postings Jay L. Westbrook

The Role of Chapter 11 Bankruptcy in Addressing the Consequences of COVID19.

posted by Jay Lawrence Westbrook

Many businesses may require bankruptcy proceedings to assist in recovery from the CV Recession. In my view, the best legal approach to any Chapter 11 reforms necessitated by the emerging CV-induced economic crisis lies in building up from the Small Business Reorganization Act (SBRA) to cover more Small and Medium Enterprises (SME), rather than trying to adjust the general provisions of Chapter 11, the home of bankruptcies like General Motors and American Airlines. Our database at the Business Bankruptcy Project shows that in 2018 more than half of the businesses that filed in Chapter 11 in the Southern District of New York would fall under the temporary SBRA cap, $7.5 million.

Most immediately, the recently voted funds for small business must be available in bankruptcy reorganization cases. We must remove any barrier to using them in that way. I start the study of Chapter 11 by reminding students that the clerk at the bankruptcy court does not hand out money. Bankruptcy does not produce funding, although it can help facilitate it in important ways. Thus there is no legal reform that will avoid the need for very substantial financing with implications far beyond reorganization procedures. Bankruptcy cannot help unless it can be used in connection with rescue funding.

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Ian Fletcher

posted by Jay Lawrence Westbrook

Ian Fletcher has passed away. He was a very important figure in insolvency law in England and elsewhere and a giant in the international side of our field. His passing is a great loss of a wonderful scholar and friend. His career is described on line at and in a posting by the distinguished Dutch scholar Bob Wessels,

In the Festschrift in his honor I recounted how I met him:

I remember so well my first meeting with that great scholar and teacher Ian Fletcher. I had been astounded to come upon Cross-Border Insolvency: Comparative Dimensions (The Aberystwyth Papers). At a time when international and comparative insolvency was in its infancy, to come upon so sophisticated an editor and author was remarkable. As soon as I could, I hied myself to the very tip of Wales to meet him. I have learned from him and enjoyed his friendship ever since. One reason we fell in so quickly together was a common conviction that international juridical cooperation was a growing necessity and that insolvency presented perhaps the most pressing case for it. As he later put it in his outstanding treatise on international insolvency: “The increased awareness in recent times of the negative consequences of [the] international fragmentation of policy and approach to cross-border insolvency issues has fueled the quest for improved solutions.”

As part of the Internationalist Principle, he wisely advised that: “flexibility and pragmatism must be substituted for the dogmas so beloved of former ages.”

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The End of Bankruptcy

posted by Jay Lawrence Westbrook





Credit Slips/IACCL

The End of Bankruptcy

“Bob Rasmussen, call the Chapter 11 Desk.” Two recent decisions, one on each side of the Atlantic, have enshrined contract bankruptcy—or at least the defeat of bankruptcy law by contract.  Although the context for both was international, in principle they could work for domestic cases as well and at last achieve the demise of bankruptcy law proclaimed in the above-titled 2002 article by Rasmussen and Douglas Baird. The analysis is complex, so this brief note will focus on results and implications.

The cases are Bakhshiyeva in London [Bakhshiyeva -and- Sberbank of Russia, et al., [2018] EWHC 59 (Ch).] and Sun Edison in Manhattan [In re SunEdison, 577 B.R. 120 (2017). Their common ground is that a choice of law clause in a contract may trump the applicability of bankruptcy law to that contract. In the hands of any competent lawyer, the result may be party autonomy in the application of bankruptcy law to contractual obligations, making bankruptcy law largely irrelevant.

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Global Preferences

posted by Jay Lawrence Westbrook

An important opinion by one of our most knowledgeable bankruptcy judges, Judge Bernstein in Manhattan, may have reached the right result by the wrong path in deciding if a foreign debtor’s Chapter 7 trustee can avoid a foreign transfer to a foreign creditor. In re Ampal-American Israel Corp., 562 B.R. 601 (2017) (Ampal). Because the opinion’s reasoning may seriously weaken section 547 of the Bankruptcy Code, it is worth imposing on the reader’s time for a brief analysis.

Ampal, a corporation organized in the United States but operated in Israel, filed a Chapter 11 case that was converted to Chapter 7. The trustee sought to recover a preference paid through a bank in Israel to its Tel Aviv law firm. The company’s only substantial business connection with the United States was its listing on NASDAQ. The court held that section 547 of the Bankruptcy Code did not apply, which was very likely correct. (The trustee apparently did not seek to apply Israeli law.)

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Nortel: The CBI Case of the Century (So Far)

posted by Jay Lawrence Westbrook

There can be little doubt Nortel wins the title for the cross-border insolvency case of the young century. Not only is it a huge case (US$7B or so), but as I noted in my last post it has established several milestones, including a joint televised trial in Toronto and New York and a common result in the two courts. Even more important are the substantive results in the universalist mode: the initial agreement on a global sale of assets without reference to territorial or corporate boundaries and the new ruling that orders global distribution on a quasi pro rata basis. The ruling is also notable for what it is not. It is not an acceptance of substantive consolidation. It is not territorialist; the result was unrelated to the situs of assets or creditors. It is also not fully universalist, although it does represent a species of modified universalism.

The key to the global distribution ruling, discussed below, is a finding that ownership of the sold assets could not be attributed to any one corporation in the corporate group and thus the proceeds should be distributed globally. I refer the reader to the opinions for the details, especially paragraph 250 of Judge Newburgh’s opinion. In summary, the proceeds of the sales are distributed pro rata among the estates. That result differs from a pure pro rata among all creditors of the corporate group primarily for three reasons. First, some cash stays in place. Second, intra-group claims share in the distribution from each estate, including an established $2B claim by the US sub against the Canadian parent. Third, an intra-group guarantee is potentially recognized.

