433 posts categorized "Corporate Bankruptcy"

"Drinking water from a fire hose:" The Weinstein Company Chapter 11 Hearing #2

posted by Melissa Jacoby

Sale AdNestled in a review of an album by Spinal Tap bassist Derek Smalls (a/k/a Harry Shearer), the April 10 edition of Variety magazine published a notice of sale of The Weinstein Company. The notice includes a bid deadline of April 30, a sale hearing on May 8, and the soothing assurance to bidders that a buyer would incur "NO SUCCESSOR LIABILITY" (bolded and all-caps) for the heinous acts TWC apparently tolerated and facilitated over many years. The notice anticipates that a buyer might agree to remain liable for some TWC obligations, however, perhaps contemplating valuable licensing contracts.

The Variety notice is a consequence of the second TWC hearing on April 6 (for the first hearing, see here). By the end, objections to the bidding procedures order had been resolved, resulting in docket #190, the order approving the procedures, including a $9.3 million breakup fee and escalating expense reimbursement for the stalking horse bidder if the sale is delayed. The number of times sexual harassment, sexual assault, or rape were mentioned at the hearing: zero.

Counsel to the newly-appointed five-member creditors' committee told the court that getting up to speed in this case (no pun intended) was "drinking water from a fire hose." And a battle is brewing over whether bids should be allocated among the various asset categories (again, given the stated complexity) - something the stalking horse bidder seems to resist. Meanwhile, at least one counterparty to a licensing agreement asserts that its contract was rescinded prior to the filing. Assuming it loses that fight, the party worries it will have insufficient time to consider whether the asset buyer is providing adequate assurance of future performance.

This case invites the caustic lament, "if only the Bankruptcy Code drafters had established a fair and transparent process to deal with all of these issues!" When Harry Shearer decides to send his imaginary-band bassist into a quiet retirement, maybe he will make a film about chapter 11. After all, fairness rocks.

 

Was Charleston Gazette-Mail a good case for an Ice Cube Bond?

posted by Melissa Jacoby

Based only this news report, the answer appears to be yes - an Ice Cube Bond would have honored the claimants' need for speed without allowing them to shift all the risk to the bankruptcy estate. The news article indicates that sale proponents referred to the holdback request as a "Hail Mary." In the foundational Lionel case, the dissenting Second Circuit judge used that characterization for a request to reverse the sale order, not to hold back proceeds. An Ice Cube Bond arguably reduces the possibility of Hail Mary arguments because it allows analysis of entitlements to be determined at a less pressured pace.

 

H/T Ted Janger

 

Notes on Complexity: The Weinstein Company Chapter 11 Hearing #1

posted by Melissa Jacoby

Some rarely-heard terms at The Weinstein Company's March 20 chapter 11 first-day hearing: sexual harassment, sexual assault, rape.

A more common utterance among TWC representatives: complex. The industry, the capital structure, the lending arrangements. All complex. Complex complex complex complex complex.

Part of the complexity, TWC said, comes from the fact that some collateral is governed by the Uniform Commercial Code while other collateral (certain intellectual property) is governed by other law. Yes - secured transactions professors keep saying this mixture is difficult to handle especially at the remedial/recovery stage. Another part of the complexity, according to TWC, is that the property interests have been sliced and diced into... hold on, this sounds familiar. 

What if anything is hiding behind this complexity? If TWC and the sale proponents get their way, the mystery likely will be buried.  The company and other proponent of a quick sale (which includes the sale of avoidance actions) says this sale needs to be done ASAP. 

TWC does not look like a melting ice cube now. It melted in the fall of 2017. Claimants need as much, if not more, protection in manufactured ice cube cases as in real ones, especially if the capital structure is so, well, complex. Complexity and speed are not the best of friends. If claimants are going to be denied full process, quick sale proponents need to post an Ice Cube Bond. Otherwise, a sale of TWC should happen through a plan, with all of the constitutional and statutory hurdles that were supposed to be necessary for the extraordinary exercise of federal court power that TWC seeks.

TWC's representatives also emphasized how business judgment should be respected. From the outside, it looks like TWC terminated Harvey Weinstein only when the news media blew their cover on the track record of heinous allegations. Sure, there is a new CRO, but are all who were complicit in the cover up really out of the picture now? 

A lawyer for the motion picture guilds said at the hearing that the guilds have had "difficulty" with the debtor pre-bankruptcy, and that the case calls for "adult supervision."  Another objector (docket #68)  said at the hearing that it heard from third parties that TWC had been "flagrantly" breaching agreements and misdirecting payment - a state of affairs feared to be the tip of the iceberg, but there had not yet been time to do a full investigation. 

A particularly interesting portion of the hearing involved debtor-in-possession financing. Among other reasons, TWC said it preferred to allow an existing lender to offer the DIP financing because that lender understood the complexity of the business and collateral package. Is chapter 11 practice now at a place where a DIP argues with a straight face that, for continuity purposes, it is better off borrowing money at higher interest rates and higher fees, from an existing lender with incentives that unlikely to align with the best interests of the estate overall? That did not go unchallenged, however. In addition to allowing another potential lender to be heard, the court asked a series of reasonable questions that indicated concerns about the cost of the proposed deal for the bankruptcy estate, and then took a brief recess. Then the proposed lender reported to the court the fees would be reduced.  The court approved the financing on an interim basis to avoid irreparable harm but will be looking at this issue fresh when TWC seeks the final order for financing.

The U.S. Trustee is having a creditors committee formation meeting this week. That committee has a lot to investigate.

