rule. The Commission Report breaks from those principles, arguing that market changes have led to distributions of value in bankruptcy that are “subjectively unfair,” and seeks to achieve results that it believes are fairer. But a clear, objective process that respects non-bankruptcy entitlements wherever possible is fair.
  • Many of the changes proposed by the Commission would reduce recoveries by secured lenders in the event of default. That would necessarily result in the increased cost, and reduced supply, of secured credit.

The LSTA Report reviews a number of specific proposals in the ABI Commission Report, including (i) calculating adequate protection based on a hypothetical foreclosure value; (ii) limitations on 363 sales and DIP loan provisions; (iii) “redemption option value”—which would require senior creditors in large bankruptcy cases to pay junior creditors even when the senior creditors have not been paid in full; and (iv) proposals for small and medium size enterprises. The LSTA concludes that these and other proposals would add cost and complexity to, and lengthen Chapter 11 cases.

For the full report, see here.

TCEH Bankruptcy: SDNY Transfers Delaware Trust Company v. Wilmington Trust N.A. Intercreditor Dispute to Delaware Bankruptcy Court, Reaffirming Broad View of Bankruptcy Jurisdiction

By Mark Ellenberg, Howard Hawkins, Ivan Loncar, Ellen Halstead, Michele Maman and Tom Curtin of Cadwalader Wickersham & Taft LLP

In Delaware Trust Company v. Wilmington Trust N.A. the United States District Court for the Southern District of New York found that a complaint based on an intercreditor agreement among secured creditors of Texas Competitive Electric Holdings LLC constituted a core proceeding.  Accordingly, the court denied a motion to remand the case to New York state court, where it had originally been filed, and also transferred the case to the US District Court for the District of Delaware.  The case was subsequently referred to the bankruptcy court presiding over the TCEH bankruptcy cases.  Plaintiff had alleged that the dispute, which involved allocation of adequate protection payments ordered by the Delaware Bankruptcy Court, was an intercreditor dispute that turned solely on the interpretation of a prepetition intercreditor agreement and, accordingly, should be decided in state court.  As such, the issue before the District Court was whether a New York court or the Delaware Bankruptcy Court should resolve the intercreditor dispute.

The District Court ruled that the dispute was core because the dispute would have no meaningful existence but for TCEH’s bankruptcy filing, as the ability to receive adequate protection derives solely from the Bankruptcy Code.  In addition, the Court found that the dispute was core because the intercreditor issue would likely arise again in the context of plan confirmation.   The decision is important because it reaffirms the often-challenged principle that contractual disputes solely among creditors may nonetheless qualify as “core” proceedings where, as here, the underlying dispute could only arise in the context of a bankruptcy proceeding.

For our full memo, please click here.