If You're Gonna File in Texas, You Gotta Have Your Votes in Hand

J&J’s at it again with a third talc bankruptcy filing, this time in SDTX.  To paraphrase Marx, the first time was tragedy, the second time farce, and now the third time is fubar. 

Why fubar? tl;dr is that J&J's betting the case on the purported authority of a small Mississippi plaintiffs' firm to unilaterally change the votes of its joint clients from "no" to "yes". 😮🤯

Preliminary Injunctions After Harrington v. Purdue Pharma

The Supreme Court's opinion in Harrington v. Purdue Pharma left open a lot of questions about the extent of its scope. We now have one of the first opinions exploring those questions. Judge Craig Goldblatt of the Delaware bankruptcy court faced a request for a preliminary injunction in the bankruptcy of right-wing social media platform Parler. Judge Goldblatt concluded that "authority to 'extend the stay' survives Purdue Pharma." I'm skeptical. 

Procedural Justice and Chapter 11 Venue

The good people at Bloomberg News asked if I wanted to elaborate on a post I did about procedural justice and chapter 11 forum shopping. The resulting opinion piece is here: "Bankruptcy Venue Shopping Breaks Perceptions of Judicial Fairness." It should not be behind a paywall.

The piece builds on the procedural justice literature about the noninstrumentalist concerns that drive perceived legitimacy of a legal system. It is easy to find a court decision legitimate when the court rules in your favor, or as a nonparty, you agree with it. For the legal system to work, parties have to respect decisions they don't agree with. Fortunately, social scientists have told us a lot about what drives perceptions of judicial legitimacy.

Spoiler alert: picking your own judge ain't it.

Unjust Debts on the Road

First, thanks to Bob Lawless for his post about my new book. It has been great to engage with people about Unjust Debts so far, and especially appreciated the book making a new Financial Times best books list (links to that and other coverage here). Wanted to note a few upcoming book events for Credit Slips readers:

• June 27 (TONIGHT): Greenlight Bookstore, Brooklyn NY, in conversation with Zephyr Teachout. Information and RSVP here. 
• July 1 (VIRTUAL): Commonwealth Club World Affairs, in conversation with Senator Elizabeth Warren. Information and registration here. 
• July 8: Politics & Prose, Washington DC, in conversation with Vicki Shabo. Information here. 

Not All Third-Party Releases Are the Same

My friend Professor Tony Casey has been the most vocal academic defender of non-consensual non-debtor releases in bankruptcy. I obviously disagree with Tony on both the legality and policy substance, but Tony's repeatedly taken me to task in scholarship (here and here) and various social media platforms (here and here) for having supposedly changed my view of the issue.

Tony's charge that I've flip-flopped is based on a 2019 blog post in which I defended then presidential candidate Elizabeth Warren's work in Dow Corning, which Tony thinks is a non-consensual non-debtor release case. 

Unfortunately, Tony's misread Dow Corning and therefore sees a contradiction where none exists.  I have never taken issue with consensual releases of creditors' claims against non-debtors as part of a global settlement (although what constitutes adequate consent is a separate issue). Instead, my concern has always been with mandatory, non-consensual release of claims against non-debtors. Dow Corning released third-parties, but it was not a non-consensual release case. Unlike in, say, Purdue Pharma, where the non-debtor releases purport to bind all creditors irrespective of consent, the dissenters in Dow Corning were allowed to opt-out and pursue their remedies.

FTX Bankruptcy Plan: What's with the "Consensus" Interest Rate?

The FTX bankruptcy plan proposed today has gotten a lot of attention for the fact that it is promising to pay (over time) 118% of allowed customer claims. That's not quite as great as it sounds given that customer claims were locked in at their November 2022 values. Getting 118% isn't nearly as good as getting 300% (roughly the appreciation of Bitcoin since November 2022), but it's a heckuva lot better than getting the typical "cents on the dollar" bankruptcy treatment.

But there is something here that could be controversial:  the payment of post-petition interest on customer claims at a 9% "Consensus Rate." (The 118% is with two years of 9% interest.)

The Texas Three-Step

Johnson & Johnson is preparing to take a third crack at addressing its toxic talc liabilities through bankruptcy in what we might call a "Texas Three-Step". And as with J&J's previous attempts, this one has some pretty glaring issues.Yet because of J&J's ability to forum shop and even picks its judge, it will likely be able to sidestep adjudication of many of the issues and avoid appellate review entirely. Instead, J&J's strategy is going to be to ram a seriously deficient plan through with the assistance of its hand-picked judge and then avoid appellate review through the equitable mootness doctrine. It's a strategy that might work. And if it does, it is a sign that the bankruptcy system is seriously broken.

