The world’s second-largest economy (China) stumbled; Japan receded; the U.K. showed signs of life; the war-torn Middle East reeled; oil revenue-dependent Russia, Brazil, and Venezuela took body blows; and the European Union exhaled after narrowly avoiding Grexit (and possibly Brexit), only to confront a refugee crisis of alarming (and expensive) proportions, as well as a demonstrated terrorist threat from the self-proclaimed Islamic State.
A Good Year for the U.S.
By comparison, 2015 was a relatively good year for the U.S., with modest growth in the economy (approximately 2 percent), the lowest budget deficit ($439 billion) as a percentage of gross domestic product (2.5 percent) since 2007, persistently low inflation (just over 1 percent), and the lowest unemployment rate (5 percent) in more than seven years. Perhaps the biggest business news of 2015 was that, heralding the end of the post-Great Recession period of easy money, these developments prompted the U.S. Federal Reserve on December 16 to raise its benchmark interest rate from near zero for the first time since December 2008.
Unlike in 2013, the U.S. Congress averted another government shutdown, passing a $1.8 trillion spending bill on December 18 with broad bipartisan support in both houses, both controlled by Republicans for the first time in nine years.
The other big stories in the turbulent business, financial, and economic narrative of 2015 included a commodities meltdown precipitated by weak demand (principally from China) and rock-bottom prices for oil, gas, coal, and minerals, all of which sent hundreds of overleveraged U.S. and foreign producers and related companies scrambling down the road to bankruptcy.
The U.S. surpassed Saudi Arabia and Russia in 2015 to become the world’s largest oil and natural gas producer combined. A massive oversupply of oil caused by increased U.S. production and the refusal of a bloc of producers led by Saudi Arabia to stem their production meant that oil prices plummeted 30 percent in 2015 to as little as $35 a barrel, after having plunged from more than $100 a barrel to nearly $50 a barrel in 2014. The fallout among energy-sector companies will likely continue well into 2016 and beyond.
A Record Year for M&A
The year 2015 was the biggest year ever for mergers and acquisitions. Buoyed by rising boardroom confidence, (still) inexpensive debt, pressure to become more efficient in a slow-growth economy, and a desire to keep up with consolidating competitors, companies agreed to merge at a dizzying pace in 2015. Dealogic estimated that the total value of M&A transactions in 2015 approached $5 trillion, a record. Some of the biggest names agreeing to tie the knot in 2015 were Pfizer/Allergan ($160 billion), Anheuser-Busch InBev/SABMiller ($117 billion), Royal Dutch Shell/BG Group ($81.5 billion), Charter Communications/Time Warner Cable ($79.6 billion), Dow Chemical/DuPont ($68.6 billion), and HJ Heinz/Kraft Foods ($62.6 billion).
Sovereign and Commonwealth Debt
The sovereign debt crises of several nations, including Greece, Argentina, and Ukraine, and the calamitous financial straits of a U.S. commonwealth—Puerto Rico—were writ large in 2015 headlines. Greece received a (third) bailout of up to €86 billion in loans from the eurozone in August 2015 after defaulting on a €1.55 billion repayment to the International Monetary Fund (the “IMF”) at the end of June. Argentina, which defaulted on its sovereign debt for the second time in July 2014, continued its standoff with holdout bondholders from two previous debt restructurings, despite having lost—repeatedly—at every level of the U.S. judiciary regarding its obligation to pay.
In February 2015, the IMF agreed to a new $17.5 billion bailout for Ukraine, hoping to stabilize the country as it teeters on the edge of default and economic collapse precipitated by the separatist uprising that began in 2014 with Russia’s annexation of the Crimea. In December, the Ukrainian government declared a moratorium on repaying $3.5 billion in debt to Russia.
Puerto Rico struggled throughout 2015 to manage its more than $72 billion in debt. Because the island commonwealth is a U.S. territory, its heavily indebted public corporations are precluded from seeking the debt-adjustment relief that is available to most state public agencies under chapter 9 of the U.S. Bankruptcy Code. Puerto Rico’s long-standing efforts to change the law were unsuccessful in 2015, although several bills were introduced in the U.S. Congress to deal with the problem in various ways. Puerto Rico also attempted to enact its own legislation that would provide debt relief to its instrumentalities, but the law was struck down as being unconstitutional by the courts. Those rulings will be reviewed by the U.S. Supreme Court in 2016.
On September 16, the U.N. General Assembly, in an initiative prompted by Argentina’s sovereign debt crisis and the perceived heavy-handed tactics of holdout creditors, approved “basic principles” for sovereign debt restructuring processes to improve the global financial system. The resolution, which is nonbinding but carries political weight, urges debtors and creditors “to act in good faith and with a cooperative spirit to reach a consensual rearrangement” of sovereign debt.
After recovering from a summer rout, U.S. stock markets finished 2015 relatively flat. The Standard & Poor’s 500 finished the year down 0.7 percent, well below the solid gains of the last three years, but up 63 percent over the last five years. The Dow Jones Industrial Average finished the year down 2.2 percent, its first annual decline since 2008. The technology-heavy NASDAQ Composite did better than the other two benchmarks in 2015, rising 5.7 percent for the year.
Business Bankruptcy Filings
Business bankruptcy filings continued a downward trend in 2015. The Administrative Office of the U.S. Courts reported that business bankruptcy filings in the fiscal year (“FY”) which ended on September 30, 2015, totaled 24,985, down 12 percent from the 28,319 business filings in FY 2014. Chapter 11 filings totaled 7,040 in FY 2015, down 8 percent from 7,658 in FY 2014.
Seventy-four chapter 15 cases were filed in FY 2015, compared to 70 in FY 2014. There were seven chapter 9 filings in FY 2015, compared to 10 in FY 2014.
The data for bankruptcy filings in calendar year (“CY”) 2015 paint a similar portrait, with two notable exceptions. According to Epiq Systems, total business bankruptcy filings during CY 2015 were 30,018, a 14 percent drop from the 34,749 filings during CY 2014. However, chapter 11 business filings were 5,309 for 2015, compared to 5,188 for 2014, representing an increase of about 2 percent. This represents the first year-over-year increase in business chapter 11 filings since 2009. Ninety chapter 15 petitions were filed on behalf of foreign business debtors in CY 2015, compared to 59 in CY 2014—roughly a 50 percent increase. Only three municipal debtors filed for chapter 9 protection in CY 2015, compared to 10 in CY 2014.
The number of bankruptcy filings by “public companies” (defined as companies with publicly traded stock or debt) in CY 2015 was 79, according to data provided by New Generation Research, Inc.’s bankruptcydata.com, compared to 52 public company filings in CY 2014. At the height of the Great Recession, 138 public companies filed for bankruptcy in 2008 and 211 in 2009.
The combined asset value of the 79 public companies that filed for bankruptcy in 2015 was $81.2 billion, compared to $72 billion in 2014. By contrast, the 138 public companies that filed for bankruptcy in 2008 had prepetition assets valued at $1.16 trillion in aggregate. Unlike in the three previous years, when the health-care and medical sector claimed the largest number of bankruptcies, energy, mining, and related-sector companies led the pack in 2015, representing almost half of the total public company bankruptcy filings in 2015 (and all but one of the filings in December).
The year 2015 added 18 public company names to the billion-dollar bankruptcy club (measured by value of assets), compared to 11 in 2014 and 10 in 2013. Counting private company and foreign debtor filings, the billion-dollar club gained 27 members in 2015. But the largest bankruptcy filing of 2015—Caesars Entertainment Operating Co., Inc., with $15.9 billion in assets—did not crack the Top 30 List of the largest public company bankruptcy filings in history.
