Credit Slips

Executory Contracts & Puzzles of the Code

Tomorrow I'm going to be busy at the law school's graduation, so I think I'll make this my last post.  I really appreciate the chance to post here at Credit Slips.  I'll end with my musing about one of many puzzles I see in the Bankruptcy Code.

Courts and academics often proclaim, with little analysis, that the Bankruptcy Code prohibits non-debtor termination of contracts. Specifically, because section 362(b) of the Bankruptcy Code does not mention termination of contracts with the debtor, several courts have held that non-debtor parties are precluded from unilaterally terminating a contract or lease with the debtor, absent relief from the automatic stay. Why this should be so, especially in cases where the contract would be terminable outside of bankruptcy, is unclear. Arguably the automatic stay should not give the debtor greater contractual rights than it enjoys outside of bankruptcy.

Instead, I argue that careful reading of sections 362 and 365 shows that the Bankruptcy Code simply ensures that the non-debtor party will have to pay full breach damages if it terminates a contract solely because of the debtor’s bankruptcy filing. In most cases paying damages is an unattractive option, since the debtor will likely incur substantial costs to cover. In short, the Code often effectively precludes termination by the non-debtor party, by making it prohibitively expensive, but there may be instances in which a party could advance sufficient “cause” to lift the automatic stay for purposes of breaching a contract.

Am I wrong? What are some other puzzles you see in the Code?

Some that I wonder about are: (a) where does it say in the Code that administrative expenses come after secured claims (it was the other way around in receiverships with regard to "six month" claims) and (b) where exactly does it say that a chapter 11 debtor can’t pay prepetition debts in the ordinary course of business?

Why Think About Delaware?

In his response to my thoughts about Delaware, Lynn LoPucki writes that "many believe Delaware venue is not worth discussing because there is no way to ban it while Joseph Biden remains in the Senate."  To the extent that this suggests I am wasting my time, it would be easy to dismiss as the unkind words of a respected scholar who has been harshly attacked by some in the bankruptcy community.  After all, why is my paper less useful than his book?  Senator Biden has been entrenched for a long, long time, long before Courting Failure came out.

But I do think that Lynn's comment raises an important point:  why do scholars think and write about issues that will never change?  In this case, I have two responses.  First, I'm not sure that the Senator will be in his post for that much longer.  While his Presidential hopes are unlikely to be fulfilled, it is quite possible that he could take a cabinet post in a future administration.

Second, my sense is that bankruptcy practitioners and judges are still smarting from Lynn's criticisms.  Even those folks that support removing Delaware's privileged place in the chapter 11 system, which they argue is inherently unfair in a supposedly uniform federal system, often express their discomfort with Lynn's claim that the courts he highlights were not acting in good faith. 

For these two reasons alone I think studying Delaware still has some merit.  I'd be interested in what others think about this.

Professional Fees & Overhead

As some of you know, I spend a good deal of my time thinking about professional fees in chapter 11. One thing that has always puzzled me is the issue of "overhead." It is still common to find courts stating that certain items (e.g., secretarial overtime, attorney late night meals, word processing) are not recoverable in bankruptcy because they constitute "overhead." A variation on this same theme is those courts who announce that certain categories of expenses are not compensable "in this district."

Assuming these items are passed on to the client outside of chapter 11, the bankruptcy court that adopts this approach is essentially accusing the professional of double charging its clients.

More to the point, I wonder how the bankruptcy court knows that these items are overhead? Indeed, the fact that some law firms have two hourly rate structures, one with separate charges for expenses and one, higher hourly rate structure without these charges, suggests that these items are not part of overhead. And since law firm billing systems can easily assign these items to specific client and matter numbers, why assume they are overhead? 

In short, is it time for bankruptcy judges (and the U.S. Trustee) to drop the notion of "overhead"?

And Now for Something Completely Different

For a person interested in the history of corporate bankruptcy, living in Northern New Jersey can be great fun, as every day provides reminders of the great bankruptcy cases of the past, particularly those involving the many railroads that once converged here, all of which were in receiverships and/or section 77 proceedings at various points in time. The sign pictured here is one I see every morning at the Newark's Pennsylvania Station, even though the last Penn Central train departed several decades ago. I'm sure this has confused more than a few tourists over the past few years!

The Delaware Thing

I want to thank the Credit Slips folks for having me visit for the week.  I thought I'd start off with a short post, on an uncontroversial subject.

Next week I'll be flying off to Vienna (yes, academic life is rough) to present my paper on Delaware's role in corporate reorganization at a conference on financial distress at the Vienna Graduate School of Finance. Unless you’ve been living under the well known rock, you know that for the last couple of years the bankruptcy community has been riveted by Lynn LoPucki's controversial thesis that Delaware is the central part of a system where "competing bankruptcy courts offer high fees to bribe the lawyers to bring them cases." In particular, as I understand Lynn's argument, he contends that Delaware is so desirous of big corporate cases that it (a) bribes professionals to come to Delaware and (b) goes easy on the 1129(a)(11) feasibility analysis, leading to more refilings.

As I note in the paper, even would be defenders of Delaware seem to have accepted that that Delaware cases refile at an abnormally high rate, and debates then proceed from that point. I remain unconvinced.