Unbundling Business Bankruptcy Law

A long-in-process draft article has just become available to be downloaded and read here. Comments remain welcome.  The Weinstein Company bankruptcy features prominently in this draft article. 

Every contract in America contains an invisible exception: different enforcement rules apply if a party files for bankruptcy. Overriding state contract law, chapter 11 of the federal Bankruptcy Code gives bankrupt companies enormous flexibility to decide what to do with its pending contracts. Congress provided this controversial tool to chapter 11 debtors to increase the odds that a company can reorganize. To promote this objective while also preventing abuse and protecting stakeholders, Congress embedded this tool and others in an integrated package deal, including creditor voting. The tool was not meant as a standalone benefit for solvent private parties to pluck from the process for their own benefit, like an apple from a tree.

In recent decades, the chapter 11 package deal has been unbundled in practice, typically on grounds of economic urgency. While scholars and policymakers have attended to the quick going-concern sales of companies featured in unbundled bankruptcies, they have not sufficiently explored the challenges associated with a contract-intensive business.

To help fill that gap, this draft article illustrates how the ad hoc procedures used to manage quick sales of contract-intensive businesses can undercut two major chapter 11 objectives: maximizing economic value and fair distribution. They amount to a wholesale delegation of a substantial federal bankruptcy entitlement to a solvent third party. In addition to the impact on economic value and distribution, this draft article also explores a Constitutional problem with this practice: it arguably exceeds the scope of the federal bankruptcy power.

 

Let's Make Some Crypto Law!

One of the undiscussed consequences of the spate of recent crypto bankruptcies – domestically including Celsius and Voyager – combined with Congress' inability to legislate is that the bankruptcy courts, namely those in the SDNY, will have a chance to make a lot of law regarding crypto.

For example, is Tether a good? (the citation to the UCC is odd - that's not actually the law anywhere, right?).

 

3M's Aearo Technologies' Bankruptcy: the Hoosier Hop

3M's earphone subsidiary, Aearo Technologies, filed for bankruptcy today in the Southern District of Indiana. This is looking like a really interesting case: it looks like a new generation of the Texas Two-Step strategy. Let's call it the Hoosier Hop. Here's the story.

Tort Law, Social Policy... and Bankruptcy

I cannot tell you what to think about the fact that the long-running Clifford Symposium on Tort Law and Social Policy, at DePaul University College of Law in Chicago, kicks off with a bankruptcy panel this year.  The official title of the conference this year is Litigating the Public Good: Punishing Serious Corporate Misconduct. Much of the June 2-3 conference is scheduled to occur in person but online observation is available and free: register here. 

The Texas Two-Step? Just Don't Go to the Dance

Suppose a company facing mass tort liability to U.S. citizens produced a piece of paper that read "Cook Islands Liability Extinguishment Corporation." The company then says to the tort victims, "We have formed this corporation under the law of the Cook Islands, which allows us to assign any liability we want there and extinguish it. And, that's exactly what we did with your tort claims." The legal response would surely be that the law of the Cook Islands does not govern the company's tort liability under U.S. law.

Harmony or Mismatch? A virtual event on mass torts and bankruptcy on February 28

Just wanted to make sure Credit Slips readers were aware of this virtual event at noon Eastern/3 Pacific on February 28. Bonus: a link to a masterful analysis of the topic by Professor Elizabeth Gibson that the Federal Judicial Center published in 2005. (click here for information and registration)

Just posted: Other Judges' Cases

This article has been in the works a long time. During the Detroit bankruptcy, I wrestled with some of its topics on Credit Slips.  

The case studies involve bankruptcy. The mediators in those cases are life-tenured judges.

The footnotes make it long; the text is short.  

Other Judges' Cases remains in the edits stage and is scheduled to be published later this year.  

Please read it. Thank you!

Non-Debtor Releases

I have an op-ed in Bloomberg Law about the abuse of non-debtor releases. Many chapter 11 attorneys argue that non-debtor releases are an essential all-purpose deal lubricant and that the excesses of a few cases—Purdue Pharma, Boy Scouts—shouldn't result in throwing out the baby with the bath water. I disagree. There's no question that non-debtor releases can grease a deal (and let's put aside the questionable practice of attorneys negotiating plans that give them releases as well). But so what? There's also a little thing called due process. It's only within the tunnel vision of chapter 11 that reorganization trumps all. Hopefully the Nondebtor Release Prohibition Act, which passed out of the House Judiciary Committee last month will become law and clarify the matter. 

Indeed, are non-debtor releases actually so important for practice? Chapter 11 lived with them for years before Mansville and even after Mansville it was years before they started being used in non-asbestos cases. Indeed, can anyone actually point to a case where a debtor would have had to liquidate and jobs would have been lost but for non-debtor releases? Perhaps there is such a case, but if so, it's the exception.

Take Purdue Pharma. What would have been the alternative to boughten releases for the Sacklers?  Perhaps a liquidating plan, but I'm not sure that it would have resulted in any job loss, just a going-concern sale. And the estate could have sold its own litigation claims against the Sacklers or put them into a litigation trust. To be sure, one might argue that the boughten releases for the Sacklers are a better deal economically for the estate, and that's the proper measure when considering a settlement of estate claims, but I do not see how the estate—or any bankruptcy judge—can constitutionally impose a settlement of creditors' direct claims against non-debtors. It doesn't comport with due process and it's pretty clearly an uncompensated taking.

I'm sure some readers will disagree, and comments are welcome. Further affiant sayeth not. 

Shocking Business Bankruptcy Law

Another quick announcement that I have posted a draft essay on some under explored intersections between big business bankruptcy and big shocks here. The abstract is short, yes, but so is the essay. It also discusses ice cream. Thanks for reading! 

