466 posts categorized "Corporate Bankruptcy"

A Filing Means What It Says

posted by Bob Lawless

Almost two weeks ago now, the Delaware Supreme Court handed down its decision over J.P. Morgan's mistaken termination statement in the General Motors bankruptcy. (Note to Google Chrome users like me -- the link may not work; try a different web browser.)  I think they got it right, but to understand why, one obviously needs to know the facts. Melissa Jacoby has blogged about the case (especially) here and here. As Melissa explains in more detail in the former post, the case revolves a mistaken Uniform Commercial Code (UCC) filing by JPMorgan Chase. 

To really stylize the facts, there were two loans from JPMorgan Chase to General Motors. Let's call them Loan A and Loan B. Both loans were secured. Loan A was being paid off. Acting on behalf of JPMorgan Chase, lawyers for General Motors were instructed to file a termination statement in the UCC records. Because of a slip-up in the paperwork, termination statements were filed for both Loan A and Loan B. At the time General Motors entered bankruptcy, Loan B was still outstanding in the amount of $1.5 billion, meaning that if the termination statement is effective JPMorgan Chase would be unsecured in the General Motors bankruptcy.

Continue reading "A Filing Means What It Says" »

My Worlds Collide

posted by Bob Lawless

Caterham MarussiaI am obsessively interested in two things -- bankruptcy and Formula One auto racing. I feed the first interest through this blog. The second interest is tended to by watching way, way too much Formula One on television. Indeed, the best way to wind me up is to ask me if Formula One is the same as Nascar.

This weekend, my worlds collided when two Formula 1 teams -- Caterham and Marussia (shown to the right) --were placed in administration in the U.K., a procedure akin to chapter 11. I was going to resist doing a post, but now that Pat Fitzgerald over at Bankruptcy Beat has posted a story, I feel enabled.

Continue reading "My Worlds Collide" »

Would it Surprise You to Know

posted by Stephen Lubben

That I still think the "safe harbors" as currenlty drafted are a bad thing?

Markets?

posted by Stephen Lubben

Some thoughts on how much faith we should have in the debt markets, and whether they are actually markets at all, over at Dealb%k.

Detroit: "Now Is Not the Time for Defiant Swagger..."

posted by Melissa Jacoby

3dPuzzlePlan confirmation time. Doesn't everyone relish a big trial? Headlines in national newspapers breathlessly proclaim that the fate of Detroit's future is in the hands of one single judge!

Well, no.

Let's get literal about the judicial role at this juncture. There's no way over the finish line without a determination by the bankruptcy court that the City has met its burden of showing its plan satisfies all legal requirements by a preponderance of the evidence.

This standard includes the City showing that the plan is not likely to fail. Back in January 2014, as the parties negotiated the plan's initial version, Judge Rhodes called for restraint in creditor demands, modesty in City promises:

Now is not the time for defiant swagger or for dismissive pound-the-table, take-it-or-leave-it proposals that are nothing but a one-way ticket to Chapter 18 ... . If the plan ... promises  more to creditors than the city can reasonably be expected to pay, it will fail, and history will judge each and everyone of us accordingly.

    --Jan 22, 2014, afternoon session

Detroit's plan includes revitalization investments, and does so not merely to show how it will service its debt. That scope takes the court into a farther-reaching review.  And the judge appointed his own feasibility expert, and is planning to conduct the direct examination of the expert himself. Such factors further fuel the image of a judge as gatekeeper of Detroit's future.

Yet, no bankruptcy judge should be saddled with the full weight of longstanding socio-economic and geographic challenges. Historian Thomas Sugrue teaches us that the roots of Detroit's crisis run quite deep. Deeper than the recent past of corruption in the Kilpatrick administration, or dependence on casino revenues, interest rate swaps on certificates of participation, or questions about thirteenth checks. Even before the height of worries about auto industry competition abroad, or the enactment of Michigan constitution language on pensions. By Sugrue's account, Detroit's economic decline started in the 1940s and 1950s with hemorrhaging (his word) of good jobs and capital. For the spiral downward from there, the book is here, the speech, 19 minutes into the video, there.  Repair depends on collaborative work: many tools, many hands. How to engage all communities in the effort to conquer longstanding racial tensions and segregation, achieve regional cooperation, expand jobs that offer more security and opportunity than downtown coffee shops and sports stadiums? ("Downtown does not trickle down," said Sugrue at a Wayne State conference earlier this year; explanation here). Again, many tools, many hands.

Although these challenges illustrate how the judge's plan confirmation role operates within a much broader framework of actors, judges also can shape a municipality's restructuring and future throughout the bankruptcy process, in more informal ways. In Detroit's case, Judge Rhodes planted the seeds of oversight and influence in the earliest days of the bankruptcy. He drew on tools and techniques used decades earlier in other kinds of complex litigation, including prison reform and school desegregation cases. See here, here, here, and here.