Twelve public and private companies with assets valued at more than $1 billion exited from bankruptcy in 2015—including six of the 18 billion-dollar public companies that filed in 2015. Continuing a trend begun in 2012, more of these companies (seven) reorganized than were liquidated or sold.
Banks and Pension Insurance
The Federal Deposit Insurance Corporation shuttered eight banks in 2015, compared to 18 in 2014 and 24 in 2013. This represents the lowest number of bank failures since 2007. There were 157 bank failures in 2010 and 140 in 2009, during the height and immediate aftermath of the Great Recession.
On November 18, the Pension Benefit Guaranty Corporation (the “PBGC”), which insures pensions for approximately 40 million Americans, reported that its deficit increased 23 percent to $76.4 billion, with the agency’s program for multi-employer pension plans continuing to account for a large share ($52.3 billion). The deficit reported for FY 2015 was the widest in the 41-year history of the PBGC, which has now run shortfalls for 13 straight years.
According to Standard & Poor’s Ratings Services, 112 companies worldwide defaulted on their obligations in 2015, the highest year-end tally since 2009, when the default figure hit 268. Fifty-nine percent of 2015’s global defaults came from U.S. borrowers, up from 55 percent in 2014. After the U.S., companies from emerging markets (Brazil and Russia) were the second-largest defaulters, followed by companies in Europe and other developed nations. The oil and gas sector led the 2015 default tally with 29 defaulters, or 26 percent of the global total. Seventeen defaults (15 percent of the global total) came from issuers in the metals, mining, and steel sector. The consumer products and bank sectors were tied for the third-highest concentration at 13 issuers (12 percent each).
Of the 112 defaulting entities in 2015, 36 defaulted because of distressed exchanges, 32 defaults were due to missed interest or principal payments, 22 followed a bankruptcy filing, 11 reflected regulatory intervention, seven are confidential, one followed a judicial reorganization, one followed a judicial recovery, one was due to the filing of an administration proceeding, and one followed the completion of a de facto debt-for-equity swap.
Top 10 Bankruptcies of 2015
All but two of the Top 10 public company bankruptcies of 2015 were filed by companies in the oil and gas or mining (principally coal) industries, reflecting the dire straits of these sectors caused by weakened worldwide demand and plummeting prices. The two exceptions came from the banking and the lodging and entertainment sectors. Each company gracing the Top 10 List for 2015 entered bankruptcy with assets valued at more than $2 billion. Six of the 10 companies on the Top 10 List filed pre-negotiated or prepackaged chapter 11 cases.
The bouncing ball on the roulette wheel for the largest public company bankruptcy filing in 2015 landed on hotel and gaming giant Caesars Entertainment Operating Co., Inc. (“CEOC”). CEOC, together with its parent company (Caesars Entertainment Corporation (“CEC”)) and its affiliates, owns, operates, or manages 50 gaming and resort properties in 14 U.S. states and four foreign countries, primarily under the Caesars, Harrah’s, and Horseshoe brand names. On August 4, 2014, Wilmington Savings Fund Society, FSB (“WSFS”), as indenture trustee for second priority noteholders, commenced an action against CEC, CEOC, certain of their affiliates, and certain directors for, among other things, recovery of fraudulent transfers of CEOC’s assets, breaches of fiduciary duty, and declaratory relief with respect to CEC’s guarantee of the second priority notes.
On January 12, 2015, holders of second priority notes filed an involuntary bankruptcy petition against CEOC in the District of Delaware. CEOC and 172 of its subsidiaries filed voluntary chapter 11 petitions on January 15, 2015, in the Northern District of Illinois after entering into a restructuring support agreement with CEC and certain of CEOC’s first priority noteholders. CEOC listed $15.9 billion in assets and approximately $19 billion in debt, a significant portion of which was incurred during a 2008 leveraged buyout (“LBO”) of CEC (then known as Harrah’s Entertainment, Inc.) in one of the largest LBOs in history. On February 2, 2015, the U.S. Bankruptcy Court for the District of Delaware transferred CEOC’s involuntary bankruptcy case to the Northern District of Illinois. Thereafter, an examiner was appointed to investigate claims of fraudulent transfer and breach of fiduciary duty, among others.
Jones Day represents the Official Committee of Second Priority Noteholders, WSFS as indenture trustee for $3.7 billion in second priority notes, and the petitioning creditors in CEOC’s involuntary proceeding.
The No. 2 spot on the Top 10 List for 2015 was excavated by Bristol, Virginia-based Alpha Natural Resources, Inc. (“Alpha”). As of the bankruptcy filing, Alpha was engaged in the extraction, processing, and marketing of steam and metallurgical coal in 54 active mines and 22 coal preparation plants located in Kentucky, Pennsylvania, Virginia, West Virginia, and Wyoming. Alpha is the nation’s largest supplier and exporter of the type of coal used to produce steel. The company filed for chapter 11 protection on August 3, 2015, in the Eastern District of Virginia, showing $10.7 billion in assets against $7.1 billion in debt on its balance sheet. A severe slump in coal prices continues to wreak havoc on the industry. Alpha and many of its rivals are facing historically adverse market conditions, a difficult regulatory environment, and intense industry competition, while also burdened by debt taken on when the industry’s outlook was rosier. Jones Day represents Alpha in connection with its chapter 11 filing.
San Juan, Puerto Rico-based bank holding company Doral Financial Corporation (“DFC”) collapsed into the No. 3 spot on the Top 10 List for 2015 when it filed for chapter 11 protection on March 11, 2015, in the Southern District of New York with $8.5 billion in assets—the largest bank failure since 2010. DFC’s banking operation—Doral Bank—was hit hard by falling residential housing prices and underperforming loans, but the coup de grace was an appellate court’s ruling in favor of Puerto Rican tax authorities in protracted litigation surrounding an accounting fraud and DFC’s entitlement to a $229 million tax refund. DFC filed for bankruptcy to liquidate its remaining assets after the unsuccessful resolution of the tax dispute forced undercapitalized Doral Bank, Puerto Rico’s only community lender, into receivership on February 27, 2015, where it was purchased by Banco Popular de Puerto Rico.
Privately owned, Tulsa, Oklahoma-based oil and gas producer Samson Resources Corporation (“Samson”) trickled into the No. 4 spot on the Top 10 List for 2015 when it filed for chapter 11 protection in the District of Delaware on September 16, 2015, with $5.6 billion in assets and $4.3 billion in debt. Samson filed for bankruptcy with a pre-negotiated plan to give equity in the restructured company to junior lenders and wipe more than $3.25 billion in debt from its books. Samson was taken private in 2011 in a $7.2 billion LBO—the biggest-ever LBO for an oil and gas producer.
Birmingham, Alabama, and Vancouver, British Columbia-based coal miner and exporter Walter Energy, Inc. (“Walter”) struck the No. 5 lode on the Top 10 List for 2015 when Walter’s U.S. units filed for chapter 11 protection on July 15, 2015, in the Northern District of Alabama with $5.4 billion in assets against $5 billion in debt. Walter is the world’s leading publicly traded, “pure play” metallurgical coal producer for the global steel industry. It filed for bankruptcy with a prepackaged chapter 11 plan that, if confirmed, would convert $1.8 billion of debt to equity and transfer ownership of the company to senior secured creditors. With the recent plunge in coal prices and greatly reduced Chinese import demand, Walter has struggled to service its high-yield debt.