Who extracts the benefits of big business bankruptcy?

The Deal has a new podcast called Fresh Start hosted by journalist Stephanie Gleason. Stephanie and I recently chatted about big bankruptcies with litigation management at their core and the stakes those cases raise. We covered a lot of ground along the way, including non-debtor releases and the SACKLER Act, notice and voting, forum shopping, equitable mootness, the homogeneity of the restructuring profession, bankruptcy administrators and the United States Trustee system, and the skinny clause of the Constitution at the heart of all of this. We begin by reminiscing about the mass tort and future claims discussion during the deliberations of the National Bankruptcy Review Commission, for which Elizabeth Warren was the reporter, and how much has changed. Check it out here.

Does J&J Have a Patriot Coal Problem?

J&J has put its Talc subsidiary into bankruptcy in North Carolina. Trick is, the only basis for venue in North Carolina is that the talc assets were put into a Texas LLC this past Tuesday, and then that Texas LLC converted into a North Carolina LLC the same day.  

Put to one side the problematic question of how the talc assets (and liabilities) ended up in the Texas LLC – what is the reason for the conversion to a North Carolina LLC?  It seems to be a rather transparent attempt to manufacture jurisdiction in North Carolina.

Arguably venue should be transferred to Texas. Perhaps the Western District of Texas – not that other Texas district – since J&J's only clear connection with Texas is incorporation ... 

Five reasons to read Unsettled by Ryan Hampton

Ryan Hampton, author of a book about the Purdue Pharma bankruptcy published earlier this month, is a "national addiction recovery advocate, community organizer, author, and person in long-term recovery" who also was a member of the Purdue Pharma bankruptcy official unsecured creditors' committee. On Purdue's committee, Hampton and three other personal injury claimants sat alongside five institutional/corporate creditors, at least some of which were defendants in other opioid crisis lawsuits.  This is a quick post to recommend that the bankruptcy world read Unsettled for at least the five following reasons: 

Recommended reading: Afsharipour on Women and M&A

For many reasons and no reasons, blogging on Credit Slips during the COVID-19 pandemic has not come easy, or at all, for me (Twitter, a different story). Rejoining the Credit Slips conversation by recommending scholarship relevant to bankrupty-land even if not directly about bankruptcy-land. 

Today's recommendation is an empirical study, Women and M&A, by Professor Afra Afsharipour.  

Chapter 11 has become the forum for lots of mergers and acquisition activity, including and particularly in sales outside of plans. Some think that's great and others are skeptical (I have work in progress that further tallies the costs of unbundling chapter 11's package deal, or what I call bankruptcy a la carte). While Professor Afsharipour's article does not focus on M&A in bankruptcy, the law firms appearing in the study will be familiar names in the larger chapter 11 practice world. 

Many readers likely will have a prediction about the demography of the people taking the lead in M&A. Check out how your prediction compares to Professor Afsharipour's findings and why her findings matter. Read more about and download the article here.  

Now Is the Time for Bankruptcy Venue Reform

Judges Joan Feeney and Steven Rhodes and Professor Jay Westbrook and I have an op-ed supporting bankruptcy venue reform running in The Hill. Forum shopping has long been a problem in chapter 11, but with mass tort cases like Purdue and Boy Scouts of America, we're seeing it have effects on an previously unprecedented scale. It's time to do something about for the good of the system. 

Does Purdue Have a 203 N. LaSalle Problem?

I was really struck by a line in the Purdue Pharma plan objection of the Distributors, Manufacturers and Pharmacies (DMP). They called the Sacklers mere "out-of-the-money shareholders."  That's 100% accurate. And it has important implications, one of which is in their objection, and one of which is not.  The point the DMP were making is that the release of the Sacklers has no reorganizational benefit to Purdue—it does nothing for Purdue's business.  This isn't like a release of litigation against folks who will remain officers and directors of a reorganized company and will be distracted by on-going litigation.  It's a good point.  But I think there's actually a stronger one. 

If one thinks of the Sacklers as out-of-the-money shareholders, then their release creates a 203 N. LaSalle Street P'Ship problem. 

Purdue Continues to Peddle Malarkey About Why It's in White Plains

Purdue Pharma continues to peddle some malarkey about why it filed for bankruptcy in White Plains, New York.  In response to my House Judiciary testimony yesterday, Purdue told the Stamford Advocate:

Purdue Pharma Inc., the general partner of Purdue Pharma LP, has been a N.Y. corporation since its incorporation on Oct. 1, 1990. White Plains is about 15 miles from our corporate headquarters and is the closest federal bankruptcy courthouse. Thus it was the most appropriate place for us to file.

Let’s get real. Purdue—and that really means the Sacklers, who were still in control when Purdue's bankruptcy filing strategy was worked out—filed in White Plains because it wanted its case to be heard by Judge Robert Drain. If Judge Michael Wiles—who has held that bankruptcy courts do not have the power to issue third-party releases—had been the judge sitting in White Plains, there’s no chance Purdue would have gone anywhere near White Plains. On top of that, Purdue’s claim about convenience doesn’t pass the smell test. Convenience to corporate headquarters is never a real consideration in bankruptcy filings. If it were, would GM and Chrysler have filed in NY? Would Nieman Marcus or Belk have filed in Houston? Would anybody ever file in Delaware?

Nondischargeability and the Sacklers

In the wake of today's House Judiciary Committee hearing, I got a text from an attorney who pointed out that if the Sacklers themselves filed for bankruptcy, creditors could raise non-dischargeability challenges under section 523, including for "willful and malicious injury by the debtor to another entity or to the property of another entity" or, or under section 1141(d)(6) for false claims acts violations. But with a non-debtor release, there's no opportunity or process to raise non-dischargeability challenges.

