The Excluded Asset Gap: Why Floating Charges Capture Realizations of Unsecured Assets
by | posted in: Bankruptcy, Bankruptcy Roundtable Updates, Secured Lenders | 0

By Matteo Clarkson-Maciel (Willkie Farr & Gallagher) and Paul Fradley (South Square Chambers)

Matteo Clarkson-Maciel
Paul Fradley

Will the proceeds of the sale of an asset, excluded from the scope of a floating charge governed by English law, be captured by that charge when sold after the crystallization of that charge? The answer turns upon the “Excluded Asset” definition found in the floating charge debenture and poses a key question with practical consequences for lenders, insolvency officeholders and other creditors. If the proceeds from the realization of an excluded asset are captured by the floating charge and distributed to the debenture-holder, the value of their security will be significantly enhanced, and the effect of the exclusion of assets from the charge will be reduced considerably in insolvency. A floating charge captures assets within a class of assets[1] (both present and future)[2] and allows the security provider to use those assets in the ordinary course of business.[3] A floating charge will cover property within a specified class even if assets within the class are acquired after the appointment of an administrator or where the charge has crystallized.

There is a poorly understood lacuna which, in principle, could entitle debenture-holders to the proceeds of assets, even where excluded from the scope of a floating charge, when sold by insolvency practitioners. We call this the “Excluded Asset Gap”. Professional advisers in England need to consider the Excluded Asset Gap when designing and drafting security packages under English law. The crux of the Excluded Asset Gap is the law of floating charges and the interaction between floating charges and company assets following (i) crystallization of that floating charge and (ii) an insolvency process in England & Wales.

An Excluded Assets clause, limiting the assets over which a floating charge applies, will not exclude the proceeds of a realization of assets from becoming subject to a floating charge unless specifically contemplated. This is the case regardless of whether the realizations were made before or after the initiation of an English administration process.[4] When charged assets are realized by the insolvency practitioner, they are not necessarily treated in the same way in the security package perimeter as was their progenitor. An asset not subject to a floating charge (because it falls outside the class of assets to which the charge applies) will, when converted or exchanged so that the new asset falls within the class of assets, fall within the scope of the floating charge. The initiation of administration does not change the nature of the sale of assets being realized.

Some ways of addressing the Excluded Asset Gap include specifying that Excluded Assets include: (i) the excluded assets specifically and their proceeds; and (ii) any Excluded Asset realizations are paid into a specific, designated bank account which is itself defined as an Excluded Asset.

Insolvency practitioners will need to make an assessment before the distribution of the estate. If an insolvency practitioner incorrectly assumes that the proceeds of an Excluded Asset remain excluded, their decision may give rise to a claim by secured creditors regarding the loss incurred by their actions. Lenders, too, should be weary of insolvency practitioners intuitively believing that proceeds of Excluded Assets remain excluded. This will likely result in material losses in recovery by the lenders.

Click here to read the full article, which first appeared in the September 2022 edition of Butterworth’s Journal of International Banking and Financial Law.

[1] Re Yorkshire Woolcombers [1903] 2 Ch 284

[2] See Holroyd v Marshall (1862) 10 H.L. Cas. 191 for floating charges over future property.

[3] See Ashborder BV v Green Gas Power Ltd [2004] EWHC 1517 (Ch).

[4] Ferrier & Australian Factors (Qld) Pty v Bottomor (1972) 126 CLR 597

 

[Crypto Bankruptcy Series] Staking, Yield Farming, Liquidity Mining, Crypto Lending – What are the Customer’s Risks?
by | posted in: Bankruptcy, Bankruptcy Roundtable Updates, Crypto-Bankruptcy Series, Cryptocurrency, International and Comparative, Priority | 0

By Matthias Lehmann et al. (Universitat Wien)

Matthias Lehmann

Note: This post is the fourth post in a series of posts on bankruptcies of cryptocurrency companies and the emerging issues they pose. Previous posts in the series include:

1. The FTX Bankruptcy: First Week Motions, Jurisdictional Squabbling, and Other Unusual Developments, by Megan McDermott

2. Quantifying Cryptocurrency Claims in Bankruptcy: Does the Dollar Still Reign Supreme?, by Ingrid Bagby, Michele Maman, Anthony Greene, and Marc Veilleux

3. The Public and the Private of the FTX Bankruptcy, Diane Lourdes Dick and Christopher K. Odinet

This series is being managed by the Bankruptcy Roundtable and Xiao Ma, SJD at Harvard Law School, xma [at] sjd [dot] law [dot] harvard [dot] edu.