Cayman Islands exempted offshore oil rig operator Offshore Group Investments Limited (“Offshore”), a wholly owned subsidiary of Vantage Drilling Co. (“Vantage”), barreled into the No. 6 spot on the Top 10 List for 2015 when Offshore and 23 subsidiaries filed for chapter 11 protection on December 3, 2015, in the District of Delaware with a prepackaged chapter 11 plan to swap $1.15 billion in debt for control of the company. The plan, which was confirmed by the bankruptcy court on January 14, 2016, leaves Offshore intact while Vantage is being wound down in the Cayman Islands. Like others in the oil and gas industry, Offshore has been crippled by stubbornly low oil prices, with the price of U.S. crude oil plummeting to $35 a barrel from more than $100 a year and a half ago. The offshore drilling sector has also faced an oversupply of drilling rigs since late 2013, with customers turning their focus to onshore shale gas drilling. Finally, Offshore has been buffeted by bribery, money-laundering, and corruption allegations linked to the corruption scandal at Brazil’s state-run oil firm, Petróleo Brasileiro SA (“Petrobras”), once Offshore’s biggest customer. Offshore listed $3.5 billion in assets and $3 billion in debt in its chapter 11 petition.
Greenwood, Colorado-based Molycorp, Inc. (“Molycorp”), the only U.S. supplier of rare-earth minerals used in electric cars and wind turbines, excavated the No. 7 lode on the Top 10 List for 2015 when it filed for chapter 11 protection along with its North American subsidiaries on June 25, 2015, in the District of Delaware with $2.6 billion in assets against $1.7 billion in debt. Molycorp’s plight mirrors the dramatic rise and fall of the rare-earth market over the past five years. Prices for the group of 17 metals soared dramatically in 2011 after exports were curbed by China, the world’s largest supplier. However, by the end of 2011, prices were falling as consumers sought cheaper substitutes. Molycorp filed for bankruptcy with a pre-negotiated chapter 11 plan that, if confirmed, would cancel $700 million in unsecured debt and surrender majority control of the reorganized company to senior secured noteholders. Jones Day is representing Molycorp and its subsidiaries in connection with their chapter 11 cases.
Privately held, Houston-based exploration and production companySabine Oil & Gas Corp. (“Sabine”) drilled into the No. 8 spot on the Top 10 List for 2015 when it filed for chapter 11 protection on July 15, 2015, in the Southern District of New York with $2.4 billion in assets against $2.9 billion in debt. Like many of its competitors, Sabine has been hamstrung by a combination of cratering oil prices, low natural gas prices, and substantial debt. It has been negotiating with creditors since March 2015 to restructure its obligations, so far without success.
Houston, Texas-based shale oil driller Swift Energy Company (“Swift”) struck the penultimate vein in the Top 10 List for 2015 when it filed for chapter 11 protection on December 31, 2015, in the District of Delaware with $2.2 billion in assets and $1.35 billion in debt. Swift became the latest U.S. shale driller—and the 40th North American oil producer in 2015 (20 headquartered in Texas)—to succumb to the brutal 68 percent slide in U.S. crude oil prices during the past 19 months. Swift filed a pre-negotiated chapter 11 plan that, if confirmed by the bankruptcy court, would de-lever the company’s balance sheet by converting $905 million in unsecured debt to equity. Jones Day represents Swift in its chapter 11 case.
The final spot on the Top 10 list for 2015 belonged to St. Louis, Missouri-based Patriot Coal Corporation (“Patriot Coal”), which operated eight mining complexes in West Virginia. Patriot Coal revisited bankruptcy on May 12, 2015, when it filed for chapter 11 protection in the Eastern District of Virginia with $2 billion in assets against $2.4 billion in debt. Patriot Coal first filed for bankruptcy in July 2012. In addition to being strained by union and pension obligations, the company had been hit hard by dropping coal prices brought on by a glut of cheap natural gas. The U.S. Bankruptcy Court for the Eastern District of Missouri confirmed a chapter 11 plan in the first Patriot Coal bankruptcy on December 17, 2013, following a new capital infusion of $250 million and a settlement with its former parent company of claims that subsidiary spinoffs violated the Employee Retirement Income Security Act.
Legacy employee obligations, environmental obligations, and depressed coal prices brought Patriot Coal back to bankruptcy 18 months later. The U.S. Bankruptcy Court for the Eastern District of Virginia confirmed a chapter 11 plan in Patriot Coal’s second bankruptcy case on October 8, 2015. Under the plan, Patriot Coal’s mines were sold at auction to Blackhawk Mining LLC and a unit of the nonprofit Virginia Conservation Legacy Fund in exchange for assumed liabilities.
Other notable debtors (public, private, and foreign) in 2015 included the following:
Houston, Texas-based Hercules Offshore, Inc. (“Hercules Offshore”), a worldwide oil and gas drilling services company that operates a fleet of 27 jack-up rigs and 21 liftboats. Another casualty of plunging oil prices, Hercules Offshore filed a prepackaged chapter 11 case on August 13, 2015, in the District of Delaware to implement a $1.2 billion debt-for-equity swap with its bondholders. The company listed $2 billion in assets against $1.3 billion in debt. The bankruptcy court confirmed Hercules Offshore’s prepackaged chapter 11 plan on September 24, 2015.
Falls Church, Virginia-based Altegrity, Inc. (“Altegrity”), owner of the company that carried out background checks on former National Security Agency contractor Edward Snowden and Navy Yard shooter Aaron Alexis. Altegrity filed for chapter 11 protection on February 8, 2015, in the District of Delaware with $1.7 billion in assets against $1.8 billion in debt. A slimmed-down Altegrity emerged from bankruptcy on September 1, 2015, under new ownership after jettisoning its troubled U.S. Investigations Services Inc. subsidiary, but retaining its Kroll private security unit and its HireRight employee screening business.
Iconic 94-year-old consumer-electronics chain RadioShack Corporation(“RadioShack”), which filed for chapter 11 protection in the District of Delaware on February 5, 2015 ($1.6 billion in assets against $1.4 billion in debt) with a dual-track strategy to maximize value by: (i) entering into a strategic alliance with Sprint and selling approximately half of RadioShack’s 4,000 stores as going concerns; and (ii) liquidating its remaining assets, both on an expedited timeline. The strategy succeeded, as the proposed store sale was approved by the bankruptcy court in less than 60 days, enabling the company to preserve more than 7,000 jobs and avoid the fate of many other retailers whose chapter 11 filings resulted in a complete cessation of operations and full chain liquidations. The bankruptcy court confirmed RadioShack’s liquidating chapter 11 plan on an expedited basis on October 2, 2015. Jones Day represented RadioShack in connection with its chapter 11 case.
Irving, Texas-based oil and gas producer Magnum Hunter Resources Corporation (“Magnum”), yet another victim of the glut of cheap energy—including a 14-year low in natural gas prices—and a heavy debt load. Magnum filed a pre-negotiated chapter 11 case on December 15, 2015, in the District of Delaware with $1.7 billion in assets against $1.1 billion in debt. If confirmed, Magnum’s plan would cede control of the company to creditors by means of a debt-for-equity swap.