The TWC enterprise might be complex. But that's not what this case is about.

 

 

 

 

 

The Economic Growth, Regulatory Relief, and Consumer Protection Act

posted by Stephen Lubben

Or EGRRCPA, for short. That is the official name of S. 2155, a bill which seems to be tearing Senate Democrats apart. Republicans are uniformly in favor of the bill, which Bloomberg describes as "another faulty bank-reform bill." Some Democrats see it as needed regulatory relief for small banks, while others, including the one who used to blog here, see S. 2155 as a rollback of keys parts of Dodd-Frank for big banks that remain too big to fail.

It is both. Indeed, if the bill were stripped of its title IV, I think most people could live with it. But title IV is a doozy.  

Most notably, it raises the threshold for additional regulation under Dodd-Frank from $50 billion in assets to $250 billion. Banks with more than $50 billion in assets are not community banks.

The banks in the zone of deregulation include State Street, SunTrust, Fifth Third, Citizens, and other banks of this ilk. In short, with the possible exception of State Street, this is not a deregulatory gift to "Wall Street," but rather to the next rung of banks, all of which experienced extreme troubles in 2008-2009, and all of which participated in TARP.

My prime concern – given my area of study – is that these banks will no longer be required to prepare "living wills." That is, they will not have to work with regulators on resolution plans.

How then do we expect to use Dodd-Frank's orderly liquidation authority if they fail? It would be impossible without advanced planning. Same for the misguided attempts at "chapter 14." I have real doubts about the wisdom of "bankruptcy for banks," but if it is ever to work, it will require lots of advanced planning (and luck).

And we can't use the normal FDIC approach of finding another, bigger bank to take them over, because that would simply create another colossus, like Wells Fargo. Certainly we don't want that.

Maybe a bailout then? Is that the "new" plan?

Chapter 11 Locale

posted by Stephen Lubben

For nearly two decades, the fact that many really large chapter 11 cases file in two districts has been a point of controversy.  On the one hand, the present system makes some sense from the perspective of debtor’s attorneys, and many DIP lenders, who value the experience and wisdom of the judges in these jurisdictions and the predictability that filing therein brings.  On the other hand, for those not at the core of the present system, it reeks of an inside game that is opaque to those on the outside.  And it is not clear the judges outside the two districts could not handle a big case; indeed, most could.

Where big chapter 11 cases should file is an issue again, at least among bankruptcy folks, given the possibility that the pending Cornyn-Warren venue bill might pass as part of some bigger piece of legislation, perhaps the pending S. 2155 (whose Title IV is so misguided it certainly warrants a separate post).

I have long been frustrated by the discussion of chapter 11 venue.  On the one hand, the present system has developed largely by accident, with little thought for the broader policy implications.  On the other, there is certainly some merit in concentrating economically important cases before judges who are well-versed in the issues such cases present.  The issue calls for careful study, but, as with most political issues these days, we are instead presented with a binary choice.

I have often contemplated concentrating the biggest chapter 11 cases among a group of bankruptcy judges, trained in complexities of multi-state or even global businesses.  A small panel of such judges could be formed in various regions around the country, such that the parties would never have to travel further than to a neighboring state for proceedings.  Geographically larger states – i.e., California and Texas – might comprise regions all by themselves.

Such an approach would ensure that cases would capture some of the benefits of the present system, without the drawbacks of having a Seattle-based company file its bankruptcy case on the East Coast.  Comments are open, what do readers think about developing a nationwide group of "big case" judges?

Merit Mgmt. Group LP v. FTI Consulting Inc.

posted by Adam Levitin

The Supreme Court weighed in today on one of the the most important circuit splits in the bankruptcy world, namely the scope of one of the section 546(e) safe harbors from avoidance actions in bankruptcy.  Section 546(e) has two safe harbors, one for "settlement payments" and the other for transfers "made by or to (or for the benefit of) a ... financial institution ... in connection with a securities contract … commodity contract… or forward contract…”. This latter safe harbor had been read (ridiculously) broadly by some of the courts of appeals, as every non-cash transaction has to go through some sort of financial institution.  Specifically, imagine a transaction in which funds are moving from A to D, but go through intermediary financial institutions B and C:  A-->B-->C-->D.  Can D shelter in the fact that the transfer went through financial institutions B and C?  

The Supreme Court unanimously said no, and I think they clearly got the right result, although I fear the methodology the court used may ultimately be unhelpful for those who think that fraudulent transfer law has an important role to play in policing the fairness of financial markets and preventing against excessively risky heads-I-win, tails-you-lose gambles.  

Continue reading "Merit Mgmt. Group LP v. FTI Consulting Inc." »

Bankruptcy Venue Reform -- Yes, Again, But Maybe This Is the Time?

posted by Bob Lawless

As many Credit Slips readers will know, chapter 11 venue reform has been an issue for decades. As corporate filers have flocked to the Southern District of New York and the District of Delaware, the real reason some observers say is that these courts favor corporate managers, dominant secured lenders, bankruptcy attorneys, or a combination of all of them. Regardless of the merits of these claims, it certainly undermines respect for the rule of law when faraway federal courts decide issues affecting local interests. A great example comes from right here in Champaign, Illinois, where local company Hobbico has recently filed chapter 11. The company, a large distributor of radio-control models and other hobby products, has more than $100 million in debt. The company has over 300 employees in the Champaign area who own the company through an employee stock ownership plan. Yet, the company's fortunes are now in the hands of a Delaware bankruptcy court.