Stuffing the Chapter 11 Ballot Box with "Junk" Claims

A recent, disturbing, and truly scandalous development in Chapter 11 mass tort cases is the phenomenon of debtors trying to stuff the ballot box with "junk" claims, that is claims that should by all lights be disallowed as unenforceable and therefore ineligible to vote on a plan. Debtors have recognized that they can strategically co-opt part of the mass tort bar to push through plans:  debtors offer small payments to claims that ought to be disallowed (and thus to the attorneys representing those claims on contingency fee) in order to get those claimants to vote in favor of a plan that forces a low-ball payment on the legitimate tort claimants. While debtors have to pay a bit for the "junk" claims' votes, they come out ahead in the end because by flooding the electorate with the junk claims, they can overwhelm the voting power of the legitimate claims and stick the legitimate claimants with a much lower payment than otherwise.  

Predictably Reliable

Law360 has a nice Q&A with Chief Judge Michael Kaplan of the New Jersey bankruptcy court. The interviewer rightly asked Judge Kaplan why New Jersey has recently become a Chapter 11 filing destination. Judge Kaplan's answer is telling:  

What do filers look for? They look for predictability, and we have a body of work that you can look at to get a sense, whether it be third-party releases, whether it be bidding procedures, whether it be outlook on examiners or mediation. I believe we have really gained exposure, probably initially with the LTL Management case. Not my work on that case as much as our clerk's office, our chambers, how we can handle a deluge of filings and the multiple committees and the scheduling.

Judge Kaplan is partially right here. Filers are absolutely looking for predictability. But that's only half of the story. They are looking for a venue that is predictably favorable. If you're shopping around for third-party releases, you aren't going to file in the 5th Circuit, where you can predictably not get one. As I've explained at length, the predictability trope that is sometimes used to defend venue shopping is really about predictability giving the debtor the outcomes it wants on major issues: appointment of an examiner, third-party releases, retention of right to investigate avoidance actions, etc.  And with LTL Management, particularly with his denial of the motion to dismiss in LTL 1.0 and then reluctant granting of the motion to dismiss in LTL 2.0, Judge Kaplan made clear the sort of reception large debtor firms could expect in Trenton.  One might even say it's predictable. 

A Trump Bankruptcy?

Will Donald Trump file for bankruptcy? It's certainly a possibility as Trump struggles to come up with a supersedeas bond for staying the NY Attorney General's civil fraud judgment against him while he takes an appeal.

I don’t know the strength of Trump’s possible arguments for an appeal, but the legal arguments might be beside the point. If Trump wins the election, the entire dynamic of the litigation changes. Is the New York Attorney General really going to enforce a judgment against the President-elect, particularly one who is likely to be vengeful once in office? Maybe, given that we will likely be facing an period of extended lawfare, but the calculus for enforcement or settlement shifts in Trump’s favor if he wins election. That means that Trump’s best move might be trying to run the clock until Election Day:  7 months and 17 days.  And maybe not even that long. The optics of pursuing the collection on the eve of the bankruptcy will make it look very political and might generate sympathy for Trump. So Trump might only need to run the clock, say, 6 months. That’s where bankruptcy comes in.

Alabama Supreme Court and Section 366

By sheer coincidence, the first problem I taught in my financial restructuring class today was about a bankrupt fertility clinic that is behind on its electric bill and is having trouble coming up with the funds to provide adequate assurances to the power company that it will pay its future bills: if the electricity is cut off, all the frozen zygotes and embryos will thaw and become unviable. 

I found myself wondering how this would play out in Alabama now. Suppose the debtor could not provide adequate assurances. Would the DIP/trustee or utility face some sort of liability for wrongful death if what one of my students termed "the biological material" melted?  I assume the Barton doctrine would provide some level of protection to the DIP or trustee. (I also assume the bankruptcy judge would have broad immunity for his or her official acts.) I'm not sure if the power company could even have liability, but given the potential scale of liability, it's probably not worthwhile cutting off the power, even if the risk of liability is very small.

I know that similar sorts of issues can emerge in hospital or nursing home bankruptcies, where there are patients who have to be transferred to other facilities in the event that the debtor is liquidating, but that's addressed by 11 USC 704(a)(12). Maybe an embryo that is frozen at a fertility clinic is now a "patient" at a "health care facility." Otherwise, I'm not sure what would create a duty for the trustee/DIP to preserve the embryos. 