Montvale, New Jersey-based Great Atlantic & Pacific Tea Company, Inc. (“A&P”), operator of A&P, Best Cellars, Food Basics, Food Emporium, Pathmark, Superfresh, and Waldbaum’s supermarkets. A&P filed for chapter 11 protection for the second time in five years on July 20, 2015, in the Southern District of New York ($1.6 billion in assets against $2.3 billion in debt), with a plan to sell its businesses to competitors. As of January 2016, A&P had sold more than 200 stores to new owners and was still seeking buyers for approximately 50 supermarkets.
Reno, Nevada-based Allied Nevada Gold Corp. (“Allied Nevada”), the operator of the gaming state’s Hycroft mine. Allied Nevada filed a prepackaged chapter 11 case on March 10, 2015 ($1.5 billion in assets against $664 million in debt) in the District of Delaware after operational setbacks and plunging gold prices eroded profitability at its sole working property. On October 8, 2015, the bankruptcy court confirmed a chapter 11 plan for Allied Nevada whereby unsecured creditors swapped their debt for equity in the reorganized company and the company swapped in new first-lien debt.
Santa Ana, California-based, for-profit college operator Corinthian Colleges, Inc. (“Corinthian”), which once operated nearly 100 schools in 25 U.S. states and 14 campuses in Ontario, Canada, under the Wyotech, Heald College, and Everest University brand names, with an enrollment of more than 85,000 students. Corinthian filed for chapter 11 protection on May 4, 2015, in the District of Delaware as the final step toward a full shutdown in the wake of a financial crisis which began in the summer of 2014 and scores of lawsuits brought by state attorneys general and federal agencies alleging that the company had used illegal tactics in marketing itself to students and had inflated reported job placement rates. The bankruptcy court confirmed a chapter 11 plan of liquidation for Corinthian on August 28, 2015. In June and December 2015, the federal government announced that student loans to tens of thousands of Corinthian’s former students would be forgiven.
Brazil-based OAS S.A. (“OAS”), parent company of the OAS Group, a construction, engineering, and infrastructure investment enterprise with projects located throughout Latin America, the Caribbean, and Africa. OAS experienced a liquidity crisis after the company was implicated in “Operation Carwash,” a government anti-corruption investigation in Brazil involving Petrobras, the state-owned oil company. The U.S. Bankruptcy Court for the Southern District of New York entered an order on July 13, 2015, recognizing the Brazilian bankruptcy cases of OAS and its affiliates under chapter 15 of the Bankruptcy Code, which stayed U.S. litigation against the company by bondholders.
Privately held Bahamian resort and hotel developer Baha Mar Ltd.(“Baha Mar”). Baha Mar filed for chapter 11 protection in the District of Delaware on June 29, 2015, with more than $1 billion in assets, weeks after opening U.S. bank accounts to establish eligibility for a U.S. bankruptcy filing. The U.S. bankruptcy court entered an order less than three months afterward abstaining from exercising jurisdiction over the chapter 11 case in deference to a pending Bahamian bankruptcy proceeding.
Los Angeles-based studio and production company Relativity Media LLC(“Relativity”), the independent television studio behind such recent releases as The Lazarus Effect and hits like MTV’s Catfish. Relativity filed for chapter 11 protection on July 30, 2015, in the Southern District of New York. The bankruptcy court approved the sale of Relativity’s reality television unit on October 20, 2015, and the company has proposed a reorganization plan based on recapitalizing its film and other business units. Relativity recently announced that Kevin Spacey and his producing partner will be leading Relativity’s film division as part of the restructuring. Jones Day is representing the company and its affiliates in connection with their chapter 11 cases.
San Diego-based, privately held Millennium Health LLC (“Millennium”), one of the nation’s largest drug-testing laboratories. Millennium filed a prepackaged chapter 11 case in the District of Delaware on November 10, 2015, one month after agreeing to pay $256 million to settle whistleblower allegations that it fraudulently billed Medicare and Medicaid for medically unnecessary tests and provided free items to physicians who agreed to refer business to it. The bankruptcy court confirmed a chapter 11 plan for Millennium on December 14, 2015, providing for a $1.15 billion debt-for-equity swap that handed control of the reorganized company to lenders. On January 12, 2016, the bankruptcy court certified a direct appeal of the confirmation order to the Third Circuit to determine the validity of the plan’s nonconsensual third-party releases.
American Apparel, Inc. (“American Apparel”), the manufacturer and retailer of edgy, made-in-America apparel. American Apparel filed for chapter 11 protection on October 5, 2015, in the District of Delaware. The filing followed a deal struck with American Apparel’s secured lenders to reduce the retailer’s debt by $200 million through a debt-for-equity swap. American Apparel garnered the support of the official unsecured creditors’ committee by means of a settlement to be incorporated into the company’s chapter 11 plan. The plan was confirmed by the bankruptcy court on January 25, 2016, ending American Apparel’s less than 120-day stay in bankruptcy. Jones Day represented American Apparel in connection with its chapter 11 case.
Highlights of 2015
Among the most memorable business, economic, and financial sound bites of 2015 were “Swiss franc crash,” “Grexit,” “commodities rout,” “VW sensorgate,” “high yield rout,” and “U.S. Fed interest rate hike.”
January 20—China’s National Bureau of Statistics reports that economic growth has slowed to a level not seen in a quarter century, firmly marking the end of a high-growth heyday which buoyed global demand for almost everything. The slipping momentum in China reverberates around the world, sending prices for commodities tumbling and weakening an already soft global economy.
February 6—A U.S. federal district court rules that Puerto Rico’s 2014 Public Corporations Debt Enforcement and Recovery Act, patterned on chapters 9 and 11 of the U.S. Bankruptcy Code, is unconstitutional.
April 7—Cloud Live, a troubled Chinese restaurant chain turned technology company, announces that it cannot make debt repayment commitments in what Chinese state media call a “landmark,” noting that the default is the country’s first domestic bond interest default.
June 15—In Starr Int’l Co. v. United States, 2015 BL 188318 (Fed. Cl. June 15, 2015), the Federal Court of Claims rules that the U.S. government acted with undue harshness, and in violation of Section 13(3) of the Federal Reserve Act, in taking over American International Group in 2008. However, the court rules that no damages are owed for this conduct, since the alternative was a complete wipeout of shareholders in a bankruptcy.
July 13—Greece and its European creditors announce a tentative agreement intended to resolve the country’s debt crisis and keep it in the eurozone by providing Greece with a bailout package of up to €86 billion in loans—the nation’s third bailout in five years.
August 3—A Puerto Rico agency defaults for the first time when it misses a $58 million bond payment, initiating a clash with creditors as the struggling commonwealth seeks to renegotiate its $72 billion debt load.
August 13—The U.S. Federal Reserve reports that U.S. student loan debt now totals $1.27 trillion, an amount which tops the $1 trillion owed in auto loans and $901 billion in credit card debt.
August 21—A report by the U.S. Department of Education shows that nearly 7 million Americans have gone at least a year without making a payment on their federal student loans, a high level of default which suggests that a widening swath of households is unable or unwilling to pay back school debt.
October 7—The Loan Syndications and Trading Association, the principal advocate for the corporate loan market, issues “The Trouble with Unneeded Bankruptcy Reform: The LSTA’s Response to the ABI Chapter 11 Commission Report.” The objections include a challenge to a key narrative underpinning the ABI’s report—namely, that the Bankruptcy Code has become outdated due to the evolution of financial markets and the increased use of secured credit.