Continue reading "Bankruptcy Venue Reform -- Yes, Again, But Maybe This Is the Time?" »

Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy

posted by Pamela Foohey


NumberNRYesterday I posted about the number of religious organizations that filed chapter 11 between 2006 and 2017, and how their filings track fluctuations in consumer bankruptcy filings during those years. Non-religious non-profit organizations also file chapter 11, but in fewer numbers than religious organizations. As shown in this graph, between 2006 and 2017, a mean of 44 other non-profits filed chapter 11 per year (note: I count jointly-administered cases as one case).

 In comparison, a mean of 79 religious organizations filed chapter 11 per year between 2006 and 2017. Over these twelve years, 36% of all chapter 11 cases filed by non-profit organizations were filed by non-religious non-profits.

Continue reading "Other (Non-Religious) Non-Profit Organizations Also File Bankruptcy" »

So, Is the High Yield Market Efficient?

posted by Stephen Lubben

My inbox is being bombarded with law firm commentary on the Court of Appeals for the Second Circuit's decision that cramdown interest rates should be determined by "market rates," rather than by formula, when the relevant debt market is efficient. A good summary of the commentary can be found over at the Harvard Bankruptcy Roundtable.

And then we have a Bloomberg story this morning, filled with hand wringing about what might happen if a particular mutual fund were to sell a particular bond position – where the fund owns less than 20% of the issue. Nevertheless, the suggestion is that such a sale could have big, market moving effects. That does not sound like a very efficient market.

Given that the high yield market is apt to be the most relevant market to a chapter 11 case, what precisely, then, has the Court of Appeals achieved?

Rights of Secured Creditors in Chapter 11: New Paper

posted by Melissa Jacoby

ABITed Janger and I have posted a paper of interest to Credit Slips readers called Tracing Equity. We still have time to integrate feedback, so please download it and let us know what you think.

As the image accompanying this post suggests, the project was inspired in part by recommendations of the American Bankruptcy Institute's Chapter 11 Commission. Discussion of those proposals starts on page 51 of the PDF.

One of the main insights of Tracing Equity is that both Article 9 of the Uniform Commercial Code and the Bankruptcy Code distinguish between (1) lien-based priority over specific assets and their identifiable proceeds, and (2) unsecured claims against the residual value of the firm. By our reasoning, even attempts to obtain blanket security interests do not give secured lenders an entitlement to the going-concern and other bankruptcy-created value of a company in chapter 11. We explain why our read of the law is normatively preferable and, indeed, is baked into corporate and commercial law more generally--part of a large family of rules that guard against undercapitalization and judgment proofing.

Looking forward to your thoughts.

 

 

Toys "Я" US's Curious Bankruptcy Venue

posted by Adam Levitin

Toys "R" Us filed for bankruptcy with impeccable timing--the very morning I was teaching my Financial Restructuring class about the commencement of the bankruptcy process. I decided to take my class through the TRU petition on PACER. Some 19 TRU entities filed in the Eastern District of Virginia, Richmond division. Only one of those 19 entities is a Virginia entity. I don't know the domicile of the other entities, but TRU is headquartered in New Jersey, and I'd be shocked if there wasn't at least one Delaware entity in the family.  

This left me puzzled. It would seem that TRU likely had at least two respected venues for large Chapter 11s:  District of New Jersey, and District of Delaware. Yet TRU chose to file in Virginia, and in Richmond to boot. 

After a few minutes of sleuthing on the LoPucki-UCLA WebBRD, I discovered that TRU's counsel, Kirkland & Ellis seems to have a cottage industry of Chapter 11 filings in Richmond:  5 cases in recent years. Again, this is puzzling. Richmond is hardly a convenient venue for K&E (with a bankruptcy practice based in Chicago and NY), nor is it a convenient venue for really anyone else--all of the financial creditors are likely to be NY-based, while the suppliers are from all over.  Nor is there obviously better law in the 4th Circuit for a retail bankruptcy (as far as I know, and if there is, it doesn't explain why Richmond rather than Alexandria). Are EDVA judges more lenient on fee applications or less likely to push back against overreaching DIP financing agreements? I don't know, but clearly there's something on tap in Richmond that K&E likes.  

Now here's what else I discovered--there are only two bankruptcy judges in Richmond, and K&E seems to keep getting the same one for its cases. I don't know how cases are assigned in EDVA, but it seems that K&E has discovered a sort of one-judge venue, much like Reno, NV. And what lawyer wouldn't want to pick the judge?  

I'm curious for others' thoughts.  I'd like to think that the chances of bankruptcy venue reform have increased with the departure of Joe Biden from the Senate (or Naval Observatory), not that we're likely to see any legislative action in the foreseeable future.  

WARN Act Claims after Spokeo v. Robins

posted by Adam Levitin

I'm musing out loud here, but does the Supreme Court's holding in Spokeo v. Robins—that a suit claiming statutory damages without alleging actual damages lacks Article III standing—impact WARN Act claims in bankruptcy? The WARN Act is a labor law that requires advance notice of certain plant closings--basically advance notice of mass layoffs. Failure to provide such notice results in statutory damages, even though there might not be any actual damages. For example, imagine that a debtor provided notice of a plant closing but not sufficiently in advance--it was one day too late. Where's the harm?  I think under Spokeo there wouldn't Article III standing for a suit seeking damages. If so, that's a nice boon to unsecured creditors because WARN Act claims are going to be priority claims that get paid ahead of them. Going foward, I would think that Official Committees of Unsecured Creditors should be challenging WARN Act claims. Thoughts?    