In other words, the Sacklers will be able to get greater a type of relief by piggybacking on Purdue's case that they could if they were debtors themselves.  Bruh. 

If that isn't a strong indication that the Bankruptcy Code does not contemplate non-debtor releases outside of the asbestos context, I'm not sure what is.

Is DOJ Supporting the Purdue Pharma Plan? Or Not?

The Department of Justice appears to be mumbling out of both sides of its mouth in the Purdue Pharma bankruptcy.  On July 19, DOJ filed a "statement" regarding the release of the Sacklers. Not an "objection," but a statement that sure reads a lot like an objection.  Then today we learn that DOJ did not bother to vote its multi-billion dollar claim. The plan deems a vote not cast to be an acceptance. 

So which one is it?  Is DOJ for the plan or against it?  Or trying to keep its head down and avoid political heat while not really derailing anything?  Whatever position DOJ wants to take, this approach is not exactly a profile in courage.  (And failing to vote is not exactly in keeping with DOJ's brand... And failing to exercise governance rights on a multi-billion dollar asset? Bruh.)

I'll be very curious to see if DOJ actually argues anything at the confirmation hearing or joins in any appeal. The appellate point is key--there's a long-shot chance that the district court or 2nd Circuit might stay the effective date of the plan--but I think the odds of that are close to zero unless DOJ is among the parties making such a motion. If DOJ fails to seek a stay of the plan going into effect, it will be hard to see DOJ's "statement" as anything more than political posturing.

House Judiciary Testimony on Chapter 11 Abuses

I'm testifying before the House Judiciary Committee on Wednesday at a hearing entitled "Confronting Abuses of the Chapter 11 System."  My written testimony can be found here. It touches on six topics:

1. Non-debtor releases
2. Judge-picking
3. Lack of appellate review (especially equitable mootness)
4. Increased use of sub rosa plans
5. Increasingly brazen fraudulent transfers
6. Payday before mayday executive bonuses

By the way, since my draft article on Purdue has been public, I've heard from a number of attorneys, including folks I had not previously known, confirming various insights in the paper and wanting to tell me their own stories.  I have really appreciated that and learned a lot from it.  I have not seen this scale of a reaction to a paper previously. So if you've got your own tale of aggressive restructuring transactions being blessed by a hand-picked judge and then evading appellate review, I'm eager to hear them (and won't attribute them to you). 

The Texas Two-Step: The New Fad in Fraudulent Transfers

There's a new fad in fraudulent transfers. It's called the Texas Two-Step. Here's how it goes. A company has a lot of tort liabilities (e.g., asbestos, talc, benzene, Roundup). The company transforms into a Texas corporate entity (the particular type doesn't matter). The new Texas entity then undertakes a "divisive merger" that splits the company into two companies, and it allocates the assets and liabilities as it pleases among the successor entities.

The result is that one successor entity ends up saddled with the tort liabilities (BadCo) and the other with the assets (GoodCo).  The companies then convert to whatever type of entity the want to be going forward for corporate governance (or venue) purposes, and the BadCo files for bankruptcy, while GoodCo keeps chugging away. The tort victims find themselves creditors in the bankruptcy of BadCo and get bupkes, while the bankruptcy plan inevitably includes a release of all claims against GoodCo. Pretty nifty way to hinder, delay, or defraud creditors if it works, right?

Well, that's the question:  does this work?  We've only seen two Texas Two-Steps to date. There have been a few Texas Two-Steps to date (and one might be a Wilmington Waltz). First was BestWall's asbestos bankruptcy. BestWall (formerly part of Georgia Pacific) is a subsidiary of Koch Industries, and its bankruptcy is pending in the Western District of North Carolina. No plan has been confirmed, but the case has been dragging on since 2017, and the asbestos victims have been enjoined from suing any of the non-bankrupt Koch entities. Plan exclusivity has long-lapsed, but the court won't dismiss the case and doesn't seem willing to consider any alternatives. Even if the Two-Step isn't completely successful in the end, it will surely reduce whatever settlement the Koch entities have to pay.

Then there's DBMP (CertainTeed), another asbestos case, again in the Western District of North Carolina. Same story going on there; there's an adversary proceeding pending about the preliminary injunction. Also in WDNC, before the same judge is Aldrich Pump. Same judge as DBMP, and again a preliminary injunction. And then pending in Delaware is Paddock Enterprises, LLC, the rump of Owens-Illinois. The UST filed an examiner motion over the divisive merger transaction. Denied.

In any case, the Two-Step looks promising enough that Johnson & Johnson is supposedly considering using it for its talc liabilities.

Sacklers Withdraw Their Threatened Sanctions Motion

The Sacklers decided not to proceed with their threatened sanctions motion. Their counsel wrote to the case distribution list:

After having heard from several parties that the motion served yesterday may be counterproductive to the deal, we are withdrawing the email we sent yesterday serving the Rule 9011 motion.  It was not our intention to do anything counterproductive to concluding the deal, and we take seriously the views that have been expressed to us.  The motion has not been and will not be filed. 

Not every day you see a party put out a 201 page sanctions motion and then to yank it back the next day. 🤦🏻‍♂️🤦🏻‍♂️🤦🏻‍♂️  Wonder what the billing was for this episode?

The Sacklers Try to Strong Arm the Non-Consenting States with a Threat of Sanctions

Every time I think the Purdue Pharma bankruptcy couldn't get crazier, it does. The latest development is that some of the Sacklers (the Raymond branch) are seeking sanctions against five of the holdout non-consenting states for allegedly false statements in the states' proofs of claim. It's a blatant litigation tactic. The clear motivation for this motion is to bully the non-consenting states into dropping their opposition to the plan (and the release of the Sacklers) in exchange for the Sacklers dropping the sanctions motion. It’s absolutely outrageous.

