Reorganizing Health Care Bankruptcy

By Laura Coordes (Sandra Day O’Connor College of Law)

Many health care providers are experiencing financial distress, and if the predicted wave of health care bankruptcies materializes, the entire U.S. economy could suffer. Unfortunately, health care providers are part of a growing group of “bankruptcy misfits,” in the sense that bankruptcy does not work for them the way it works for other businesses. This is so for two primary reasons. First, the Bankruptcy Code is insufficiently specific with respect to health care debtors. Second, the Code lacks an organizing principle to allow the court to reconcile the competing players and interests in a health care bankruptcy case.

Previous attempts to address these issues have not succeeded. Notably, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 scattered reforms across the Code, making bankruptcy more complicated for health care debtors. As a result, some have argued that these debtors are better off using bankruptcy alternatives such as state receiverships to address their debts.

In Reorganizing Health Care Bankruptcy, I assert that despite their bankruptcy misfit status, health care providers can realize distinct benefits from bankruptcy relief. To be effective, however, this relief must respond to health care providers’ unique needs. Creating separate Bankruptcy Code subchapters for health care business bankruptcies would allow Congress to clarify many aspects of health care bankruptcy and enable the development of specific procedures and a distinct organizing principle unique to health care provider bankruptcies. Although this proposal contemplates a significant structural change to the Bankruptcy Code, the Article explains why this change is warranted as part of the Code’s necessary evolution.

The full article is available here.

Rethinking “Too Big To Fail”

 By Saule T. Omarova (Cornell University)

“Too big to fail” – or “TBTF” – is a popular metaphor for a core dysfunction of today’s financial system: the recurrent pattern of government bailouts of large, systemically important financial institutions. The financial crisis of 2008 made TBTF a household term, a powerful symbol of the pernicious society-wide pattern of “privatizing gains and socializing losses.” It continues to frame much of the public policy debate on financial regulation even today, ten years after the crisis. Yet, the analytical content of this term remains remarkably unclear.

In a forthcoming article, I take a fresh look at the nature of the TBTF problem in finance and offer a coherent framework for understanding the cluster of closely related, but conceptually distinct, regulatory and policy challenges this label actually denotes. I begin by identifying the fundamental paradox at the heart of the TBTF concept: TBTF is an entity-centric, micro-level metaphor for a complex of interrelated systemic, macro-level problems. I argue that, while largely unacknowledged, this inherent tension between the micro and the macro, the entity and the system, critically shapes the design and implementation of the key post-2008 regulatory reforms in the financial sector.

To trace these dynamics, I deconstruct the TBTF metaphor into its two basic components: (1) the “F” factor focused on the “failure” of individual financial firms; and (2) the “B” factor focused on their “bigness” (i.e., relative size and structural significance). Isolating and examining these conceptually distinct components helps to explain why the potential for failure (and bailout) of individual firms – or the “F” factor – continues to be the principal focus of the ongoing TBTF policy debate, while the more explicitly structural, relational issues associated with financial firms’ “bigness” – or the “B” factor – remain largely in the background of that debate.

Analyzing post-crisis legislative and regulatory efforts to solve the TBTF problem through this simplifying lens reveals critical gaps in that process, which consistently favors the inherently micro-level “F” factor solutions over the more explicitly macro-level “B” factor ones. It also suggests potential ways of rebalancing and expanding the TBTF policy toolkit to encompass a wider range of measures targeting the relevant systemic dynamics in a more direct and assertive manner. Admittedly, implementing such deliberately structural measures would require a qualitative shift in the way we think and talk about the financial system and its dysfunctions – not an easy precondition to meet in practice. Yet, as I argue in the article, this deep attitudinal shift is the necessary first step toward finally achieving the lofty – and persistently elusive – goal of eliminating the TBTF phenomenon in finance.

The complete article is available for download here.

 

Bankruptcy for Banks: A Tribute (and Little Plea) to Jay Westbrook

By David A. Skeel, Jr. (University of Pennsylvania Law School)

Over the past several years, Congress has considered various versions of a legislative reform that would amend the Bankruptcy Code to facilitate the prompt reorganization of systemically important financial institutions (“SIFIs”). The reform would adapt the “Single Point of Entry” strategy devised for use under Title II of the Dodd Frank Act to bankruptcy. In each context, the assets, short term liabilities, and secured debt of the troubled SIFI would be transferred to a newly created bridge institution, leaving behind its stock and long-term debt. The newly recapitalized bridge institution would be fully solvent, and could contribute liquidity to the troubled subsidiaries as necessary. Although the bankruptcy for banks legislation appears to have strong support in Congress, its reception among bankruptcy scholars has been mixed.