A Quiet Revolution in Pension Reform

posted by Jason Kilborn

A historic vote was announced overnight that signals a new era for large pension reform. As is often the case, "reform" here means that ordinary, hard-working folks will suffer a significant amount of pain as big companies are relieved of some liabilities, but the hope is it will be less painful than the alternative. The revolution began in 2014, when Congress adopted the Multiemployer Pension Reform Act (MPRA).  The Pension Benefit Guaranty Corporation guarantees a portion of the benefits due to participants in pension plans that have become insolvent, but as a result, it is also facing a nearly $100 million shortfall in its ability to cover the projected volume of its existing guarantees. Congress attempted to avert disaster by allowing particularly large and especially distressed pension funds to slash benefits themselves in order to maintain solvency. Ordinarily, this extraordinary action would, if possible at all, require an insolvency filing and court oversight of some kind, but the MPRA allows plans who aggregate benefits for many companies (multiemployer plans) to apply to the Treasury Department for administrative permission to abrogate their pension agreements and cut benefits with no court filing or general reorganization proceeding. There are, of course, restrictions on the level of distress required for such a move and the degree of proposed cuts, but the MPRA allows large pension funds to reduce the pension benefits of thousands of beneficiaries with simple administrative approval. The plan participants get a vote on such proposals, but the law builds in a presumption: Treasury-approved cuts go into effect unless a majority of plan beneficiaries votes to reject the cuts.

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Old-Fashioned Insolvency Policy in India

posted by Jason Kilborn

It seems to me a sign of serious regulatory dysfunction when a government expressly uses bankruptcy law as a means of collection, rather than rescue or at least collective redress, with an aim to treating economic stagnation. I've seen several stories recently like this one, touting the new Indian insolvency law and government regulators' strategy of putting pressure on banks to use involuntary insolvency (creditors' petitions) to clean up the NPL problems of a series of major industrial firms. The notion that insolvency law is about collecting NPLs seems at best anachronistic, and likely at least a sign of major dysfunction in other law or policy.

The right way for one lender (including the government tax collector) to collect one defaulted loan is to engage an ordinary collections process (judgment enforcement)--which itself might well result in the sale of the company, as envisioned in the story linked above. Creditor-initiated bankruptcy/insolvency proceedings should be the nuclear option, engaged only when creditors are worried that the debtor's assets will be dissipated by other enforcing creditors before the later-in-time ones can reach the ordinary enforcement stage. Such cases should be rare. The primary users of modern insolvency law should be debtors responding to positive incentives to seek an orderly opportunity for a global renegotiation of their debts, or an orderly way for the governors of those companies to liquidate and redeploy the assets of their companies more effectively--avoiding in the process a protracted battle about their own liabilities as personal guarantors and/or as directors liable for "insolvent trading." 

The subtext of the stories I've seen about the new Indian insolvency law seem to be (1) it does not provide an adequate incentive for debtor-companies to seek either rehabilitation or orderly liquidation when they realize they're in obvious financial distress, (2) the ordinary collections apparatus in India must be totally dysfunctional if banks have no incentive to engage it to deal with their NPLs, (3) the new insolvency law also provides an inadequate incentive for creditors to engage it to seek collective redress, since the government has to put pressure on banks to do so, and (4) all of the work on proper, modern insolvency policy in recent years by UNCITRAL, the IMF and World Bank, and many, many others has been lost on Indian regulators. Especially in developing nations like India and South Africa, the battle over the appropriate, modern role of insolvency law as debtor-initiated rescue or exit, as opposed to old-fashioned creditor-initiated collections, continues to rage.

 

Trump's Bank Regulators: More Swamp Creatures

posted by Alan White

Following his appointment of Steven Mnuchin as Treasury Secretary, the President has nominated Joseph Otting, former CEO of OneWest Bank, to be the chief federal bank regulator as head of the Office of the Comptroller of the Currency. The OCC is theMnuchinprotest bank cop for the nation's largest banks. The OCC determines whether banks are taking too many risks with depositor and taxpayer money, and is charged with preventing failures of banks that are too big too fail, in other words, with preventing the next financial crisis.

OneWest Bank was founded by Treasury Secretary Mnuchin in 2009  primarily to acquire, and foreclose, thousands of troubled mortgage loans made by the failed subprime lender IndyMac. Otting served as CEO of OneWest from 2010 until 2015. The President's two leading bank regulators made considerable fortunes by running this very unusual bank, relying on some big-time government funding.

IndyMac had specialized in "nonprime" mortgages, including no-doc interest-only loans and other toxic products, that failed massively in the foreclosure crisis. IndyMac was the first large federally-regulated bank to fail and be bailed out by the FDIC in 2008.

The California Reinvestment Coalition determined from several Freedom of Information Act requests that the FDIC will pay OneWest $2.4 billion for foreclosure losses on the IndyMac loans. Housing counselors in California identified OneWest as one of the most ruthless and difficult banks to deal with in trying to negotiate foreclosure alternatives on behalf of homeowners. In 2011 OneWest signed a consent decree with the federal banking agencies, neither admitting nor denying the agency's findings that OneWest had routinely falsified court documents in foreclosure cases, the practice known as robosigning. In his Senate confirmation hearing last week, Otting insisted that the regulators' findings of OneWest misconduct were a "false narrative." False or not, OneWest foreclosures, and its deal with the FDIC, do seem to have proven very profitable. Bloomberg estimates that Mnuchin made $200 million from the sale of OneWest in 2015, and Otting earned about $25 million in compensation and severance in his final year at OneWest.

