Planning for an American Bankruptcy Epidemic

By Ben Iverson (Brigham Young University), Mark Roe (Harvard Law School)

Ben Iverson
Mark Roe

The COVID-19 pandemic looks likely to cause a surge in bankruptcies in the United States—conceivably a surge as rapid and as substantial as the U.S. court system has ever experienced. A significant and rapid increase in judicial capacity to manage the flood of cases is more than appropriate, we argued in a recent op-ed.

Bankruptcy filings in the United States have historically peaked several months after a surge in unemployment. And American unemployment is now rising at an unprecedented rate, with more than 30 million claims filed in the last six weeks. If historical patterns hold, the bankruptcy surge would be on track to be the largest the American bankruptcy system has experienced.

Bankruptcy works well enough and quickly enough in normal times, particularly for restructuring large public firms. But it cannot work as well, and the economy will suffer, if the bankruptcy system is overloaded. Delays in critical vendor orders, DIP loan approvals, pre-packaged bankruptcy confirmations and the like could all slow commerce unnecessarily.

The full op-ed is available HERE.

Bankruptcy and Aircraft Finance

By Franklin H. Top III, Stephen R. Tetro, Richard F. Klein, James M. Heiser (Chapman and Cutler LLP)

Franklin H. Top III
Stephen R. Tetro
Richard F. Klein
James M. Heiser

Hundreds of billions of dollars are invested in aircraft equipment in the United States. With the airline industry suffering devastating losses resulting from the COVID-19 pandemic, Chapman and Cutler LLP recently released its Bankruptcy and Aircraft Finance Handbook. The handbook aims to help aircraft investors navigate the numerous challenges typically faced in airline bankruptcies. The handbook seeks to provide an understanding of the unique aspects of § 1110 of the Bankruptcy Code and other related provisions that govern the treatment of claims in bankruptcy involving aircraft. It also outlines the state law remedies available to aircraft investors outside of bankruptcy.

In addition, the handbook seeks to demystify the complex structures behind these investments, including secured loans, sale/leasebacks, operating leases, pass-through certificates, leveraged leases and public debt, including equipment trust certificates or enhanced equipment trust certificates. Each structure can present its own unique challenges in bankruptcy.

We also provide a checklist of considerations for aircraft investors drawn from over 30 years of experience, and identify some of the common challenges that investors face in airline bankruptcies. We provide investors with an understanding of the legal protections available in the event an aircraft investment heads south, as well as share lessons learned from prior airline bankruptcies from the 1990s to the present

The full article is available here.

Bankruptcy Tourism and the European Union’s Corporate Restructuring Quandary: The Cathedral in Another Light

By Samir D. Parikh (Lewis & Clark Law School)

Samir D. Parikh

For the last decade, the European Union has been reconceptualizing its corporate restructuring framework with the hope of bolstering capital markets and improving cross-border lending. Unfortunately, the system remains plagued by two intractable problems: divergent substantive law at the Member State level and jurists unaccustomed to guiding reorganization cases. The result is a system beset by uncertainty and disparate treatment. The EU is intent on addressing these problems, but progress has been elusive. The EU must work through recommendations and directives to encourage Member States to align substantive restructuring law with policy design. But Member States have been unresponsive to the EU’s recent efforts. The prospect of addressing these intractable problems in the foreseeable future is grim. Therefore, this Article breaks with current scholarship and urges the EU to adopt a radical alternative. The EU should consider making legal and structural changes that will facilitate bankruptcy tourism. I argue that affording corporations increased discretion as to the location of restructuring cases will aid in creating judicial hubs of optimal law and experienced jurists. The EU has the power to adopt my recommendations by simply modifying its own law and procedure, which should accelerate implementation timelines.

Ultimately, economists foresee an impending financial correction. The EU’s restructuring framework is unprepared to offer predictable and comprehensive reorganization outcomes for the next wave of distressed corporations. This Article proposes a novel vantage point from which to assess policy alignment.

For previous Roundtable posts on for bankruptcy tourism, see Wolf-Georg Ringe, “Bankruptcy Forum Shopping in Europe.”

The full article is available here. Forthcoming in the University of Pennsylvania Journal of International Law.

