[Texas Two-Step and the Future of Mass Tort Bankruptcy Series] Postscript and Analysis of Third Circuit Dismissal of LTL Management’s Bankruptcy
by | posted in: Bankruptcy Reform, Chapter 11, Corporate Governance, fraudulent transfer, Jurisprudence, Mass Torts, Texas Two-Step and the Future of Mass Tort Bankruptcy Series, Third-Party Releases | 0

Editor’s Note: On November 1, 2022, the BRT concluded our eight-part series on the Texas Two-Step, the bankruptcy of LTL Management, and the future of mass tort bankruptcies (see below for the full list of posts in the series).  On January 30, 2023, the Third Circuit released its opinion dismissing the bankruptcy filing of LTL Management, raising a host of new questions for mass tort bankruptcies.  In response, the BRT invited contributors to the prior series, as well as some new voices, to analyze the decision and what it might mean for the future of mass tort bankruptcies.

We will resume our series on crypto bankruptcies next week!

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William Organek

In “The Dismissal of LTL and What Lies Ahead for Mass Tort Bankruptcy,” William Organek (Harvard Law School) summarizes the Third Circuit’s opinion dismissing LTL’s bankruptcy filing.  The post then describes key takeaways from the opinion, suggesting how this might impact future mass tort bankruptcy filings, LTL’s tort creditors, and parent company Johnson & Johnson.  Finally, it examines questions raised by mass tort bankruptcies that the opinion does not answer, instead leaving them for future cases and debtors.

The full post can be read here.

 

 

 

Hon. Judith K. Fitzgerald (ret.)

In “Over-Thinking Ramifications of the Dismissal of LTL Management LLC’s Bankruptcy,” Hon. Judith K. Fitzgerald (ret.) (University of Pittsburgh School of Law and Tucker Arensberg, P.C.) explains how the Third Circuit’s opinion merely applies existing Third Circuit precedent to a single debtor to reach a fact-specific conclusion about the appropriateness of bankruptcy for LTL Management LLC.  In doing so, the post argues against concerns that the opinion will make it more difficult for companies facing imminent financial distress to use bankruptcy to resolve their liabilities, even in the mass tort context.

The full post can be read here.

Note: Judge Fitzgerald is a consultant for counsel for certain parties in the LTL bankruptcy, and the opinions expressed herein are solely her own.

 

 

Adam J. Levitin

In “The Implications of LTL’s Per-Debtor Analysis,” Adam J. Levitin (Georgetown University Law Center and Gordian Crypto Advisors LLC) describes how the LTL decision interacts with the standard entity separateness explanation for much of corporate law.  If courts read the opinion strictly to require a debtor-by-debtor analysis of insolvency, this could have major implications for joint administration, venue, and other issues central to bankruptcy administration that stretch far beyond the mass tort context.

The full post can be read here.

Note: Adam Levitin is a consultant for counsel for certain parties in the LTL bankruptcy, and the opinions expressed herein are solely his own.

 

 

Edward J. Janger
John A. E. Pottow

In “Waltz Across Texas: The Texas Three-Step,” Edward J. Janger (Brooklyn Law School) and John A. E. Pottow (University of Michigan Law School) explore how the seemingly limited decision in the LTL bankruptcy cannot be divorced from wider questions about why bankruptcy is being used to resolve mass tort liability.  Focusing on the essential role that third-party releases play in mass tort bankruptcy filings, it suggests that we consider not only whether financial distress is required for good faith, but also what should be required of nondebtors seeking third-party releases and what justifies such extraordinary relief.

The full post can be read here.

 

 

Jonathan C. Lipson

In “The Third Circuit’s New One-Step: Good Faith as Purpose in LTL,” Jonathan C. Lipson (Temple University–Beasley School of Law) analyzes the LTL decision by examining how the court understands the concept of good faith.  Earlier decisions in the Third Circuit relied on a primarily contractualist, or rules-based approach to good faith–does a debtor face financial trouble or does it have a substantial number of creditors?  The LTL decision, however, endorses a more policy-oriented, or standards-based approach to good faith, asking whether the contemplated use of bankruptcy appropriately furthers the policy goals of chapter 11.  This could lead to a re-evaluation of whether bankruptcy should be used for resolving mass torts, and some of the tools used by bankruptcy courts to facilitate a deal among the debtor and its creditors.  This could have particular ramifications for other mass tort bankruptcies such as that of Purdue Pharma.

The full post can be read here.