OneWest was acquired by CIT group, one of the few banks that did not repay the taxpayers for their 2008 TARP bailout--the bank filed bankruptcy in 2009, stiffing the taxpayers for $2.3 billion. The bankruptcy reorganization and the shedding of CIT's debt allowed CIT to return to profitability and eventually fund its purchase of OneWest from Mnuchin and his partners.

photo credit Walt Mancin Pasadena Star-News

I Also Do Weddings

posted by Stephen Lubben

Blog administrator's note: I hope Stephen does not get mad at me, but I have moved the video "below the fold" as it wants to autoplay whenever Credit Slips loads. Click on the "continue reading" link to see a CBS video featuring Stephen and problems from the Alfred Angelo bankruptcy with women who may not get their wedding dresses.

Continue reading "I Also Do Weddings" »

Thoughts and Frustrations – Jevic

posted by Stephen Lubben

Over at Dealb%k.

Jevic Commentary

posted by Melissa Jacoby

Just a cross-posting note: Jonathan Lipson and I comment on the U.S. Supreme Court's Jevic decision at the Harvard Law School Corporate Bankruptcy Roundtable.

Exchange Offers and Hardball

posted by Stephen Lubben

Over at Dealb%k.  (BTW, I don't pick the pictures).

Jevic

posted by Stephen Lubben

Third Circuit is reversed. Opinion is here.

Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask

posted by Adam Levitin

There's a great new paper available on out-of-court restructuring and the Trust Indenture Act.   The New Bond Workouts is up on SSRN.  From the abstract it sounds pretty darn amazing—a new, empirically based analysis of bond restructurings that rediscovers a long-forgotten intercreditor duty of good faith: 

Continue reading "Everything You Wanted to Know About Bond Workouts But Were Afraid to Ask" »

Marblegate and a Dose of Reality for the Trust Indenture Act

posted by Jason Kilborn

The Second Circuit on Tuesday released its long-awaited opinion on the Trust Indenture Act, Marblegate v. EDMC. Several of us Slipsters have been discussing the case behind the scenes, and others will have (more intelligent) things to say about the opinion than I, but I thought I'd introduce the blockbuster case to get us rolling.

Long story short, the TIA essentially prohibits out-of-court workouts over the objection of any noteholder whose notes (debt securities) are part of the issuance qualified under the TIA. Section 316(b) says "the right of any holder of an indenture security to receive payment ... or to institute suit for the enforcement of any such payment ... shall not be impaired or affected without the consent of such holder." (emphasis added). The case was about what it means to "impair or affect" the "right" to get paid under indentured notes. The creative argument advanced by Marblegate was that lots of activities having nothing to do with changing the notes or their terms can "impair or affect" its right to get paid, and EDMC crossed the line. EDMC had done a creative end-run around the TIA by suffering its secured creditors to foreclose their (undisputed) security interests in all of its assets and then resell those assets to a newly created subsidiary of EDMC, scrubbing the former unsecured claims from those assets and leaving Marblegate and other noteholders with a claim against an empty shell. This was the second option in a Hobson's choice presented to noteholders; the first was to accept a 67% haircut and participate in a global workout with the secured creditors. Nearly 100% of the noteholders chose this option; Marblegate chose to play chicken and see if the courts would allow EDMC and its secured creditors to wipe out Marblegate's practical ability to enforce its claim by leaving an empty shell as the only obligor on Marblegate's unsecured debt after senior secured claimants exercised their superior rights in every scrap of available value. The contractual terms of Marblegate's right to collect were unchanged, but the practical ability of Marblegate to make anything of this right was clearly "impaired and affected," Marblegate argued.

Continue reading "Marblegate and a Dose of Reality for the Trust Indenture Act" »

Jevic and the Supremes

posted by Stephen Lubben

My own conflicted thoughts on Jevic, over at Dealb%k.

A Note On Setoff and Recoupment

posted by Stephen Lubben

For Slips readers that might not otherwise see it, I wanted to highlight this post on the Delaware Corporate & Commercial Litigation Blog, about a recent state supreme court decision on the distinction between setoff and recoupment, and the applicability of the statute of limitations to the former.

Do the Distressed Debt Traders Know About This?

posted by Stephen Lubben

N.C. Gen. Stat. § 23-46:  

It shall be unlawful for any individual, corporation, or firm or other association of persons, to solicit of any creditor any claim of such creditor in order that such individual, corporation, firm or association may represent such creditor or present or vote such claim, in any bankruptcy or insolvency proceeding, or in any action or proceeding for or growing out of the appointment of a receiver, or in any matter involving an assignment for the benefit of creditors.

Venezuela

posted by Stephen Lubben

John Dizard has a useful, and clearly written, piece on the lay of the land in this morning's FT. What puzzles me is why PDVSA, the national oil company,  has not done a UK scheme of arrangement or a US prepack to exchange the bonds, instead of messing around with an exchange offer. But the entire situation is rather opaque.

What is the point of that?

posted by Stephen Lubben

Perhaps as a result of GM, I've been thinking about notice issues in connection with insolvency. Thus, I was a bit surprised to see these three notices, all related to Lehman cases pending in Hong Kong (and schemes of arrangement in those cases), which appeared in this morning's Financial Times.


Credit Slips ImageNote that in the title the notice is addressed to the "Scheme Creditors," as "defined below." Yet below, we are told that Scheme Creditors are "as defined in the Scheme."  So unless you are an insolvency fanatic – I plead guilty – and going to run down the documents and read them, this published notice has told you absolutely nothing.