Check the HLS Bankruptcy Roundtable periodically for additional contributing posts by academics and practitioners from institutions across the country.

***

The consequences customers face in case a crypto exchange like FTX goes bankrupt are enormous, but they may be even more severe if they had previously staked their digital assets or engaged in a similar transaction. As a matter of fact, it is not a far-fetched to fret that a bankruptcy court may construe such a transaction as entailing an asset transfer to the exchange or a third party. In this case, the crypto assets – Bitcoin, Ether or token – would be considered as a part of the insolvency estate or as belonging to somebody else. Customer would have no propriety rights in them and be relegated to the status of mere creditors, with the prospect of receiving only a fraction of the asset’s value.

In this context, it is of paramount importance how the transaction in question is to be legally characterized. Characterization is the process by which an empirical phenomenon is attributed to a particular legal category. This exercise is not always easy, and it is particularly difficult with regard to the operations in the crypto space. There is hardly any literature on them, because they are in large part novel and unprecedented. The legal nature and effects of such operations depend in the first place on the terms and conditions to which they are submitted. But many of them use highly general notions and are legally unprecise. To achieve definite results, it is likely for a court to intuitively trying to associate the transactions described with a known category. This will be important in two respects.

First, the category chosen for a certain transaction will inform the conditions for its validity as well as its effects. In particular, it will decide whether the customer has transferred her rights fully and thus bears the full risk of the counterparty’s insolvency, or whether the transaction merely creates a more limited right in rem of the crypto exchange or a third party.

Second, characterization is also important to identify the national law governing these transactions. Conflict-of-laws rules will be applied by a bankruptcy court to determine, as a preliminary question, whether an asset forms part of the insolvency estate or whether it belongs to another person. There are different conflict-of-laws rules for different types of transaction, which point to different laws depending on the transaction’s characteristics.

Which category a transaction is shoehorned in will thus be decisive in several ways for the position of the crypto investor. But how can they be legally characterized?

Admittedly, this is not easy. To take just one example, the legal nature of staking is quite doubtful. Potentially, it could be considered as a secured transaction because it enables to ‘slash’ the investor’s crypto asset in case of manipulative activity or inactivity of a node. But it may also be compared to a deposit or a loan of cryptos. It is even not excluded to view staking through the lenses of a partnership that may exist between all nodes of a platform, or as being constitutive of a trust.

Similar problems arise for yield farming, liquidity mining and crypto lending. These operations must be distinguished from staking and from each other, even though the lines are often blurred. How they are to be legally characterized is highly relevant for the position of the crypto investor.

Any characterization needs to reflect the terms and conditions, the typical intention of the parties, and the economic purpose of the transaction. But above all, it should be informed by the consequences it has for investor protection. Unless clearly indicated in the agreement and absolutely indispensable for achieving the purpose of the transaction, it should not be assumed that the investor intended to part with her ownership or other rights of entitlement. Where the terms and conditions are equivocal or ambiguous about this point, they should be interpreted against the person that formulated them, according to the time honoured “contra proferentem” principle for constructing constructs. When and for which transactions a transfer of property or other rights can be presumed will be the decisive question. The debate about this problem has just begun. Felix Krysa, Emeric Prévost, Fabian Schinerl, Robert Vogelauer and I have examined different options and made suggestions for precise characterization in a new paper.

Click here to read the full article.

Roundup: Ultra Petroleum and Contractual Make-Wholes
by | posted in: Bankruptcy Roundtable Updates, Chapter 11, Default-Rate Interest, Statutory Interpretation | 0

The Fifth Circuit held in October of this year in In re Ultra Petroleum Corp., 51 F.4th 138 (5th Cir. 2022) that a contractual make-whole provision in the debt instruments of certain unsecured creditors was unmatured interest under Section 502(b)(2). In this unusual case, where the debtor became solvent after filing for bankruptcy, the Fifth Circuit also held that the Solvent Debtor-Exception applied to claims for unmatured interest. The Fifth Circuit then determined that the Make-Whole Amount was a valid contractual claim and held that Ultra must pay the contractual Make-Whole Amount under the Solvent Debtor-Exception. Lastly, the Fifth Circuit held that an unimpaired creditor of a solvent debtor is entitled to interest at the bargained-for rate rather than the Federal Judgment Rate. In reaching this conclusion, the Fifth Circuit interpreted Section 726(a)(5)’s interest at the legal rate provision (relevant to a plan under Chapter 11 through Section 1129(a)(7)(A)) as a floor, rather than a ceiling, for interest payable by a solvent debtor.

