Corporate Bankruptcy Tourists

By Oscar Couwenberg & Stephen J. Lubben

Insolvency procedures are not designed for corporate group, but for individual debtor corporations. This becomes an especially important issue when corporations have international operations.

When such a corporate group becomes financially distressed, then different national insolvency procedures will claim jurisdiction over assets and debts of the corporation, the consequence of which is an uncoordinated wealth-destroying piecemeal sale of assets. The obvious solution is to look for a single forum that can address an entire firm’s financial distress.

In this paper we argue that chapter 11 of the United States Bankruptcy Code, and to a lesser extent also the UK scheme of arrangement under the Companies Act 2006, can be considered such bankruptcy havens for corporate bankruptcy tourists.

We construct a database of foreign debtors initiating a chapter 11 case over the period 2005 to 2012. In total our dataset includes 316 corporate debtors, organized in 49 corporate groups.

What we find is that corporations with mobile assets, with subsidiaries in many jurisdictions, or both, are the most frequent tourists in chapter 11. We further discuss why chapter 11 and its competitor in the UK render a trans-national insolvency system superfluous. We expect these two jurisdictions to see increasing amounts of “tourist” activity as Europe moves from its traditional reliance on bank financing to more frequent use of North American style high yield bond markets.

The full version of this article is available here.

The New Corporate Web: Tailored Entity Partitions and Creditors’ Selective Enforcement

posted in: Cramdown and Priority | 0

By Anthony J. Casey, University of Chicago Law School

Casey, Anthony_0 (1)Firms often separate assets into distinct entities that have their own legal identity but are commonly owned and together form a large corporate group. While the law-and-economics literature has viewed these legal partitions as either all or nothing, firms have developed sophisticated legal mechanisms to create precisely tailored partitions. The result is a complex corporate web of interconnected legal affiliates.

For example, an asset that is placed in one legal entity may serve as collateral guaranteeing the debts of another legal entity within the corporate group. The assets of the two entities are separate for some purposes but integrated for others. Conventional theories of corporate groups cannot explain the tailored partitions in this corporate web. This article develops a new theory of selective enforcement to fill that gap.

When a debtor defaults on a loan, that default may signal a failure across the entire firm or it may signal a project-specific failure. Tailored partitions provide monitoring creditors with a valuable option to choose between project-specific and firm-wide enforcement depending on the information signal provided. Thus, firm-wide risks and failures can be addressed globally while the effects of project-specific risks and failures can be locally contained when necessary.

These concepts of selective enforcement and tailored partitions reveal important implications for theory and practice. They provide a cohesive justification for the web of entity partitioning and cross liabilities that characterize much of corporate structure today and inform the analysis of holding-company equity guarantees, fraudulent transfers, and ipso facto clauses.

The full version of this article is available here.

From Chrysler and General Motors to Detroit

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

dskeel

In the past five years, three of the most remarkable bankruptcy cases in American history have come out of Detroit: the bankruptcies of Chrysler and General Motors in 2009, and of Detroit itself in 2013. The principal objective of this Article is simply to show that the Grand Bargain at the heart of the Detroit bankruptcy is the direct offspring of the bankruptcy sale transactions that were used to restructure Chrysler and GM. The proponents of Detroit’s “Grand Bargain” never would have dreamed up the transaction were it not for the federal government-engineered carmaker bankruptcies. The Article’s second objective, based the comparison of the Detroit cases, is to make a very brief case for reform of bankruptcy sales.

Part I of the Article briefly surveys the increased use of bankruptcy sales and related shifts in Chapter 11 practice over the past several decades. Part II describes the Chrysler and General Motors bankruptcies, which built on but radically expanded the scope of a bankruptcy sale. Part III turns to the Detroit bankruptcy, focusing primarily on the “Grand Bargain,” while also exploring the city’s use of another recent bankruptcy strategy, known as “gifting.” The Article concludes, in a brief final part, that the Detroit cases have pushed recent bankruptcy innovations to their logical extremes — and beyond — exposing the need to update the oversight of bankruptcy sales.

The full version of this article is available here.