They might as well run an add that says "A company is insolvent. You might be a creditor. Or maybe not.  Good luck."

GM & Ignition Switches

posted by Stephen Lubben

My take on the Second Circuit's opinion – which Levitin has also written about (and I agree with him that the used car analysis is a bit "off") – is over on Dealb%k.  In short, I think that GM mostly has itself to blame for the inability to "discharge" these claims in its chapter 11 case. But the basic point that the federal Bankruptcy Code can override state law successor liability claims remains, despite what some state (and federal) courts have previously held.

Thoughts on the GM Ignition Switch Opinion

posted by Adam Levitin

The Second Circuit handed down its much-anticipated decision on the GM successor liability claims. Bottom line is that most, if not all, of the various claims against New GM are not barred by the Sale Order because of lack of procedural Due Process.  That said, there's a lot more in the ruling.  My thoughts below the break: 

Continue reading "Thoughts on the GM Ignition Switch Opinion" »

A few thoughts on Brexit and Restructuring

posted by Stephen Lubben

Over at Dealb%k.

Thoughts on Nortel (from Bob Rasmussen)

posted by Stephen Lubben

The following post comes to us from Professor Rasmussen at USC:

Nortel Bankruptcy Sets a Dangerous Precedent For the Future of Lending

Lenders are no fools. They care deeply about the promises they receive in return for the money they hand over to the borrower.  And if a 2015 ruling in the long-running Nortel Networks bankruptcy case is allowed to stand, it could lead to more restrictive lending to borrowers in the future.

For decades, our commercial law has allowed enterprises to divvy up promises as they see fit. Companies often conduct business through multiple, related entities. This allows lenders to extend credit knowing they’ll receive repayment for their loans from particularly asset-rich subsidiaries, that are not on the hook for all of the debts of the business. This adroit use of the corporate structure allows borrowers to get funds at a lower cost and, in the extreme, can mean securing a loan or not — which can be the difference in a business being able to operate.

Until recently, a lender taking a promise from a subsidiary of a business could rest assured that its only other competition to the subsidiary’s assets would be the other creditors. A recent case, however, threatens to overturn this accepted wisdom and bring uncertainty to financing of large enterprises.

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New York Professional Responsibility Rules vs. Delaware Corporate Law?

posted by Adam Levitin

The Caesars examiner's report makes for interesting reading. Of particular interest for our readers might be its discussion of the role of the lawyers, namely those at Paul Weiss, who simultaneously represented the Caesars holding company, its operating subsidiary, and the holding company's private equity sponsor.  As the report notes, it is not unusual for a law firm to simultaneously represent at a parent and a sub or a sponsor and a portfolio company. But the examiner's report argues that things change in one of the entities is insolvent because then the real party interest in that firm are the creditors, not the shareholders, and that means there is a real conflict of interest between the insolvent (or potentially insolvent) sub and the holding company (and private equity sponsor). 

Although the examiner's report ultimately concludes that there's probably not much basis for finding liability against Paul Weiss (which might not have even know of the insolvency), something jumped out at me:  the lurking conflict between Delaware corporate law and NY Rules of Professional Conduct.  

Here's the problem.  While the examiner's report is correct in describing creditors as the real party in interest in an insolvent company, that's not how Delaware corporate law treats things. In North American Catholic Educational Programming Foundation, Inc. v. Gheewala, the Delaware Supreme Court made very clear that even if a firm is insolvent, the duties of the directors still run to the firm and its shareholders, not to the creditors. (Were it otherwise, we'd have a lot of interesting litigation every time a firm got anywhere near insolvent, and risk averse directors would be well-counseled to file for bankruptcy the second insolvency appeared on the horizon.)

But let's assume that the examiner's report is correct that for the purposes of New York Rules of Professional Conduct there would be a conflict of interest such that the attorneys could not simultaneously represent both the parent and the insolvent sub.  Presumably whatever attorneys would represent the sub would have to look to the interests of the creditors of the sub under NYRPC.  How on earth would that work, when the sub's directors are responsible to the shareholder (i.e., the parent) under Delaware law?  If the examiner's report's interpretation of NY RPC is correct, then I don't see how any NY barred lawyer can represent a Delaware corporation that might be insolvent. (Of course, the solution to all of this might be simply be that there is a violation of NY RPC, but it isn't really actionable by any body, and no bar committee is going to look at this too closely.) 

Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted by 546(e) ... or Not Reverted?

posted by Jason Kilborn

After a delay of nearly 15 months, the Second Circuit this past Friday finally released its opinion in the Tribune Co. Fraudulent Conveyance Litigation. Briefly, the case concerned attempts by creditors to claw back payments to former shareholders in the Tribune Company's ill-fated LBO, which led to its 2008 bankruptcy. The theory of recovery was that buyout payments to former shareholders were made for less than reasonably equivalent value (to the company) while the company was insolvent (or thus rendered insolvent), so contemporaneous creditors could sue the former shareholders for return of the value they received as constructively fraudulent transfers. While the bankruptcy trustee (in this case, the Creditors Committee, by delegation) had the power to pursue these claims (under section 544(b)), it chose not to, most likely because section 546(e) prohibited it from doing so. But when the two-year statute of limitations for pursuing those actions passed, the claims supposedly reverted to the individual creditors (more on this below), who took up those claims with the explicit permission of the bankruptcy court. Fast-forward to last week ... I am not surprised that the Second Circuit stuck to its historically broad construction of the "settlement payment" safe harbor in section 546(e) and held that state law fraudulent conveyance actions by creditors are barred by that provision just as a similar action by a "trustee" would be. More interesting, in my view, is the "why are we even talking about this" discussion of whether those creditors had any right to be pursuing those claims in the first place.