A Uniform Law Project of Note: Special Deposits Act

Last week, bolstered by a continuing legal education program offered by the American Law Institute, I started studying a new uniform law that will be recommended to your state legislature in the coming days and months. It is called the Special Deposits Act. As of today it has not yet been enacted by a state legislature. But trust me when I predict that you want to study it too - especially because the choice of law rules will work differently for this uniform law than for, say, the digital assets amendments to the Uniform Commercial Code. In other words, if one of the green states in the map below adopts the law, parties can contract for that state to govern the special deposit as well as to be the forum for disputes, even if there's no other relationship with that state.

 

 

 

 

 

 

 

 

 

 

A special deposit is payable on the occurrence of a contingency and the identity of the party entitled to the funds is uncertain until the contingency happens. Right now, the law governing special deposits is nonuniform and the details can be uncertain, including the rights of creditors against those funds. One big impact of this uniform Special Deposits Act is this: in broadest terms, if a bank and depositor agree that a deposit account is a special deposit, and it meets the requirements for permissible purpose under the law, this law says that the funds in that account are not property of the depositor, including if the depositor files for bankruptcy, and cannot be reached by the depositors' creditors. (Fraudulent transfer law still applies and the drafters say there are other anti-fraud measures in place). The bankruptcy world may be interested in this law for an additional reason: possible use of special deposits in a bankruptcy case to pay professionals, or for large numbers of claimants, etc.

I also find this law interesting because of its implications for loans secured by deposit accounts under Article 9 of the Uniform Commercial Code. Even if a bank has a security interest in all deposit accounts of a debtor held by a bank, and is automatically perfected by control, the bank's enforcement rights are far more limited against the special deposit than against a typical bank account. In general, the bank cannot exercise rights of setoff or recoupment against a special deposit.

Again, as of today no state has enacted the Special Deposits Act. But given how the law is drafted, it will take just one state to adopt it, and for lawyers to encourage banks and depositors to opt in to that state's law, to have a much broader effect. Check out the materials here.

Rapoport on Judicial and Legal Ethics

Just wanted to make sure Credit Slips readers are aware of Professor Nancy Rapoport's new paper forthcoming in the Emory Bankruptcy Developments Jounrnal, accessible here. The abstract:

In late 2023, news stories picked up stories about a lawsuit alleging that Bankruptcy Judge David Jones of the United States Bankruptcy Court for the Southern District of Texas had been hearing cases in which his live-in romantic partner was appearing as counsel. The Fifth Circuit began disciplinary proceedings, and Judge Jones resigned from the bench. The scandal has affected more than just these two people: it implicates law firms, and potentially implicates other lawyers or judges who might have known more than they were saying. This article explores who had a duty to disclose this particular “connection,” and under what authority.

Again, paper available here:

What's 43 Years Among Friends?

One of my recent blog posts took issue with the historical claims in a Supreme Court amicus brief filed by several eminent law professors in the Purdue Pharma appeal. One of the professors, Tony Casey at University of Chicago Law School, fired back with a comment, and I responded at length in the comments section, but I think the exchange is worth elevating to a stand-alone blog post. 

To recap, the good amici jumped all over my claim that the Framers could not have conceived of nonconsensual nondebtor releases as being within the scope of the Bankruptcy Power. To this end, they cited a couple of English cases from 1618-1620. My original post pointed out that these were not contemporaneously reported decisions; they remained unknown until 1932 when a modern scholar "reported" the cases from his own reassembly of various Chancery documents. Moreover, the decisions were not even bankruptcy decisions, but compositions, not operating under any bankruptcy statute. 

Professor Casey responded:  

I really don't understand the argument here. First, how can you say releases were "incomprehensible" to the framers given that Lord Bacon was granting them? Even if the opinion is unreported, I just can't see the leap to arguing that no one designing a judicial system could have thought of or comprehended this thing that the Lord Chancellor had done multiple times. Second, the point about these not being "bankruptcy" cases is semantic. These were part of compositions that look just like Chapter 11 cases today. Third, even if you are right about everything else, our main point was about your 1986 claim. You write this [in your blog post], "because there was no reported decision of these cases until 1932, they do not undercut the fact that Anglo-American bankruptcy law had no notion of nonconsenusal nondebtor releases in until 1986." How do you get from 1932 to 1986? Finally, we point out other historical pedigree including cases from the 1940s.

Okay. Let's try this again.

 

Let's End Bankruptcy Judge Shopping

Credit Slips bloggers Adam Levitin, Stephen Lubben, and I joined eight other academics in putting our names to a letter calling for the Southern District of Texas to end its practice of having a "complex chapter 11" panel composed of two bankruptcy judges. This procedure ensures that large corporate debtors filing chapter 11 know their cases will be heard by one of these two judges rather than being randomly assigned among the judges on the court. Congress has authorized up to six bankruptcy judges for the Southern District of Texas. Although I do not speak for Levitin and Lubben, I wanted to elaborate on my reasons for signing the letter.

