On January 13, 2020, the United States Bankruptcy Court for the District of Delaware issued an opinion in In re La Paloma Generating Company, LLC., Case No. 16-12700 [Adv. Pro. No.19-50110], which examined the implied covenant of good faith and fair dealing in the context of an intercreditor agreement (ICA) governing the relationship between the First Lien Lender (First Lien Lender) and the Second Lien Lenders (Second Lien Lenders) to the Debtors. The bankruptcy court held a party cannot be in breach of the covenant of good faith and fair dealing under New York law when merely enforcing a contractual right, in this case the First Lien Lender enforcing the ICA.
By Charles Tabb and Carly Everhardt (Foley & Lardner)
In Ritzen Group Inc. v. Jackson Masonry, LLC,the Supreme Court unanimously held that a bankruptcy court’s order denying relief from the automatic stay constituted a final order, and thus that order may—and must—immediately be appealed if so desired. The holding regarding finality is important, because parties normally only have an absolute right to appeal when an order is final, not when an order is interlocutory. In Ritzen, the Court announced a clear blueprint for gauging the finality of any bankruptcy order.
The opinion comes just a few years after the Supreme Court decided Bullard v. Blue Hills Bank, in which the Court held that an order denying confirmation of a plan was not final, because the plan confirmation process could continue notwithstanding the denial. In Ritzen, the Court distinguished Bullard, explaining that the stay relief proceeding constituted its own complete procedural unit, separate and apart from any claims resolution issues. Ritzen puts to rest the view that Bullard signaled relaxed finality in the context of bankruptcy.
The article analyzes Ritzen and how it will impact strategic decisions by creditors regarding stay relief and other forms of bankruptcy litigation. The article considers open questions left by the Court, including the impact on the finality of an order which states it was entered “without prejudice,” and whether res judicata may apply in cases where creditors make multiple requests for relief.
Although the Boy Scouts of America (BSA) is headquartered in Texas, it filed for chapter 11 in Delaware in February. That was permissible under existing bankruptcy venue rules because the BSA had created an affiliate in Delaware seventh months earlier. Unsettled by this apparent forum shopping, the Attorneys General of 40 states, the District of Columbia, and Puerto Rico sent a letter to Congress expressing their support for H.R. 4421, the Bankruptcy Venue Reform Act of 2019. It would have prevented the BSA’s conduct. Ten state Attorneys General did not sign the letter: New York, Delaware, Connecticut, Florida, Kansas, New Jersey, North Carolina, Montana, Virginia, and Wyoming.
Under the Act, a corporation could only establish venue in three places. First, the district where its “principal assets” were located for the 180 days before filing. Second, the district where it maintains its “Principal Place of Business.” Third, and only for controlled subsidiaries, any district where a case concerning an entity controlling 50 percent or more of its voting stock is pending. Changes of control or in the Principal Place of Business in the year before filing or conducted “for the purpose of establishing venue” would be disregarded. Corporations could thus no longer manufacture venue in a preferred jurisdiction by simply creating an affiliate there.
H.R. 4421 would also require the Supreme Court to promulgate rules allowing “any attorney representing a governmental unit” to appear in any chapter 11 proceeding without paying a fee or hiring local counsel. This provision likely factored heavily into the Attorneys General’s support for the Act. Their support letter emphasizes that the resulting rule would help them enforcers consumer protection and environmental laws by reducing the costs of defending their states’ interests in chapter 11 cases filed in distant jurisdictions.
The letter offered two reasons why corporations should not be able to manufacture venue in districts with seemingly favorable judges just by creating an affiliate there. First, it is costly for creditors (particularly small creditors) because they must either travel long distances or forgo face-to-face participation as well as hire local counsel in expensive legal markets. Second, it may cause the public to perceive the bankruptcy system as unfairly advantaging large corporations. H.R. 4421 would solve these problems by “ensur[ing] that bankruptcies are filed in jurisdictions where debtors have the closest connections and filings will have the largest impacts.” The letter notes the Southern District of New York and the District of Delaware as two currently attractive districts. But the Attorneys General argue that other district and bankruptcy judges have similar expertise.
Academics largely agree that 28 U.S.C. § 1408’s permissive venue rules encourage competition among bankruptcy courts to attract high profile cases, but opinion is split on whether this competition improves or degrades bankruptcy law.
Lynn LoPucki and William Whitford argue that venue choice degrades bankruptcy law by pressuring judges to exercise their discretion to favor debtors and their attorneys because these are the actors who usually choose where to file. They suggest, for example, that bankruptcy judges of the Southern District of New York misuse discretion by freely granting extensions of the 120-day exclusivity period during which only the debtor may propose a reorganization plan. Debtors can then agree to move toward confirmation of a plan in exchange for concessions from creditors.