Among the most consequential moves was delegating to Chief District Judge Rosen the authority to mediate nearly every substantive issue in the case. Detroit heads into the confirmation hearing with many settlements in its pocket - with financial creditors as well as workers and retirees. Most discussed is the pension/art settlement (a.k.a. Grand Bargain) that looks the least like a conventional mediated settlement. Chief Judge Rosen has suggested the deal could be a model for other distressed cities. On harnessing the power of the non-profit sector, maybe so. On a sitting life-tenured judge being the designer, broker, and closer of this type of deal, not so much. However socially desirable the content of the Grand Bargain may be (and that debate will rage on), the costs and risks of this procedural model are simply too great. 

So, as the last phase of the historic Detroit bankruptcy commences, the question of judicial responsibility and influence must be put in context. The role of federal judges in shaping Detroit's future has been overstated in some ways, understated in others. Trials matter. But if they capture too much of our attention, we will miss other important things.

Puzzle picture courtesy of Shutterstock

 

With a whole lot more

posted by Stephen Lubben

Thoughts on cramdown and "make whole" call provisions, over at Dealb%k.

Small Formalities, Big Consequences in Secured Credit Law - An Update

posted by Melissa Jacoby

FolderRowTo what extent does secured credit law protect creditors from the consequences of mistaken actions made on their behalf? I wrote about this issue in March 2013. As discussed in that post, the bankruptcy court issued both a decision on the merits and a certification for a direct appeal to the U.S. Court of Appeals for the 2nd Circuit.

The 2nd Circuit has now certified the following question to the Delaware Supreme Court: 

Under UCC Article 9, as adopted into Delaware law by Del. Code Ann. tit. 6, art. 9, for a UCC-3 termination statement to effectively extinguish the perfected nature of a UCC-1 financing statement, is it enough that the secured lender review and knowingly approve for filing a UCC-3 purporting to extinguish the perfected security interest, or must the secured lender intend to terminate the particular security interest that is listed on the UCC-3? 

The 2nd Circuit decision is here.  (The date of oral argument on the cover page should say March 2014, not March 2013). 

File folder photo courtesy of Shutterstock

A Three-Hour Tour and Other Distractions

posted by Melissa Jacoby

MichiganRoadsThe City of Detroit has proposed a three-hour bus tour of the City to start its chapter 9 plan confirmation hearing. Some creditors object. The City's motion says "[i]f any case ever warranted a Site Visit, this one does." I don't agree, for reasons explored below, but in any event, the eligibility trial would have been a more logical place for it. And even Gilligan and the Skipper too couldn't cover 139 square miles in three hours. So what is going on here?

A step back. In the earliest days of my bankruptcy court clerkship, the United States Trustee sought to dismiss or convert the chapter 11 of a small nonprofit on the south side of Chicago. The debtor and the U.S. Trustee parties presented starkly contrasting depictions of this debtor - I remember the dueling photographs - with neither more obviously credible than the other. The case, like most in the bankruptcy court, had a starkly human element: the debtor was a rehabilitation center of sorts. The U.S. Trustee essentially was alleging that the residents lived in deplorable conditions, and the debtor strongly disagreed. To resolve the discrete factual dispute between two parties about the property's condition, Judge Ginsberg decided to schedule a time to leave the modernist skysraping box that was the Dirksen Federal Courthouse and visit the premises, in a van, with law clerk, court reporter, and others in tow. No easy way to verify -  the name of the case is lost to me now - but my strong recollection is that the site visit idea prompted no objections. The case cratered for an unrelated reason, mooting the trip. No other case during my clerkship prompted Judge Ginsberg to make a similar proposal.

Over the years, I have learned of other judges' experiences with site visits, revealing similar characteristics: cases with limited parties in interest, specific factual disagreement, the resolution of which could be accomplished efficiently by visiting circumscribed sites. 

Continue reading "A Three-Hour Tour and Other Distractions" »

Two Vast and Trunkless Legs of Stone

posted by Stephen Lubben

So Caesar's Entertainment is engaged in some Dynegy-like revamping of its corporate structure. Its motives are colorfully described here, but I have to stick to more G-rated language over at Dealb%k.

Q & A on C of D

posted by Melissa Jacoby

Yesterday's Is. It. Legal. provoked some comments and questions. Some quick replies above the line, so to speak.

Q: Is it clear that this is going to be a cramdown plan?

    Multiple groups of creditors have not settled with the City (e.g., those with financial interests in certificates of participation, water and sewer bonds, LTGO, a few police and fire groups). Non-settling claimants are actively challenging plan confirmation from top to bottom, including whether Detroit's current plan passes muster under the standards applicable to nonconsensual plans. Those who hold or insure COPs are most relevant to yesterday's comments on unfair discrimination.  In addition to offering little payment, the City has challenged the COPs' validity altogether. Will all of that get settled?  Stranger things have happened in the history of bankruptcy and municipal finance law. But I would guess that result would necessitate some sharing in the Grand Bargain premium.

Q: If it is not a cramdown, then all of the unfair discrimination and absolute priority issues are moot.

    I disagree. The strength of the cramdown-related arguments contribute to the leverage of the parties to compromise and settle.