November 30— By adopting formal restrictions on its ability to help failing financial firms, the U.S. Federal Reserve takes the final step to ensure that it cannot repeat the extraordinary measures taken to rescue American International Group and Bear Stearns Cos. in 2008.
December 2—2015 officially becomes the biggest year ever for mergers and acquisitions as announced transactions push global M&A volume to $4.304 trillion.
December 14—U.S. oil prices fall below $35 a barrel in New York for the first time since 2009, reflecting continued U.S. oversupply and weak Chinese manufacturing.
December 16—The U.S. Federal Reserve raises its benchmark interest rate from near zero for the first time since December 2008, emphasizing that it will likely lift the rate gradually thereafter in a test of the economy’s capacity to stand on its own with less support from super-easy monetary policy.
December 18— Britain’s last underground coal mine closes, calling time on an industry that helped propel the U.K. to superpower status in the 19th century. One hundred years ago, more than a million men made their living digging coal from deep beneath U.K. soil.
Proposed Chapter 16 of the U.S. Bankruptcy Code
On December 18, 2015, the National Bankruptcy Conference (the “NBC”) submitted proposed legislation to the U.S. House of Representatives’ Subcommittee on Regulatory Reform, Commercial and Antitrust Law and the Senate’s Committee on the Judiciary outlining proposed changes to the Bankruptcy Code intended to address the unanimity requirement—referred to by some as the “holdout problem”—of section 316(b) of the Trust Indenture Act (the “TIA”). This problem was highlighted by 2014–15 rulings involving Caesars Entertainment Corporation and Education Management Corporation in which the courts interpreted the TIA to restrict the ability of parties to strip guarantees from dissenting bondholders in out-of-court restructurings without the bondholders’ unanimous consent.
The NBC argues that even though the TIA’s unanimity requirement successfully shields “the minority from majority abuse,” it also “impedes beneficial out of court restructurings.” The NBC further contends that “a chapter 11 filing necessitated solely by a holdout problem can inflict serious ‘collateral damage’ on a debtor.”
The draft legislation would create a new chapter 16 of the Bankruptcy Code that would permit debtors to modify the rights, including payment terms, of one or more classes of claims by obtaining the acceptance of a two-thirds supermajority of “disinterested” creditors of each impaired class. According to the NBC, proposed chapter 16 would allow parties to avoid “triggering the whole panoply of Bankruptcy Code provisions, requirements and limitations that typically accompany the filing of a petition under the Bankruptcy Code.” Instead, chapter 16 would create a “streamlined court-sanctioned process” that can provide “a far less burdensome alternative that remains consistent with the purpose of the TIA.”
Congress elected not to include a provision that would have limited the scope of section 316(b) of the TIA as part of the federal transportation bill which was signed into law on December 4, 2015. The proposed amendment was sharply criticized by both Republicans and Democrats as well as a group of finance and bankruptcy scholars. Last-minute efforts to include proposed changes to the TIA in the omnibus spending bill signed into law on December 18, 2015, were similarly unsuccessful.
U.S. Bankruptcy Rule and Official Bankruptcy Form Changes
On December 1, 2015, changes to certain Federal Rules of Bankruptcy Procedure and comprehensive revisions to the Official Bankruptcy Forms as part of the Forms Modernization Project became effective. A more detailed description of the changes is available here.
Bills Introduced in the U.S. Congress to Amend the Bankruptcy Code and Related Statutes
The “Puerto Rico Financial Stability and Debt Restructuring Choice Act of 2015,” H.R. 4199, would amend the Bankruptcy Code to give Puerto Rico’s public agencies access to chapter 9 in exchange for which a five-member federal “Financial Stability Council” would have the authority to oversee and approve or disapprove of the island’s financial planning and annual budgets, in a bid to restore investor confidence and improve tax collection and budgeting practices.
The “Puerto Rico Assistance Act of 2015,” S. 2381, would provide up to $3 billion to Puerto Rico to help stabilize its budget and debt; establish the “Puerto Rico Financial Responsibility and Management Assistance Authority,” which could issue bonds; provide assistance in improving the commonwealth’s accounting and disclosure practices; and provide a five-year, 50 percent cut on the employee side of the payroll tax.
The “Puerto Rico Emergency Financial Stability Act of 2015,” H.R. 4290 and S. 2436, would impose a short-term moratorium on creditor lawsuits against the Commonwealth of Puerto Rico by establishing an “automatic stay” patterned on section 362 of the Bankruptcy Code that would prevent creditor collection efforts until March 31, 2016. Creditors could seek relief from the automatic stay for cause, including a lack of adequate protection, or to avoid irreparable damage.
The “Bailout Prevention Act of 2015,” H.R. 2625 and S. 1320, would amend the Federal Reserve Act and the Bank Holding Company Act to prohibit megabank bailouts during a financial crisis by limiting the Federal Reserve Board’s lending authority, and to close a loophole that creates risk-taking exemptions for certain megabanks. Among other things, the bills would limit the Federal Reserve Board’s emergency lending authority by requiring such lending programs to be truly broad-based, restricting lending to those institutions that are not insolvent, and requiring loans to be provided at a penalty rate.
The “Financial Institution Bankruptcy Act of 2015,” H.R. 2947, would amend the Bankruptcy Code to establish procedures to resolve (wind up or liquidate) systemically important financial institutions, including banks and bank holding companies with at least $50 billion in assets, in a new subchapter V of chapter 11.
The “Taxpayer Protection and Responsible Resolution Act of 2015,”S. 1841, would replace taxpayer-funded bailouts for large financial institutions by creating a new chapter 14 of the Bankruptcy Code for certain financial corporations and eliminating the “orderly liquidation authority” in Title II of the Dodd-Frank Wall Street Reform and Consumer Protection Act.
The “Consumer Reporting Fairness Act of 2015,” S. 1773, would force major banks and other creditors to notify credit reporting agencies when an individual’s debt has been discharged in bankruptcy, thereby eradicating “zombie” debts. The bill would also empower credit card borrowers who have inaccurate credit reports after a bankruptcy filing to sue banks and third-party debt purchasers for damages.
The “Christopher Bryski Student Loan Protection Act,” H.R. 3474 and S. 1958, would: (i) amend the Truth in Lending Act to require private education lenders to, among other things, describe clearly and conspicuously in writing the cosigner’s obligations regarding such a loan and ensure that the borrower and any cosigner receive comprehensive information on the loan’s terms and conditions; (ii) direct the Consumer Financial Protection Bureau to publish a model form describing the cosigner’s obligations regarding a private education loan; and (iii) amend the Higher Education Act of 1965 to require learning institutions to provide the borrower of a federal education loan with information at the loan’s inception concerning his or her obligations, as well as repayment, refinancing, deferment, forbearance, or forgiveness opportunities available in the event of the borrower’s or cosigner’s death, disability, or inability to engage in gainful activity.
The “Student Loan Debt Protection Act of 2015,” H.R. 3634, and the “Student Loan Borrower’s Bill of Rights Act of 2015,” H.R. 1352, would: (i) repeal section 523(a)(8) of the Bankruptcy Code, which restricts to cases of “undue hardship” the dischargeability of federally insured or guaranteed student loans as well as some private student loans, and amend the Higher Education Act of 1965 to reinstate a six-year statute of limitations for actions to collect such loans; (ii) prohibit offsets against Social Security benefits and tax refunds as well as wage garnishments to collect federal student loans; (iii) exclude from taxable income student loans discharged or forgiven; (iv) prohibit suspension of professional licenses due to student loan defaults; (iv) prohibit loss of access to an educational transcript due to a student loan default; and (v) make eligible for loan cancellation borrowers of student loans who have been employed in public-service jobs for five years.