The fundamental issue presented was entitlement to the proceeds of the sale of various assets. The first step necessarily was to determine ownership of those assets, primarily IP. The two judges agreed that the highly integrated nature of Nortel made it impossible to arrive at a fair and accurate determination of ownership within the Nortel group. By contrast, they obviously felt that the intra-group claim ($2B) against the parent and the parent’s guarantees were firmly attached to the US sub. No doubt they were also keenly aware of the Third Circuit precedent limiting substantive consolidation. Given a decision to avoid a result equivalent to substantive consolidation, and therefore to honor the corporate form as to claims, they were stuck with the problem of allocating the sale proceeds, a problem that substantive consolidation would have enabled them to avoid as discussed below.

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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

Dysfunctional Analysis Part 2

posted by Jay Lawrence Westbrook

Shutterstock_112522430Per Part 1 of this post, the word “executory” under section 365 of the Bankruptcy Code should be defined by its original, common law meaning per Williston: a contract in which some obligations remain. That common law definition was the one on the table when Congress originally adopted this ancient provision and there is no longer any justification for imposing the labyrinthine elements of executoriness on top of it. These additional executoriness requirements were developed by the courts in the olden days when court approval of AorR was not required and executoriness was a way to protect estates from trustee foolishness or carelessness. (See my old article for details at A Functional Analysis of Executory Contracts, 74 Minn. L. Rev. 227 (1989).)  During that time, the Countryman test did a brilliant job in greatly improving the policing of those failures. However, the Countryman test is not needed for that purpose now that court approval is required for AorR. It also does not solve the underlying problem, which is manipulation of the label “executory” in lieu of applying the statute as written to cover modern problems like options and licenses. The result is confusion and unpredictable injustice to estate and counterparty alike.

Under the form of Functional Analysis that I have suggested, the basic approach to AorR is taken from the words of the statute and is simplicity itself:

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Dysfunctional Analysis Part 1

posted by Jay Lawrence Westbrook

Warning: Grumpy Alert. I am grumpy because the ABI Commission’s recent report rejected any reform of the bizarre American approach to executory contracts, which requires a quality of “executoriness” in a contract before it can be assumed or rejected. (Think of Stephen Colbert and “truthiness.”) Worse still, it recommended codifying the Countryman test, which was a great advance in its day but has been rendered hopelessly outdated by statutory changes and modern contract practices—e.g. in options and LLC memberships. Shutterstock_112522430

One reason for the Commission’s recommendation was “the perceived value in maintaining some type of gating feature to vet those contracts that a debtor in possession could assume, assign, or reject in the chapter 11 case.” A reasonable conclusion from that would be that the reason for retaining the old test was that continued confusion and inconsistency would help counterparties to maneuver in the fog. But no. The Report explains that the case law is so predictable that eliminating executoriness would just create more litigation. For those who have recently reviewed that case law, I can only assure you I am not making this up. (Please note I don’t for a moment blame this error of the Commission majority on its excellent reporter.)

Some twenty-five years ago I was guilty of an article on this subject called A Functional Analysis of Executory Contracts. Unfortunately, some cases used the phrase to mean that executoriness should depend on benefit to the debtor, while my pitch was to abolish the executoriness requirement altogether. Herewith a brief reprise of that old article and perhaps an intimation of a new one.

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TBTF and The Single Point of Entry (SPOE): Part Two

posted by Jay Lawrence Westbrook

In an earlier post I described the FDIC’s proposed SPOE approach to resolution of SIFI banks and other financial institutions under Title II of Dodd-Frank. That post discussed two of the three components of SPOE: control of the process by the regulator and no bailout for management or owners. This post lays out the role of the third component, the “forlorn hope” debt. Shutterstock_95970961

That debt is unsecured debt owed to a bank holding company (BHC) and predestined to get little or nothing in case of the failure of the BHC. It serves in effect as a debt reserve to buffer the financial distress of the bank group. By being dumped, it would make the group as a whole solvent. By contrast, legislation already passed by the House would ignore the need for the reserve, thus setting up another bank bailout. The reserve debt component of SPOE awaits a strong rule from the Fed to make it a reality. This post discusses what the rule must do.

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Busted Banks: TBTF and the Single Point of Entry

posted by Jay Lawrence Westbrook

Shutterstock_95970961A Single Point of Entry (SPOE) sounds like the route of a returning astronaut or perhaps a building’s security plan or even a sex guide, but actually it is the FDIC’s proposal for saving the financial system when a giant financial institution strikes out on the derivatives market or discovers it has a school of London Whales. SPOE is important because the FDIC and the Bank of England have agreed on it as the best approach to a global resolution of a failing SIFI, the polite term for a TBTF bank. That agreement is crucial, because the largest banks can only be resolved on a global basis.

SPOE is a method of resolution of a SIFI in financial distress without having to choose between a government bailout or the collapse of the global financial system. By contrast, legislation passed by the House would privatize the SPOE process and likely result in future bailouts. The legislation is being marketed under the term SPOE, but bears little relationship to the FDIC proposal. The three key aspects of the FDIC plan are that a) the resolution process will be controlled by the regulator; b) there will be no bailout of the SIFI’s owners and management; and c) the creditors of the parent holding company will be tossed overboard, returning the bank group to solvency by erasing debt and lessening the need for government money to make the process work. This post discusses the first two points, control and no bailout, while a second post will talk about the debt dump. 

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