Chapter 11 of the U.S. Bankruptcy Code strives to rehabilitate distressed companies and maximize creditors’ recoveries. After its enactment in 1978, the Code served those purposes well, saving companies such as Federated Department Stores, Laidlaw International, Texaco, and multiple U.S. airlines. In the process of those reorganizations, secured and unsecured creditors received distributions on their claims, employees retained their jobs, and revenue streams continued for local, state, and federal governments.
Nevertheless, today’s financial landscape is very different. The testimony from almost three years of public hearings before the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 suggests … Read more
Thomas Jackson famously described the role of all bankruptcy law as reducing the incentive for individual enforcement against the assets of a distressed company. Although scholars have debated other aspects of Jackson’s thesis, most have continued to identify with this as a central tenet of bankruptcy law. In a recent working paper, Rethinking the Role of the Law of Corporate Distress in the Twenty-First Century, I propose a new taxonomy: the law of corporate distress comprised of insolvency law and restructuring law. I suggest that Thomas Jackson’s description remains apt for part of that taxonomy but draw a distinction … Read more
On December 17th, the FDIC issued guidance for the 2015 resolution plans of the covered insured depository institutions (CIDIs) of large bank holding companies (BHCs). The guidance (applicable to 36 CIDIs) adds welcome clarification around regulatory expectations, but also raises the bar – in some cases quite significantly – on the nature and depth of required plan content.
In addition to the BHC resolution plans required under Dodd Frank Section 165(d) , the FDIC requires a separate CIDI resolution plan for US insured depositories with assets of $50 billion or more. Most of the largest, most complex BHCs are subject … Read more
On December 8, 2014, the American Bankruptcy Institute (“ABI”) Commission to Study the Reform of Chapter 11 (the “Commission”) issued its Final Report and Recommendations (the “Report”). The Report proposes a number of important changes to Chapter 11.
The Commission was formed in 2012 to respond to shifts in the financial markets, corporate structures and credit and derivatives products since the Bankruptcy Code’s adoption in 1978 and is comprised of leading bankruptcy practitioners, professors and judges. The Report is the result of an in-depth, two-year review of Chapter 11 by the Commission and 13 separate Advisory Committees. The “Recommended Principles” … Read more
On October 14, 2014, the Bankruptcy Court for the Southern District of New York issued a bench ruling (as later modified, the “Bench Ruling“) in the In re MPM Silicones, LLC (“Momentive“) Chapter 11 cases (Case No. 14-22503-rdd, Adv. Proc. Nos. 14-08248 [Docket No. 50], 14-08247 [Docket No. 60]), which serves as a stark reminder of the function and importance of carefully drafted and negotiated intercreditor agreements in a Chapter 11 context. Intercreditor agreements generally govern the rights of multiple classes of creditors vis à vis each other. A typical intercreditor agreement directs future distributions post-default … Read more
In an opinion entered on November 17, 2014, Judge Stuart M. Bernstein of the United States Bankruptcy Court for the Southern District of New York held that Suntech Power Holdings Co., Ltd. was eligible to be a chapter 15 debtor by virtue of a bank account opened in the U.S. specifically for the purposes of establishing U.S. jurisdiction under the Second Circuit’s controversial Barnet decision, and that Suntech’s center of main interest (“COMI”) was the Cayman Islands despite conducting no business in the Cayman Islands prior to its filing of a winding-up proceeding there. Under chapter 15, COMI is … Read more
On October 17, the Delaware Supreme Court held that JP Morgan (JPM) terminated its security interest in all of the collateral provided by General Motors (GM) in support of a $1.5 billion loan, despite neither party intending that result, when it authorized the filing of a termination statement to its existing Uniform Commercial Code (UCC) financing statement. The Delaware Supreme Court stated that under Delaware law, the UCC requires only that a secured party authorize the filing of an amendment or termination statement, not that it otherwise understand the intent or the effect of such a filing. This holding places … Read more
The following post comes to us from Anthony Casey, Assistant Professor of Law at the University of Chicago Law School. It is based on his recent article, “The New Corporate Web: Tailored Entity Partitions and Creditors’ Selective Enforcement,” which is available here.
Firms have developed sophisticated legal mechanisms that partition assets across some dimensions and not others. The result is a complex web of interconnected affiliates. For example, an asset placed in one legal entity may serve as collateral guaranteeing the debts of another legal entity within the larger corporate group. Conventional accounts of corporate groups cannot explain these … Read more
On August 26, 2014, the U.S. Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) issued a notable decision in the chapter 11 cases of MPM Silicones, LLC and its affiliates (the “Debtors”) that could have far-reaching implications for future chapter 11 cases, particularly as it strengthens a debtor’s ability to cram down a dissenting class of secured creditors with new secured debt at a below market interest rate.
The Bankruptcy Court issued rulings on three issues that could negatively impact creditors in future cases:
The Bankruptcy Court held that the appropriate interest rate for debt to … Read more
The following post comes to us from John M. Conley, William Rand Kenan Jr. Professor of Law at the University of North Carolina School of Law, and Cynthia A. Williams, Osler Chair in Business Law at Osgoode Hall Law School, York University. It is based on their recent paper, “The Social Reform of Banking,” which was published in the Journal of Corporation Law and is available here.
The financial crisis of 2008 led to global demands for reforms that would put the financial services industry on a more sustainable ethical, economic, and legal footing. Thus far, the response to … Read more
On August 5, 2014, the Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation (the “Agencies”) released a Joint Statement identifying common shortcomings and action steps for the 11 largest financial companies that initially filed resolution plans in 2012 (the “First Wave Filers”). Contemporaneously with the Joint Statement, the Agencies sent letters to each of the First Wave Filers in which they identified more detailed and specific shortcomings in individual First Wave Filers’ 2013 resolution plans and additional information required for the 2015 plans (the “Joint Letters”).
In effect, the Joint Statement and the Joint … Read more
Applying the U.S. Supreme Court’s landmark decision in Morrison v. National Australian Bank Ltd., 130 S. Ct. 2869 (2010), to the highest profile and widest-ranging securities fraud case in decades, Judge Jed S. Rakoff of United States District Court for the Southern District of New York ruled Monday, July 7, 2014, that the trustee administering Bernie Madoff’s insolvent estate may not use the U.S. Bankruptcy Code to claw back “purely foreign” transactions between foreign entities. By applying Morrison to such a visible case with a number of foreign defendants, the court recognized an important protection for foreign investors who … Read more
The following post comes to us from Michelle Harner, Professor of Law and Director of the Business Law Program at the University of Maryland Francis King Carey School of Law. It is based on her recent paper entitled “The Value of Soft Variables in Corporate Reorganizations,” which is forthcoming in the University of Illinois Law Review and is available here.
When a company is worth more as a going concern than on a liquidation basis, what creates that additional value? Is it the people, management decisions, the simple synergies of the operating business, or some combination of these types … Read more
On June 9, 2014, the U.S. Supreme Court issued its decision in Executive Benefits Ins. Agency v. Arkison, which partially resolved procedural uncertainty created by the Court’s prior decision in Stern v. Marshall.
In Stern, the Supreme Court analyzed the constitutionality of 28 U.S.C. § 157, which in relevant part defines certain matters as “core” or “non-core,” and authorizes bankruptcy courts to finally adjudicate “core” matters but only to issue findings and conclusions subject to de novo review in “non-core” matters. The Court held that Article III of the U.S. Constitution prohibits Congress from vesting bankruptcy judges … Read more