After more than two years of study on what needs fixing, the ABI Reform Commission proposed hundreds of discrete recommendations on refurbishing the Bankruptcy Code. The 396 page report addresses a wide variety of topics, from modifying the rights of secured lenders in large corporate workouts to creating a viable restructuring path for small businesses.
Yet the Commission’s report fails to address a number of important bankruptcy topics. As observed below, the report is silent on topics for which the Commission had designated special committees to examine and make recommendations. This appears to have resulted from the Commission’s desire to achieve unanimity on the reforms recommended. Described below are three topics for which the report offers no recommendations for reform.
Under current law, a chapter 11 debtor may file in a federal judicial district even if its only connection is its state of incorporation, and even though all of its assets, officers and employees are located elsewhere. It may also file in any district where a subsidiary has filed a bankruptcy case. Under the present venue law, many large corporations have found a way to file for chapter 11 bankruptcy relief in either the District of Delaware or the Southern District of New York, in the absence of any significant contact with those venues.
In its final report, the Commission declined to recommend any changes to the venue rules for bankruptcy cases. To be precise, the report states that the commissioners “were unable to reach a consensus regarding whether reform of the venue statute was necessary or what potential reform might best serve the diverse interests in chapter 11 cases.” It appears a majority of the Commission voted to reject all venue reform proposals and to maintain the status quo.
Former bankruptcy judge Steven Rhodes recently criticized the Commission’s silence in his Wall Street Journal piece: “The Baffling Rejection of Venue Reform by the ABI Chapter 11 Reform Commission”. See http://blogs.wsj.com/bankruptcy/2015/02/09/the-baffling-rejection-of-venue-reform-by-the-abi-chapter-11-reform-commission (February 9, 2015). In this article, Rhodes meticulously dissects the arguments advanced by proponents of the status quo.
2. Corporate Groups
The Commission appointed a “Multiple Enterprise Cases Advisory Committee” to investigate problems associated with corporate groups in bankruptcy. This Advisory Committee was provided with a “Preliminary Assessment” of questions/issues to be investigated, including the rights of non-debtor affiliates and whether and when bankruptcy law should impact those rights. Minutes of Commission meetings indicate at least a preliminary discussion was had regarding possibly distinguishing full substantive consolidation from a mere consolidation for distributional purposes under a plan, as well as related issue of voting in the latter context. The Commission’s published minutes indicated the Commission preliminarily debated these issues, as well as the fiduciary duty issues presented in multiple enterprise cases for management and professionals.
Notwithstanding the debates on this topic, the Commission’s final report is silent on such issues. The final report does not even include the term “substantive consolidation” within its text. Clearly the entire topic of the administration of multi-debtor affiliates remains open to reform proposals.
In a law review article published in 2010, this author commented on whether a federal law of substantive consolidation should be included in the Bankruptcy Code, and if so, what should be the governing standards. See Substantive Consolidation: The Cacophony Continues, 18 Am Bankr. Inst. L. Rev. 89, 157 – 184 (Spring 2010). The article argued that a legislative choice should be made in favor of stricter “bright line” rules for consolidation, as distinguished from the current jurisprudence in which courts cite and assign weight to various “factors”. That latter approach varies significantly from state law and has led to highly divergent rulings. A recommendation from the Reform Commission, even one that was not unanimous, could have provided an opportunity for productive discussion of this issue.
The Commission report could have also suggested standards for courts to apply in appointing creditor committees in complex, multi-enterprise debtor cases. Pragmatism currently prevails under current practice and ordinarily only one creditor committee will be appointed in multiple debtor cases. However, as exemplified by the Energy Future Holdings chapter 11 cases currently pending, multiple committees can be appointed in circumstances where there is a divergence of business functions within the corporate group, and where the debt structures diverge among those business units within the group. Once again, some suggestion for reform from the Commission would have been welcome.
3. “Bankruptcy proofing”
The Reform Commission also appointed a “Bankruptcy Remote Entities, Bankruptcy-Proofing and Public Policy Advisory Committee”. This “BRE Committee” was provided with a “Preliminary Assessment” of questions/issues to be investigated. In the Commission’s minutes of May 29, 2012, this study topic was reported to involve the following topics: the use of “bankruptcy remote entities” which “raise questions regarding freedom of contract principles in the context of waiving or impairing the rights of debtors and other creditors in bankruptcy.” Likewise this Committee apparently was to examine inter-creditor agreements, subordination agreements and “bad boy” guarantees. The minutes reflect that one committee member also suggested the BRE Committee consider the question of whether these structures and contract provisions are value destructive or value neutral and, depending on the answer to that question, whether bankruptcy laws should address such impacts. A related issue is under what circumstances, if any, a person should be allowed to waive bankruptcy protections, including the automatic stay. Again the final Commission Report is silent on all these issues.
Conclusion: While the ABI Reform Commission’s report represents a prodigious effort on many topics, it is nonetheless not comprehensive in scope. Optimally, future legislative deliberations on bankruptcy law reform should address issues in addition to the matters addressed in the final Commission report. Our current laws governing venue, corporate groups, and bankruptcy remote entities merit further reform and it is a lost opportunity that the ABI Commission was unable to formulate a starting point for discussion on those topics.