Corporate bankruptcy venue abuse remains overdue for reform as explained by Credit Slips bloggers just a few times both on and off the blog. For some examples, see here, here, here, here, here, and here. The problem with the complex chapter 11 panel is even worse because it creates the appearance of being able to pick your own judge. Whatever benefits there are from having a specialized panel for large cases, and I am sure there are some, they are not worth the corrosive effect on public confidence in an impartial system of justice. Because the bankruptcy court created the complex chapter 11 panel as a local administrative procedure, the same court could end it with a stroke of a pen.

What's 300 Years Among Friends?

It often doesn't end well when law professors play at being legal historians. The Purdue Pharma Supreme Court appeal is a case in point. 

A group of prominent bankruptcy law professors filed an amicus brief in support of the appellee, Purdue Pharma. Their brief takes direct aim at my amicus brief in support of the appellant, the United States Trustee. Specifically, the good professors challenge my claim that nonconsensual nondebtor releases were entirely unknown in Anglo-American law until the Johns Manville case in 1986. They write: 

One amicus has argued that releases would have been “incomprehensible to the Framers” and “were entirely unknown in American bankruptcy” prior to 1986. Adam J. Levitin Amicus Br. 4-5. This is a puzzling claim that misses the mark by at least 367 years.

Third-party releases have been known and comprehended in bankruptcy law as means to achieve global resolution since at least 1619, when the Lord Chancellor used his injunctive powers to release third-party sureties from the non-debtor claims in exchange for compelled contributions to a bankruptcy composition. See Tiffin v. Hart (1618-19), in John Ritchie, Reports of Cases Decided by Francis Bacon 161 (London 1932). Similar to the releases at issue in the present, the injunction in Tiffin was directed at dissenting creditors to facilitate a resolution that had been approved by the majority. Ibid.; see also Finch v. Hicks (1620), in Ritchie, Reports, at 166-167 (enjoining creditors from pursuing actions at common law against non-debtor sureties of an insolvent individual).

So, according to Purdue's amici, I'm wrong on the history because I failed to account for a 1619 case. But there's a HUGE problem with their argument...

Rite Aid Pulls a Purdue Pharma to (Sorta) Pick Its Judge

Last night I did a post about the Rite Aid bankruptcy. I assumed that the first affiliate to file was Lakehurst and Benson Corp. because that case had the lowest number of any case up on the public docket. But it seems that not all petitions had been posted to the public docket at that time, and instead the first to file was Rite Aid of New Jersey, Inc. (RANJ), which turns out to be a more interesting story than Lakehurst's petition.

Like Lakehurst, RANJ is a New Jersey corporation that is listed in NJ corporate records (both incorporation and UCC filings) as being based in Pennsylvania. So New Jersey venue is appropriate under the venue statute. But on its petition, RANJ, unlike Lakehurst, lists a principal place of business in New Jersey, specifically, "820 Beaverton Road, West Trenton, New Jersey 08628." That would seem to trigger the New Jersey local bankruptcy rules to have the case automatically assigned to one of the two judges in the Trenton vicinage.

But what happens when you plug that address into Google?  You get... nothing. Google does not know of a Beaverton Road anywhere in New Jersey.  Hmmm.

Google, however, in its artificial intelligence, does know of an "820 Bear Tavern Road, Ewing, New Jersey 08628." A look on the map indicates that Ewing is right next to West Trenton (and the post office doesn't actually care about the name of the town, just the ZIP...)

So it looks as if some Kirkland associate (do we really think Cole Schotz did the drafting?) had a bit of fauna mix up: "Beaverton" is actually "Bear Tavern".  If that's the case, what is actually at 820 Bear Tavern Road?  Well, it's the address of the Corporate Trust Company, a business that serves as the registered agent for other businesses.

You might be thinking at this point that Rite Aid is starting to look a lot like Purdue Pharma, where the White Plains venue was based on the address of the registered agent, not the actual business. (At least Rite Aid had the decency not to change registered agents in order to get a favorable address...)

Last time I checked, a registered agent is just an agent for service of process and the like. It is not a principal place of business, which is what matters for bankruptcy law: by definition the agent isn't the principal. In fact, RANJ has represented to the State of New Jersey that its principal business address is "30 Hunter Lane, Camp Hill, PA17001." And RANJ has made the same representation to the State of New York.