Continue reading "Q & A on C of D" »

Is.It.Legal.

posted by Melissa Jacoby

BomeyDetroitIn a week bustling with municipal finance activity (e.g., conclusion of the Stockton confirmation hearing), the Michigan Senate rather easily passed legislation to contribute money to Detroit's restructuring, earmarked for pension claims and permanent insulation of the City-owned art museum against the City's creditors. The bankruptcy is not fully resolved yet, of course. For one thing, creditor voting is not complete, and some pension claimants must be resolicited because of errors in ballots. Assuming that the requisite votes materialize, the City has the burden to prove that its plan of adjustment meets all requirements of the Bankruptcy Code by a preponderance of the evidence. Due to a series of document production delays on the City side, the trial will likely be postponed by at least a few weeks.

Since I last wrote about Detroit, the City filed an omnibus reply to plan objections (doc #5034). Exceeding 250 pages, brief it is not. But the City had much ground to cover, and the end pages are a very useful chart breaking down who made which objections. Several assertions I found troubling relate to whether the plan unfairly discriminates in favor of pension claimants who benefit from the Grand Bargain premium and against dissenting classes of creditors who do not.

Continue reading "Is.It.Legal." »

ABI/Illinois Symposium -- Now on Video!

posted by Bob Lawless

The American Bankruptcy Institute (ABI) Commission on Chapter 11 Reform has been considering how to improve the chapter 11 process. Among the thorniest issues the ABI Commission has faced is how to fairly balance the interests of secured creditors with the rights of other stakeholders in the chapter 11 process. To better understand the issues and especially to illuminate whether secured creditors can assert constitutional limits on chapter 11 reform, the ABI and the University of Illinois College of Law co-sponsored a symposium in early April at the offices of Kirkland & Ellis. 

The presentations now are all available for streamning over the Internet at the low, low price of free. The papers will be published in the University of Illinois Law Review.

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Detroit: So Many Questions

posted by Melissa Jacoby

Arrows...but first, a new (and short!) article: Please download here a just-published piece on the first months of Detroit's bankruptcy, resulting from a fall 2013 Fordham symposium. It reflects efforts to follow public parts of Detroit's chapter 9 through recordings of court hearings and monitoring the docket. And although largely descriptive, the piece sets the stage for unpacking the institutional and functional roles played by the federal court in municipal bankruptcies and beyond. The court's early management and oversight choices (discussed on Credit Slips here & here & here & here) can be tied quite directly to this bankruptcy's development  - most notably through the appointment of Chief District Judge Rosen as lead mediator. Without Chief Judge Rosen, would the  Grand Bargain exist?

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When the Wheels are Spinning Around

posted by Stephen Lubben

Some thoughts on GM, successor liability, 363 sales, and due process – over at Dealb%k.

DIP Loans and the SIFI Problem

posted by Stephen Lubben

Word on the street is that the company formerly known as TXU – now known as Energy Future Holdings – is lining up the biggest private DIP loan ever. About $9 billion.

Still substantially less than the $33 billion that GM needed, and that is still much, much less than a global SIFI might need upon failure. A few years ago I suggested that number might be as high as $300 billion.

So why do we continue to pretend that private DIP lending can work in SIFI resolution? Do we really think the DIP loan market will provide more lending than usual during times of financial stress?

And It's Just Not True

posted by Stephen Lubben

A bit on the overemphasis of the "absolute priority rule" in academia, over at Dealb%k.

I'm Confused

posted by Stephen Lubben

Again.  This morning's Daily Bankruptcy Review reports that Fisker's creditors want to sue the debtor's secured lender.  This is part of a fight over the proceeds of a 363 sale, where the holder of the secured debt was infamously limited to credit bidding the amount it had paid for the debt, rather than the full face amount.

Now the creditors want to contest the validity of the $168.5 million secured loan that Hybrid Tech Holdings LLC purchased from the Department of Energy.  In short, they argue that Hybrid discouraged bidding at the loan sale, so it was able to pay the DOE less than the loan was worth.  Thus they want to void part of the creditor's lien ...

This is where I get lost. How do the creditors have standing to challenge a sale they were not part of? And how are they harmed by the secured creditor's actions?  Isn't this something for the DOE to complain about?

Alas, the story provides no answers.

New Harvard Law School Bankruptcy Roundtable Blog

posted by Adam Levitin

Harvard Law School's Bankruptcy Roundtable, a dialogue between academics and practitioners, is now in the blogosphere!  The Roundtable has launched with a number of very substantive posts by Douglas Baird and Anthony Casey; Judge Sontchi; Thomas Jackson and David Skeel; Nelly Alemeida; and Marshal Huebner and Hilary Dengel.  I know that we academics benefit a lot from discussions with practitioners. (I hope, but am not entirely sure, that the benefits are mutual...)  

Highly recommended.  

In the Western Sky

posted by Stephen Lubben

A grand tour of several percolating global restructuring issues, including Greece, the Ukraine, TXU, and, Mark and Anna's favorite, Argentina. Over at Dealb%k.

Bernie Madoff, Haven Jurisdiction, and the End of COMI?

posted by Andrew Dawson

The liquidation of the largest Madoff feeder fund, Fairfield Sentry, recently made a major mark on Chapter 15 of the Bankruptcy Code. The lynchpin of Chapter 15 (and the Model Law on Cross-Border Insolvency) is the ability to locate a debtor’s center of main interests (COMI). If a debtor files for bankruptcy in the location of its COMI, then it is entitled to certain automatic protections from ancillary proceedings in other countries, e.g., the imposition of the automatic stay to bar all collection activities.

