Regulating Bankruptcy Bonuses and Protecting Workers in the Age of COVID-19

By Jessica Ljustina (Harvard Law School)

Since March, executives of 18 large companies received over $135 million total in bonuses prior to their companies filing under Chapter 11, while “[t]hose same companies laid off tens of thousands of workers,” according to a Washington Post report. These recent examples are illustrative of gaps left by the last major reform targeting bankruptcy bonuses. Further reforms have been introduced in Congress every few years since 2005. Referencing inequality and perceived abuses in the context of COVID-19, the House Judiciary Committee advanced the current House bill to the full chamber on September 29, 2020, marking the proposed legislation’s furthest progress thus far.

H.R. 7370, the Protecting Employees and Retirees in Business Bankruptcies Act of 2020 (PERBB) would present significant changes to the Bankruptcy Code aimed at protecting workers. The bill would expand from existing regulation of insider retention bonuses to include a broader set of payments to insiders, senior executive officers, the 20 highest compensated employees who are not insiders or senior executives, department and division managers, and any consultants providing services to the debtor.

Through expanding the scope of executive compensation subject to restrictions, PERBB may more effectively reduce management bonuses paid in bankruptcy. However, the House version of PERBB fails to address bonus payments prior to filing for bankruptcy, a key issue identified at the outset of the post. The related Senate bill has an additional provision which would designate any transfer made to management “made in anticipation of bankruptcy” as a §547 preference avoidable by the trustee.

The full post, including a summary of proposed changes to the Code, is available here.

The full text of the House bill can be accessed here. A redline of relevant 11 U.S.C. provisions reflecting amendments proposed in H.R. 7370 is available here. The full text of Senate bill can be accessed here.

For related Roundtable posts, see Jared Ellias, Regulating Bankruptcy Bonuses; James H. M. Sprayregen, Christopher T. Greco, and Neal Paul Donnelly (Kirkland & Ellis), Recent Lessons on Management Compensation at Various States of the Chapter 11.

Argentina’s Quest for the Moral High Ground in the Recent Restructuring with Its Foreign Bondholders

By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)

 

Steven T. Kargman

Argentina’s new government under President Alberto Fernández recently completed a bond exchange which was approved overwhelmingly by its foreign bondholders.  The final restructuring deal that Argentina reached with its foreign bondholders in early August was the product of a fraught and tortuous negotiating process that lasted several months and came after Argentina had defaulted on its sovereign debt in late May for the ninth time in its history.

A recent four-part article published in Global Restructuring Review examines the negotiating dynamics in the restructuring negotiations between Argentina and its foreign bondholders.  The article focuses in particular on what I call the “three P’s”—namely, the pandemic, the professoriate, and the Pope—that I argue underpinned Argentina’s strategy in those negotiations.

Argentina sought to use each of the “three P’s” to its advantage.  First, the pandemic likely made Argentina’s foreign creditors more accommodating in their stance vis-à-vis Argentina in light of the strains the pandemic placed on Argentina’s sovereign balance sheet.  Second, Argentina benefited from the support of prominent professors from around the world who expressed their strong support for Argentina’s negotiating position.  The professors weighed in on various matters such as whether Argentina’s debt sustainability would or would not be restored by debt restructuring proposals then under consideration and what type of collective action clauses (CACs) for binding dissenting creditors through a supermajority vote should be used in the new bonds issued pursuant to the restructuring.  Third, Argentina sought to benefit from the Pope’s moral authority as reflected in a meeting the Pope held in late January with President Fernández as well as in the Pope’s participation a few days later in a Vatican conference on issues of debt and development.

In its final section, the article discusses the economic prospects for Argentina post-restructuring in view of the major economic challenges that Argentina will continue to face notwithstanding the outcome of the recently concluded sovereign debt restructuring.  The article also provides an overview of certain factors that may be relevant to Argentina’s upcoming discussions with the International Monetary Fund (IMF) concerning the IMF’s outstanding loan of $44 billion to Argentina.

The full article can be found here. This four-part article was first published in Global Restructuring Review (GRR) and is reposted with the permission of the GRR.

Big Data Meets Bankruptcy

By Carl Wedoff (Jenner & Block), David P. Saunders (Jenner & Block)

Carl Wedoff
David P. Saunders

For as long as there have been consumer businesses, they have collected consumer data. But in recent years, the volume and value of consumer data collection has increased exponentially, becoming a multibillion-dollar industry of its own. At the same time, consumer privacy laws are on the rise at the state level and are under consideration at the federal level. The value of data can create substantial friction for a business with respect to maintaining consumer interests and complying with privacy laws and regulations while maximizing the usefulness of consumer data to the business itself.