Now let's be clear: Rite Aid of New Jersey, Inc. is a New Jersey corporation, which means a New Jersey venue is technically proper, but the case should not have automatically been assigned to a Trenton judge under the NJ local rules, as there isn't any real claim for a Trenton vicinage. (It isn't clear how cases are assigned within a vicinage.) In any event, RANJ should have listed its actual Pennsylvania business address on its petition. If it had done so, it would not have had a 1 in 2 chance at getting Judge Kaplan, but would have had a 7 in 8 chance that the case would be assigned to another judge. And Kirkland no doubt knew what it was doing--someone made a deliberate decision to (mis)list the address of the registered agent as the principal place of business.

In short, this looks like yet another case of judge-picking. I recognize that parties are very hesitant to raise judge-picking before the picked judge, as it implies that at least the debtor thinks that the judge is not impartial. Nevertheless, I hope that there will be some probing questions about the judge-picking.

What's Rite Aid Doing in Trenton?

The big news this past week in bankruptcy was the resignation of Judge David R. Jones of the Southern District of Texas bankruptcy court after his romantic involvement with an attorney at Jackson Walker, who represented Chapter 11 debtors before him was revealed. That story is still unfolding (to be seen if there is bar discipline or even criminal charges), but let's not beat around the bush:  the real story is venue.

Specifically, the Jones scandal appears to go straight to the heart of Houston's meteoric rise as the premier Chapter 11 filing destination: Kirkland and Ellis would file large cases, sometimes with no obvious venue hook, in SDTX, where the cases would end up before one of two judges on a complex case panel:  Judge Jones or Judge Marvin Isgur, who was Jones's former law partner. In other words, file in Houston and you've got a 50% chance of getting Judge Jones, and even if you get Judge Isgur, the two judges worked very closely, mediating each others cases, for example.

Now that's all normal exploitation of the rules, but where a lot of questions emerge is from Kirkland having Jackson Walker as co-counsel. That's something Kirkland only did in Houston, meaning that Jackson Walker was really more like local counsel. It's quite strange as local counsel is not required under SDTX rules and, in any case, Kirkland has its own Houston office with restructuring partners. Other large firms filing cases in Houston have not had on local counsel. This story probably isn't over yet.

Now, having left a hot mess behind in Houston, now Kirkland is moving on...to Trenton, New Jersey, where once again there seems to be some venue funny business with Rite Aid

Judges as Mediators

With rising interest in the topic of judges as mediators, I am recirculatating the article published last year on this topic. The article reviews prominent accountability measures for judges and how these systems may not operate effectively when judges serve as mediators, especially when lawyers and parties have strong disincentives to object as needed. Given the objective of maintaining the legitimacy of the court system to the public, the appearance of impropriety is a major basis of concern throughout judicial ethics, whether or not there is evidence of actual inpropriety. Again, here is the article. 

Nondebtor Releases and the Future of Mass Torts

Certain members of the bankruptcy academy and bar seem to have their knickers in a twist over the Supreme Court’s grant of certiorari to review the nonconsensual nondebtor releases in Purdue. Conventional wisdom is that SCOTUS is going to find that there's no statutory authority whatsoever for nonconsensual nondebtor releases outside of the asbestos context (expressio unius and Congress doesn't hide elephants in mouseholes....).

Let's be clear: nonconsensual nondebtor releases are not necessary to resolve mass tort cases.

Treasury in the Red... with Yellow

Freight company Yellow is on the verge of bankruptcy. It's not a company whose financial distress would normally stand out but for the fact that it received $700M in national security loans from the US Treasury in 2020, and, oh man, are taxpayers going to take it on the chin. 

The Treasury financing was one of a eleven of national security loans made as part of the CARES Act, and it accounted for 95% of the total dollar amount of those loans.  These weren't PPP loans, but were supposed to play a sort of analogous role, ensuring that companies critical to national security would be able to keep operating. There are really two loans from Treasury to Yellow:  a Tranche A loans and a Trache B loan. 

The Tranche A loan is for $300M and is secured by a junior lien on Yellow's accounts receivable, cash, and various other squishy stuff. Tranche B is for $400M and is secured by the vehicle fleet it financed—something like 1,100 tractors, 1,600 trailers, and 140 containers.  Both loans are cross-collateralized with each other, meaning that the collateral for Tranche A supports Tranche B and vice-versa. The Tranche A and Tranche B loans sit behind approximately $1B of pre-existing debt in the form of (1) a revolver that's secured by the accounts receivable and cash and (2) a term loan (Apollo) secured by Yellow's terminals and rolling stock (other than those financed by Tranche B). Treasury also took an approximately 30% equity stake in Yellow.