Shutterstock_170061494Fairfield Sentry is being liquidated in the British Virgin Islands, its place of incorporation. Prior to its liquidation, its day-to-day operations were conducted in New York. When the Madoff scheme imploded, Fairfield's shareholders commenced a liquidation proceeding in the BVI and all operations in New York ceased. Roughly a year later, the BVI liquidators filed a Chapter 15 petition in the New York bankruptcy court, arguing that the debtor’s COMI was in the BVI.

About four years ago, I predicted that following the Bear Stearns decision, courts would no longer find a debtor’s COMI to be in a haven jurisdiction.  Haven incorporated companies do not conduct business there, and thus in no way could they be said to have a center of main interests there based solely on their place of incorporation. The Second Circuit's recent decision in In re Fairfield Sentry Ltd.,  however, proves that prediction flat wrong.

Continue reading "Bernie Madoff, Haven Jurisdiction, and the End of COMI?" »

Chapter 11 in the UK

posted by Stephen Lubben

So Business of Fashion points to a story on the Independent's web page, wherein a fashion designer calls for the adoption of something like chapter 11 in the UK. While chapter 11 debtor advocates are few and far between in the US, the motivation in this case comes from the designer having lost control of his business when his lender took control and sold the operation to a private equity fund.

My knowledge of British fashion pretty much starts and ends with Turnbull & Asser, so click on the links above if you want the juicy details.

My question is whether chapter 11 would have achieved what the designer thinks it would have.  I have doubts.

Namely, because chapter 11 as practiced today is so heavily controlled by senior lenders, I'm not sure he would have had too much more time to get his house in order here in the U.S. either. You basically have to work with the senior lender – who often becomes the DIP lender – or else. And the story suggests an inability to do that.

Worker Representation in Bankruptcy

posted by Andrew Dawson

Thank you to the Credit Slips team and, in particular, Bob, for inviting me to guest blog.

The recent news about the Tennessee Volkswagen workers’ voting against UAW representation fits into some of my current research looking at worker representation in bankruptcy. Shutterstock_158578121Interestingly, VW itself favored the unionization effort and, despite the rejection, VW has stated its intention to continue to find ways to create something akin to a German works council, which provides a way to incorporate employee voice into corporate governance.

Would something like a works council also improve governance in bankruptcy?

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And It's So Damn Cold

posted by Stephen Lubben

Yet I've used my numb fingers to stop checking the weather in Los Angeles and write a Deal%k column on a recent SDNY decision involving the safe harbors, and what it tells us about the safe harbors generally.

Detroit and the Swaps

posted by Stephen Lubben

So in declining to approve Detroit's proposed payoff of its interest rate swaps – all out of the money, naturally – Judge Rhodes has reminded us that the case is not pending in Wilmington or Manhattan.

PhotoBut now what? The swaps and their supporting collateral (a particular tax revenue stream) are the beneficiaries of the safe harbors, which means the counterparties are not subject to the automatic stay, among other things. Thus, while there has been some suggestion that Detroit might challenge the validity of the swaps, in the interim how does Detroit regain control of the revenue, which they say they need?

The parties stipulated that the terimination amount due was $247 million at the end of 2013. Presumably the counterparties get to hold onto the tax revenue until they are paid that amount. In that light, paying $160 million to end the swaps does not look so bad.

Maybe Detroit asks the judge to enjoin the counterparties while they challange the validity, but then there is our friend section 560, which says that termination of a swap shall "not be stayed, avoided, or otherwise limited ... by order of a court."  

Sure Detroit will get the money back from the counterparties if it turns out the swaps are not unenforceable, but in the interim there might be a lot of chaos.

Spin Offs, Environmental Claims, and Fraudulent Transfers

posted by Stephen Lubben

Some thoughts on the Tronox fraudulent transfer opinion, over at Dealbook. In many respects this opinion may encourage the use of 363 sales to avoid environmental liabilities, as Stephanie Ben-Ishai and I predicted in a paper published in the British Columbia Law Review.

Detroit's Managerial Milestones

posted by Melissa Jacoby

PathA city in bankruptcy operates with considerably more freedom from judicial oversight than its private chapter 11 counterparts. People often say judges have just two principal points of involvement in a chapter 9: presiding over trials on eligibility and confirmation of the plan of adjustment. My earlier posts about Detroit have told a story that puts judges in a more active ongoing role, emblematic of the evolution of the federal judiciary over the second half of the Twentieth Century. Serious managerial judging (plus a team) empowers them to shape the speed and direction of municipal restructuring notwithstanding doctrinal and constitutional limits on their formal legal authority. Yesterday's evidentiary hearing in Detroit's bankruptcy is illustrative.

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The Fed and Chapter 11

posted by Stephen Lubben

It’s become fashionable to ascribe the decline in big chapter 11 cases to the low interest rates created by the Federal Reserve. If so, yesterday’s actions suggest a revival in the restructuring trade is still further off.