Several law firms have now written memos summarizing this impactful decision. Weil summarizes the history of the Ultra Petroleum series of cases. Davis Polk suggests that the decision may have far-reaching consequences on the market use of make-whole provisions given the popularity of the Southern District of Texas as a forum for bankruptcy petitions. Proskauer notes that the Fifth Circuit’s decision addressed only the rights of an unsecured creditor with respect to a make-whole provision and suggests that Section 506(b) provides a legal basis for recovery of a make-whole provision by an oversecured creditor.

(This post was authored by Wesley Sheker, J.D. ’23.)

Financial Restructuring Roundtable–Call for Papers
by | posted in: Bankruptcy Roundtable Updates | 0

Note: The Harvard Law School Bankruptcy Roundtable is pleased to share the call for papers for the Financial Restructuring Roundtable below.  The Harvard Law School Bankruptcy Roundtable is not affiliated with, and makes no representations regarding, the Financial Restructuring Roundtable.  We will continue our regular weekly posts next week.

 

 

 

Financial Restructuring Roundtable

Call for Papers

April 13, 2023 [New Date]

New York City

The Financial Restructuring Roundtable (formerly the West Coast Bankruptcy Roundtable) will be held in person on April 13, 2023 in New York City. Spearheaded by Tony Casey, Samir Parikh, Robert Rasmussen, and Michael Simkovic, this invitation-only event brings together practitioners, jurists, scholars, and finance industry professionals to discuss important financial restructuring and business law issues.

The Financial Restructuring Roundtable invites the submission of papers. Selected participants will receive a $2,000 stipend and have the opportunity to workshop their papers in an intimate, collegial setting. Last year’s attendees included Barry Adler, Ken Ayotte, Douglas Baird, Bruce Bennett, Susan Block-Lieb, Jared Ellias, Anna Gelpern, Marshall Huebner, Ed Morrison, Mark Roe, David Skeel, and Jamie Sprayregen.

The Financial Restructuring Roundtable seek papers exploring diverse topics and will be interested in interdisciplinary perspectives. Papers will be selected through a blind review process. Scholars are invited to submit a 3 – 5 page overview of a proposed paper. Submissions may be an introduction, excerpt from a longer paper, or extended abstract. The submission should be anonymized, and – aside from general citations to the author’s previous articles – all references to the author should be removed.

Please submit proposals by October 10, 2022. Invitations will be issued via email by November 15.  Working drafts of papers should be available for circulation to participants by March 10, 2023.

Proposals – as well as questions and concerns – should be directed to Samir Parikh at sparikh@lclark.edu.

The Financial Restructuring Roundtable is hosted by the University of Chicago Law School, USC Gould School of Law, and Lewis & Clark Law School in partnership with Sidley Austin.

Due Process Alignment in Mass Restructurings
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Chapter 11, Mass Torts | 0

By Sergio J. Campos (University of Miami School of Law) and Samir D. Parikh (Lewis & Clark Law School)

Sergio J. Campos
Samir D. Parikh

Mass tort defendants have recently begun exiting multi-district litigation (MDL) by filing for bankruptcy. This new strategy ushers defendants into a far more hospitable forum that offers accelerated resolution of all state and federal claims held by both current and future victims.

Bankruptcy’s resolution promise is alluring, but the process relies on a very large assumption: future claimants can be compelled to relinquish property rights – their cause of action against the corporate defendant – without consent or notice. Bankruptcy builds an entire resolution structure on the premise that the Bankruptcy Code’s untested interest representation scheme satisfies Due Process strictures. This Article questions that assumption, and identifies two compromised pillars. Primarily, the process for selecting the fiduciary that represents future victims’ interests (FCR) is broken. Further, the process by which courts estimate the value of thousands of mass tort claims places too much pressure on a jurist unfamiliar with personal injury claims. These compromised pillars raise the risk that the settlement trust will be underfunded and fail prematurely. In this outcome, future victims would have no recourse but to argue that the process did not satisfy Due Process, and the settlement should be unwound.

This Article proposes that the risk of a prematurely insolvent victims’ trust can be reduced considerably by making two adjustments. Our proposal seeks to (i) rebuild the FCR construct in order to ensure that future victims’ interests are effectively represented, and (ii) recalibrate the claim estimation process by facilitating coordination between the bankruptcy court and nonbankruptcy trial courts.