There's no way to sugar coat this:  Treasury's screwed on the Yellow loans.

June 7 virtual event on Second Circuit's Purdue Pharma decision

The Commercial Law League of America is holding a virtual event next week, free of charge and open to all, on broader implications of the Second Circuit's Purdue Pharma decision. Register here. Date and time: June 7, 2023 at noon Eastern. The panel is Candice Kline, Ralph Brubaker, Karen Cordry, and me, with Eric Van Horn moderating. 

Again, here's the link to register. 

Third-Party Releases Clearly Endorsed in the 2nd Circuit, At Long Last

Yesterday's 2nd Circuit opinion reconfirming Purdue Pharma's settlement/restructuring plan is an enlightening read for those interested in third-party releases. In what seems to me (and the concurrence) a bit of a reach, the 2nd Circuit conceded that statutory authority more specific than section 105 was needed to support third-party releases, but the Court found such support in section 1123(b)(6): “a plan may . . . include any other appropriate provision not inconsistent with the applicable provisions of this title.” Hmmm. That's quite a slender reed on which to balance such a powerful action. More interesting, the Court set forth a series of seven tests to gauge whether any given third-party release is appropriate. One key test is rather vague (whether the plan provides for the fair payment of enjoined claims), but at least we now have a roadmap for getting to an effective third-party release. Or do we? The Court in a crucial passage emphasizes "to the extent that there is a fear that this opinion could be read as a blueprint for how individuals can obtain third-party releases in the face of a tsunami of litigation, we caution that the key fact regarding the indemnity agreements at issue is that they were entered into by the end of 2004—well before the contemplation of bankruptcy." So the type of pre-bankruptcy planning we've seen in other cases may be a bridge too far, at least in the 2nd Circuit. This latest opinion seems to add weight to recent arguments that bankruptcy court is, indeed, an appropriate and effective venue for resolving sticky mass-tort issues, though the policy debate will doubtless continue.

Calculation of Secured Claims

When I was a law student the rule I learned about secured claims was that they accrue post-petition interest and attorneys' fees (if provided for by contract or statute) up to the amount of the value of the collateral that exceeds their claims, but then nothing further once they are fully secured.  That was an easy enough rule to apply.

But then the Supreme Court's ruled in Travelers v. PG&E (2007) that the standard basis for disallowing the excess attorneys' fees—the Fobian rule—was no longer valid. SCOTUS expressly left open the possibility of other arguments for limiting attorneys' fees, but none have been successful in the courts of appeals so far. 

So this brings up a question:  If post-petition interest is capped by the collateral cushion, but post-petition attorneys' fees are not so capped and can therefore spillover into an unsecured claim, what is the order in which the collateral cushion is applied?  That is, what is the correct order of operations?  Is the collateral cushion applied first to post-petition interest and then to attorneys' fees or vice-versa or are they applied as they accrue? 

I'm curious for readers' thoughts on the right answer to this problem, or at least how it is handled in practice.  I'm also curious for thoughts on why the issue hasn't arisen in any reported decision. The problem seems akin to that of how adequate protection payments are applied to reduce a claim and collateral value, where there is a little bit of caselaw.  

LTL 2.0: The Largest Fraudulent Transfer in History

[Updated 4.12.23 to reflect the transcript of the first day hearing with much more detailed analysis of LTL's arguments regarding fraudulent transfer allegations.]

Today was the first day hearing for LTL 2.0. An ad hoc committee of talc claimants (most of the members of the Official Committee from LTL 1.0) weighed in with an informational brief that blasted the bankruptcy filing as being in bad faith and premised on what is, without hyperbole, the largest fraudulent transfer in history, weighing in a jaw-dropping $52.6 billion.

LTL, Part Deux (now with even more fraudulent transfers!)

This post is a joint post by Hon. Judith K. Fitzgerald (ret.)[*] and Adam Levitin

Here we go again. Precisely one hour and thirty-nine minutes after the dismissal of the bankruptcy filing of LTL, Johnson & Johnson’s artificially created talc-liability subsidiary, the company was right back at it again with the filing of a new chapter 11 case in New Jersey, again assigned to Judge Kaplan.

It took some fast work from our friends at Jones Day to get a second complex chapter 11 case out the door, albeit without any schedules! With the filing came, inter alia, a declaration, a statement by the Debtor regarding its second filing, and a new Adversary Proceeding that seeks the same preliminary injunctive relief for the benefit of some 700 J&J affiliates and favored customers that was achieved in the first LTL case.