 

Overview of ABI Commission Report and Recommendation on the Reform of Chapter 11 of the Bankruptcy Code

By Jay M. Goffman, George N. Panagakis, Ken Ziman, Van C. Durrer II, John K. Lyons, Mark A. McDermott, and David M. Turetsky of Skadden, Arps Slate, Meagher & Flom LLP

The American Bankruptcy Institute’s Commission to Study the Reform of Chapter 11 recently released its Final Report recommending comprehensive reforms to Chapter 11 of the Bankruptcy Code. The report is the culmination of a three-year effort by over 200 restructuring professionals to evaluate Chapter 11 in light of the changing environment in which financially distressed companies operate. The Report is approximately 400 pages long. Skadden, Arps has prepared a comprehensive overview of the Report that condenses the salient points into a 30-page summary which can be found here. Selected recommendations for reform include:

  • DIP financing orders cannot impose milestones requiring the debtor to perform material tasks within the first 60 days (e.g., conduct a sale or file a plan).
  • No 363 sales of all or substantially all assets (“363x sales”) within the first 60 days unless the debtor demonstrates a high likelihood that the value of the debtor’s assets will decrease significantly.
  • 363 sales must satisfy requirements similar to plan confirmation requirements.
  • Junior, out-of-the-money stakeholders may be entitled to receive an allocation of value from senior creditors to reflect a possible upswing in the reorganized debtor’s value.
  • The cost of capital for similar debt issued to companies comparable to the debtor as a reorganized entity should be used when determining the appropriate discount rate for purposes of cram down.
  • Eliminating the requirement of at least one impaired accepting class of creditors for plan confirmation.
  • No appointment of an unsecured creditors’ committee if general unsecured creditors do not need representation in the case (e.g., if their claims are out-of-the-money).

The Weakest Link in Intercreditor Agreements Breaks Again in Momentive

posted in: Valuation | 0

By Lawrence Safran, Mitchell A. Seider, Keith A. Simon, and Adam J. Goldberg of Latham & Watkins LLP

Intercreditor agreements among secured creditors with respect to common collateral are often limited to lien subordination, as opposed to claim subordination. The agreement governs each secured creditor’s rights over the common collateral, without imposing claim subordination, which would require junior creditors to subordinate their claims and turn over all of their recoveries, whether or not derived from proceeds of collateral. Intercreditor agreements that provide only for lien subordination typically include a reservation of rights for junior creditors to retain all of their rights as unsecured creditors; however, the formulation of this reservation varies from agreement to agreement, and the exact language used can be critical in a court’s analysis.

The recent decision in In re MPM Silicones, LLC, Case No. 14-22503 (RDD) (Bankr. S.D.N.Y. Sept. 30, 2014) (Momentive) reflects the emerging trend of courts to narrowly interpret restrictions on junior creditors in these intercreditor agreements, where the restrictions are ancillary to the distribution of the common collateral’s value. In Momentive, the Bankruptcy Court found that the general reservation of rights as unsecured creditors serves to “ameliorate obligations that [junior secured creditors have] undertaken elsewhere in the agreement.”

This article explores recent case law arising from disputes over intercreditor agreements before bankruptcy courts, the issues and rulings in Momentive, and lessons that market participants should draw from the decision.

To read more, click here.

Bankruptcy Court Approves Non-Market Cramdown Rate on Momentive Secured Creditors

posted in: Valuation | 0

By Adam C. Harris and Karen S. Park of Schulte Roth & Zabel LLP

A recent decision from the Bankruptcy Court for the Southern District of New York provides guidance on the “fair and equitable” requirement as it relates to secured creditors in a so-called “cramdown plan.” Section 1129(b) of the Bankruptcy Code provides the means by which a Chapter 11 debtor may obtain confirmation of a plan of reorganization over the objection of a dissenting class of creditors, including secured creditors.  To cram down a plan on a class of secured creditors, the plan must be “fair and equitable” to that class.  One way to meet the “fair and equitable” requirement is to provide that the secured creditors retain their liens and receive deferred cash payments having a present value equal to the allowed amount of their secured claims.