The basic idea is that when interest rates are low, distressed companies can refinance their way out of trouble – companies being somewhat like homeowners in that regard. When refinancing is possible, bankruptcy looks like a very poor second choice.

But when interest rates rise, the refinancing option becomes less attractive, because there is a cost to refinance, again just like for homeowners. When that happens, the company must either pay according to the original terms or face the possibility of filling for bankruptcy.

We were seeing a bit of this sort of an effect following the Fed’s suggestion this summer that it would begin to “taper.” Now the refinancing window has been opened again, for at least some brief period of time.

All of which means that restructuring departments of law firms are not going to be adding associates in the near term, and the partners in those departments are going to be scrambling to get the cases that are available. Given that finance has not fully rebounded, this means some number of law firms are going to be a bit squeezed.

And those of us who (darkly) enjoy following large chapter 11 cases have to wait a bit longer.

Jonathan Lipson on “Relational Reorganization”

posted by Jean Braucher

Prof. Jonathan Lipson of Temple University School of Law has an interesting post today on the idea of “Relational Reorganization.”   Find it over at the ContractsProf blog. He advocates more attention by scholars and lawyers working on debtor-creditor issues to the relational perspective of Stewart Macaulay, a leading contracts scholar in the law-in-action tradition.  Macaulay has studied, among other contracts phenomena, the ways that business do and don’t use contracts, including that they typically readjust relationships in light of business realities rather than formal contracts entitlements.

Lipson points out that when business debtors struggle to meet their many obligations, workouts are the norm, and formal contracts give way, no matter the care with which they were entered.  Even bankruptcy reorganization is typically mostly consensual.  What is different in the debtor-creditor world is that multiple relationships often have to be adjusted or abandoned in a reorganization process.  Lipson suggests that more attention to relational thinking could help us better understand various bankruptcy practices, particularly those used in close-knit groups of repeat players, including bankruptcy lawyers, claims traders, and professional distress investors.

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Detroit: More People, Moving Faster (and, in an instance, Slower)

posted by Melissa Jacoby

PuzzleExclamationMy Detroit posts so far (here and here) focus on the role of the judge and court. The first considered managerial judging, and there's significant news on that front this week. Having read one hundred and nine timely objections to eligibility, Judge Rhodes interpreted many objections to raise only legal issues and expedited the hearing on those issues to September 18, from October 23 (see p.3 of order). On September 19, the court will hear from individuals who filed eligibility objections, three minutes each. October 23 remains the date for objections that require the resolution of material fact. But the court is deferring objections based on treatment of pension rights in a plan because they are not eligibility issues (see section VI of the order, p. 6). This is the technically "slower" instance, per this post's title. Parties troubled by this new order have until September 6 to file objections or comments (see section XI. p.7).

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Doesn't Anyone Want to Talk About Jurisdiction This Week?

posted by Melissa Jacoby

PurpleElephantWith the Second Circuit's ruling in the Argentina/NML case and the now-urgent need to get secured transactions and bankruptcy into the 1L curriculum, Credit Slips has yet to give attention to Wellness International Network, Limited,  issued on Aug 21 by the Seventh Circuit. Luckily, on this issue, I don't mind getting the ball rolling, and then stepping out of the way. 

Continue reading "Doesn't Anyone Want to Talk About Jurisdiction This Week? " »

Why Do We Even Bother with Subs?

posted by Stephen Lubben

So today is Kodak's confirmation hearing, and when the plan is confirmed, as I expect it will be, Kodak will continue to exist, but it will no longer be a film company. That will take some getting used to.

For some strange reason a British pension fund decided it would rather run the film business than get paid, so film will continue to be made, but not by an entity owned by the Eastman Kodak Company.

But as my title suggests, something else about the Kodak plan also caught my attention. The plan calls for the "deemed substantive consolidation" of the debtors. Deemed substantive consolidation is the chapter 11 equivalent of "slightly pregnant."

In Kodak's case, the debtors will be deemed consoildated for purposes of voting, confirmation, and distribution. Oh, is that all? 

Kodak makes the case that its corporate structure is so complex that it would make seperate voting and the like "inefficient" and nobody will be harmed.  If that's the case, then why not just do normal substantive consolidation?

One suspects that once out of bankruptcy, Kodak has a reason to keep that convoluted corporate structure it now disdains. In short, Kodak would like it both ways.

It Takes A Village: Detroit, Chapter 9, and Litigotiation

posted by Melissa Jacoby

HumanspokesFirst, the most recent news: the fee examiner job in Detroit's chapter 9 has just been awarded. And the Detroit Free Press has just awarded itself a not-so-subtly snarky news headline

Similar to the bankruptcy court's order appointing a mediator, the fee examiner order authorizes the examiner to call in reinforcements - other lawyers at his law firm, as well as an accountant and the accountant's firm. Judicial Team Chapter 9 Detroit grows. 