The new case is supposedly engineered to comply with the strictures of the Third Circuit’s decision dismissing the original filing for not being in good faith on account of the debtor not being in financial distress. To recall, LTL found itself hoist on its own petard before the Third Circuit, which noted that its assets included a $62 billion funding agreement, vitiating any claim of financial distress.

To this end, what has changed in LTL 2.0 is the design of the funding agreement. The funding agreement in LTL 1.0 was for up to $62 billion, and the funding was to come from both LTL’s HoldCo (New JJCI) and J&J. Now in LTL 2.0, the funding agreement is just from HoldCo, and it is for only $8.9 billion. There is a proposed backstop from J&J, but that will require bankruptcy court approval, so LTL claims that it is not part of the good faith analysis. LTL’s thinking is that Judge Kaplan previously found that the HoldCo (or at least its predecessor) was in financial distress, so it must be so now, particularly because in January of this year it transferred most of its assets—the entire J&J consumer business!—to the J&J parent. The idea is that the new funding agreemen tisn’t really so valuable, so LTL must be in financial distress.

There are (at least) three flies in J&J's ointment.

FDIC's Poor Track Record in Holdco Bankruptcies

Last week I did a post about how the FDIC as receiver for Silicon Valley Bank probably doesn't have a claim against SVB Financial Group, the holdco of the bank. I got some pushback on that (including from a former student!), but I'm sticking to my guns here. It's a result that seems wrong and surprising, but if you look at the three most recent big bank holdco bankruptcies (this takes some digging in old bankruptcy court dockets), the FDIC has ended up with little or no claim.

What Could Go Wrong When a DIP Maintains a Large, Uninsured Deposit Account at Silicon Valley Bank?

You gotta feel for BlockFi customers. First, they find themselves creditors in BlockFi's bankruptcy. And now they've found out that BlockFi had a large, uninsured deposit...at Silicon Valley Bank. Yup, it seems that BlockFi had $227 million in a money market deposit account at SVB. (The UST refers to it as a "money market mutual fund," but that cannot be right, or it wouldn't be at SVB or have any insurance. [See "Another update" below regarding possibility that it was a money market mutual fund sweep account, in which case the money would in fact be protected.]) That would mean there's a $226.75 million uninsured deposit. Given what we know about SVB, part of that $226.75 million in uninsured funds is likely lost if it's still at SVB.  

The US Trustee filed a motion today to force BlockFi to put the funds in insured accounts, but it sure looks as if the cow's out of the barn already. If the money's lost, then the question is who's going to pay for this screw up, and it's especially juicy because it's all tied up with venue competition. 

The Texas Two-Step's Liquidation Problem

This post is a joint post by Hon. Judith K. Fitzgerald (ret.)[*] and Adam Levitin

The Texas Two-Step has been the latest fad in mass tort bankruptcies, used, among others, by Johnson & Johnson, Georgia-Pacific, and, in a variation, 3M. The essential elements of the Texas Two-Step are the segregation of the debtor's mass tort liabilities in a non-operating subsidiary, which then enters into a funding agreement with the parent company to cover the mass tort liabilities up to some level. The subsidiary then files for bankruptcy and seeks to have the court stay the mass tort litigation against the non-debtor parent. If this maneuver is successful, the non-debtor parent goes about its normal business,[1] as do all of its creditors ... other than the mass tort victims. Meanwhile, the non-operating debtor subsidiary—whose sole creditors are mass tort victims—just sits in bankruptcy indefinitely.

The basic strategy behind a Texas Two-Step is “delay to discount”: the extended delay of the bankruptcy process pressures tort victims and their counsel to accept discounted settlement offers. The non-debtor parent feels no urgency for the bankruptcy to end because litigation is stayed against it. Moreover, the parent is able to continue its normal operations without being subject to bankruptcy court oversight or even to the regular expenses of defending the mass tort litigation. And because the debtor is a non-operating entity, it is under no pressure to emerge from bankruptcy. The debtor and its parent are both happy to let the bankruptcy drag on as long as necessary. In other words, the Texas Two-Step is an underwater breath-holding contest where the debtor has a snorkel. 

The ultimate end-game in a Texas Two-Step bankruptcy, however, is obtaining releases for the non-debtor parent (and other affiliates), bolstered by a channeling injunction that precludes tort victims from bringing suit against the parent and affiliates after the bankruptcy. There’s a fly in the ointment, however. A channeling injunction under section 524(g) requires that the debtor receive a discharge, and the debtor entity in the traditional Texas Two-Step case is not eligible for a discharge because it is a non-operating corporate entity that will be liquidating.