Pre-packaged Insolvency in India: Lessons from USA and UK

By Himani Singh (New York University School of Law)

Himani Singh

Corporate rescue is used as a pre-cursor to bankruptcy filing to provide the creditor classes of a stressed debtor with necessary means to formulate a plan of reorganization to recover their dues and make the business of the debtor sustainable again. A prepackaged bankruptcy commonly referred to as “Pre-packs”, is a form of corporate rescue which may involve any element or combination of restructuring methods to be undertaken in respect of a debtor.

Pre-packaged bankruptcy finds its roots in United States and United Kingdom; but is yet to be formally integrated in the Indian bankruptcy regime. While the latest Insolvency and Bankruptcy Code, 2016 has been helpful in improving the stressed asset statistics, the statute is still undergoing teething troubles and has scope for bringing in many improvements such as introducing Pre-packs. The concept of Pre-packs however is niche in India and its viability has been extensively debated. There have been apprehensions that the Indian market is not developed enough to allow out of court of restructuring, but some of the recent decisions by the National Company Law Tribunals have indicated a different trend.

In this backdrop, this term paper discusses the basic features of Indian insolvency structure and how Pre-packs will fare in the market given the current regulatory regime. The paper analyses the corporate insolvency resolution process in India, highlights specific challenges to introduction of Pre-packs and presents a holistic overview of the benefits as well as disadvantages that Pre-packs would bring along with them.

The full article is available here.

Bankruptcy’s Role in the COVID-19 Crisis

By Edward R. Morrison and Andrea C. Saavedra (Columbia Law School)

Edward R. Morrison
Andrea C. Saavedra

Current COVID-19 policies treat bankruptcy law as a last resort for stressed businesses and consumers. We think that’s a sensible approach for small businesses and consumers, but not for large corporations. What many small businesses and consumers need now is quick access to liquidity and other forms of forbearance or debt forgiveness, not the debt-discharge of bankruptcy. Even for those who need a debt-discharge, it makes sense to offer them liquidity now and thereby ease the burden on our bankruptcy system, which could be overwhelmed by a flood of filings. In our view, it’s better to stabilize households and small businesses immediately and worry about restructuring their balance sheets after the crisis ends.

For large corporations, however, bankruptcy should be a front-line policy tool. Many were financially fragile before the current crisis, due to high leverage or operational problems. For them, government-backed financing should be provided during a bankruptcy process that cures these problems and forces investors, not taxpayers, to bear the costs of cure. Government action should save businesses (and jobs), not investors. This is a crisis-tested policy response, as we saw in the 2008 Financial Crisis: Both Chrysler and General Motors received government-backed financing during their bankruptcy cases. To be sure, an increase in filings by large corporations would burden our bankruptcy courts but our courts, and the professional bar and consultant industry that supports them, are well prepared to assist these corporations (and fairly represent and protect all parties’ interests), as they have done in past crises.

The full article is available here, and a more detailed summary can be accessed here.

COVID-19 Impacts on Landlords of Retail Debtors

By Scott K. Charles, Amy R. Wolf, Michael H. Cassel (Wachtell)

Scott K. Charles
Amy R. Wolf
Michael H. Cassel

This memorandum addresses one of the impacts of COVID-19 on retail bankruptcies. Several retailers in chapter 11 have sought to suspend their cases given the inability to operate or conduct going out of business sales during the pandemic. Courts in some cases have granted requests for extraordinary relief, which have included excusing the payment of rent notwithstanding the requirements of the Bankruptcy Code that nonresidential leases of real property be paid on a current basis.

The full article is available here.

The Late Prof. Harvey R. Miller, A Man for All Seasons: A Student’s Tribute

By Jay Rao (University of California, Berkeley, School of Law)

Jay Rao

Prof. Harvey R. Miller passed away after his battle with amyotrophic lateral sclerosis, commonly called Lou Gehrig’s disease, in 2015.  Before and after his passing, his substantial contributions and legacy have been discussed at length.  An exceedingly rare individual, he had an extraordinary impact on the field of restructurings and bankruptcies, the large law firm community, the business landscape, academic institutions, and, perhaps most important, the younger generation, including his classroom students.  This brief article, written by his former student at Columbia Law School, is intended as a tribute to this gifted practitioner, scholar, leader, and teacher, focusing on the reason this particular individual was so unique and compelling to the young men and women he encountered and how he transcended the practice and, in many ways, his era.