The full article is forthcoming in the Fordham Law Review and is available here.

 

Holdout Panic
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Insider Status | 0

By Stephen J. Lubben (Seton Hall Law School)

Stephen J. Lubben

It has been recognized that corporations themselves are designed to promote collective action, and thus “a primary function of corporate law is to coordinate and constrain individual behavior – even profit-motivated behavior.”  Given that corporate debt instruments largely serve a governance function amongst creditors, it is not surprising that they, like corporations themselves, tend to quash individual action in favor of the group.  But the divergence between individual and group interests comes to the fore in times of stress.

An individual creditor can be either an oppressed minority investor or a holdout.  Majority holders can be either the group seeking an efficient and beneficial restructuring, or effectively an insider group that collaborates with more formal insiders to extract value from minority creditors.  Which reality is genuine is highly dependent on the particular facts of the case at hand, and may be quite difficult for an outsider to discern.

Restructuring law attempts to balance this uncertainty by providing a series of checks and balances.  In general, restructuring law begins with a preference for the collective, but encircles the collective with a series of rules that protect individual creditors from abuse.  

Some of the balance comes from the agreements that create the creditor relationship or duties related to those agreements; however, other aspects of balance are external and come from outside structures like the Bankruptcy Code or the Trust Indenture Act.  In general, the basic challenge here is to find the point at which the illegitimate power of holdouts is reduced without trampling on the legitimate rights of minority creditors.  It is very easy to avoid holdouts if the majority always wins.

My paper explores the ways in which modern restructuring practice has moved toward that “majority always wins” extreme.  This change was not part of some grand plan, but rather the result of a series of incremental decisions, each reacting to perceived abuses by holdouts.  But in indulging our fears of holdouts, we have lost the essential balance of the system.

Take the example of the RSA – or restructuring support agreement – that, in a variety of ways, can represent a generalized assault on the requirement in section 1123(a)(4) that a chapter 11 plan must “provide the same treatment for each claim or interest of a particular class.”  RSAs achieve this end by providing for backstop fees paid to a select group that will never have to backstop anything or DIP loans that the debtor does not really need.

In one recent case, pre-bankruptcy the debtor contracted with a sub-group of its secured noteholders to have those noteholders make an interest payment on the notes.   That is, some of the secured noteholders paid the interest payment due to all the secured noteholders.

In exchange, these distinctive noteholders received new “super-priority secured notes” secured by a lien that surpassed the old secured notes’ liens, while also carrying a hefty 10% coupon.  When the debtor filed for chapter 11 later that same year, to implement its own RSA-driven plan, the new super-priority notes were paid in full, with interest and “make whole call” fees.  In short, the select lenders made a small, six-month loan for a very high return at low risk.  This opportunity was not available to everyone in the original class of noteholders.

In short, I conclude that the modern American restructuring system has evolved to favor the interests of the majority to the point where a debtor and a majority of its lenders can inflict serious harm on minority creditors.  At some point, this reality is bound to have consequences for both the debt markets and the utility of chapter 11.

The full article is available here.

Texas Two-Stepping Out of Bankruptcy
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Chapter 11, fraudulent transfer, Jurisprudence, Legislation | 0

By Michael A. Francus (Harvard Law School)

Michael Francus

Johnson & Johnson’s use of the Texas Two-Step to manage its talc liabilities has put the company, and the Two-Step, front and center in the roiling debates over aggressive uses of the bankruptcy system. Those debates have led to scholarly criticism, congressional hearings, and proposed legislation that would curtail debtors’ ability to so use the bankruptcy courts.

My Essay details the mechanics of the Two-Step. Beginning with the Texas divisive merger, the funding agreement, and forum shopping for the Fourth Circuit, the Essay fleshes out precisely how the Two-Step boxes in tort claimants. Like other scholarship, this Essay identifies the risk that such maneuvering effects a fraudulent transfer. It also goes a step further, arguing that the point of the Two-Step is not to succeed, but to delay. Fraudulent-transfer litigation in a bankruptcy consumes time because it requires an adversary proceeding, and that delay pressures tort claimants to settle. So the Two-Step can succeed as long as claimants cannot wait out the course of the bankruptcy, even if a court never declares the particular Two-Step to be a proper use of divisive merger law rather than an improper fraudulent transfer.