Bankruptcy courts routinely deal with the sale of consumer data, often in retail bankruptcies, but to date, “big data” issues have rarely, if ever, surfaced. However, this could change with the anticipated surge of corporate bankruptcy resulting from the recent COVID-19 pandemic.

As a result, bankruptcy judges and “consumer privacy ombudsmen,” or CPOs, need to evaluate more now than ever whether the transfer of consumer data is both permissible and in the best interests of all parties involved, including the consumers to whom the information relates.

This article explores the current framework for the sale of consumer data in bankruptcies and the potential changes in how bankruptcy courts may approach consumer data privacy issues in the future.

The full article can be found here.

Insolvency of Significant Non-Financial Enterprises: What Can We Learn from Bank Failures and Bank Resolution?

By Ilya Kokorin, Leiden Law School (The Netherlands)

Ilya Kokorin

The current economic downturn triggered by the spread of COVID-19 demonstrates that the role of insolvency law should not be restricted to resolving conflicts between private parties (i.e. creditors and debtors). Nevertheless, the very framework of insolvency law remains primarily: (i) microprudential – single entity focused and designed to protect individual debtors and their creditors, (ii) contractarian – implementing the idea of creditors’ bargain and solving coordination problems between creditors of a single entity, and (iii) reactive – centred around post-crisis liquidation of assets and allocation of proceeds among creditors. It may therefore be ill-fitted to serve the public interest in mitigating the negative externalities of large-scale (systemic) corporate debacles (e.g. Chrysler, GM, British Steel, Carillion) or handling the economy-wide instability experienced nowadays.

In contrast to corporate insolvency, in the aftermath of the global financial crisis of 2008 (GFC), bank resolution in the European Union (EU) and the USA went through fundamental changes that seek to preserve financial stability and ensure continuity of critical functions. Bank resolution has increasingly embraced the macroprudential vision, recognizing the need for an advanced preparation and a speedy intervention to ensure continuity of critical functions, preservation of financial stability and avoidance of bailouts. This vision has resulted in the specific proactive and reactive recovery and resolution strategies. In the recent paper Insolvency of Significant Non-Financial Enterprises: Lessons from Bank Failures and Bank Resolution, I explore whether the modern approaches to bank crises can be extended to non-financial enterprises. I discuss how insolvency law might help minimize social harm stemming from wide-ranging shocks and grand-scale business failures and suggest what we can learn from bank failures and bank resolution.

The failure of Carillion, once the UK’s second-largest construction company, has shown that the reactive approach to crisis resolution, centred around post-crisis intervention, posed significant risks not only for creditors but also for other stakeholders and communities at large. Carillion had around 43,000 workers, of whom 19,000 were based in the UK. It owed around GBP 2 billion to the extensive network of 30,000 suppliers, sub-contractors and other creditors and left the pension liability exceeding GBP 2.5 billion. Even though the signs of financial distress appeared long before Carillion filed for liquidation in January 2018, these warning signals were largely ignored. The failure of Carillion had substantial implications for the provision of public services, raising environmental, health and safety concerns. It ultimately led to a state intervention backed by taxpayers’ money. However, the actual economic and social cost of Carillion’s insolvency are hard to quantify. Financial distress of such a significant enterprise (significant non-financial enterprise or SNFE) required timely state intervention. Nevertheless, its multiple profit warnings came as a surprise to the Cabinet Office.

Insolvency of Carillion was characterized by the absence of timely reaction to prevent crisis escalation, a genuine threat of public disruption and a vast complexity determined by both the debtor’s organizational structure, consisting of more than 320 group members, and the nature of its activities. Many of the same features were observed in the failure of banks and banking groups during the GFC. As a response, both the EU (BRRD) and the USA (Title II of the Dodd-Frank Act) have embraced a proactive and precautionary approach focused on preparation and early response. In my paper, I use the case of Carillion to inquire whether selected bank recovery and resolution tools could have been adopted to prevent the collapse of Carillion, or to mitigate its negative consequences.

In particular, I analyse three such tools, namely: (i) intervention powers granted to state authorities for early (preventive) reaction to the escalation of financial problems before the actual insolvency, (ii) entity and group recovery and resolution planning, and (iii) administrative-led insolvency process. I conclude that while the first two mechanisms may prove beneficial, the last one is rather controversial. While an administrative-led process has certain advantages and prevails in bank resolution, it may be difficult and unnecessary to replicate or transpose to non-financial enterprises. Instead, a transparent court-supervised process with active involvement of creditors and debtors, as well as a limited and targeted engagement of public authorities on matters of public interest should be encouraged.