A cadre of federal judges once fought hard - repeatedly and successfully - to exclude bankruptcy judges from the Article III judiciary. In so doing, they conceptualized bankruptcy judges as the helpers, not the ones building teams. When a district judge was asked at a Congressional hearing in the 1970s whether bankruptcy judges would need law clerks, the district judge's NO could be heard from miles around. That issue has long been resolved - of course, they need law clerks. The Federal Rules of Bankruptcy Procedure prohibit special masters in bankruptcy cases. But bankruptcy courts commonly appoint fee examiners or fee committees in bigger cases, which seem little different from a special master. And the judges fighting against Article III status never imagined a bankruptcy judge appointing his own chief district judge as the omnibus mediator, with the potential for a raft of additional judicial and non-judicial mediators in tow. But now it has happened. And that delegation of responsibility from bankruptcy judge to district judge is already underway, per the first mediation order dated August 16.  

And yet, the building of this team should feel familiar to those Article III judges from the 1970s and 1980s. When they needed to bring order to complex cases involving unconstitutional conditions in prisons and schools, and bargaining over the remedial scheme, district judges brought in more people. Masters. Special masters. Hearing officers. Monitors. Various kinds of committees. Ombudsmen. Barring the appointment of lions, tigers, or bears, the City of Detroit case yet again illustrates commonalities between the non-adversarial aspects of bankruptcy cases and non-bankruptcy litigotiation.

Human spokes image courtesy of Shutterstock

Detroit's Chapter 9 and the Vanishing Umpires

posted by Melissa Jacoby


SpiralCrowd
When the Chief Judge of the Sixth Circuit selected Judge Rhodes to preside over the City of Detroit's chapter 9 case, she attached a letter from the Chief Judge of the Eastern District of Michigan. Among other things, it lauded Judge Rhodes' case management skills, and asserted the need for those skills in a case of this nature. To many, the phrase “case management” may evoke procedural judicial tasks of little normative content. But the sandwich of the two words should invite deeper questions about the role of courts, judges, judicial adjuncts, and trials, and the impact of the presence or absence of disputes playing out in public view.

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Duties of Counsel for a Debtor-in-Possession

posted by Lois R. Lupica & Nancy Rapoport

What are the duties of the lawyer represent the debtor-in-possession? We know the DIP has fiduciary duties to the estate. Does this mean that the DIP’s attorney is actually counsel for the “estate”? This is not a question on a law school exam, but a very real and vexing practical issue that arises in situations when the DIP acts in ways that appear to compromise its fiduciary duties to the estate. Some courts facing this issue have relied on the designation of the lawyer as “counsel for the estate” as a way of expressing their frustration with cases in which counsel for DIPs have ratified the bad decisions of the individuals speaking for the DIPs. Although “counsel for the estate” is a convenient concept, there remains the need for more clarity in terms of describing specifics of the DIP’s fiduciary duties and the particular duties of DIP counsel. This is the task the Ethics Task Force took on in drafting its proposal Report on Duties of Counsel for a DIP as Fiduciary and Responsibilities to the Estate.

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Meaningful Disclosure Under Rule 2014

posted by Lois R. Lupica & Nancy Rapoport

One of the frustrations experienced by all business bankruptcy attorneys seeking engagement in chapter 11 cases can be traced to the vague language of Rule 2014. The rule requires the disclosure of information necessary to determine whether the professional’s employment is in the best interest of the estate.

But what specific information should be disclosed and in what detail?  Currently, Rule 2014 does not limit the extent of disclosure of a professional’s connections with: (i) the debtor; (ii) any creditors of the debtor; (iii) other parties in interest; (iv) attorneys of the debtor, creditors, and parties in interest; (v) accountants for the debtor, creditors, and parties in interest; and (vi) the United States Trustee and persons employed by the U.S. Trustee’s office. The broad but undefined term “connection” has further led to confusion over the appropriate level of inclusiveness in disclosures. The uncertainty surrounding the meaning of “connection” has also led to attempts by professionals to argue that some important “connections are immaterial.” In other cases, professionals present a “phone book” sized disclosure documents, in which the meaningful connections are all but lost in the static. In deciding which connections are relevant, getting the judgment call wrong can be catastrophic for a lawyer; the failure to appropriately disclose connections is an independent basis for the disallowance of fees or even disqualification.

This context set the stage for the Ethics Task Force’s drafting of Proposed Rule 2014 (included in the Final Report). The Proposed Rule is an effort to provide clarity to professionals concerning what relevant connections must be disclosed, as well as to provide improved information for courts and other parties to use in determining a professional’s eligibility for employment.

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The Bankruptcy Ethics Task Force's Final Report

posted by Lois R. Lupica & Nancy Rapoport

Thanks to Bob and Credit Slips for the warm welcome.  In April, after two long years, we completed the American Bankruptcy Institute Ethics Task Force's Final Report. This week we will be guest blogging about “bankruptcy ethics” and discussing many of the issues we confronted as Reporters. We will also do our best to summarize the white papers, “best practices” narratives, and proposed rules presented in the Final Report.

Here is some background about the Task Force and its work product. In 2011, then-ABI President Geoffrey L. Berman asked us if we would serve as Reporters for the newly formed ABI National Ethics Task Force. The Task Force was constituted to address a problem familiar to all bankruptcy professionals and judges: state ethics rules do not always “fit” with the realities of bankruptcy practice. State ethics rules may also not be a perfect fit in the context of other types of practice, either—for example, states may not yet know how best to handle the increasingly interconnected digital and virtual world—but it is clear that the Model Rules do not fit neatly in a practice that involves numerous parties with changing allegiances, often departing from the classic two-party adversarial proceeding.