Continue reading "Tribune Co. Creditors' Fraudulent Conveyance Claims Preempted by 546(e) ... or Not Reverted?" »

The Trust Indenture Act Rider Is Not a "Clarifying Amendment"

posted by Adam Levitin

Ken Klee has argued that the Trust Indenture Act rider to the omnibus appropriations bill is just a "clarifying amendment":

The primary objection being made by those opposed to this amendment is that Congress needs to hold extensive hearings. But this is just a correction to a recent misinterpretation of the statute – not a wholesale revision of the Trust Indenture Act.

That's just not right. This isn't just a "clarifying amendment". The proposed amendment neuters the Trust Indenture Act as a protection for bondholders. 

Continue reading "The Trust Indenture Act Rider Is Not a "Clarifying Amendment"" »

Save the TIA!

posted by Stephen Lubben

So a brazen attempt to undermine the Trust Indenture Act of 1939 has failed, but you can expect the proponents will try again.

There is no way that Congress should be thinking about changing anything in the TIA without comprehensively studying our entire corporate reorganization system. The TIA intentionally makes it hard to restructure debt outside of bankruptcy. It was passed at the same time that corporate bankruptcy was federalized. The two systems are part of the same package, and can't be considered in isolation.

So if we think that the TIA needs to be "updated," let's discuss that in the proper context of the entire corporate restructuring system. But sneaking in amendments to unrelated bills is not how any responsible member of Congress should be proceeding on this issue.

The Future of Bankruptcy Work for Lawyers

posted by david lander

As expected, as the number of consumers filing bankruptcy has continued to decrease, the revenue of the consumer bankruptcy debtor and creditor bar has been hit hard. Over the past several years billable hours of business bankruptcy (including insolvency, workout or reorganization) lawyers have been dropping and many mid-level partners at large firms are looking for work in related or unrelated specialties. 

We would expect consumer bankruptcy work to increase when:

  1. Filing has a better chance of discharging some or all student loan debt;
  2. Filing has a better chance of helping consumers modify the terms of their first mortgages;
  3. Filing has a better chance of helping consumers modify the terms of their car loans; and/or
  4. Credit card debt and/or defaults increase.

The future is harder to call for the business bankruptcy field. Everyone expects the number of business failures and loan defaults to increase when interest rates tick up and those businesses that are surviving only because of the low rates cannot service their debts or find alternative financing.  Even though the economy had not been vibrant, with the exception of specific industries such as coal or oil defaults are low.

The challenge is to predict to what extent law work in this area is down because of structural and legislative changes.  For example, the shift from traditional financial institution lenders to “Loan to Own” lenders has reduced the amount of law work related to default and/or restructure on both the debtor and the creditor side. Partly related to that change, the shift from chapter 11 reorganizations to “chapter” 363 sales has significantly reduced bankruptcy court work. One of the factors in the shift to 363 sales rather than true reorganizations was the legislative changes to Article 9 in all fifty states. When the ALI –ULI drafting committee made it much easier to take and enforce in bankruptcy court a security interest in just about every conceivable type of asset they reduced the reorganization leverage.

What percentage of the drop off in work involving defaults, workouts and restructure is related to these factors will determine to what extent the work will grow when defaults rise.

Doubts About the Future

posted by Stephen Lubben

Over at Dealb%k, I express my doubts about the future of chapter 11.

Recycling News

posted by Stephen Lubben

2015-10-16 09.07.31    Catching up on some posting in other places:

  • The Columbia Blue Sky Blog recently featured a summary of my article on the treatment of failed clearinghouses under Dodd-Frank. Interestingly, the EU recently opened the door to something similar to what I've been suggesting. Thanks to Colleen Baker for pointing that out.
  • And over at Dealb%k, I look at LSTA's recent rejection of the ABI's chapter 11 reform proposals in light of two recent retail bankruptcy cases.

The Future?

posted by Stephen Lubben

2015-08-02 18.20.34Some thoughts on the 3d Circuit's recent opinion in LifeCare, which I suspect will lead to even more 363 sales, over at Dealb%k.

Just Can't Get Enough

posted by Stephen Lubben

The quest for yield and its effect on the future of chapter 11 cases, over at Dealb%k.

Venue (Again)

posted by Stephen Lubben

Some thoughts on the latest dustup over venue in big chapter 11 cases, on Dealb%k.

Pie and Mash

posted by Stephen Lubben

Or a bit of this this and that. I've totally neglected cross-posting my writings on Dealbook here on IMG_8988Slips, so I give you two recent columns:

  • The first, on Chase's living will, version 3.0 or thereabouts.
  • The second, on the confusing Baha Mar bankruptcy case. Since I wrote that one, the Bahamian court has rejected a petition to recognize the Delaware chapter 11 case under the Bahamian equivalent of chapter 15.