The full paper is available here.

Challenges of Emerging Market Restructurings in the Age of COVID-19

By Steven T. Kargman (Kargman Associates/International Restructuring Advisors)

Steven T. Kargman

As part of the overall global economic slowdown in the wake of the COVID-19 pandemic, many emerging market economies around the globe have suffered sharp economic downturns, particularly in light of the lockdowns of economies that were imposed in many of these countries.  With the economic fallout from the COVID-19 pandemic in emerging economies, a number of these economies have been faced with a veritable perfect storm.

Specifically, many of these economies have been adversely affected by, among other things, a sharp drop in prices for commodities such as oil and various metals, the drying up of foreign tourism revenues in view of the disruption of international air travel and the closing of national borders, and the major decrease in remittances due to layoffs of overseas foreign workers.  In addition, many major emerging market currencies have experienced significant depreciation vis-à-vis hard currencies such as the US dollar.

Moreover, emerging economies as a whole have also faced what economists term a “sudden stop”—i.e., a sudden outflow of foreign investment capital that had previously been flowing into these economies.  Furthermore, the public finances of governments in the emerging markets have become strained as such governments have been forced to make expenditures on economic recovery programs as well as public health responses to the pandemic.

The article discusses the implications of the global economic slowdown associated with COVID-19 for restructuring activity in the emerging markets around the globe.  In particular, the article examines how the economic slowdown may give rise to several different types of emerging market restructurings, namely, sovereign debt restructurings, corporate debt restructurings, and infrastructure project restructurings.  It also examines how the economic slowdown in the emerging markets might affect restructuring-related matters involving state-owned enterprises (SOEs) and non-performing loans (NPLs) in national banking systems.

The article also considers special issues associated with China’s newly prominent role as the largest official creditor to the emerging markets and developing countries and China’s sponsorship of Belt and Road Initiative (BRI) projects around the world.  Further, the article discusses other legal and policy issues that have become more salient in recent years in the context of emerging market restructurings, such as the role of holdouts in sovereign debt restructurings as well as the relevance in corporate debt restructurings in these jurisdictions of any potential gap that may exist between insolvency/restructuring law and practice.

The full article can be found here.

INSOL Europe/LexisNexis coronavirus (COVID-19) Tracker of Insolvency Reforms—China

By Xiahong Chen (China University of Political Science and Law)

Xiahong Chen

The modification of Enterprise Bankruptcy Law of the People’s Republic of China in 2006 had been announced to be in legislative organ’s amendment procedure for years. As there is no further progress in 2020, the slow process must not catch the urgent needs of economic community for corporate rescue after breakout of coronavirus epidemic. Consequently, the Supreme People’s Court of P.R.China was playing an active role in policy-making from judicial perspective concerning civil disputes resolution. From April to June 2020, the Supreme People’s Court of P.R.China had issued 3 judicial guidance in series to direct judicial hearing of civil case in all level of courts during and after the epidemic, with purpose to guide judicial hearing of civil cases relating to disputes caused by coronavirus. Among them, the second one, published on 19 May 2020, contains 7 important guidelines for judicial hearing of bankruptcy cases relating to COVID-19, aiming to improve possibility of corporate rescue and enhance viability of those financial-distressed companies further.

Changes of bankruptcy policy in above-mentioned guidance include: (1) Court-supervised negotiation between the insolvent debtor and those creditors before the opening of bankruptcy proceeding; (2) Distinguishing real causes of insolvency when examining bankruptcy criteria; (3) Further promoting the link between civil execution proceedings and bankruptcy proceedings; (4) Extending the reorganization period from maximum of 9 months according to EBL 2006 by another 6 months; (5 ) Highlights of effective protection of creditors’ substantive rights and procedural rights in bankruptcy proceedings;(6) Maximizing the debtor’s ability to continue operations and the value of property disposal; (7) Promoting the efficient hearing of bankruptcy cases.

In this short note, the author Xiahong Chen, fellow of Bankruptcy Law and Enterprise Restructuring Research Center of CUPL, was invited by the INSOL Europe, introduces the main points of adjustments of bankruptcy policies relating to epidemic in detail. According to his observation, like the global legal and policy changing trends in bankruptcy area all over the world recently, the changes concerning judicial hearing of bankruptcy cases in China is expected to be helpful for survival of those financial struggling companies.

The full article is available here.

