Congressional Committees Propose Changes to Bankruptcy Code Prohibiting Non-Consensual Releases of Third Parties and Limiting Other Important Bankruptcy Tools
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates, Jurisprudence, Legislation, Third-Party Releases | 0

By Michael J. Cohen, Michael A. Rosenthal & Matthew J. Williams (Gibson Dunn)

The recent decision in In re Purdue Pharma did not uphold the third-party releases in the bankruptcy court’s approved plan. This post discuss the third-party releases issue.

— Harvard Law School Bankruptcy Roundtable Editors

Michael J. Cohen
Michael A. Rosenthal
Matthew J. Williams

On July 28, 2021, certain Democratic members of Congress, primarily in response to the $4.325 billion contribution made by the Sackler family to fund the settlement underpinning Purdue Pharma’s chapter 11 plan, introduced the Nondebtor Release Prohibition Act of 2021 (the “NRPA”), which proposes to amend the Bankruptcy Code to (i) prohibit the use of non-consensual third party releases in chapter 11 plans, (ii) limit so-called “Section 105” injunctions to stay lawsuits against third parties to a period no greater than 90 days after the commencement of a bankruptcy case, and (iii) provide a ground for dismissing a bankruptcy case commenced by a debtor that was formed within 10 years prior to such case via a divisional merger that separated material assets from liabilities.

When viewed against the backdrop of current complex chapter 11 practice, the NRPA is a flawed remedy for issues for which alternative means of redress already exist. First, the proposed elimination of the important bankruptcy tools of non-consensual third party releases and Section 105 injunctions – each of which is extraordinary in nature and only permitted in the rarest of circumstances – is a blunt force measure that threatens to vitiate the longstanding bankruptcy policy of favoring settlements over interminable value-destructive litigation.  Second, the loss of these tools may cause inequitable disruption in currently pending cases and stymie the implementation of critical creditor-supported strategies to resolve the most difficult cases going forward.  Moreover, a per se prohibition against non-debtor releases would contravene core bankruptcy principles by elevating the interests of a minority of creditors who would otherwise be bound to the terms of a chapter 11 plan containing such a release that is supported by the requisite majorities required under the Bankruptcy Code.  Third, while the disincentive against divisional mergers would affect a far more limited set of cases, it appears that the harm raised by some divisional mergers that are followed by bankruptcy may be adequately addressed through clarifying the applicability of fraudulent transfer law to challenge these transactions.

On November 3, 2021, the House Judiciary Committee sent the NRPA to the House floor for further consideration; the Senate Judiciary Committee has yet to act on the bill.  For more detail on the NRPA and our analysis of the bill, please find the full article here.

Bankruptcy & Bailouts; Subsidies & Stimulus: The Government Toolset for Responding to Market Distress
by | posted in: Bankruptcy, Bankruptcy Reform, Bankruptcy Roundtable Updates | 0

By Anthony J. Casey (The University of Chicago Law School)

Anthony J. Casey

In the spring of 2020, as the Covid-19 pandemic shut down economies around the world, pressure arose for governments to respond to the growing threat of pandemic-related market distress. In the United States, the initial proposals for government action varied in nature and focus. Some proposals targeted the financial system while others targeted small businesses and individuals. Others were intended to bail out large businesses and specific industries. Still other proposals took a more institutional focus. In the context of bankruptcy law, many imagined building up the bankruptcy system as a primary bulwark against a seemingly imminent wave of economic and financial distress.

With the exception of measures related to financial markets, the actual responses formed a chaotic mix of disconnected half-measures that neither stabilized the economy nor provided meaningful relief to those most affected. While that failure may be attributed in part to general government dysfunction and legislative gridlock, a large part of the problem arises from the lack of a clearly identified framework to guide government responses.

The main lesson here is that the appropriateness of tools deployed to alleviate a crisis depends on the nature of the specific problem at hand, and scattershot approaches are unlikely to work. As obvious as that principle may seem, it was largely ignored in 2020. Much of the confusion in the pandemic responses is attributable to using the wrong tools and implementing measures that lacked any clear purpose.