The “Student Loan Bankruptcy Parity Act of 2015,” H.R. 3451, would repeal section 523(a)(8) of the Bankruptcy Code, which restricts to cases of “undue hardship” the dischargeability of federally insured or guaranteed student loans as well as some private student loans.
The “National Guard and Reservist Debt Relief Extension Act of 2015,” H.R. 4246, would amend the National Guard and Reservists Debt Relief Act of 2008 to exempt for an additional four-year period qualifying Armed Forces reserve components and National Guard members from the application of the means-test presumption of abuse under chapter 7 of the Bankruptcy Code.
The “Protecting Employees and Retirees in Business Bankruptcies Act of 2015,” S. 1156 and H.R. 97, would amend the Bankruptcy Code to improve protections for employees and retirees by, among other things: (i) increasing the amount of wage and benefit claims entitled to priority under section 507(a) and eliminating the requirement that wages or benefits be earned within 180 days of an employer’s bankruptcy filing; (ii) allowing employees to assert claims for losses in certain defined contribution plans due to employer fraud or breach of fiduciary duty; (iii) establishing a new priority administrative expense for severance pay; (iv) restricting the conditions under which collective bargaining agreements and commitments to fund retiree pensions and health benefits may be modified under sections 1113 and 1114; (v) requiring full disclosure and court approval of executive compensation packages; and (vi) restricting the payment of bonuses and other forms of incentive compensation to senior officers.
The “PACT (Protecting All College Tuition) Act of 2015,” H.R. 2267, would amend section 548 of the Bankruptcy Code to preclude avoidance as a fraudulent transfer of good-faith payments made by parents of post-secondary education tuition for their children.
The “Fairness for Struggling Students Act of 2015,” S. 729, and the “Private Student Loan Bankruptcy Fairness Act of 2015,” H.R. 1674, would amend section 528(a)(8) of the Bankruptcy Code to make private student loans dischargeable.
The “Protecting Gun Owners in Bankruptcy Act of 2015,” H.R. 1488, would amend section 522 of the Bankruptcy Code to designate as exempt property a firearm or firearms with an aggregate value of up to $3,000.
The “Furthering Asbestos Claim Transparency (FACT) Act of 2015,”H.R. 526 and S. 357, would amend the Bankruptcy Code to require public disclosure by trusts established under section 524(g) of quarterly reports that contain detailed information regarding the receipt and disposition of claims for injuries based on exposure to asbestos.
United Nations Sovereign Debt Restructuring Resolution
On September 10, 2015, the United Nations General Assembly, in an initiative prompted by Argentina’s sovereign debt crisis, approved “basic principles” for sovereign debt restructuring processes to improve the global financial system. One hundred thirty-six countries voted in favor of the nonbinding resolution, six (including the U.S.) voted against it, and 41 abstained. The vote came little more than a year after the General Assembly agreed to negotiate and adopt a multilateral legal framework for sovereign debt restructurings. The resolution urges debtors and creditors to, among other things, “act in good faith and with a cooperative spirit to reach a consensual rearrangement” of sovereign debt. It also states that “[a] sovereign state has the right . . . to design its macroeconomic policy, including restructuring its sovereign debt, which should not be frustrated or impeded by any abusive measures.”
Italian Insolvency Law Reforms
On August 5, 2015, the Italian Parliament approved Italian Law Decree No. 83 of June 27, 2015 (the “Decree”) as part of the reform process for pre-insolvency proceedings under Italian bankruptcy law (Royal Decree No. 267 of March 16, 1942). The Decree includes measures designed to, among other things: (i) give distressed Italian entities greater access to rescue financing; (ii) promote the active participation of creditors in pre-insolvency proceedings (e.g., by giving creditors the ability to propose alternative restructuring plans under certain circumstances); (iii) empower Italian courts to approve asset sales as part of a restructuring plan by means of competitive bidding; and (iv) implement certain special rules applicable to debt restructuring agreements entered into by distressed entities with obligations principally to banks and/or financial intermediaries. A more detailed discussion of the Decree can be accessed here.
French Insolvency Law Reforms
On August 6, 2015, France adopted legislation designed to promote economic growth, activity, and equal opportunity. The new legislation completes reforms to French insolvency law first undertaken in 2014, including the creation of specialized insolvency courts for large cases and the implementation of rules that permit “cramdown” of shareholder interests in reorganization proceedings. A more detailed discussion of the reforms can be found here.
Amendments to Spain’s Insolvency Act and Public Sector Contracts Act
On October 1, 2015, the Spanish Parliament passed the Public Sector Legal Regime Act, which amended the Spanish Insolvency Act (2003) and the Spanish Public Sector Contracts Act (2011). Among other things, the new law clarifies the ranking in insolvency proceedings of debts secured by pledges granted over future credit rights and requires advance approval of pledges over credit rights arising from the liability of the National Institute of Public Administration due to the termination of public concessions. A more detailed discussion of the reforms is available here.
Australian Insolvency Law Amendments
In December 2015, the Australian government announced a number of important changes to its insolvency (bankruptcy) legislation. Among the amendments are: (i) a safe harbor protecting company directors from personal liability if they appoint a restructuring advisor to assist in attempting to rescue the company; (ii) a provision making unenforceable any “ipso facto” clauses that cause a contract to terminate (or allow the contract to be terminated) upon the insolvency of a contract party; and (iii) a reduction from three years to 12 months of the period after which an individual debtor may receive a discharge of debts. A more detailed discussion of the reforms can be accessed here.
Revised Russian Bankruptcy Regulations
On March 24, 2015, the Russian government enacted new bankruptcy procedures, including amendments to rules governing insolvency cases that involve tax debts. Decree No. 265 implements reforms authorized by Order No. 1358-r of July 24, 2014. Among other things, the decree permits greater interaction between the Russian Federal Tax Service (the “FTS”) and other federal and municipal agencies in insolvency cases where the FTS acts as the government’s representative with respect to claims for taxes, fees, and customs duties. Decree No. 265 also allows for a greater exchange of information (electronic and otherwise) between the FTS and other federal and municipal agencies.
New Polish Restructuring Law
On April 9, 2015, Poland’s National Assembly adopted a new Restructuring Law, with the goal of introducing an effective mechanism to restructure a debtor-company’s business and prevent liquidation. The Restructuring Law, which became effective on June 1, 2015 (with certain exceptions), makes the existing Bankruptcy and Reorganization Law applicable to liquidation proceedings only and establishes new rules and procedures governing restructuring proceedings patterned on chapter 11 of the U.S. Bankruptcy Code, the English scheme of arrangement, and the Frenchsauvegarde proceeding.
Proposed Indian Bankruptcy Law Reforms
On November 3, 2015, the Indian government published long-awaited proposals to overhaul India’s outdated and overburdensome bankruptcy process, calling for public comment on what could become the country’s first unified bankruptcy legislation. The proposed bill aims to expedite decisions on whether to rehabilitate or liquidate ailing companies, in a move to curb asset stripping and ensure higher recovery rates for creditors, both of which are key to fostering a modern credit market and increased investment in India. If adopted, the reforms would include provisions: (i) entrusting the resolution process to insolvency professionals; (ii) establishing creditors’ committees to participate in bankruptcy cases; and (iii) ending government involvement that has created decades of judicial gridlock.