What Small Businesses Need Most Is A Little More Time

By Brook Gotberg (University of Missouri Law School; Chair, Small Business Committee of the Bankruptcy & COVID-19 Working Group)

Brook Gotberg

In the wake of the national shutdown of most commercial activity in response to the COVID-19 pandemic, many small businesses are struggling with financial disruption, restrictions on reopening, and uncertainty regarding future business prospects.  Small businesses make up the vast majority of private firms in the United States, and provide nearly two-thirds of all new jobs.  These businesses have been the most visible economic casualties of the global pandemic, with many already closing for good, and many others reevaluating their prospects.  Certain industries, particularly dining and entertainment, have been particularly hard-hit, and could face large-scale obliteration.

A group of interdisciplinary scholars, the Small Business Committee of the Bankruptcy & COVID-19 Working Group, has been meeting regularly since March to discuss policy proposals for bankruptcy that would best protect viable small businesses from unnecessary death.  Although bankruptcy serves as a method to discharge debt, it also operates to stop collection efforts, which may be essential even for companies with little to no debt.  We fear that many formerly profitable small businesses will unnecessarily fail in the face of the current constraints on bankruptcy protection – constraints which assume a functioning economy, not the current reality.  Moreover, a mass filing of bankruptcies could overwhelm the bankruptcy system itself, particularly in light of the accelerated time frames currently designated for small businesses under the Bankruptcy Code.

We therefore recommend that the Code be temporarily adjusted to put a six-month freeze on most typical deadlines, affording debtors additional time to propose a plan of reorganization.  Furthermore, we recommend that debtors be allowed an amortized schedule to repay past-due rent.

Our reasoning for this proposal is simple.  While bankruptcy law in normal times can distinguish viable companies from non-viable companies and recommend reorganization or liquidation accordingly, these are not normal times.  Baseline assumptions for the value of businesses depend on revenues, which are now artificially constrained.  Creditors, trustees, and judges cannot make informed decisions on the viability of a given enterprise based on the recent past, and that uncertainty is unlikely to be resolved in the near future.  It is therefore essential to allow bankrupt firms more time to take advantage of the automatic stay while reassessing options for reorganization.

Furthermore, the hit to revenues will likely create debt overhang for otherwise profitable businesses that could prove impossible to overcome in the short run. This is particularly true for rental obligations.  For many small businesses, past-due rent is likely to be the primary obligation, but the law does not permit debtors to repay past-due rent over time, as is permitted for other forms of debt.  Current bankruptcy rules require a debtor to commit to its outstanding rental agreements within 60 days of filing, and then to repay all past-due rental obligations “promptly” (see 11 U.S.C. § 365(b) and (d)(4)(A)).  Our policy recommendation would permit small business debtors to repay rental obligations over the life of the plan – three to five years, under the Small Business Reorganization Act (SBRA).

Similarly, we also recommend that interest accumulated on oversecured collateral after the date of the national emergency proclamation, March 13, 2020, be disallowed in an effort to preserve the respective positions of all creditors.

Recognizing the burden placed on landlords and secured creditors by these recommendations, our proposed changes to deadlines do not interfere with swift cash collateral motions and motions to obtain alternative financing.  We also recommend that, although most motions to lift the stay would not be permitted, creditors should be allowed to lift the stay in circumstances where it can be shown that the debtor is wasting or spoiling the collateral.

A simultaneous permanent closure of small businesses would be catastrophic for the American economy, as hinted at by the surge in unemployment that followed the temporary closures.  Beyond the loss of jobs, closure of businesses would mean fewer services offered within the community, and closed storefronts would likely invite blight, particularly in already vulnerable communities.  This could erase years of hard-won economic and social progress.

The goal of the Bankruptcy & COVID-19 Working Group is to make workable policy recommendations that will have a meaningful impact in mitigating the harm caused by COVID-19 to the American economy.  The group continues to meet, gather data, and review additional policy recommendations.  The goal is to minimize the long-term damage caused by the global pandemic by exploring how bankruptcy policy can do the most good.

The full letter can be found here.

Estimating the Need for Additional Bankruptcy Judges in Light of the COVID-19 Pandemic

By Benjamin Iverson (BYU Marriott School of Business), Jared A. Ellias (University of California, Hastings College of the Law), and Mark Roe (Harvard Law School)

Ben Iverson
Jared A. Ellias
Mark Roe

We recently estimated the bankruptcy system’s ability to absorb an anticipated surge of financial distress among American consumers, businesses, and municipalities as a result of COVID-19.