Available now, wherever books are sold.

I'm pleased to announce the publication of the second edition of American Business Bankruptcy. Now featuring coverage of the Small Business Reorganization Act (subchapter V) and a nifty endorsement from a fellow Slipster.

Purdue Retaliates Against the Parent of an Opioid Victim Who Dares to Speak Out

Another recent Purdue docket item caught my notice. It is an order approving a settlement between Peter Jackson, the parent of a teenage opioid overdose victim, and Purdue and the Personal Injury Ad Hoc Committee regarding discovery requests that Purdue and the PI Ad Hoc Committee served on Mr. Jackson. It's a minor episode in the overall bankruptcy, but shows just how nasty Purdue is willing to get to push through its plan.

District Judge to Purdue: "You Don't Get to Choose Your Judge"

"[Y]ou don't get to choose your judge." That's what US District Judge Colleen McMahon wrote to Purdue Pharma, in response to an ex parte letter Purdue had written to her addressing a possible motion to withdraw the reference to the bankruptcy court for a third-party release and injunction. 

The irony here is incredible. I suspect that Judge McMahon does not realize that judge picking is precisely what Purdue Pharma did to land its case before Judge Drain, rather than going on the wheel in Bowling Green and risking landing a judge who does not believe that there is authority to enter third-party releases.

The problem with judge picking is that it creates an appearance of impropriety. And judge picking is the original sin in Purdue's bankruptcy. It has tainted everything in the case. It will mean that however much money the Sacklers pay, there will always be the suspicion that they would have had to pay a lot more had the case been randomly assigned to another judge, who might not have stayed litigation against them for nearly two years.

Venue Reform: Once More Unto the Breach

Chapter 11 venue reform is back and not a moment too soon. The perennial problem of forum shopping has devolved into naked judge picking with what appears to be competition among a handful of judges to land large chapter 11 case. The results are incredible: last year 57% of the large public company bankruptcies ended up before just three judges, and 39% ended up before a single judge. When judges compete for cases, the entire system is degraded. Judges who want to attract or retain the flow of big cases cannot rule against debtors (or their private equity sponsors) on any key issues. If they do, they are branded as "unpredictable" and the business flows elsewhere. The result is that we are seeing a weaponization of bankruptcy and procedural rights, particularly for nonconsensual or legacy creditors being trampled.  

Recognizing this problem, Rep. Zoe Lofgren (D-CA) and Ken Buck (R-CO) introduced the bipartisan Bankruptcy Venue Reform Act of 2021, H.R. 41931. The bill would require debtors to file where their principal place of business or principal assets are located—in other words in a location with a real world connection with the debtor's business. 

Judge Shopping in Bankruptcy

Several months ago, I did a long post about how Purdue Pharma's bankruptcy was the poster child for dysfunction in chapter 11.The gist of the argument is that the procedural checks and balances that make chapter 11 bankruptcy a fair and credible system have broken down because of a confluence of three trends:

1. increasingly aggressive and coercive restructuring techniques;
2. the lack of appellate review for many key issues; and
3. the rise of “judge-shopping” facilitated by bankruptcy courts’ local rules.

I've written it up into a full length paper, forthcoming in the Texas Law Review and available here.

While writing the paper I was surprised to learn just how bad and concentrated the judge shopping has become in chapter 11. There are 375 bankruptcy judges nationwide. Yet last year, 39% of large public company bankruptcy filings ended up before a single judge, Judge David R. Jones in Houston. A full 57% of the large public company bankruptcy cases filed in 2020 ended up before either Jones or two other judges, Marvin Isgur in Houston and Robert D. Drain in White Plains. 

I discuss the implications of the supercharged judge shopping in the paper, but let me say here what no no practicing attorney (or US trustee) is able to say, because I don't have to worry about appearing before these judges in the future: these judges should be recusing themselves from hearing any case that bears indicia of being shopped into their courtroom, if only to avoid an appearance of impropriety. 

Professionals Fees and Purdue Pharma LP

Featuring two Slipsters – here.

The Failure of the United States Trustee Program in Chapter 11

The United States Trustee settled with three large law firms that failed to disclose the nature of their relationship with the Sackler Family Purdue when they were engaged by Purdue in its bankruptcy. The result is that these firms will return $1 million in fees.  This action has produced headlines like "Bankruptcy Watchdog Bares Teeth at BigLaw in Purdue Ch. 11," but I have a completely different take on the story. I see this settlement as an indictment of the US Trustee Program as a complete failure in chapter 11. 

In Purdue, the UST is focused on a measly million of fees, and is AWOL on the issues that affect billions in creditor recoveries. And the story is hardly limited to Purdue.

Book Recommendation: Caesars Palace Coup

A fun new book applies a revealing Law & Order analysis to the multi-billion-dollar, knock-down-drag-out reorganization of Caesar's Palace. In The Caesars Palace Coup, Financial Times editor, Sujeet Indap, and Fitch news team leader, Max Frumes, open with a detailed examination of the personalities and transactions that preceded the Caesars bankruptcy case, leading to the second (and, for me, more interesting) part of the book, tracking step-by-step the harrowing negotiations, court proceedings, and examiner report that led to the ultimate reorganization.