 

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Earlier posts in the series:

  1. Introduction to LTL Management’s Bankruptcy, by Jin Lee and Amelia Ricketts (students at Harvard Law School)
  2. Vertical Forum Shopping in Bankruptcy, by Jonathan C. Lipson (Temple University-Beasley School of Law)
  3. Upending the Traditional Chapter 11 Bargain, by Jared A. Ellias (Harvard Law School)
  4. A Qualified Defense of Divisional Mergers, by Anthony Casey and Joshua Macey (University of Chicago Law School)
  5. Is the Texas Two-Step a Proper Chapter 11 Dance?, by David Skeel (University of Pennsylvania Carey Law School)
  6. The Texas Two-Step and Mandatory Non-Opt-Out Settlement Powers, by Ralph Brubaker (University of Illinois College of Law)
  7. The Texas Two-Step: The Code Says it’s a Transfer, by Mark Roe and William Organek (Harvard Law School)
  8. A Different Look at Sec. 548 and Concluding Thoughts, by Hon. Judith K. Fitzgerald (University of Pittsburgh School of Law and Tucker Arensberg, P.C.) and Adam J. Levitin (Georgetown University Law Center and Gordian Crypto Advisors LLC); and John A.E. Pottow (University of Michigan School of Law)

Badges of Opportunism: Principles for Policing Restructuring Support Agreements
by | posted in: Bankruptcy, Bankruptcy Roundtable Updates, Workouts and Pre-Packs | 0

By Edward J. Janger (Brooklyn Law School) and Adam J. Levitin (Georgetown University Law Center)

Edward J. Janger
Adam J. Levitin

Business reorganizations are corporate control transactions. When a debtor is insolvent or nearly so, control is in play along two different axes. The first axis allocates control within the existing capital structure. The filing of bankruptcy effectuates a change of control from equity to debt. On the second axis, the company itself is on the auction block, meaning that its assets, or even the entire firm, may be transferred to a new owner. Outside investors may wish to buy the company, and the choice among offers implicates serious governance concerns. This article considers the dynamics of control through the lens of restructuring support agreements (“RSAs”)—contractual agreements among creditors, and sometimes the debtor, to support restructuring plans that have certain agreed-upon characteristics. We conclude that RSAs offer a salutary bridge between the efficiencies of a quick “all asset” sale and the procedural protections of a plan of reorganization. However, they also pose a potential avenue for opportunistic abuse. Specifically, we are concerned with provisions in an RSA that hold value maximization hostage to a reordered priority scheme. Thus, we argue that courts should scrutinize RSAs carefully, and prohibit those that lock in opportunistic value reallocation.

Opportunistic behavior can arise on all sides of restructuring negotiations. Insolvency creates opportunities for creditors (and the debtor) to use transactional leverage to influence the allocation of scarce assets: secured creditors may foreclose; banks may engage in setoff; key suppliers may threaten to stop supplying; landlords can threaten to evict; unsecured creditors may get judgments and start grabbing assets; and purchasers may seek to take advantage of a depressed valuation to purchase the company on the cheap. To the extent that the debtor has value as a going concern, individual creditors may have the power to extort value by threatening to force liquidation. Alternatively, fully secured creditors may prefer a quick realization on their collateral, because they do not benefit from increasing the value of the firm.

The Bankruptcy Code seeks to limit these uses of situational leverage in a number of ways: (1) it stays unilateral creditor action (the automatic stay); (2) it allows for the unwinding of certain prepetition transfers (avoidance); (3) it sets a baseline distribution if the firm liquidates, but promises more if the firm can restructure (best interests/adequate protection); (4) it creates a structured bargaining process that ensures adequate information and reduces the ability of a creditor to holdout in the face of a reorganization plan that is supported by key creditor constituencies (supermajority acceptance); and (5) it sets an entitlement baseline if the firm reorganizes (cramdown). Bargaining in bankruptcy is informed by these procedural requirements and substantive entitlements. If a deal is not reached, liquidation follows.

Recently, in Czyzewski v. Jevic Holding Corp., the Supreme Court raised concerns about procedural innovations that might be used to create “end-runs” around the plan process and these procedural protections. In this regard, RSAs can be a useful tool for aiding compliance with the plan process. However, they are also sometimes also referred to as “lockup” agreements. Once an RSA is proposed and supported by key constituencies, the costs of opposing the contemplated plan may be prohibitive for most creditors. The proposal may operate as a fait accompli. If the RSA freight train is being used to stop creditors from developing information or identifying bases for objection, the device becomes problematic.

The difficulty is distinguishing beneficial RSAs from harmful ones. In our view, a fundamental norm of chapter 11 should govern RSAs, all-asset sales, and a range of other transactions: the common interest in value maximization may not be held hostage by a creditor seeking to improve its own priority. The essay begins by describing the practice surrounding restructuring support agreements and identifies some of the anecdotal concerns raised. We then catalogue the good and bad in RSAs. Next, we illustrate how to distinguish the good from the bad by focusing on bargaining in the shadow of entitlements. Finally, we flesh out the concept of an end-run around the plan process in the context of an RSA and identify “badges of opportunism” that should raise an inference that the practice is being abused.

The full article can be found here.