Instead of playing into this delay game, this Essay argues, courts should evaluate the Texas Two-Step for good faith. Tort claimants can raise such challenges as a motion to dismiss (as some have) and thus avoid the need for a fraudulent-transfer adversary proceeding. And under current doctrine, the Two-Step likely qualifies as a bad-faith filing: In most cases, the Two-Step is a litigation tactic. And the Two-Step, invariably, is filed by an entity created solely to file for bankruptcy. Both of those are doctrinal hallmarks of bad-faith bankruptcies.

More broadly, the Essay explains, the Two-Step and good-faith challenges to it underscore the continuing role of common law in bankruptcy. The Code does not define good-faith filing, so courts have developed the doctrine case by case. They may yet find an acceptable form of Two-Step, one which yields tort claimants the rights they would receive in, say, a Johnson & Johnson bankruptcy, without hurting Johnson & Johnson’s ability to do business by forcing the whole company into bankruptcy. Along the way, though, a vigilant common-law gatekeeping is warranted, and judges should not hesitate to dismiss Two-Steps thinking that a later ruling on a fraudulent-transfer adversary proceeding can adequately safeguard tort claimants from an improper use of the bankruptcy system.

The full essay will be available at 121 Mich. L. Rev. Online __ (forthcoming 2022) and can be accessed here.

Mitigating Rejection of Midstream Agreements in Bankruptcy
by | posted in: Bankruptcy, Bankruptcy Reform, Bankruptcy Roundtable Updates, Chapter 11 | 0

By David H. Sweeney, Jason P. Rubin, and Laura P. Warrick (Akin Gump Strauss Hauer & Feld, LLP), with Practical Law Oil & Gas

Producers of hydrocarbons generally require some level of gathering, processing, and other midstream services to monetize hydrocarbons. Midstream services are typically secured through contracts between the producers and the midstream providers. The fixed facilities that are required to perform those midstream services require significant investment by the midstream providers and have capacity constraints. To ensure producers’ performance and protect their investment, midstream providers often include in their contracts a dedication clause styled as a “covenant running with the land”. This clause purports to dedicate the land or reserves to the midstream infrastructure and is intended to bind third parties, including estates in bankruptcy, as an interest in real property. 

Decisions in recent Chapter 11 cases have challenged the notion that midstream services contracts containing purported covenants running with the land are not rejectable under section 365 of the Bankruptcy Code. The result is that a debtor may be able to reject a midstream contract containing a covenant running with the land, repudiate future performance of its duties, and a midstream service provider may find its claims reduced to a pre-petition unsecured claim for monetary damages. 

This article explores some recent case law regarding covenants running with the land in bankruptcy and offers practical suggestions for how producers and midstream providers might navigate the newly developing reality, including: 

  • Conducting diligence on midstream contracts to identify red flags and address potential issues before they become problems.
  • Addressing the shortcomings of covenants running with the land noted by bankruptcy courts.
  • Replacing covenants running with the land with a substitute, such as a presently possessory interest or a lien.

The full article is available here.

Are Judges Randomly Assigned to Chapter 11 Bankruptcies? Not According to Hedge Funds
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Reform, Bankruptcy Roundtable Updates, Chapter 11, Insider Status, Legislation | 0

By Niklas Hüther (Indiana University) and Kristoph Kleiner (Indiana University)

Niklas Hüther
Kristoph Kleiner

”The bankruptcy system is supposed to work for everyone, but in many cases it works only for the powerful.”  – House Judiciary Committee Chairman Jerrold Nadler, July 28th, 2021

Researchers have long recognized that judicial outcomes are subject to the biases of the ruling judge. To alleviate concerns of fairness, courts in both the U.S. and abroad claim to assign judges to individual court cases randomly. From a policy perspective, randomization promotes public confidence in the judicial process by limiting forum shopping and the individual influence of any individual judge. From an academic perspective, recent empirical research in economics and finance exploits the random assignment of judges to causally identify of a wide range of legal outcomes.

This paper revisits the claim of randomized judicial assignment in the context of U.S. Bankruptcy Court. Our research is motivated by legal scholarship arguing that debtors in recent cases are influencing judicial assignments (Levitin, 2021), as well as renewed interest in these issues from policy makers and the public (Merle and Bernstein, 2019; Randles 2020). Despite these arguments, there are reasons to believe assignment is random. For instance, after contacting all U.S. Bankruptcy Courts, Iverson et al. (2017) found that only one court (the Eastern District of Wisconsin) reports assigning cases to judges non-randomly. In addition, a range of research including Bernstein et al. (2019) provides convincing evidence that debtor characteristics fail to predict judicial assignments. Missing from this literature is any large-scale empirical evidence of non-random assignment.

