Recent Developments in Bankruptcy Law October 2017
by | posted in: Bankruptcy Administration and Jurisdiction, Cramdown and Priority, Workouts and Pre-Packs | 0

By Richard Levin (Jenner & Block LLP)

The bankruptcy courts and their appellate courts continue to explore issues of interest to practitioners and academics. This quarterly summary of recent developments in bankruptcy law covers cases reported during the third quarter of 2017.

The Second Circuit adopted the use of a market rate to determine cram-down interest rates in a chapter 11 case. It also disallowed a secured lender’s make-whole, although without deciding whether a make-whole should be generally disallowed as unmatured post-petition interest. (In re MPM Silicones (Momentive)) In contrast, the Houston bankruptcy court allowed a make-whole in a solvent case, but also without reaching the post-petition interest issue. (In re Ultra Petroleum)

The Delaware bankruptcy court clarified its jurisdiction to approve a third-party release in a settlement implemented through a confirmed chapter 11 plan, holding that plan confirmation is a core proceeding, so Article III limits do not apply. (In re Millennium Lab Holdings II, LLC) The Delaware bankruptcy court also reconsidered, and disallowed, a merger agreement termination fee after termination of the agreement. (In re Energy Future Holdings, Inc.)

Bankruptcy courts increasingly approve of the idea that under section 544(b), the trustee may use the longer reachback periods of the Internal Revenue Code and the Federal Debt Collection Procedures Act (In re CVAH, In re Alpha Protective Services). And the Ninth Circuit has ruled that for the trustee to pursue an avoidance claim against the United States, section 544(b) does not require a separate sovereign immunity waiver. (In re DBSI, Inc.) 

Finally, the courts have been sympathetic to attorneys in allowing their fees. (In re Stanton; In re Hungry Horse, LLC; In re CWS Enterps., Inc.) Less so for investment bankers. (Roth Capital Partners)

The full memo, discussing these and other cases, is available here, and the full (900-page) compilation of all prior editions is available here.

Momentive: Law Firm Perspectives
by | posted in: Bankruptcy Roundtable Updates, Cramdown and Priority, Valuation | 0

On October 28, 2017, the United States Court of Appeals for the Second Circuit handed down its decision in In re MPM Silicones, L.L.C., holding that where an efficient market exists, the appropriate cram-down interest rate in Chapter 11 cases is the market rate, distinguishing the formula rate applied by the Supreme Court in Till v. SCS Credit Corp. in Chapter 13 cases. The Second Circuit wrote that “the market rate should be applied in Chapter 11 cases where there exists an efficient market. But where no efficient market exists for a Chapter 11 debtor, then the bankruptcy court should employ the formula approach endorsed by the Till plurality.” The Second Circuit also disallowed the senior creditors’ claim for a make-whole payment, although the Third Circuit had allowed such a claim in In re Energy Future Holdings Corp.

Law firms have so far reacted unanimously that this decision is a win for secured creditors as it ameliorates the risk that unsecured creditors could extract value from the debtor at the secured creditors’ expense. Weil writes that “it seems like the Bankruptcy Court, now freed from Till, will find that an efficient market exists, and will adjust the interest rate on the replacement notes accordingly.”

Nevertheless, some firms predict that there may still be areas future controversy. Davis Polk warns that this decision “could result in expensive litigations between debtors and secured creditors as to whether there exists an efficient market and, if so, what the efficient market rate should be.” Norton Rose Fulbright also emphasizes that the next step for secured creditors is to focus on when an efficient market exists.

Firms have also noticed the decision’s implication for debtor-side strategy. Baker McKenzie suggests the possibility that “a debtor may engage in forum shopping to file its case in a jurisdiction that applies the formula approach,” or “be even more sensitive to the potential for exit financing quotes to be used as evidence against [debtors] in establishing a market rate.”

On the issue of the make-whole premium, Davis Polk highlights that the circuit split may increase forum shopping for distressed issuers with potentially significant make-whole obligations. It expects future issuers to draft clearly around the issue of make-whole obligation to provide for future Chapter 11 cases.

(By Jianjian Ye, Harvard Law School, J.D. 2018.)

Fair Equivalents and Market Prices: Bankruptcy Cramdown Interest Rates
by | posted in: Cramdown and Priority | 0

By Bruce A. Markell (Northwestern University Law School)

Cramdown is the confirmation of a plan of reorganization over the dissent of an entire class of creditors. Bankruptcy’s absolute priority rule permits such confirmation only if the dissenting class is paid in full, or if no junior class receives anything. “Paid in full,” however, does not require payment in cash. It can consist of intangible promises to pay money that banks, investors, and markets regularly value.

Whether this market value can precisely be transferred to cramdown has vexed many. This Article, “Fair Equivalents and Market Prices,” surveys the doctrinal background of such valuations and devises three short apothegms that can synthesize the history and doctrine under these phrases: “don’t pay too little”; “don’t pay too much”; and “don’t expect precision.”

Against this background, debates arose recently when a New York bankruptcy court applied a chapter 13 case, Till v. SCS Credit Corp., to a large corporate cramdown in In re MPM Silicones, LLC (“Momentive”). Given the legislative history and precedents in the cramdown area, the Article takes the position that Momentive was correct, that it is compatible with the doctrinal roots of cramdown, and that in the future, courts should resist using pure market-based valuations in cramdown calculations.

This article recently appeared in the Emory Bankruptcy Developments Journal (2016). The Roundtable has also recently posted Anthony Casey’s related article from the same issue, “Bankruptcy’s Endowment Effect.”

Bankruptcy’s Endowment Effect
by | posted in: Cramdown and Priority | 0

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

The notion of endowments and entitlements has a powerful effect on corporate bankruptcy policy. Scholars and lawyers generally assume a creditor endowed with a right outside the bankruptcy system must receive the equivalent of that right when its debtor is within the bankruptcy system. Proponents of this idea often assert that the result is required by the foundational theory of bankruptcy.

In a forthcoming essay, “Bankruptcy’s Endowment Effect,” I demonstrate that this is false. The idea of sacred creditor endowments is an untenable position that misunderstands the fundamental principles of bankruptcy. Corporate bankruptcy is, at its core, a system that alters nonbankruptcy endowments according to a hypothetical bargain that all creditors of a firm would have entered if bargaining were costless. The entire point of that hypothetical bargain is to suspend and alter some nonbankruptcy endowments to maximize the value of the bankruptcy estate and the firm as a whole. Indeed, if every stakeholder retained all of its nonbankruptcy endowments, the Bankruptcy Code would have no provisions at all.

Of course, altering nonbankruptcy endowments can impose costs. Foremost among those costs is the risk of opportunistic behavior that is costly for the estate as a whole. Bankruptcy policy will, therefore, be designed to maximize estate value while minimizing opportunistic bankruptcy behavior. Thus, the guiding principle for optimal bankruptcy design should be not the preservation of nonbankruptcy rights but rather the minimization of opportunistic behavior that reduces the net value of a firm.

With that principle in hand, we can resolve many difficult questions of bankruptcy policy. In the essay, I focus on applying the principle to the debate over what interest rate a senior creditor should get in a chapter 11 cramdown. In particular, I analyze the dispute in In re MPM Silicones, LLC (“Momentive”), where the bankruptcy court mistakenly reached its final decision by importing a creditor-endowment framework from consumer bankruptcy law (where the framework might make more sense). I show that an optimal rule for corporate bankruptcy supports a cramdown interest rate based on the prevailing market rates for similar loans, which reduces the risk of opportunistic behavior by both debtor and creditor.