Nortel: More Universalist Than Not

posted by Jay Lawrence Westbrook

Shutterstock_108750656The Canadian and US courts have now ruled in the Nortel case. (Disclosure: I served as an expert for the UK pension interests in the case.) The case was already incredibly important because of an agreement among the parties to sell the worldwide assets of the corporate group without regard to territory or corporate ownership, creating a global pool of proceeds (about $7B) for distribution in such manner as agreed by the parties or as mandated by the two courts. (The UK court was not involved at this stage, which is an interesting point for another day.) A unified worldwide sale is a central advantage of universalism, enabling the parties here to achieve much higher values than had been predicted.

However, when the parties could not agree as to distribution, the two courts were forced to decide. Ignoring many significant aspects of that process, after a joint on-line trial the two courts reached a common result. The joint trial and common result were two more extraordinary accomplishments. The common resolution is a special triumph for universalism.

The result is a pro rata distribution of the sale proceeds by estate based upon the percentage of claims allowed in each case. In other words, the allocation of the $7B in proceeds was global, but global by estate, not pro rata as to each creditor of the group. The formula produces a global distribution overall, a universalist result, but one that favors the creditors of the US company in several ways, including giving effect to an inter-company claim by the US estate against the Canadian parent and to the guarantees that certain US bondholders had from the Canadian parent. While the result falls between the positions of the parties, it is reasonably defensible in principle rather than merely being a compromise. I look forward to making a further post analyzing the result. 

Graph image from Shutterstock

Postpetition Wages Held by Chapter 13 Trustee Belong to Debtor Upon Conversion

posted by Pamela Foohey

In case you haven't seen it, the SCOTUS issued its unanimous opinion in Harris today, holding that postpetition wages held by the Chapter 13 trustee at the time a case is converted to Chapter 7 must be returned to the debtor. When the Fifth Circuit issued its decision that created the split with the Third Circuit, I blogged some thoughts, primarily focusing on statutory analysis. Now that the SCOTUS has weighed in, the practical question is: how can creditors protect themselves from the risk that the trustee will accumulate a large sum of postpetition wages? Today's opinion ends with that question and notes that the amount of postpetition wages a particular Chapter 13 trustee will be holding at the time of conversion will depend upon the practices of that trustee. In addition, as in the case before the Third Circuit, sometimes Chapter 13 trustees accumulate funds because creditors refuse to receive plan payments for whatever reason.

Today's opinion suggests that creditors can include a disbursement schedule in the Chapter 13 plan. The Third Circuit's opinion sets out a few other ideas (see fn 9), including requesting plan modification if a creditor is refusing to accept payments. Perhaps the most effective protection suggested by the Third Circuit is for the plan to provide that payments vest in creditors immediately upon receipt by the Chapter 13 trustee, and to include similar language in the order confirming the plan. The Third Circuit, however, explicitly noted that it was not ruling on whether such language would remove accumulated undistributed payments from revesting with the debtor upon conversion. Today's opinion notes that a plan that provides that payments are property of the estate (as the plan provided in Harris) does not change the outcome that undistributed postpetition wages revest with the debtor upon conversion. But that still seems to leave creditor vesting language as a potential way for creditors to protect themselves.

Shareholders in Chapter 11 Cases

posted by Stephen Lubben

Now up on Dealb%k.

No Evading Illinois Pension Woes

posted by Jason Kilborn

The Illinois Supreme Court issued its unanimous opinion this past Friday putting a stake through the heart of the legislature's latest attempt to evade its responsibility for woefully underfunding four of the state's five public pensions. Adam (among others) has discussed the pension issue in the Detroit bankruptcy case and the Michigan constitutional provision protecting pension benefits from impairment. The Illinois Constitution of 1970 has an identical provision (art. XIII, s. 5), which will have much more bite in the case of the state of Illinois--an entity that, unlike Detroit, is not eligible for bankruptcy protection. Long story short: the Supreme Court all but scoffed at the state's arguments that contracts can sometimes be impaired (and the state has a really, really good reason here) and that prohibiting the legislature from reducing vested pension benefits is an impermissible abdication of sovereign authority. The Court pointed out that it wasn't the legislature, but the people of Illinois, who imposed the pension protection restriction ... and it seems now the people will likely have to revisit the idea of vastly increased state income taxes and the like, as "[a]dherence to constitutional requirements often requires significant sacrifice, but our survival as a society depends on it."