An increase in the unemployment rate has historically been a leading indicator of the volume of bankruptcy filings that occur months later.  If prior trends repeat this time, the May 2020 unemployment rate of 13.3% will lead to a substantial increase in all types of bankruptcy filings.  Mitigation, governmental assistance, the unique features of the COVID-19 pandemic, and judicial triage should reduce the potential volume of bankruptcies to some extent, or make it less difficult to handle, and it is plausible that the impact of the recent unemployment spike will be smaller than history would otherwise predict. We hope this will be so.  Yet, even assuming that the worst-case scenario could be averted, our analysis suggests substantial, temporary investments in the bankruptcy system may be needed.

Our model assumes that Congress would like to have enough bankruptcy judges such that the average judge would not be pressed to work more than was the case during the last bankruptcy peak in 2010, when the bankruptcy system was pressured and the public caseload figures indicate that judges worked 50 hour weeks on average.

To keep the judiciary’s workload at 2010 levels, we project that, in the worst-case scenario, the bankruptcy system could need as many as 246 temporary judges, a very large number. But even in our most optimistic model, the bankruptcy system will still need 50 additional temporary bankruptcy judgeships, as well as the continuation of all current temporary judgeships.

Our memorandum’s conclusions were endorsed by an interdisciplinary group of academics and forwarded to Congress.

Congress is ignoring the best solution for troubled companies: bankruptcy

By Jared A. Ellias (University of California Hastings College of the Law), George Triantis (Stanford Law School)

Jared A. Ellias
George Triantis

During the COVID-19 pandemic, Congress has moved quickly to get trillions of dollars of emergency relief to consumers, small businesses, and large firms. These efforts aim to rescue millions of American consumers and businesses from insolvency.

It is troubling, though, that the federal government is ignoring the law that already exists for cushioning the blows associated with financial distress: the bankruptcy system. In its strategy to provide relief and stimulus, the government is in effect offering roadside emergency assistance when the infrastructure and expertise of a hospital is easily accessible.

Because the bankruptcy system entails a detailed restructuring process, it forces companies to think hard about how they’ve been doing things and whether it makes sense to continue doing them that way. Cash infusions from programs like those in the CARES Act, on the other hand, are only designed to keep businesses’ heads above water. That’s all that some companies need, but for others that were already struggling before the crisis hit, such as J.Crew and Neiman Marcus, bankruptcy can encourage them to focus on their long-term health.

Our existing bankruptcy system isn’t only crucial for helping companies move past their immediate crisis of zero revenue and illiquidity, it will also be essential in helping entire industries adapt to a prolonged period of uncertainty created by the coronavirus pandemic.

For the full opinion piece, click here.

For other Roundtable posts relating to the Covid-19 crisis, see Andrew N. Goldman, George W. Shuster Jr., Benjamin W. Loveland, Lauren R. Lifland, “COVID-19: Rethinking Chapter 11 Bankruptcy Valuation Issues in the Crisis.”

COVID-19 and the Bankruptcy Court Workload

By Taylor Custer (Harvard Law School)

Taylor Custer

The United States’ response to COVID-19 has led to record levels of unemployment and a severe contraction in real GDP. The economic shock has already pushed companies such as J.C. Penney and J.Crew into bankruptcy. And many more, such as AMC and Hertz, may quickly follow. If that happens, the nation’s bankruptcy courts could soon face unprecedented levels of stress. There are at least four ways to address a potential surge.

First, Congress could authorize more permanent bankruptcy judges. It has currently authorized the federal courts of appeals to appoint 316 permanent bankruptcy judges throughout the country. But three years ago, when the economy was much stronger, the Judicial Conference argued that more judges were still needed.

Second, Congress could authorize more temporary bankruptcy judges. It has currently authorized about three dozen of them. Temporary bankruptcy judgeships expire when the occupant dies, retires, resigns, or is removed from office 5 years after the seat was created or extended. The most recent extension was in 2017, so the current temporary bankruptcy judgeships will remain vacant once occupants begin to depart after 2022 if the seats are not extended.

Third, the judicial council of each federal court of appeals could recall retired bankruptcy judges to serve.

Fourth, the judicial councils for the federal courts of appeals could agree to temporarily transfer bankruptcy judges around the country. Although this would do little to alleviate stress from an absolute rise in bankruptcies, it could help manage bottlenecks in places with disproportionate bankruptcy filings—such as Delaware, New York, and Texas. Under 28 U.S.C. § 152(d), “[w]ith the approval of the Judicial Conference and of each of the judicial councils involved, a bankruptcy judge may be designated to serve in any district adjacent to or near the district for which such bankruptcy judge was appointed.” And, under 28 U.S.C. § 155(a), “[a] bankruptcy judge may be transferred to serve temporarily as a bankruptcy judge in any judicial district other than the judicial district for which such bankruptcy judge was appointed upon the approval of the judicial council of each of the circuits involved.”

1 2