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Turn the Gold to Chrome

posted by Stephen Lubben
Some thoughts on the recent prepack of an Eastern European vodka maker that passed through Delaware, over at Dealb%k.

Equitable Mootness and Forum Shopping

posted by Bob Lawless

A few weeks ago, the Supreme Court denied cert in a case called Law Debenture Trust Co. v. Charter Communications, Inc. (No. 12-847). The issue was whether the Second Circuit had correctly applied the doctrine of equitable mootness to an appeal in the Charter Communications bankruptcy. Paul Allen -- yes, that Paul Allen -- held an ownership stake in Charter that should have been worth approximately zero because that is usually the value of an ownership stake in a bankrupt company.

Charter, however, needed to retain Allen's voting interest in the company to avoid a default in its senior credit facility with J.P. Morgan and also to preserve net operating losses. By the time negotiations were over, Allen had $375 million, Charter's purchase of his preferred stock in a Charter subsidiary, a liability release, and other consideration. The junior creditors complained the deal violated the absolute priority rule, the requirement in chapter 11 that creditors be paid in full before shareholders receive anything. Allen responded that it was a perfectly cromulent deal because he was being paid to help out Charter and not because he was a shareholder. The legal dispute revolved around the meaning of "on account of" in § 1129(b)( bb76uyhj09-=09g hewa*a[0g zzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzzz . . . .

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Ice Cube Bonds: New Paper on 363 Sales and Chapter 11

posted by Melissa Jacoby

MatchesFAC UT ARDEAT, begins The Flamethrowers by Rachel Kushner. It means "made to burn," the narrator learns (from that "gasbag . . . Chesil Jones"). Whether your preferred hurry-up 363 sale metaphor involves flames, ice, or a wagon full of rotting salmon, Ted Janger and I have just posted a draft of an article reframing the problems with pre-plan going-concern sales, and reallocating the risk associated with such sales. The abstract:

Financially-distressed companies can melt like ice cubes. In Chrysler’s Chapter 11 bankruptcy, the finding that the debtor was losing $100,000,000 per day justified the hurry-up sale of the company to Fiat.  This assertion -- that the firm is a rapidly wasting asset -- is frequently offered, and accepted, in support of quick sales under section 363(b) of the Bankruptcy Code. This raises a policy question:  is this speed and streamlined process a “bug” or “feature?” Do these hurry-up going-concern sales create a speed premium and maximize value for the bankruptcy estate, or do they facilitate collusive deals between incumbent managers, senior creditors and potential purchasers? The answer is, “a little bit of both.” It is, therefore, crucial to distinguish between sales where the court and parties have good information about the value of the company and the costs of delay, from those in which melting ice cube leverage is used to exploit information asymmetries and to lock-in a favored deal. To accomplish this sorting and reduce transactional leverage, we seek to allocate the increased risks of foregone process to the beneficiaries of the sale. We propose that a reserve – the Ice Cube Bond – be set aside at the time of sale to preserve any potential disputes about valuation and priority for resolution after the sale has closed. This approach retains expedited section 363 sales as a useful way to quiet title in complex assets and preserve value, while preserving the opportunities for negotiation and adjudication contemplated by the Bankruptcy Code.

Perhaps Ice Cube Bonds is the long weekend reading material you were hoping would come your way? We'd value your feedback.

Match image courtesy of Shutterstock.

MF Again

posted by Stephen Lubben
The MF Global trustee filed his lawsuit against Jon S. Corzine and other former MF Global executives.

But the complaint itself, while quite well done, makes for rather strange reading upon further reflection.

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Interesting Automatic Stay Decision in FastBucks Chapter 11 Case

posted by Nathalie Martin

Readers might recall that back in November, I blogged about a case in which the unconscionability doctrine was used to invalidate one lender’s entire book of payday and installment loans. The post described how the court found that FastBucks employees encouraged borrows to not pay off loans, which loans were found to violate state law. We in New Mexico, where the case was brought, watched to see if the FaskBucks shops would close down, but they never did. Rather, Fastbucks filed some motions and an appeal in state court, then filed for Chapter 11 on December 10, 2012. Their largest creditor? The State of New Mexico.

FastBucks removed the New Mexico lawsuit to federal court, to be heard as part of its bankruptcy case. FastBucks also filed an adversary proceeding seeking to recover for violation of the stay and to enjoin the New Mexico Attorney General’s Office (the plaintiff in the suit) from:

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Run around in the radiation

posted by Stephen Lubben
Some thoughts on the bankruptcy of solar panel maker Suntech, at Dealb%k.

When a Billion Dollars has Eight Digits; Taking Authorization Seriously

posted by Melissa Jacoby

CloudytitleMove over, two ships Peerless. Even in legal regimes that prioritize substance over form, errors in the execution of formalities can produce significant consequences and the risk of transactional failure. And even chapter 11 cases featuring quick asset sales can generate litigation over such formalities for years to come. A recent example illustrates both points.  