In particular, governments and commentators lost sight of two important distinctions in deciding how to act. The first is the distinction between tools appropriate for addressing economic distress and those appropriate for addressing financial distress. The second is the distinction between a systemic crisis where distress is spreading and an instance of firm-specific distress where the harm—though perhaps large—is contained.

These distinctions present four types of market distress: specific economic, systemic economic, specific financial, and systemic financial. Each type is distinct from the others, and for each there is a category of appropriate government responses (respectively): direct subsidies, general stimulus, bankruptcy proceedings, and financial bailouts. We thus have this matrix:

Systemic Specific
Economic General Stimulus Direct Subsidies
Financial Financial Bailouts Bankruptcy Proceedings

(Chapter 11)

 

The importance of understanding these classifications is most evident in the flawed proposals for pandemic-related fixes to bankruptcy law and in the lack of a centralized economic plan to support failing small businesses around the country.

In a new article, I lay out this framework for identifying the right tools for responding to different forms of market distress.  I describe the relationship between the category of tools and the type of distress. Having presented the framework, I then use it to closely examine the interaction between pandemic responses and bankruptcy law. This analysis is particularly important because efforts to understand the bankruptcy system’s role during the pandemic provide the starkest example of confused analysis of appropriate responses to systemic crises, and because a striking decline in bankruptcy filings in 2020 has puzzled many commentators.

Bespoke Bankruptcy
by | posted in: Bankruptcy Roundtable Updates | 0

By Laura N. Coordes (Associate Professor of Law, Sandra Day O’Connor College of Law)

Laura N. Coordes

The U.S. Bankruptcy Code is the primary source of bankruptcy relief for debtors in the United States. But it is not the only source. Over the years, Congress has occasionally created bespoke bankruptcy—customized debt relief designed for a particular group of debtors. Bespoke bankruptcy may provide desperately needed bankruptcy relief to entities that are ineligible or otherwise unable to access bankruptcy through the Bankruptcy Code. But bespoke bankruptcy is also fraught with difficulties. To what extent should bespoke bankruptcy be used or developed instead of the Bankruptcy Code?

In Bespoke Bankruptcy (forthcoming in the Florida Law Review), I take up this question. The Article begins by acknowledging the limitations of the Bankruptcy Code and highlighting instances where Code-based bankruptcy relief does not work. Some entities, which I term “bankruptcy misfits,” require such different relief mechanisms that using the Bankruptcy Code becomes difficult, impractical, or even impossible. To assist these entities, Congress has historically chosen either to amend the Bankruptcy Code or to create alternative debt relief processes through statutes outside of the Code. The Article then examines the extent to which bespoke bankruptcy, as opposed to Code amendments, should be used to provide other bankruptcy misfits debt relief.

To address this question, the Article devises a framework that policymakers can use to decide when and how to implement bespoke relief. In so doing, this Article sets the stage for a new direction in bankruptcy law and theory: one where bespoke bankruptcy performs a limited, but critical, role in providing relief to entities that the Bankruptcy Code either does not or cannot assist.

The full article is available here.

Bankruptcy and COVID-19 Working Group
by | posted in: Bankruptcy, Bankruptcy Administration and Jurisdiction, Bankruptcy Roundtable Updates | 0

An interdisciplinary group of bankruptcy scholars from the “Large Corporations Committee of the Bankruptcy & COVID-19 Working Group” recently sent an open letter to the United States Senate/House of Representatives on the potential impact of a sharp rise in bankruptcies on the bankruptcy court system. In the letter, the bankruptcy scholars pointed to the deteriorating market for corporate debt and the rising unemployment rate as likely to induce increased bankruptcies in the next months. If the economy does not prepare, the level of demand on the bankruptcy court system could become overwhelming. Accordingly, the scholars urge Congress to start planning and create additional resources to support the existing court system, such as adding temporary bankruptcy judges, recalling of retired judges, and moving judges from less-busy districts to busier districts.

The full letter can be found here.