There is so much to like in this book. Its primary strength is its Law & Order backstory, peeling back the onion of every major player, revealing how they got to where they were in their careers in big business management, high finance, or law, and revealing their thoughts and motivations as the deals and legal maneuvers played out. Four years of painstaking personal interviews have paid off handsomely in this fascinating account of the inner workings of big money and big law reorganization practice. On a personal note, I was treated to a bit of nostalgia, as the book opens with and later features Jim Millstein, an absolute gem of a person who taught me about EBITDA when my path fortunately crossed with his at Cleary Gottlieb in New York City in the late 1990s. It also features the Chicago bankruptcy court in my backyard, which seldom hosts such mega cases as Caesars', and the story in the second half of this book reveals part of the reason why. Cameo appearances include some of my favorite academics, such as Nancy Rapoport, as fee examiner, and Slipster, Adam Levitin, as defender of the Trust Indenture Act. On that latter point, the book alludes to (but does not particularly carefully explain) the key role of the Marblegate rulings on the TIA, which is described in a bit more depth in a vintage Credit Slips post. Again, the book's most valuable contribution is a behind-the-scenes look at the motivations and machinations behind a salient instance of collateral stripping, adding to the literature on this (disturbing) trend.

For would-be, currently-are, or has-been (like me) business managers, investment bankers, hedge fund managers, and reorganization lawyers, this book is a fascinating under-the-hood analysis of every stage of a financial business restructuring (not much about the operational side). For anyone interested in the thoughts and motivations of the Masters of the Universe who control so much of our world and its most famous companies, this book offers a brutally honest peek at how the sausage is made. It's not always pretty, but it is both entertaining and enlightening.

Does Delaware Get the Final Say?

I've been doing some reading on officer and director fiduciary duties to creditors, and I am surprised that how much the academic and practitioner consensus seems to have settled on the notion that, in light of the Delaware caselaw following Gheewalla, it is essentially impossible for creditors to bring a fiduciary action against a board. Namely, because Delaware caselaw has held that such claims are derivative (with all the procedural limits thereon) and have narrowed the duty to apply, if at all, to cases of actual insolvency, most claims will not be viable. Moreover, most authors implicitly assume that these claims are subject to the internal affairs doctrine (i.e., that they are subject to Delaware law no matter where the case is brought).

That analysis seems right to me only if we are sure that these sorts of claims arise out of the corporate form. But if creditor fiduciary duty claims instead arise out the debtor-creditor relationship itself, then it is not clear to me Delaware gets to decide these issues. Indeed, more often New York would seem to provide the relevant law (if the debtor-creditor relationship is subject to New York law). Of course, some might argue that the debtor-creditor relationship is purely contractual, but it strikes me that the source of these claims is a greatly under-discussed issue.

NRA Bankruptcy

The National Rifle Association filed for bankruptcy in the Northern District of Texas (Dallas). The NRA's press release says that the purpose of the bankruptcy is to enable the NRA to change from being a New York corporation to a Texas corporation. This is critical to the NRA because the NY Attorney General, who regulates NY non-profits, is seeking to have the NRA dissolved for financial malfeasance. Notably, the NRA states that it "will propose a plan that provides for payment in full of all valid creditors’ claims. The Association expects to uphold commitments to employees, vendors, members, and other community stakeholders." In other words, the NRA's petition is not driven by financial exigencies, but to avoid the reach of the New York Attorney General. As the press release boasts, the NRA is "dumping New York."

This is going to be one heck of an interesting case. There are already so many glaring issues (or should I say "targets"?): venue, good faith filing, disclosures, the automatic stay the trustee question, fiduciary duties to pursue claims against insiders, executory employment contracts, the fate of Wayne LaPierre, and the generally overlooked governance provisions of the Bankruptcy Code. I'll take quick aim at these all below. 

Dissecting the Increase in Chapter 11 Filings

I just finished teaching an intensive one-week course at Cardozo School of Law designed to introduce students broadly to bankruptcy and reorganization. The course covered debt collection, consumer bankruptcy, large public-company reorganization, small business reorganization (including the SBRA), municipal bankruptcy, cannabis and bankruptcy, third-party releases, and even a bit on chapter 15.  A theme throughout the week was changes in filings during the pandemic. To impress upon students that chapter 11 filings indeed are up, but that doesn't mean they are up everywhere across the country, I created this map. It details year-over-year increases or decreases in chapter 11 filings  based on jurisdiction.

I relied on data from the American Bankruptcy Institute / Epiq detailing total chapter 11 filings in 2019 and 2020. The map thus includes non-commercial chapter 11 filings. Historically, based on data from the Administrative Office of the United States Courts, a very small percentage of chapter 11 filings are non-business-debt filings--historically, about 6%. The more important caveat is that the map counts each filing as a case, even if the case is that of a "child" company filing with a "parent." See Slipster Bob Lawless's prior post about how parent/child filings can make it seem like commercial filings are rising much more than they actually are. Regardless, across the country, in 2020, chapter 11 filings generally are down. And where chapter 11 filings have increased, they seemingly have increased a lot.

Restructuring Support Agreements and the "Proceduralist Inversion"

I'm usually fussing about bank regulation issues here on the Slips, but I do try to make time for my first love, business bankruptcy. Ted Janger and I have a short piece about restructuring support agreements out in the Yale Law Journal's on-line supplement. It's a response to David Skeel's excellent article about RSAs. Suffice it to say that we are a bit more skeptical that Skeel about the benefits of RSAs, which we see as a mixed bag that require some policing.

What's particularly fascinating to me and Ted, however, is the way that Skeel's article illustrates the way that "camps" of bankruptcy scholar have effectively swapped positions over time. The "bankruptcy conservatives"—law-and-economics camp—was historically associated with a concern about procedure over outcomes and criticized the "bankruptcy liberals"—the traditionalist camp—as too concerned about distributional outcomes. Yet now it is bankruptcy liberals who are urging adherence to procedural protections, while it is the bankruptcy conservatives who are cheering on procedurally suspect devices because of their effects. 

Purdue's Poison Pill and the Broken Chapter 11 System

Jonathan Lipson and Gerald Posner have an important op-ed about the Purdue bankruptcy in the NYT and how the DOJ settlement with Purdue is likely to benefit the Sacklers. What's going on in Purdue is troubling, but not just for its own facts. Purdue illustrates a fundamental breakdown of the checks and balances in the corporate bankruptcy system.