On March 1, 2013, the United States Bankruptcy Court for the Southern District of New York issued and certified a judgment for direct appeal to the United States Court of Appeals for the Second Circuit. The decision grants summary judgment in Official Committee of Unsecured Creditors of Motors Liquidation Company v. JPMorgan Chase Bank, N.A. et al, adversary proceeding 09-00504, in the GM bankruptcy. The decision already has received in-depth summaries, at least in some law firm bulletins. If the Second Circuit accepts a direct appeal, I aspire to watch the oral arguments, but hope it will be easier to find a seat in the courtroom than in NML v. Argentina.   

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A Change in Name and More

posted by Bob Lawless

Some recent moves in the Senate Judiciary Committee should be of interest to bankruptcy specialists.  The committee has approved a new subcommittee to be called "Bankruptcy and the Courts" with Senator Chris Coons of Delaware as the subcommittee chair. The new subcommittee is essentially a name change from the old "Administrative Oversight and the Courts" subcommittee, which also had jurisdiction over bankruptcy matters.

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Stripping Down Bankruptcy Jargon

posted by Melissa Jacoby

StrongarmA Credit Slips commenter recently asked that blog posts explain (or at least spell out) acronyms and specialist terminology. This inspired me to report back on a corporate bankruptcy terminology set that University of North Carolina Law students collaboratively produced last year (technically, a wiki) in business bankruptcy, an advanced transition-to-the-profession seminar. In both comments and emailsCredit Slips readers helped me expand the list of terms (and also offered great ideas for practical writing projects). So thanks again for your contributions, and thanks also to the Spring 2012 seminar alumni - some of whom are practicing bankruptcy law or clerking for bankruptcy courts right now, or headed there soon - who tackled the collaborative vocabulary project, and the entire seminar and its experimental elements, with such great spirit and a 100% perfect attendance record! So, some observations. 

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Gift Cards and Bankruptcy

posted by Adam Levitin

There's a linguistic irony that "gift" is the German word for poison. What, then, should we make of the "gift card"?  

Senator Richard Blumenthal's introduced new legislation, the Gift Card Consumer Protection Act (S.3636) that aims to close up the loopholes in existing gift card regulation and to protect consumers with gift cards when the retailer goes bankrupt. The legislation has a few moving parts:

  • It expands the definition of gift card to include loyalty, award, and promotional gift cards.
  • It would make the prohibition on dormancy, inactivity, and service fees absolute. Currently, the Electronic Funds Transfer Act permits inactivity, dormancy, and service fees for cards that have been inactive for a year, provided disclosure requirements have been met.  
  • It makes the ban on expiration dates on gift cards absolute.  Currently, the EFTA allows cards to expire after 5 years if the expiration date is properly disclosed. 
  • It makes it illegal for bankrupt firms to sell gift cards and for anyone to resell gift cards issued by firms that have been in bankruptcy for more than a week. 
  • The bill creates an automatic stay exception for presentation of gift cards and requires the trustee/debtor in possession to honor gift cards at full value the same as cash. 

It'll be interesting to see what the opposition ends up being to the bill. The bill is dealing with two separate, but related problems.  

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While You Wait

posted by Stephen Lubben

As somebody who has dabled in empirical legal studies, and recently noted the tendency among academics and policymakers to ignore inconvient data, I'm quite eager to see how the models hold up. After all, one guy might have to eat bugs if this goes poorly.

But in the interim, over at Dealbook I give you a summary of my latest paper (co-written with Rajesh P. Narayanan of Louisiana State University) on CDS and restructuring. In short, we argue that something like the Williams Act should apply in workouts to require disclosure of CDS positions.

Its forthcoming in the Journal of Applied Corporate Finance, and available in draft here.

I Wade Into Presidential Politics

posted by Stephen Lubben
Or why the bankruptcy professor is relevant, over at Dealbook.

Ad Hocracy

posted by John Pottow

A storyline in the AMR bankruptcy is exposing how confusing it's becoming (at least to me) to keep track of negotiating groups in chapter 11.  (Here's a good recent story from WSJ.)  Gone are the days of the simple Creditors Committee.  Now we have Ad Hoc groups of bondholders.  While there was some initial dust-up about disclosure requirements when these sorts of groups emerged, that's settled somewhat.  What I am now baffled about is the Ad Hoc group in AMR, which does not apparently see eye-to-eye with a non-Ad Hoc ad hoc group of hedge funds.   Apparently these funds were invited to join the Ad Hoc group (but declined? why??) and now are complaining that the Ad Hoc group is getting special treatment in negotiations during the exclusivity period.  (I wonder how the Creditors Committee feels?)

The broader point that has me head-scratching is why are these groups assembled (presumably for negotiating leverage) and why do they have intra-class divergence along the lines we're seeing in AMR?  Is it cultural (don't want to work with certain funds)?  Strategic (don't want to be dragged down to USAiways merger by funds with a stake there)?  Other?

Speculations welcome, because it all just devolves for me into unhappy recollection of the cliquishness of high school.  Splitters!

Turn the gold to chrome

posted by Stephen Lubben
Some thoughts on the indirect costs of financial distress, over at Dealbook.

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

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