David Skeel, on the other hand, argues that at least one of the venue choices that the proposed Bankruptcy Reform Act would eliminate—the district where the entity is incorporated—improves bankruptcy law by encouraging states to compete for incorporation fees by offering increasingly efficient bankruptcy rules in the multiple areas where federal bankruptcy law defers to state law.
On April 29, 163 current and retired bankruptcy judges sent a letter to members of the House Committee on the Judiciary expressing support for H.R. 4421’s proposed reforms. The letter stresses the preference for eliminating state of incorporation as a basis for venue.
By Andrew N. Goldman, George W. Shuster Jr., Benjamin W. Loveland, Lauren R. Lifland (Wilmerhale LLP)
Valuation is a critical and indispensable element of the Chapter 11 bankruptcy process. It drives many aspects of a Chapter 11 case, from petition to plan confirmation, in all circumstances. It may be obvious that the COVID-19 crisis has added a layer of complexity—and volatility—to bankruptcy valuation issues with respect to valuing assets, liabilities, and claims, both in and outside the Chapter 11 context. But the crisis may also change the way that courts look at valuation determinations in Chapter 11—both value itself, and the way that value is measured, may be transformed by the COVID-19 crisis. While the full extent of the pandemic’s effect on valuation issues in bankruptcy has yet to be seen, one certainty is that debtors and creditors with a nuanced and flexible approach to these issues will fare better than those who rigidly hold on to pre-crisis precedent.
The Third Circuit, applying the Supreme Court’s decision in Stern v. Marshall, recently held that the Bankruptcy Court has the authority to confirm a chapter 11 plan containing nonconsensual, third-party releases when such releases are integral to the debtor’s successful reorganization.
In Stern, the Supreme Court examined the scope of the bankruptcy court’s constitutional authority and found, among other things, that the bankruptcy court can resolve a matter that is integral to the restructuring of the debtor-creditor relationship. Analyzing Stern, the Third Circuit in In re Millennium held that the Bankruptcy Court could confirm a plan that included non-consensual, third party releases because the releases were the result of “highly adversarial” and “extremely complicated” negotiations and without the releases, the debtor would not have been able to successfully reorganize.
By Sara L. Chenetz and Tina N. Moss (Perkins Coie)
Reward Science and Technology Industry Group Co., Ltd. (“Reward”) joins a growing list of Chinese companies that have chosen to file a case in U.S. Bankruptcy Court in connection with their restructuring efforts under the People’s Republic of China’s Enterprise Bankruptcy Law (“EBL”). These U.S. cases are known as “Chapter 15” cases, in which the foreign representative of the debtor files a petition in a U.S. bankruptcy court seeking “recognition” of a foreign proceeding. Relief granted to Reward in its Chapter 15 proceedings included a stay of all efforts by Reward’s U.S. creditors to continue litigation and to commence any new lawsuits or other efforts to collect on claims in the United States. Additionally, the Reward foreign representative was granted the power to administer Reward’s U.S.-based assets for the benefit of its creditors and to gather evidence within the United States concerning Reward’s liabilities, assets, business affairs, and operations, including through examining witnesses under oath and issuing subpoenas to obtain documents. Reward’s Chapter 15 case demonstrates that companies that are the subject of EBL cases or are considering whether they could benefit from filing an EBL case may also be able to obtain protections from creditor action in the United States by commencing a Chapter 15 case. As part of a Chapter 15 case, U.S. bankruptcy courts may halt litigation and other collection efforts against the Chinese business (temporarily or permanently), limit the enforceability of certain contract provisions, and simultaneously facilitate the Chinese’s business’ efforts to reorganize or liquidate.
By Benjamin Charles Iverson (Brigham Young University), Joshua Madsen (University of Minnesota, Twin Cities, Carlson School of Management), Wei Wang (Queen’s School of Business), and Qiping Xu (University of Notre Dame, Department of Finance).
Prior studies document the influence of bankruptcy judges’ discretion on restructuring outcomes, yet we know little about how judicial experience affects the bankruptcy process. We study how the accumulation of job-specific human capital influences judges’ efficiency in handling large corporate bankruptcy filings, using 1,310 Chapter 11 filings by large U.S. public firms overseen by 309 unique bankruptcy judges in 75 bankruptcy courts between 1980 and 2012.
Using random assignment of judges to cases for empirical identification, we show that cases assigned to a judge with twice as much time on the bench realize a 5.5% decrease in time spent in reorganization. This reduced time in court translates into savings of approximately $2 million in legal fees alone for a typical case in our sample. Judges’ time on the bench is associated with higher probability of emergence but not higher recidivism. The combined evidence suggests that more experienced judges are overall more efficient. We also find that it takes up to four years for a new judge to become efficient and that judges who see a higher volume of business filings and a greater diversity of cases by size and industry early in their tenure become efficient faster than those who don’t. We find little evidence that judges’ general experience and personal attributes consistently affect case outcomes.