I had long wondered why we still see defined-benefit pensions, in either the public or the private sector. It seemed obvious to me that defined-benefit plans are not sustainable and that every retirement protection system needed to switch to defined-contribution plans (like 403(b) and 401(k) retirement savings plans). It turns out that even this "obvious" switch won't necessarily fix the problem prospectively, as this paper reports.

Where's bankruptcy (or some other kind of restructuring) protection when you need it!?

Bankruptcy and Student Loan Debt

posted by Adam Levitin

My thoughts on whether the Bankruptcy Code should be amended to allow easier discharge of student loan debt are upon The Examiners at the Wall St. Journal. Short of it is yes for private student loans, no for public student loans. I'm sure to catch hell for this from some of the more aggressive student loan forgiveness advocates, given that most of the market is public student loans, but there are other restructuring and foregiveness options available for public loans and serious fairness problems with allowing discharge of existing student loans.  New borrowers shouldn't have to subsidize older ones' dischargeability, and taxpayers shouldn't be picking up the tab for social insurance to the extent that bad educational/career choices are within individuals' control.      

Fine Corinthian Colleges

posted by Stephen Lubben

And the business model that will likely leave them unable to pay students, even if the students win in their ongoing litigation, over at Dealb%k.

Mixed Messages Regarding OLA

posted by Stephen Lubben

Over at Dealb%k I talk about the confusing state of affairs regarding Dodd-Frank Orderly Liquidation Authority and the FDIC's new "single point of entry" (SPOE) approach to OLA. 2015-04-28 09.23.39 HDR

In short, since OLA expressly excludes depository banks, it is not clear that a SIFI can be placed into OLA based on the failure of its insured bank. One way around that problem might be to use the "source of strength" doctrine to trigger a default at the parent-company level.

Trick is that the the regulators have done nothing to develop the source of strength power Dodd-Frank gives them, and doing so is also in tension with their general disapproval of parent company guarantees and cross-default provisions. They argue that guarantees and cross-default provisions will undermine SPOE.

That New Song About Bills

posted by Pamela Foohey

You may have heard it. It was on the radio the last three mornings as I drove to work. It goes, "I got bills I gotta pay, so I'm gonn' work work work every day." It made me think about bankruptcy (naturally). And it is really catchy. The song's simply titled, "Bills," and is LunchMoney Lewis's debut single. The lyrics reference empty fridges, cars not starting, shoes without "soul," praying that cards won't be declined, and, of course, piles of bills. The music video features an adorable girl and her lemonade stand, complete with a credit card reader made out of cardboard.

When asked about the song, Lewis said: "I feel like people relate to 'Bills' no matter where you’re from. Whether you’re very middle class or you’re lower class or you’re in the projects or you’re upper middle class. We all get bills. . . . That’s why I wanted to turn it into something positive, like when you hear 'Bills' it kind of makes you feel happy, you know?" (full interview). The song made me smile, and apparently is rapidly climbing the pop charts.    

Check out the official video for some Friday fun.

Stale Debts in Bankruptcy

posted by Dalié Jiménez

Should liability under the Fair Debt Collection Practices Act (FDCPA) lie against a creditor who submits a proof of claim past the statute of limitations in a consumer bankruptcy case?

That is the question the Supreme Court declined to review recently in LVNV Funding, LLC v. Crawford. In Crawford, the Eleventh Circuit applied the "least sophisticated consumer" standard to find liability for the debt buyer when it submitted a proof of claim in 2008 for a debt that was out of statute as of 2004. Other courts have held differently. In fact, just last month, district courts in Indiana and Pennsylvania dismissed FDCPA suits against debt buyers under essentially the same facts as Crawford. Other courts, including the Second Circuit, have seemingly held that FDCPA liability can never lie in a bankruptcy case.

Putting the merits of applying the FDCPA in a bankruptcy case aside, it seems to me that in this specific instance potential liability under the Act could serve very useful functions: namely efficiency and cost savings.

Continue reading "Stale Debts in Bankruptcy" »

A World Without Harvey

posted by John Pottow

Here's an early obit.  It's hard for me to imagine a chapter 11 world without Harvey Miller.  Although the adjective is over-used, I think it would be difficult to argue the man was not transformative to bankruptcy law.  He was an incredible mentor, and I am honored to have considered him a friend.  I can't count  how many younger lawyers in the field he encouraged and taught, in so many ways.  It's just hard to imagine a world without his seemingly indefatigable spirit.  Harvey makes -- made, I'm still adjusting to the past tense -- you feel both energized and exhausted at the same time after an engagement.  It's a sad day, but happy too, I suppose, knowing what a great run he had.  Trite, I apologize, but he was a rare breed, indeed.

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