The basic problem is that debtors can pick their judges in a system that precludes any meaningful appellate review. That lets debtors like Purdue push through incredibly inappropriate provisions if they can get a single non-Article III judge of their choice to sign off. This happening in as high-profile and important a case as Purdue should be an alarm bell that things have gone off the rails in large chapter 11 practice. Where Purdue goes, chapter 11 practice in other cases will surely follow. 

Purdue is perhaps the most extreme illustration of the confluence of three trends in bankruptcy each of which is problematic on its own, but which in combination are corrosive to the fundamental legitimacy of the bankruptcy court system.  

• First, there is a problem of debtors attempting to push ever more aggressive and coercive restructuring plans.
• Second, there is the lack of effective appellate review of many critical bankruptcy issues.
• And third, there is the problem of forum shopping, particularly its newest incarnation, which is about shopping for individual judges, not just judicial districts.

Put together this means that debtor are picking their judge, knowing that certain judges will be more permissive of their aggressive restructuring maneuvers and that there will never be any meaningful appellate review of the judges, who are free to disregard even clear Supreme Court decisions. A single judge of the debtor's choosing is effectively the only check on what the debtor can do in chapter 11. That is a broken legal system.  

Taub's New Book on White Collar Crime (and its connection to bankruptcy)

I just finished Professor Jennifer Taub's new book, Big Dirty Money: The Shocking Injustice and Unseen Cost of White Collar Crime. The book has been out for a couple weeks and it's already receiving rave reviews. I'm a bit late to the party. But I wanted to add my praise to the chorus. And add a shout out to bankruptcy's place in the dealing with the cost of white collar crime. Taub's introduction starts with three quick examples: the Sackler family, Pacific Gas & Electric, and General Motors. The examples aren't about their bankruptcy cases. They are about actions prior to their chapter 11 filings which had to be worked out in bankruptcy. As I read, I thought -- that ended in bankruptcy, so did that, and, yep, bankruptcy for that one too. Taub's book, of course, is not about bankruptcy. But if you're interested in white collar crime backstories of some headliner bankruptcy filings, this book will help make those connections. And it will elucidate the big business of white collar crime in a captivating read. In short, highly recommended.

J. Screwed - A Paper

A number of months ago now, I listened to a fun podcast episode on Planet Money titled "J. Screwed" about contract shenanigans by J.Crew, as it was making its way into deep financial distress.  I'm fascinated by the exploitation of contract loopholes in debt contracts. So, of course, I wanted to know more. I went digging into the world of Google.  But I couldn't find anything good in the literature that explained to me the details of what was going on (the contract term in question, how widespread this problem was, how the market had reacted, etc., etc.). The best I found was a blog post that fellow slipster, Adam Levitin, kindly pointed to me.

But now there is a wonderful article up on ssrn by the author of that post (a former student of Adam at Georgetown Law, I believe).  The appropriately titled article, "The Development of Collateral Stripping By Distressed Borrowers" by Mitchell Mengden, is here.

The abstract reads as follows:

In the past decade, private equity sponsors have taken a more aggressive stance against creditors of their portfolio companies, the most recent iteration of which has come in the form of collateral stripping. Sponsors have been using creative lawyering to transfer valuable collateral out of the reach of creditors. This Article delves deeper into the issue by examining the contract terms and litigation claims raised by these transactions.

The lack of protective covenants and ease of manipulating EBITDA and asset valuations are key conditions that permit collateral stripping. Each of these conditions were present in the past decade, primarily due to the protracted expansionary stage of the credit cycle. Lenders, however, can protect themselves from collateral stripping by negotiating stricter covenants and tighter EBITDA definitions, as well as pursuing ex post litigation for fraudulent transfers, illegal distributions, and claims for breach of fiduciary duty.

Contractual opportunism and creative lawyering will almost certainly continue to pervade credit markets. This Article provides a roadmap of ways that lenders can protect themselves from opportunism during contracting and throughout the course of the loan. As this Article concludes, ex post litigation claims are often an inadequate remedy, so lenders should seek to tighten EBITDA definitions and broaden protective covenants—even if to do so requires other concessions—to avoid litigation.

Should Chapter 11 Protect the Sacklers?

My colleague, Ralph Brubaker, and Gerald Posner have a New York Times op-ed assailing how the Sacklers are using Purdue Pharma's chapter 11 to shield themselves from personal liability. The bankruptcy world knows this tactic under the labels of third-party or nondebtor releases.

When they first appeared on the scene, third-party releases seemed like another example of the pragmatic problem-solving that the bankruptcy system excels at doing. Parties contribute money to the pot that goes to pay creditors, often victims of some tort. That money increases the amount that victims receive without having to suffer the time, expense, and uncertainty of having to file lawsuits. The release incentivizes the released parties to contribute in the first place. No contribution, no release.

Like many good ideas in the bankruptcy system, third-party releases were supposed to be the rare case but have become commonplace in chapter 11 practice. As Brubaker and Posner point out, if third parties like the Sacklers need protection from tort liability associated with Purdue Pharma, they can always file bankruptcy themselves. They want the protection of the bankruptcy court without subjecting their own assets and affairs to the scrutiny of the bankruptcy court. At the least, that needs to change. 

Best Interest Blog

There's a new bankruptcy blog around:  the Best Interest Blog.  Welcome to the blogosphere!  

I'm delighted that the blog features a great post by my former student and research assistant Mitchell Mengden about the "J. Screwed" maneuver of stripping out collateral from the restricted group and then pledging it to other creditors. While the maneuver has been going on for a while, as Mitchell explains, it's interesting how infrequently underwriter's counsel has insisted on J. Crew provisions in bond indentures, although the use seems to be picking up in junk indentures. 

