Capmark Decision Clarifies Insider Status for Market Participants
by | posted in: Bankruptcy Administration and Jurisdiction | 0

Authors: Marshall S. Huebner and Hilary A.E. Dengel, Davis Polk

Being deemed an “insider” has important ramifications for creditors in bankruptcy and can materially impact a creditor’s risk and recovery profile in any case.

In Capmark Financial Group Inc. v. Goldman Sachs Credit Partners L.P. (Capmark), the U.S. District Court for the Southern District of New York made several positive rulings on key insider status issues favorable to market participants who regularly find themselves, sometimes through affiliated entities, playing multiple roles with respect to a borrower counterparty.  Embracing the arguments advanced by the Goldman Sachs lending entities, the court rejected Capmark’s attempts to cast the lenders as “insiders” of Capmark based on an indirect equity interest in Capmark held by funds managed by certain of their affiliates – holding that Capmark failed to allege facts that would show the “extraordinary circumstances” required for veil piercing and stating that participation in an arm’s length transaction as an ordinary commercial lender will not give rise to non-statutory insider status.

The Capmark decision provides comfort and greater certainty to market participants that, absent falling into one of the expressly enumerated categories of insiders under the Bankruptcy Code, insider status should not attach to creditors who neither control a company nor deal with it at less than arm’s length.  The case is further discussed here in Capmark:  Clarifying Insider Status for Market Participants (ABI Journal, January 2014).

Bankruptcy Step Zero
by | posted in: Bankruptcy Administration and Jurisdiction | 0

Authors: Douglas G. Baird and Anthony J. Casey

In RadLAX Gateway Hotel, LLC v Amalgamated Bank, the Supreme Court’s statutory interpretation focuses on an emerging theme of its bankruptcy jurisprudence: the proper domain of the bankruptcy judge. While one might expect the Court to approach that question of domain as it has for administrative agencies, that is not the approach taken. This article explores the Court’s approach to bankruptcy’s domain. In doing so, we connect three principal strands of the Court’s bankruptcy jurisprudence. The first strand, embodied in Butner v United States, centers on the idea that the bankruptcy forum must vindicate nonbankruptcy rights. The second, most recently addressed in Stern v Marshall, focuses on the limits of bankruptcy judges in deciding and issuing final judgment on the issues before them. Bankruptcy judges must limit themselves to deciding issues central to the administration of the bankruptcy process. RadLAX is the continuation of a third strand that makes it plain that the Court reads ambiguous provisions of the Bankruptcy Code to narrow the range of decisions over which the bankruptcy judge may exercise her discretion — at least when the exercise of that discretion might impact nonbankruptcy rights. The resulting bankruptcy jurisprudence is in stark contrast with the Court’s approach in administrative law. This paper attempts to make sense of this state of affairs and connect it with the realities of bankruptcy practice today.

The article is available here on SSRN.

Bankruptcy and Economic Recovery
by | posted in: Bankruptcy Administration and Jurisdiction, Workouts and Pre-Packs | 0

Authors: Thomas Jackson & David Skeel

A striking feature of the recent economic crisis was the long period of subpar economic growth that continued even after the crisis had officially ended.  Although discussion about how to spur economic recovery has focused on the efficacy of Keynesian stimulus spending, this is only one of many factors that might plausibly encourage growth.  For a book entitled “Financial Restructuring to Sustain Recovery,” published by the Brookings Institution, we were asked to discuss the role that bankruptcy policy plays, or might play, in economic recovery.

After summarizing how bankruptcy posits a collective solution to a common pool problem of individual creditors and thereby improves the efficient use of assets, we consider two obstacles to its effectiveness.  The first is that bankruptcy proceedings often seem to begin too late.  The increased influence of debtors’ principal lenders probably counteracts this problem in part, but we suspect not fully.  We consider a wide range of strategies that lawmakers might use to encourage timely filing, some of which are fairly simple, while others are more speculative.

The second major issue is the relationship between bankruptcy and jobs.  The question whether bankruptcy should be used to protect jobs is a recurring theme that came to the fore most recently when the government used bankruptcy to bail out Chrysler, justifying its intervention as preserving jobs.  We caution that distorting the standard bankruptcy rules—focused on efficient use of assets—to save jobs in the short run may have more problematic effects overall.

The full-length article can be found here.

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