In this short essay, I take the opportunity of a celebration of the work and influence of Jay Westbrook to explore his and his fellow critics’ opposition to bankruptcy for banks. I begin the essay by surveying Jay’s wide-ranging contributions to bankruptcy scholarship. Jay’s functional analysis has had a profound effect on scholars’ understanding of key issues in domestic bankruptcy law, and Jay has been the leading scholarly figure on cross-border insolvency. After surveying Jay’s influence, I turn to the topic at hand: bankruptcy for banks. Jay has been a strong critic of the proposed reforms, arguing among other things that financial institutions need to be resolved by regulators and an administrative process, not bankruptcy. After addressing these and other objections, I ask Jay if he might reconsider his opposition if the legislation were amended to respond to several of his primary concerns.

The essay is available here.

Loan to Bond Substitution: An Empirical Analysis on the Functioning of the Substitution Channel for Eurozone Firms

By Francesco Ruggiero (University of Naples Federico II)

This paper contributes to the literature by enhancing the understanding of the link between bank debt and bond market debt in the Eurozone. This implication is particularly important for small firms that usually rely heavily on bank loans, and are likely to be excluded from the credit market during crises. In this paper, I find that firms based in the Eurozone can substitute bonds for loans in response to changing credit conditions. But the substitution is only partial, and firms will end up raising less funds than needed. Despite the bank centric feature of the European financial market that encourages firms to rely a lot on bank loans, bonds still serve as a substitute to loans. Firms in the Eurozone choose to substitute bonds for loans especially in periods in which the banking sector is in distress or the central bank implements policies to enhance credit.

The comparison with the U.S. firms (provided as benchmark) requires an in-depth analysis on the relative roles of the banking system and the financial market in Europe and the U.S. The divergence in results might indicate that policies enacted by the Fed in the U.S. might not be the best fit for European system. European Central Bank (“ECB”)  should thus tackle similar problems differently. In principle, the central bank’s expansive monetary policies should have affected bank lending positively as well. The reason why it did not work as expected along this transmission channel is that  the banks tend to hoard extra liquidity received from the ECB to deal with potential  sudden shortages in the future.

The full article is available here.

 

 

The Year in Bankruptcy: 2017

by Charles M. Oellermann and Mark G. Douglas (Jones Day).

In their annual chronicle of business bankruptcy, financial, economic, and related developments in the U.S., Charles M. Oellermann and Mark G. Douglas of Jones Day review the most significant events of 2017, including business bankruptcy filing statistics and industry trends; newsworthy developments regarding sovereign and commonwealth debt; the top 10 public-company bankruptcies of the year; notable private and cross-border bankruptcy cases; significant business bankruptcy and U.S. Supreme Court bankruptcy rulings; bankruptcy-related legislative and regulatory developments; noteworthy chapter 11 plan confirmations and exits from bankruptcy; and more.

The article is available here.

Proposed Bill: Bankruptcy Venue Reform Act of 2018

posted in: Bankruptcy Reform, Legislation | 0

Earlier this month, Senators John Cornyn, R-TX, and Elizabeth Warren, D-MA, introduced the Bankruptcy Venue Reform Act of 2018. With the aim of “prevent[ing] big companies from cherry-picking courts that they think will rule in their favor and to crack down on this corporate abuse of our nation’s bankruptcy laws,” the Act would amend §1408 of the Bankruptcy Act to require debtors to file in the district “in which the principal assets or principal place of business” are located. It would also bar debtors from tag-along filings in jurisdictions where their affiliates have ongoing bankruptcy proceedings unless that affiliate “owns, controls, is the general partner, or holds 50 percent or more of the outstanding voting securities” of the debtor. In short, the proposed Act would eliminate the domicile venue option and the affiliate option that allows larger parent companies to file in the same venue as a smaller subsidiary.

Significantly, the Act would oust Delaware from its position of bankruptcy venue of choice for the many businesses that do not operate in Delaware but are domiciled in Delaware by virtue of having incorporated there. The bankruptcy court in Delaware is the venue now chosen by many public firms that file to reorganize in chapter 11.

In response to the bill’s introduction, Delaware’s Governor and congressional delegation issued a joint statement:

Many American companies, large and small, choose to incorporate in Delaware because of the expertise and experience of our judges, attorneys, and business leaders. Denying American businesses the ability to file for bankruptcy in the courts of their choice would not only hurt Delaware’s economy but also hurt businesses of all sizes and the national economy as a whole. This is a misguided policy, and we strongly oppose it.

Senator Coons later published an additional statement emphasizing that the “Cornyn-Warren bill is bad for businesses everywhere, but it would be a disaster for Delaware.”

Bankruptcy venue reform was proposed, but not passed, in 2005 (S.314) and again in 2011 (H.R.2533). In seeking to remove the domicile and affiliate bankruptcy venue options, the Cornyn-Warren bill most closely mirrors the 2011 bill, H.R.2533, which Professor David Skeel has stated “would [have] overturn[ed] a long history of bankruptcy practice; it would undermine the effectiveness of our corporate bankruptcy system; it would increase the administrative costs of the system; and it would not help the very parties the proposal is ostensibly designed to help.”

If passed, the Act would require a major change in bankruptcy strategy for many businesses, but it remains to be seen whether the Act will gain traction in Congress.

(By Harold King, Harvard Law School, J.D. 2019.)