Why Is Anyone Paying Retention Bonuses in Today's Economy?

Wall Street Journal today has a story about Hertz having paid out $16 million in retention bonuses before filing for bankruptcy. It seems that several other firms have done the same recently.

In normal times, a retention bonus isn't a crazy idea--there are downsides to remaining employed at a bankrupt company, particularly the uncertainty about the company's future--will it survive, in what form, and under what management? An employee might reasonable look at other employment options if bankruptcy looms. 

But in today's economy, I have trouble seeing a justification for paying retention bonuses for executives. With real unemployment at nearly 25% and few firms hiring (and certainly not rental car companies), the alternative to sticking with the bankrupt company is likely unemployment, not a similar position at another firm. The bonuses just look like corporate waste (and perhaps self-dealing). But if I had to guess, given their size, they'll go unchallenged, whether because of terms of the carve-out for the official committee in the DIP financing or because of a release in the plan.  

Letter from 163 Bankruptcy Judges Backs Venue Reform

Support seems to keep building even more for changes to where large corporate debtors can file chapter 11. The latest is a letter from "163 sitting, recalled, or retired United States Bankruptcy Judges." From the letter:

The venue selection options for bankruptcy cases under current law have led to forum shopping abuses that have disenfranchised local employees, creditors, and parties in interest from participation in bankruptcy cases, undermined public confidence in the integrity of the United States Courts and the bankruptcy process, inhibited the development of uniform, national bankruptcy jurisprudence, and led to inefficient allocation of judicial resources. 

The judges join forty-two state attorneys general who signed a February letter supporting similar changes. The House bill (H.R. 4421) now has fifteen co-sponsors, which I believe is more than any venue reform bill has had. With all of that support, my views don't matter much, but I agree too. 

Like I wrote before, there have been lots of efforts at venue reform, but this time feels different.

COVID-19's Impact on Higher Education's Finances

There's a lot to say about the economic dislocation from the coronavirus and the economic policy response. But I want to focus for a moment about its impact on higher education.  Lots of schools have gone to virtual classrooms either temporarily or for the rest of the semester. It's not ideal pedagogically (and it really unsuitable for certain types of classes), but it works as a stop gap measure, especially for courses which have already been going for several weeks, in which some rapport has developed between faculty and students.  

But there's no reason to think that this disruption will be over by the end of the semester. What happens with summer courses? And most importantly, what happens in the fall? Will schools be able to enroll new cohorts of students? I suppose it's possible to teach 2Ls and 3Ls virtually all the time. But can that be done for 1Ls? Or for college freshmen? And even if it is possible to do generally, what about enrolling foreign students? To be sure, University of Phoenix and other on-line schools do this all the time, but they offer a very different kind of educational experience. Will students seek to defer for a year or simply not enroll?

This matters hugely for universities as businesses.

Mallinckrodt Pharmaceuticals Bankruptcy and Channeling Injunction Puzzle

The outline of Mallinckrodt Pharmaceutical’s chapter 11 proposal (no filing yet) puzzles me.  Mallinckrodt is looking to put its US speciality generic subs in the chapter to slough off opioid liability, while keeping the parent and other subs out of bankruptcy.  The proposal would have Mallinckrodt fund a trust with $1.6 billion (face value) of cash payments and warrants for the purchase of 19.99% of Mallinckrodt parent’s common stock at a strike price that’s currently in the money.  The bankruptcy court would be asked to enter a channeling injunction along with third-party releases that would direct all opioid creditors to look solely to the trust for recovery, freeing Mallinckrodt parent and its speciality generic subs from the uncertainty opioid liability overhang.  

Here’s what puzzles me. The channeling injunction and third party releases being sought would be entered under section 105(a).  The only express channeling injunction and third party release procedure in the Bankruptcy Code, section 524(g), is solely for asbestos cases. While we’ve seen channeling injunctions and third party releases entered in a range of contexts beside asbestos under section 105, it seems problematic to me for a court to authorize either under section 105(a) on a less strict basis than is required under section 524(g). If a court could just go with judicially-crafted section 105(a) requirements in lieu of section 524(g), it would render section 524(g) requirements meaningless in the asbestos context.  

Boy Scouts Is On A Path To Upset Survivors. It Doesn't Have To Be.

Before and just after the Boy Scouts of America (BSA) filed chapter 11, I received a few inquiries about the benefits and drawbacks to survivors of BSA's then-potential filing. I generally responded by highlighting that bankruptcy would not necessarily take away survivors' rights to compensation and to have a voice, but could ensure that each survivor received the same percentage compensation for the wrongs done to them. I also noted that the bankruptcy might help survivors come forward, both because they would have to by a certain date and because they would know they would be joining forces with hundreds of other survivors. (See here, here, here.) Both benefits hinged on BSA taking the reorganization process seriously and working to make bankruptcy court a place for survivors to be heard and negotiated with in good faith.

Based on BSA's initial filings, it seems suspect that BSA is planning to do either. Which means that the bankruptcy court must be even more vigilant in stepping up to ensure that survivors' rights and voices do not get washed away in this reorganization.

To understand why BSA is on a path to make survivors very upset, let's take a walk through BSA's informational brief and proposed plan.

Boy Scouts of America: Venue Demerit Badge

Boy Scouts of America’s bankruptcy filing is among the most flagrant abuse of the venue statute ever. It’s an illustration of just how broken the bankruptcy venue system is. But it might not be too late to do something about it. 

Here’s the quick background (some of which is also covered in Pamela Foohey's post). Boy Scouts of America (BSA) is a defendant along with its local councils (essentially franchises) in myriad sex abuse suits. BSA is a federally chartered entity, headquartered in Texas. In July 2019, roughly 210 days ago, BSA incorporated its only subsidiary, Delaware BSA, LLC, a Delaware limited liability company, of which BSA is the sole member.