The full tribute is available here.

This DIP Loan Brought to You by Someone Who CARES!

By Thomas J. Salerno, Gerald Weidner, Christopher Simpson, and Susan Ebner, (Stinson LLP)

Tom Salerno
Gerald Weidner
Chris Simpson
Susan Warshaw Ebner

 

 

 

 

 

 

 

On March 27, 2020, the Coronavirus Aid, Relief, and Economic Security (CARES) Act was enacted into law. The CARES Act is reported to be “twice as large as any relief ever signed,” and will provide $2.2 trillion in relief to US businesses (with another $1 trillion being promised in the near future). While bankruptcy lawyers are aware that CARES expanded the debt limitations for eligibility for the Small Business Bankruptcy Reorganization Act, there could (and should) be another substantial implication for the brave new bankruptcy world—a new potential source of DIP financing. It is in this context that the CARES financing provisions become particularly interesting.

The authors recognize that there are established underwriting guidelines for SBA loans. Moreover, the existing regulations (and revisions in process) will come into play as to availability of these loans. Accordingly, while there is no express prohibition for some of the loans referenced herein from being accessed in a Chapter 11 proceeding, a de facto prohibition likely comes from existing underwriting guidelines. If the overarching purpose of the CARES Act is to assist businesses in weathering the economic storm while the COVID 19 virus ravages the economy, the authors argue that such underwriting guidelines can, and must, be loosened in order to allow application of some of these programs in Chapter 11 proceedings so that they can be most effectively implemented to stabilize businesses, preserve jobs, continue to keep employees and businesses on the tax rolls, etc.

In this way the stimulus funds will be used where they can be most effectively deployed. If not, those funds will be the equivalent of the federal government sending rubber rafts to a drought stricken area—a sign that the government cares, perhaps, but of certainly no real use to address the problem at hand. The full article is available here.

Coronavirus Aid, Relief, and Economic Security Act Expands the Scope of the Small Business Reorganization Act

By Jessica Ljustina (Harvard Law School)

Jessica Ljustina

Congress passed the Small Business Reorganization Act of 2019 (“SBRA”) to streamline and reduce the cost of bankruptcy for small businesses; it went into effect on February 19, 2020.

As originally enacted, the Act allowed certain small businesses with no more than approximately $2.7 million of debt to file for bankruptcy under a new subchapter V of chapter 11 of the Bankruptcy Code.

The recently enacted Coronavirus Aid, Relief, and Economic Security (“CARES”) Act has temporarily increased the debt limit to $7.5 million for cases commenced in the next year. That may greatly expand the SBRA’s scope, as Professor Robert Lawless has estimated that over 50% of businesses that filed under chapter 11 between 2013 and 2017 had debt below $7.5 million.

The full article is available here.

Updated Overview of the Jevic Files: How Courts Are Interpreting and Applying the Supreme Court’s Ruling on Structured Dismissals and Priority Skipping

By Shane G. Ramsey and John T. Baxter (Nelson Mullins)

Shane G. Ramsey
John T. Baxter

The U.S. Supreme Court in Czyzewski v. Jevic Holding Corp., 137 S.Ct. 973 (2017), addressed the issue of chapter 11 debtors using structured dismissals to end-run the statutory priority rules. The Court’s ruling preserved the priority system, holding that the bankruptcy court could not approve a structured dismissal of a chapter 11 case that provided for distributions that failed to follow the standard priority rules unless the affected creditors consented to such treatment. Although the Bankruptcy Code does not expressly apply its priority distribution scheme to a structured dismissal, the Court clarified that courts should do so.

As a way to track how bankruptcy courts across the country are applying the ruling in Jevic, the Nelson Mullins Bankruptcy Protector has introduced a new periodic series: the Jevic Files. As of December 31, 2019, the Jevic Files has collected and summarized twenty-one cases across nineteen jurisdictions. While the majority of the cases involved structured dismissals in the context of a chapter 11 case, courts have also applied the ruling in Jevic to the dismissal of chapter 13 plans; the priority of trustee payments in a chapter 7 case; and even a state court foreclosure hearing that came on the heels of a dismissed chapter 11 case. As Jevic continues to be interpreted and applied in bankruptcy (and other) courts throughout the country, we will continue to keep an updated summary of cases through the Jevic Files.

The article is available here.

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