Analyzing U.S. corporate bankruptcy filings between 2010 and 2020, we provide new evidence that assignment is not random, but predicted by the lending decisions of hedge funds. By focusing on investments made before the assignment of a bankruptcy judge, our technique is not suspect to standard critiques that predictability is merely an outcome of ex-post data mining; instead, in order for investors to systemically invest in firms that are later assigned a preferred judge, it must be possible to infer future judicial assignments. In addition, we focus on hedge funds, as they routinely influence a wide range of bankruptcy outcomes including emergence and debt restructurings.  The prevalence of these investors allows us to explore a new channel of activism in the distress debt market: activist influence in judicial assignment process prior to filing.

In our setting, judges can decide whether to convert a Chapter 11 bankruptcy to a Chapter 7 liquidation; while secured creditors may have a preference for liquidation, unsecured creditors recover more under reorganization.  Exploiting this distinction, we confirm unsecured hedge fund creditors (relative to secured hedge funds) are significantly less likely to be assigned a judge with a tendency to convert Chapter 11 cases.  We also extend our analysis to an alternate bankruptcy outcome measure: the unsecured creditor recovery rate according to the confirmed plan. We find unsecured hedge funds are far more likely to be assigned a judge with a high past unsecured recovery rate.

We next test whether these estimates differ across the filings in our sample. First, we find that unsecured hedge fund claimants are assigned a preferable judge more commonly when the hedge fund invested shortly before the bankruptcy filing, suggesting hedge funds choose to invest explicitly to influence the filing. Second, we show the effects are greatest when the hedge fund is on the board of directors of the debtor at the time of filing, providing further support for the role of communication between debtor and creditor.

Finally, we conduct three robustness tests. First, we find no evidence that a judge’s future conversion rate (after controlling for the past conversion rate) is predicted by hedge fund investment, suggesting hedge funds are explicitly influencing judicial assignment based on information regarding past information. Second, focusing on the subset of districts that explicitly state random assignment within their district, we continue to find hedge fund investments predict assignment. Third, we include district-office-year fixed effects in our analysis and continue to find a relationship between hedge fund investments and assignment.

Moving forward, we believe there are two potential policies that can alleviate these issues. The first, and simplest, is for policy makers to develop a truly randomized process. Alternatively, policy makers can instead increase the number of bankruptcy judges, leading to lower predictability even if assignment is not fully randomized. Policy makers intent on a fairer judicial system should consider both proposals.

The full article is available here.

This piece previously appeared on the Oxford Business Law Blog.

The Judge Behind the Curtain
by | posted in: Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates | 0

By Melissa B. Jacoby (Graham Kenan Professor of Law – University of North Carolina School of Law)

Melissa Jacoby

After a district court halted OxyContin maker and hawker Purdue Pharma’s exit from bankruptcy by finding its restructuring plan unlawful in late 2021, the yellow brick road of this high-profile case forked in two. One path is traditional: more appellate process. The United States Court of Appeals for the Second Circuit agreed to review Purdue’s restructuring plan on a fast track and oral argument is expected to be scheduled for late April 2022. The second path reflects a popular development in the federal judiciary: the presiding bankruptcy judge appointed another sitting judge as a mediator to oversee negotiations between representatives of the Sackler family and states whose appeal had prevailed in the district court. According to the judicial mediator’s most recent report, the Sackler family has offered more money to resolve the dispute; many, though not all, of the objecting states are on board to settle. Expectations that a deal can be brokered run high. 

Purdue Pharma is not the only big restructuring in which a judicial mediator has been tasked with managing a high-stakes matter. As another recent example, six judges from different federal courts served as mediators in the Puerto Rico bankruptcy for almost five years: from June 23, 2017 through January 22, 2022. 

The use of sitting judges for this behind-the-scenes work is the topic of my forthcoming article. Why are judges mediating other judges’ cases, particularly when Congress encouraged use of private neutrals for alternative dispute resolution? Are traditional judicial accountability measures effective when judicial mediators work with parties and lawyers in a process that lacks a citable record? Finding that the standard accountability measures are an awkward fit for judicial mediation, the article calls on the Judicial Conference of the United States, the policy-making body for the federal judiciary, to take steps to maximize the benefits and minimize the risks of these practices. Whatever your own experiences have been with bankruptcy-related mediations, I hope you find this project useful. 

The full article is available here.

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