Notable Business Bankruptcy Rulings of 2015
Allowance of Claims—Make-Whole Premiums
Whether a provision in a bond indenture or loan agreement obligating a borrower to pay a “make-whole” premium is enforceable in bankruptcy has been the subject of heated debate in recent years. A Delaware bankruptcy court weighed in on this issue in a pair of rulings in 2015—Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 178 (Bankr. D. Del. 2015), andComputershare Tr. Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 539 B.R. 723 (Bankr. D. Del. 2015).
Aligning itself with a number of New York bankruptcy courts, the court granted partial summary judgment to the debtor-borrower in both cases, which involved claims for make-whole premiums asserted by first- and second-lien noteholders. The court ruled that, although the debtor repaid the bonds prior to maturity, make-whole premiums were not payable under the plain terms of the bond indentures because automatic acceleration of the debt triggered by the debtor’s chapter 11 filing was not a “voluntary” repayment.
In the Del Trust Co. case cited above, however, the court reserved judgment on the indenture trustee’s request for relief from the automatic stay to revive the make-whole premium claim by decelerating the bonds, as permitted under the terms of the indenture. The bankruptcy court subsequently denied that request in Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 533 B.R. 106 (Bankr. D. Del. 2015). The court concluded that stay relief was unwarranted because the debtor’s estate and its stakeholders would be greatly prejudiced by lifting the stay, and the harm to the noteholders did not substantially outweigh the harm to the debtor’s estate.
In U.S. Bank National Association v. Wilmington Savings Fund Society, FSB (In re MPM Silicones, LLC), 531 B.R. 321 (S.D.N.Y. 2015), the district court affirmed a bankruptcy court order confirming a chapter 11 plan that did not provide for the payment of a make-whole premium to senior noteholders according to the same rationale stated in the Energy Futurecases. The district court wrote that “[n]either the 2012 Indentures nor the Senior Lien Notes themselves clearly and unambiguously provide that the Senior Lien Noteholders are entitled to a make-whole payment in the event of an acceleration of debt caused by the voluntary commencement of a bankruptcy case.”
Allowance of Claims—Unsecured Creditors’ Right to Postpetition Attorney’s Fees
Courts have long been divided over the issue of whether postpetition attorney’s fees and costs of an unsecured creditor can be included as part of its allowed claim in a bankruptcy case. A bankruptcy court weighed in on this issue in In re Tribune Media Co., 2015 BL 381838 (Bankr. D. Del. Nov. 19, 2015). In upholding a mediator’s recommendation, the court concluded that “the plain language of § 502(b) and § 506(b), when read together, indicate[s] that postpetition interest, attorney’s fees and costs are recoverable only by oversecured creditors.” A more detailed discussion of the ruling can be found elsewhere in this issue.
Since the development of the doctrine of equitable mootness nearly a quarter century ago, courts have struggled to apply it in a way that strikes an appropriate balance between the need to ensure the finality and certainty of a chapter 11 plan for stakeholders, on the one hand, and the need to exercise the court’s jurisdiction and honor the right to appellate review, on the other. In JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Props. Inc. (In re Transwest Resort Props., Inc.), 801 F.3d 1161 (9th Cir. 2015), the Ninth Circuit curbed the application of the equitable mootness doctrine where the appellant diligently sought to stay consummation of a confirmed chapter 11 plan and where the plan was not so complex that uninvolved third parties (as distinguished from sophisticated investors for whom appellate consequences are a foreseeable result) would be harmed. The court also rejected the Second Circuit’s strict approach of imposing a presumption of mootness upon substantial consummation of a plan.
The ruling reflects growing concern among courts (especially in the Third Circuit) regarding overbroad application of the equitable mootness doctrine, with recent calls to limit the doctrine and, in some cases, eliminate it altogether, particularly where the parties affected by the appeal are well aware of the potential for reversal.
Avoidance Actions—Exceptions to Preference Avoidance
Section 547(c)(2) of the Bankruptcy Code excepts from the trustee’s power to avoid preferential transfers any transaction in which the debtor conveys property to a creditor in the “ordinary course of business.” Exactly what constitutes “ordinary course of business,” however, is not a settled question of law. In Jubber v. SMC Electrical Products (In re C.W. Mining Co.), 798 F.3d 983 (10th Cir. 2015), the Tenth Circuit held that a first-instance transaction between a debtor and a creditor can satisfy the ordinary course exception if: (i) the debt was ordinary in accordance with the past practices of the debtor and the creditor when dealing with other, similarly situated parties; and (ii) the payment was made in the ordinary course of business of the debtor and the transferee. The court accordingly affirmed rulings below that a two-day-early installment payment on a first-instance equipment purchase could not be avoided by a bankruptcy trustee as a preference. A more detailed discussion of C.W. Mining can be found elsewhere in this edition.
Avoidance Actions—Insider Preference Liability Settling what it characterized as an “unresolved issue” of bankruptcy law, the Ninth Circuit held in Stahl v. Simon (In re Adamson Apparel, Inc.), 785 F.3d 1285 (9th Cir. 2015), that a corporate insider who personally guaranteed a loan to the company was shielded from preference liability arising from repayment of a portion of the loan shortly before the company filed for bankruptcy because the insider guarantor, having waived the right to indemnification by the company in the event the guarantee was triggered, was not a “creditor,” as required by section 547 of the Bankruptcy Code. A dissenting judge wrote, “I would follow every bankruptcy court to have decided the issue [since Congress amended section 547 in 1994 to eliminate the inequity of imposing preference liability on the lender rather than an insider guarantor] and hold that insider-guarantors . . . are ‘creditors.’ ”
In Del. Trust Co. v. Energy Future Intermediate Holding Co. LLC (In re Energy Future Holdings Corp.), 527 B.R. 157 (D. Del. 2015), the district court affirmed a bankruptcy court order approving a settlement between the debtors and certain secured noteholders. The vehicle for the settlement was a postpetition tender offer of old notes for new notes to be issued under a debtor-in-possession financing facility. The district court ruled that a tender offer may be used to implement a classwide debt exchange in bankruptcy outside a plan of reorganization. It also held that the Bankruptcy Code’s confirmation requirements do not apply to a pre-confirmation settlement and that the settlement at issue did not constitute a sub rosa chapter 11 plan. In so ruling, the Energy Future court rejected the reasoning of other courts that have applied certain chapter 11 plan confirmation requirements—such as the absolute priority rule—to pre-confirmation settlements.
Chapter 9 Eligibility—Puerto Rico
Puerto Rico is an unincorporated territory of the U.S. This means, among other things, that its public instrumentalities are barred from seeking protection under the Bankruptcy Code to deal with the commonwealth’s $72 billion in debt. In an effort to remedy this problem in part, Puerto Rico enacted legislation in 2014 that created a judicial debt relief process—the Puerto Rico Public Corporations Debt Enforcement and Recovery Act (the “Recovery Act”)—for certain public corporations, modeled on chapters 9 and 11 of the U.S. Bankruptcy Code.
A federal district court struck down the Recovery Act as being unconstitutional in BlueMountain Capital Management, LLC v. García-Padilla, No. 14-01569 (D.P.R. Feb. 6, 2015). According to the court, “Because the Recovery Act is preempted by the federal Bankruptcy Code, it is void pursuant to the Supremacy Clause of the United States Constitution.” Shortly afterward, Puerto Rico’s representative in the U.S. Congress reintroduced a bill—the Puerto Rico Chapter 9 Uniformity Act of 2015 (H.R. 870)—to allow Puerto Rico’s public agencies to be debtors under chapter 9. Companion legislation was introduced in the U.S. Senate on July 15, 2015.