Catching Up

posted by Stephen Lubben

So I've been off the grid for a few weeks, and of course after months of little to talk about, the world gave us a bounty of stories about financial distress, and related topics, each of which would merit its own post. But I'm going to hit them quickly to get caught up again this holiday weekend:

  • I've always enjoyed reading Hamilton's Report on Public Credit, which has something of a reorganization plan about it, as well as a good discussion of distressed debt trading. Thus, I'm largely in agreement with those that say that Jackson and not Hamilton should go to free up space on one of our bills. But what about having two types of bill in each denomination? Harriet Tubman on some dollar bills, with Washington on the others, seems about right. 
  • I joined an amicus brief for the loosing side in in Baker Botts, L.L.P. v. ASARCO, L.L.C., the most important case of the term.  (Or maybe not.)  Thus, it will be no surprise that I think the dissent has the better argument. The majority seems to be totally out of touch with the reality of bankruptcy practice, and its opinion seems to be an open invitation for bomb throwers who stop just short of Rule 11. Image
  • Greece in undoubtedly between a rock and a hard place. Its economy is likely to be devastated if it leaves the Euro, at least in the short term, and it certainly will be further devastated by more austerity. Does it really matter which way they vote? The larger EU has to think about precisely what it is trying to achieve here. Yes the current Greek government is a bit buffoonish, but who helped to elect them?
  • Puerto Rico is obviously in quite a similar situation. The most realistic outcome seems to me to be (a) an exchange offer of the Commonwealth debt tied to realistic (non-punitive) reforms and (b) chapter 9 for the utilities. Part "a" of course risks holdout problems – can exit consents do the trick?

That might generate some comments this weekend.

Shareholders in Chapter 11 Cases

posted by Stephen Lubben

Now up on Dealb%k.

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.

Secured Credit, Churches, and Reorganization

posted by Pamela Foohey

Chapter 11's ability to empower true reorganization has received much criticism of late in light of an increasingly held assumption that most Chapter 11 cases end in a 363 sale of the debtor's assets. Around this time last year, the American Bankruptcy Institute and the University of Illinois College of Law co-hosted a symposium dedicated to discussing secured creditors’ rights and role in modern Chapter 11. Papers from the symposium (including by Slips contributors) very recently became available here.

I was lucky enough to moderate a couple of the symposium panels. As I was listening to the discussion, I noticed that what I was hearing about secured creditors and 363 sales did not match  what I had observed in my study of how religious organizations (mainly smaller churches) currently use Chapter 11. To accompany the release of the symposium papers, I wrote a short piece describing how secured creditors influenced religious organizations' Chapter 11 cases in ways that did not lead to widespread sales, but rather, plans and settlements.

Continue reading "Secured Credit, Churches, and Reorganization" »

A Gunmaker Gets Aggressive

posted by Stephen Lubben

TrackdownOver at Dealb%k, I have a new column up about Colt's rather aggressive dual-track exchange offer and prepack.

In short, it involves very little creditor input. Perhaps part of a larger trend of aggressive use of chapter 11 by private equity backed debtors?

And no, I have no idea if Robert Culp is holding a Colt firearm that that picture ... but he looks kind of cool, doesn't he?

Why Has Chapter 11 Failed as a Reorganizing Chapter?

posted by David Lander

The ABI has spent thousands of hours on its Chapter 11 Commission Report; the National Bankruptcy Conference is hard at work on its "Rethinking Chapter 11" project. Underlying these and other such efforts is an overwhelming frustration with the failure of Chapter 11, under current circumstances to empower true reorganization. Hard to believe but it was not always this way. During the first decade or two of the Bankruptcy Code it seemed to be working pretty well; in fact many courts were unwilling to consider quick sales of the entire business. Many large cases resulted in a confirmed reorganization plan although some led to further chapter 11 efforts or failure; the results in smaller or medium-sized cases were more uneven with a healthy percentage being dismissed or converted to Chapter 7.  There was almost no discussion of Section 363 at the Ten Year Retrospective on Chapter 11 in Williamsburg and there was little commentary on its use. Indeed, the 1997 report of the Bankruptcy Review Commission did not focus on this issue. 

Beginning sometime between the Code's tenth and twenty-fifth birthdays the tide shifted; not only did most courts back off from their legal position that Chapter 11 was for reorganization and that any sale of the entire business needed to be done within a Plan, but the vast majority of cases seemed to shift to quick 363 sales to a suitor that was identified before the filing with an auction possible if there were competing bidders. 

Continue reading "Why Has Chapter 11 Failed as a Reorganizing Chapter? " »

The Costs of Chapter 11

posted by Stephen Lubben

Although I keep swearing off the topic, I've written something about chapter 11 professional fees.  Again.  Over at Dealb%k.

Random Thoughts on Reform

posted by Michelle Harner

I just finished discussing the “random walk” theory in my Corporate Finance class, so I thought I would close out my stint on Credit Slips with some “random thoughts” on reform.

First, two expressions of sincere gratitude: I want to thank Bob Lawless and everyone at Credit Slips for the opportunity to blog about reform these past two weeks. It has been great fun. I also would like to thank the many practitioners, judges, financial advisors, academics, and industry groups who participated in the ABI Commission reform study process. Everyone made a meaningful contribution to the project. 

Continue reading "Random Thoughts on Reform" »

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  • As a public service, the University of Illinois College of Law operates Bankr-L, an e-mail list on which bankruptcy professionals can exchange information. Bankr-L is administered by one of the Credit Slips bloggers, Professor Robert M. Lawless of the University of Illinois. Although Bankr-L is a free service, membership is limited only to persons with a professional connection to the bankruptcy field (e.g., lawyer, accountant, academic, judge). To request a subscription on Bankr-L, click here to visit the page for the list and then click on the link for "Subscribe." After completing the information there, please also send an e-mail to Professor Lawless (rlawless@illinois.edu) with a short description of your professional connection to bankruptcy. A link to a URL with a professional bio or other identifying information would be great.

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