Our analyses highlight a potential benefit of allowing firms to file in courts with more experienced judges. Restricting this flexibility (e.g., through the proposed Bankruptcy Venue Reform Act of 2017) may impose a cost on firms by forcing them to file in courts with less experienced judges.
By Ralph Brubaker (University of Illinois College of Law)
This article explores the diverse and intriguing implications of the Supreme Court’s recent decision in Wellness International Network, Ltd. v. Sharif, both from an “internal” bankruptcy perspective and as a very important and revealing component of the Court’s still-evolving general jurisprudence of non-Article III adjudications.
In that larger jurisprudence, the contrast between Wellness and the Stern v. Marshall decision prominently highlights a seemingly schizophrenic admixture of formal (Stern) and functional (Wellness) analytical methods. This article maintains, however, that what Stern and Wellness reveal and confirm is a coherent and consistent jurisprudence of non-Article III adjudications with a bifurcated analytical methodology that is a logical corollary of (and that facilitates a complex interaction between) the dual interests protected by Article III, § 1 — both nonwaivable structural separation-of-powers values and the waivable personal right of individual litigants to an Article III adjudication.
In the bankruptcy context, Wellness provides further evidence that the Supreme Court is, over a long run of decisions, simply confirming the constitutional significance of its extensive summary-plenary jurisprudence (taken from established English bankruptcy practice prevailing at the time of the Founding) as the operative constitutional boundary for the adjudicatory powers of non-Article III bankruptcy judges. This article uses the Wellness litigation to demonstrate how that summary-plenary jurisprudence can directly inform the core-noncore distinction drawn by the current jurisdictional statute (which codifies constitutional constraints). The Court’s existing and extensive summary-plenary jurisprudence provides a highly developed analytical framework for resolving even the most nuanced and difficult core-noncore determinations.
By Nicholas L. Georgakopoulos (McKinney School of Law, Indiana University)
This article takes the United States Supreme Court’s simple “no” to nonconsensual structured dismissals in Jevic as an opportunity to study its contours. The first issue is the pending clarification on whether the right to object to a structured dismissal is an individual or a class right. An individual right would leave little space for consensual structured dismissals, whereas a class right would fit with the anti-hold-out scheme of reorganization law. Second, Jevic implies increased scrutiny on first-day orders, especially in liquidating reorganizations, pushing for additional caution and negotiation before early payments. Third is the issue of fees—latent in Jevic but burning in the academy—the tension between race-to-the-bottom and race-to-the-top views of jurisdictional competition with the Court’s silence in the foreground. Fourth is the Court’s approval of settlements (via interim orders) that violate priorities provided they promote a bankruptcy goal, as Iridium’s approval did. Fifth, the juxtaposition of the settlements in Iridium and Jevic stresses the importance of the bankruptcy court’s role in approving settlements when the parties’ incentives are biased.
By Andrew C. Kassner and Joseph N. Argentina, Jr. (Drinker Biddle & Reath LLP)
In Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), the Supreme Court held that structured dismissals that violate the distribution scheme set forth in the Bankruptcy Code are not permitted. The Court distinguished such situations from other, somewhat common bankruptcy practices that also violate the Code’s distribution scheme, such as critical vendor orders, employee wage orders, and lender “roll-ups.” Those practices, the Court noted, “enable a successful reorganization and make even the disfavored creditors better off.” The question remained, however, how subsequent bankruptcy courts would analyze such practices in light of the Supreme Court’s decision in Jevic.
This article summarizes two early post-Jevic decisions and concludes that at least some courts will read the Jevic holding expansively into areas of chapter 11 practice other than structured dismissals. In In re Fryar, 2017 Bankr. LEXIS 1123 (Apr. 25, 2017), the Bankruptcy Court for the Eastern District of Tennessee would not approve a settlement agreement and § 363 sale that provided payment to a lender on account of its prepetition claims. In In re Pioneer Health Servs., 2017 Bankr. LEXIS 939 (Apr. 4, 2017), the Bankruptcy Court for the Southern District of Mississippi would not permit a hospital debtor to pay three physicians as “critical vendors.” These courts concluded that Jevic required additional scrutiny of distribution-violating proposals other than structured dismissals.
Andrew C. Kassner is the chairman and chief executive officer of Drinker Biddle & Reath, and former chair of its corporate restructuring group. Joseph N. Argentina Jr. is an associate in the firm’s corporate restructuring practice group in the Philadelphia and Wilmington offices. The views expressed in the article are those of Mr. Kassner and Mr. Argentina, and not of Drinker Biddle & Reath.