Delaware BSA, LLC has less than $50,000 in assets (and possibly zero), consisting primarily (or perhaps solely) of a bank account in Delaware. It carries on no business and has no real employees. In short Delaware BSA, LLC, is a pure corporate shell. Its sole purpose appears to be to enable BSA to have proper venue for a bankruptcy filing in Delaware.  That’s because the bankruptcy venue statute allows a firm to file for bankruptcy where it is incorporated, where its principal place of business or assets are, or where a bankruptcy of an affiliate is pending.  BSA utilized this last provision to get Delaware venue:  it had its subsidiary Delaware BSA, LLC, file for bankruptcy in Delaware first and then it bootstrapped its way in by virtue of its affiliate having a case pending in Delaware. 

It’s hard to conceive of a more blatant abuse of the venue statute. (Ok, there's Winn-Dixie, which formed its affiliate 12 days before the filing, rather than outside of the 180 days required by the venue statute.) But I think there is a solution in this case, if you bear to the end of a long post.  

The Boy Scouts of America Filed Chapter 11 . . . in Delaware???

As you almost certainly have seen, early morning, Tuesday, February 18, the Boy Scouts of America (BSA) filed chapter 11 (Case No. 20-10343). The filing solely was motivated by the deluge of sex abuse claims filed against BSA. There currently are approximately 275 lawsuits pending in state and federal courts across the country. The case raises a host of issues--from litigation consolidation and multi-district litigation to limited liability to ensuring that survivors have a voice in bankruptcy and in their pending cases. I intend to take up those issues later a longer post. There is one issue particular to bankruptcy worthy of noting in this separate post.

Venue. How did BSA, with its national headquarters located in Irving, Texas, file in the Bankruptcy Court for the District of Delaware? As disclosed by the restructuring adviser to the BSA, on July 11, 2019, a non-profit limited liability company, called Delaware BSA, was incorporated under the laws of Delaware. The sole member of this company is BSA. Delaware BSA's principal asset is "a depository account located in Delaware."

Besides at its national headquarters, other employees are located at the BSA’s warehouse and distribution center in Charlotte, North Carolina. Still other employees work at "approximately 175 official BSA Scout Shops located throughout the United States and Puerto Rico and at the BSA’s four high adventure facilities located in Florida, Minnesota and parts of Canada, New Mexico, and West Virginia." I wonder who, if anyone, works at the Delaware BSA. And who involved in the bankruptcy case itself has any true connection to Delaware. BSA's attorneys are from Chicago. None of the creditors on its list of 20 largest creditors have addresses in Delaware.

In short -- Why Delaware? Will we see a venue transfer motion soon? Is this an(other) example of why venue reform remains necessary?

Bankruptcy and Mindfulness

The practice of mindfulness and other types of meditation are growing on the coasts and within the law school and lawyer communities. Perhaps these practices can provide meaningful benefits to bankruptcy clients, bankruptcy lawyers and bankruptcy professors and judges. The essence of "mindfulness for lawyers" efforts begins with the notion that the adversary system can take a toll on home life, friendships and our own notions of who we want to be. A meditation practice can help us concentrate and be the best lawyers we can be and also the best friends and family members we want to be; and perhaps even help us to be the kind of persons we want to be. It is a mix of focusing more fully on the present, mixing that with lovingkindness to ourselves and others, and observing what is going on in our minds, all without judgment.

Consumer bankruptcy debtors, creditors, practitioners and judges are constantly faced with problems for which the legal system is at best a partial solution. In most cases there are a few true winners and a host of partial winners, partial losers and complete losers. Mindfulness can help us keep a focus on the matter in front of us and also help us maintain our passion for life and practice.  On the business bankruptcy side, our duty of loyalty combined with the zealous representation ethic can allow the day-to-day fighting to change our character and perhaps even our values. In every community there are a host of ways of starting such a practice.  The book 10% Happier by Dan Harris is an easy entry point and in most communities there is a Mindfulness Based Stress Reduction course available.  More and more law schools and bar associations are providing such opportunities. Mindfulnessinlawsociety.com and themindfullawstudent.com are excellent resources.  I am enjoying teaching mindfulness to law students as well as faculty and staff at Saint Louis University Law School. 

 

 

Elizabeth Warren's Work in the CMC Heartland Case

Elizabeth Warren’s bankruptcy work continues to be in the news, now with a Washington Post article on her work in the CMC Heartland case. Unfortunately, the Washington Post completely misses the point about why Elizabeth decided to work on this case. Let me correct the record about Elizabeth’s (very limited) role in the CMC Heartland case.

The end of the UFCA?

Governor Cuomo has signed into law New York's version of the Uniform Voidable Transactions Act (UVTA). Does this mean I don't have to talk about the UFCA in my bankruptcy classes anymore?

It also means that both California and NY are on the UVTA, which may be the beginning of the end for the UFTA.

Juno?

On Friday night I landed at JFK, after a very nice international insolvency conference at the University of Miami, and took a "Juno" home. Little did I know it would be my last time using the app. 

On Monday Juno announced it was shutting down, and on Tuesday it (and several affiliates) filed chapter 11 petitions. It blamed its demise on "burdensome local regulations and escalating litigation defense costs." The company has been marketing itself for several months, and its parent (Gett) intends to continue in the US as a business only ride service, operating in partnership with Lyft.

Now here's a question. The company notes that it "operated in New York, New York, where its headquarters are located." Where did it file its case?  Delaware.  Why?

Comments are open.

In the meantime, I guess I'm stuck with Lyft. And their drivers who insist on picking me up across the street from my apartment building.