In In re MPM Silcones LLC, 2014 WL 4436335 (Bankr. S.D.N.Y. Sept. 9, 2014), the Bankruptcy Court held that the interest rates on secured claims in a “fair and equitable plan” should be derived using a formula that starts with a “risk free” Treasury rate for similar duration instruments, and adds a risk premium generally in the range of 1%-3%.  Importantly, the Bankruptcy Court rejected the objecting secured credtiors’ arguments that the interest rates should be based on the market, i.e., the rates that would be charged to the same debtor entity for a loan having the same terms and duration by a third party lender.

The Bankruptcy Court’s ruling has been appealed.  If upheld, the decision could have far-reaching implications for distressed debt investors as well as on the availability and pricing of capital for borrowers.

Please find a full-length version of the article here.

Venue Roundtable in WSJ Bankruptcy Beat

Venue in Chapter 11 cases has been a hot topic, particularly after a recent venue battle in Caesar’s and the ABI Commission declined to recommend changing existing law, which gives debtors a broad choice for venue. Do current venue laws afford debtors, influential creditors, and their advisors too much leeway in electing where to file? And if so, should venue law be reformed? Last week, over a dozen bankruptcy professionals offered their views in the Wall Street Journal’s “Examiners” panel.

There was near-consensus among the WSJ’s Examiners that existing venue law—while perhaps imperfect—works well.

Anders Maxwell and Sharon Levine claimed, as did several others, that the large volume of filings in Delaware and the Southern District of New York renders those districts more efficient. Levine explained that “[t]he large volume of cases adjudicated within these two districts encourages further filings which in turn gives these courts even more of a track record, predictability and specialization.” Jack Butler argued that broad venue choice is a boon, since “[i]t creates opportunities for jointly-administered, cost-efficient filings, allowing fiduciaries to exercise their business judgment about what filing location might maximize enterprise value or reduce execution risk or both.” Moreover, “parties-in-interest actually seek to transfer venue in [only] a fraction of the cases filed.”

Companies also must consider “legal differences within the circuits” in deciding where to file, according to Richard Chesley. Differences in law, he explained, “can spell the difference between a confirmable plan of reorganization and liquidation.” Mark Roe judged that although the debtor might choose to file where it would be favored, that concern is offset by the expertise that courts hearing and deciding large, complex cases develop through repetition and experience. Venue restrictions that would disperse big firm filings would fail to capitalize on this expertise and experience. If more uniformity were needed, Roe argues, a nationwide intermediate appellate court would be the best approach.

The most vocal opponent of wide venue choice, Lynn LoPucki, wrote in his 2005 book, Courting Failure, that venue law degrades the bankruptcy courts, because the courts compete for large, prestigious cases by (i) advancing favorable precedent to attract debtors and (ii) tolerating high fees to curry favor with restructuring professionals, who influence where the case will be filed. This leads to a detrimental “race-to-the-bottom” style of “forum shopping,” which, he argues, facilitates the disproportionately large percentage of filings in Delaware and the Southern District of New York.

Visit the WSJ’s Bankruptcy Beat website to read the rest of the Examiners’ views on modern venue law.

This post was written by Aaron David (J.D. ’15).

Venue Reform Can Save Companies

By Lynn LoPucki, Security Pacific Bank Distinguished Professor of  Law at UCLA Law School
LoPucki imgOne side in litigation should not pick the court. That is exactly what happens, however, in big bankruptcies. A debtor, perhaps working together with its largest lender, can choose virtually any court in the country. The thousands of other stakeholders have no say.

The current system’s defenders argue that venue transfers will protect the stakeholders in appropriate cases. But in big case bankruptcy, venue transfer is illusory. Over the past ten years, 209 of the 317 large, public company Chapter 11s filed in the United States (66%) were filed in Wilmington, Delaware or New York City. One hundred eighty-six of the 209 (89%) were headquartered in some other district or division, but the Delaware and New York courts retained 206 of the 209 (99%).

Because cases have flowed to Delaware and New York since the 1990s, those courts’ judges now have high levels of big-case experience. In a recently completed study, Joseph Doherty and I found that significantly more companies survive under judges with greater big-case experience.