Sorting Bugs and Features of Mass Tort Bankruptcy

I have posted a short draft article about mass tort bankruptcy. If you would like to send me comments on the draft, that would be lovely, but please keep two caveats in mind. First, I must submit the revisions by February 9. Second, the article must not exceed 10,000 words. For every addition, some other thing must be subtracted. The required brevity means the article does not and cannot canvas the large volume of scholarship about the topic, let alone the mini-explosion in recent years. 

For the Credit Slips audience I would like to particularly highlight Part I of the article, which contextualizes debates about current mass tort bankruptcy by reviewing two sets of sources from the 1990s and early 2000s. The first is the 1997 final report of the National Bankruptcy Review Commission. The second is scholarship, including two Federal Judicial Center books published in 2000 and 2005, of Professor Elizabeth Gibson, whose expertise lies at the intersection of civil procedure, federal courts, and bankruptcy.  If you are working on or talking a lot about mass bankruptcy but have not reviewed these materials in a while (or ever), then I hope you will be incentivized to check those out for yourselves. 

The Texas Two-Step as Fraudulent Transfer

Judge Judith Fitzgerald (ret.) and I have a post about the Texas Two-Step bankruptcy process up at the Harvard Bankruptcy Law Blog, which has been running a series on the phenomenon.  And the Slips' own John A.E. Pottow has a capstone post on the same topic.    

The tl;dr read version of my post with Judge Fitzgerald is that the real fraudulent transfer vulnerability of the Texas Two-Step is the incurrence of an obligation by the BadCo in the divisive merger, not the transfer of assets to the GoodCo. Focusing on the the incurrence of an obligation not only avoids the problem of the Texas divisive merger statute deeming the merger not to be a transfer of assets (as there is a separate provision in the statute about liabilities that doesn't parallel the asset provision), but it also avoids the problem that there is no longer a transferor entity in existence.  If we're right (and we are), then it means that the liabilities follow normal state law successor liability principles, which should put the liability on GoodCo, which is continuing OldCo's enterprise.

Getting Ready for Uniform Commercial Code Reform?

IAs digital assets and emerging technologies become common in commercial transactions, state commercial law must rise to the challenge - that's the driving force behind a new set of amendments to the Uniform Commercial Code, including Article 9 governing secured transactions in personal property - such as in virtual currencies and nonfungible tokens.

No state has enacted the amendments yet,* but prior reforms to Article 9, at least, have been remarkably successful at achieving broad enactment. Consider, for example, the visual of the 2010 amendments to Article 9. Blue=enacted!

How to track developments? Here are some publicly available resources courtesy of the Uniform Law Commission:

First, here is where to find the actual amendments as finally approved by the Uniform Law Commission and the American Law Institute. 

Second, here is a summary. Note the mention at the bottom of transition rules for lenders who followed existing law in perfecting security interests, etc. (by the way, there is not a prospective uniform effective date for these amendments). 

Third, videos! Here's one highlighting the changes for digital assets. And here's another on other matters covered in the amendments. 

Fourth, here's where proposed bills and enactment information will be tracked.

*According to the digital assets video, some states adopted earlier versions of part or all of these amendments (New Hampshire, Iowa, Nebraska, Indiana, Arkansas, and Texas) but are expected to update those to conform with the final versions. Wyoming and Idaho went their own way on commercial transactions in digital assets.  

Fake and Real People in Bankruptcy

This draft essay, Fake and Real People in Bankruptcy, just posted on SSRN, is considerably less far along than Unbundling Business Bankruptcy Law, posted last week. Fake and Real starts with a Third Circuit case that tends to be less well known: it upheld the dismissal of an individual bankruptcy filer whose primary asset was a home he had built with his own hands. Perhaps you will find that story relevant to current debates about what is permissible in large chapter 11 cases. Like Unbundling Business Bankruptcy Law, Fake and Real reflects some of my in-depth research on The Weinstein Company.  

Here is the abstract: 

This draft essay explores how the bankruptcy system is structurally biased in favor of artificial persons - for-profit companies, non-profit enterprises, and municipalities given independent life by law - relative to humans. The favorable treatment extends to foundational issues such as the scope and timing of permissible debt relief, the conditions to receiving any bankruptcy protections, and the flexibility to depart from the Bankruptcy Code by asserting that doing so will maximize economic value. The system's bias contributes to the "bad-apple-ing" of serious policy problems, running counter to other areas of law have deemed harms like discrimination to be larger institutional phenomena. These features also make bankruptcy a less effective partner in the broader policy project of deterring, remedying, and punishing enterprise misconduct.

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.