That doesn’t justify or necessitate letting corporate managers and DIP lenders pick their courts. The venue rules should require a big bankrupt to file with a big-case panel designated for its headquarters region. Within each of three or four regions, a chief judge could assign cases to maximize the development and utilization of big-case experience. That could eliminate forum shopping, level the playing field for stakeholders, reduce the pressure on judges to attract cases, and save more companies and jobs.

The ISDA 2014 Resolution Stays Protocol and the Bankruptcy Code Safe Harbors

By David Geen and Samantha Riley of the International Swaps and Derivatives Association (ISDA)

The International Swaps and Derivatives Association (“ISDA”) recently published the 2014 Resolution Stay Protocol (the “Protocol”). Developed by a working group comprised of both dealer and buy-side market participants in consultation with regulators from France, Germany, Switzerland, Japan, the United Kingdom and the United States, the Protocol has been hailed by the Financial Stability Board as a “crucial element[] of the policy framework to end too-big-to-fail.” In addition to addressing the failure of systemically important financial institutions (“SIFIs”) under special resolution regimes, such as the Orderly Liquidation Authority provisions of the Dodd-Frank Act or the EU Bank Recovery and Resolution Directive, Section 2 of the Protocol also addresses the failure of SIFIs under the U.S. Bankruptcy Code (the “Code”).

Section 2 of the Protocol was developed to support SIFI resolution strategies under the Code where operating companies, such as banks and broker dealers, are kept out of insolvency proceedings altogether, while affiliates, such as a parent holding company, are restructured through Chapter 11 proceedings. Section 2 introduces a short, temporary stay on the exercise of default rights that arise because of the parent’s or other affiliate’s entry into bankruptcy proceedings to enable the SIFI to take actions to preserve the operating companies as going concerns. If the actions taken satisfy the conditions established by the Protocol, the termination rights that arose as a result of the SIFI entering bankruptcy proceedings would be permanently overridden.

Naturally, questions have arisen as to the interplay between Section 2 of the Protocol and the safe harbors for swap agreements under the Code. The Code stays, and safe harbors, default rights that arise because a counterparty to an ISDA Master Agreement subject to the Protocol enters proceedings under the Code; it does not stay (and therefore does not need to safe harbor) contracts between non-debtor affiliates and their counterparties. The Protocol only addresses the affiliate contracts, and thus does not alter the scope or application of the safe harbors.

To help interested parties better understand the Protocol, ISDA has developed a detailed FAQ. The full text of the Protocol can be found on ISDA’s website.

U.S. District Court Holds that Puerto Rico’s Recovery Act is Unconstitutional

posted in: Municipal Bankruptcy | 0

By Mark Ellenberg, Howard Hawkins, Lary Stromfeld, Ivan Loncar, and Thomas Curtin of Cadwalader Wickersham & Taft LLP

On February 6, 2015, in Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, the U.S. District Court for the District of Puerto Rico held that the Puerto Rico Public Corporation Debt Enforcement and Recovery Act (the “Recovery Act”) is expressly preempted by section 903 of the Bankruptcy Code. Section 903 of the Bankruptcy Code expressly prohibits all states, including Puerto Rico, from enacting laws that prescribe a “method of composition” that discharges debts. The Recovery Act, which was loosely based on chapter 9 of the Bankruptcy Code, would have permitted Puerto Rico’s power authority (PREPA), highway authority (HTA) and water authority (PRASA) to adjust their debts without the consent of all creditors. The court concluded that this scheme ran afoul of section 903, even though municipal entities in Puerto Rico are expressly excluded from the coverage of Chapter 9. The decision is among the first to explicitly hold that section 903 expressly preempts the states, including Puerto Rico, from enacting any debt adjustment scheme that results in the discharge of indebtedness, even if the affected entities have no remedy under the Bankruptcy Code. The court also denied the Commonwealth’s motion to dismiss the plaintiffs’ claims under the Contracts Clause and certain of the plaintiffs’ claims under the Takings Clause.

To read further, click here.

1 39 40 41 42 43 44 45 49