The First Circuit affirmed the decision declaring the Recovery Act unconstitutional in Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 805 F.3d 322 (1st Cir. 2015). In its opinion, the First Circuit wrote, “In denying Puerto Rico the power to choose federal Chapter 9 relief, Congress has retained for itself the authority to decide which solution best navigates the gauntlet in Puerto Rico’s case.”
The U.S. Supreme Court granted Puerto Rico’s petition for review of the First Circuit’s ruling on December 4, 2015. See Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, No. 15-233, 2015 BL 398499 (Dec. 4, 2015).
Chapter 11 Plans—Cure of Defaults
In 1994, Congress amended the Bankruptcy Code to add section 1123(d), which provides that, if a chapter 11 plan proposes to “cure” a default under a contract, the cure amount must be determined in accordance with the underlying agreement and applicable nonbankruptcy law. Since then, a majority of courts have held that such a cure amount must include any default-rate interest required under either the contract or applicable nonbankruptcy law.
In JPMCC 2006-LDP7 Miami Beach Lodging, LLC v. Sagamore Partners, Ltd. (In re Sagamore Partners, Ltd.), 2015 BL 280922 (11th Cir. Aug. 31, 2015), the Eleventh Circuit joined the majority camp in concluding that section 1123(d) requires the payment of default-rate interest as a condition to curing a default under a loan agreement which is to be reinstated under a plan, provided that the obligation to pay default-rate interest is contained in the underlying loan agreement or authorized under applicable nonbankruptcy law. Like other courts endorsing the majority view, the Eleventh Circuit conclusively rejected the contrary approach adopted by the Ninth Circuit in Great Western Bank & Trust v. Entz-White Lumber and Supply, Inc. (Entz-White Lumber and Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988).
Chapter 11 Plans—Extinguishment of Liens
A hornbook principle of U.S. bankruptcy jurisprudence is that valid liens pass through bankruptcy unaffected. This long-standing principle, however, is at odds with section 1141(c) of the Bankruptcy Code, which provides that, under certain circumstances, “the property dealt with by [a chapter 11] plan is free and clear of all claims and interests of creditors,” except as otherwise provided in the plan or the order confirming the plan. Several courts have attempted to reconcile the pass-through principle with the statute by requiring the creditor to “participate in the reorganization” as a prerequisite to the application of section 1141(c).
This judicial gloss clouds the question of whether the terms of a chapter 11 plan providing for the treatment of secured creditor claims are binding on nonparticipating secured creditors. The Second Circuit weighed in on this issue as a matter of first impression in City of Concord, N.H. v. Northern New England Telephone Operations LLC (In re Northern New England Telephone Operations LLC), 795 F.3d 343 (2d Cir. 2015). The court ruled that a lien is extinguished by a chapter 11 plan if: (i) the text of the plan does not preserve the lien; (ii) the plan is confirmed; (iii) the property encumbered by the lien is “dealt with” by the plan; and (iv) the secured creditor participated in the bankruptcy case.
Chapter 11 Plans—Third-Party Releases
In SE Prop. Holdings, LLC v. Seaside Eng’g & Surveying, Inc.(In re Seaside Eng’g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015), the Eleventh Circuit reaffirmed its position sanctioning, under appropriate circumstances, nonconsensual third-party release provisions in chapter 11 plans as a permissible exercise of discretion under section 105(a) of the Bankruptcy Code. The court affirmed lower court decisions approving a debtor’s chapter 11 plan that released the debtor’s former principals over the objection of a noninsider equity holder. Among other things, the Eleventh Circuit, noting that the bankruptcy court had described the chapter 11 case as a “death struggle,” stated that “the non-debtor releases are a valid tool to halt that fight.” In so ruling, the Eleventh Circuit maintained its alignment with the majority position on the third-party release issue, along with the Second, Third, Fourth, Sixth, and Seventh Circuits.
In Caesars Entm’t Operating Co. v. BOKF N.A. (In re Caesars Entm’t Operating Co.), 2015 BL 422741 (7th Cir. Dec. 23, 2015), lenders sued the debtor’s parent company for $12 billion, alleging that, prior to the debtor’s chapter 11 filing, the parent improperly disavowed guarantees and caused the debtor to transfer assets fraudulently to the parent. After filing for bankruptcy, the debtor separately alleged that its nondebtor parent caused the debtor to engage in fraudulent transfers.
The debtor asserted that continuation of the lender’s litigation against the nondebtor parent would severely disrupt the debtor’s chances for a successful chapter 11 case because the parent was expected to contribute substantial sums to fund the reorganization. The debtor asked the bankruptcy court to exercise its broad equitable powers under section 105(a) of the Bankruptcy Code to enjoin the litigation. The bankruptcy court held that litigation against a nondebtor may be enjoined under section 105(a) only if it arises out of the “same acts” of the nondebtor which gave rise to the disputes in the bankruptcy case. The “same acts” requirement was not satisfied here, the court explained, because the dispute in the debtor’s bankruptcy case arose out of the parent’s alleged fraudulent transfers, whereas the lender’s claims arose out of the parent’s repudiation of the loan guarantees. The district court affirmed.
The Seventh Circuit vacated the rulings, finding that the lower courts had interpreted the powers granted by section 105(a) too narrowly. Rather than applying the “same acts” test, the Seventh Circuit explained, the bankruptcy court should have questioned whether the injunction was likely to enhance the prospects for a successful resolution of the disputes in the bankruptcy case. According to the Seventh Circuit, if the injunction would contribute to the odds of a successful reorganization, and if denial of the injunction would endanger the success of the case, the injunction would, according to the language of section 105(a), be appropriate to carry out the provisions of the Bankruptcy Code.
Chapter 11 Plans—Unsecured Creditors’ Entitlement to Postpetition Interest
In In re Energy Future Holdings Corp., 540 B.R. 109 (Bankr. D. Del. 2015), the court ruled that a cramdown chapter 11 plan for a solvent debtor need not provide for payment of postpetition interest to the holders of unsecured notes to be “fair and equitable” within the meaning of section 1129(b) of the Bankruptcy Code, even where the plan provides for a distribution to holders of equity interests. Rather, the court has the discretion to exercise its equitable powers to require the payment of postpetition interest, which may be at the contract rate or such other rate as the court deems appropriate.
The court further held that the chapter 11 plan need not provide for the payment of postpetition interest at the contract rate to the unsecured noteholders to render their claims not “impaired” within the meaning of section 1124 of the Bankruptcy Code. However, the court noted, in order for the unsecured noteholder class to be unimpaired, the plan must provide that the court may award postpetition interest at an appropriate rate if it determines to do so under its equitable power. A more detailed discussion of Energy Future can be found elsewhere in this issue.
Cross-Border Restructurings—Abstention From Chapter 11 Cases
The representative of a corporate debtor in a foreign bankruptcy proceeding that has assets located in the U.S. may file a petition in a U.S. bankruptcy court seeking recognition of the foreign proceeding under chapter 15 of the Bankruptcy Code. Alternatively, the foreign representative can file a “plenary” case in the U.S. on the debtor’s behalf under chapter 7 or chapter 11, provided that the debtor meets the eligibility requirements for the chapter chosen (7 or 11). However, as illustrated by In re Northshore Mainland Services Inc., 537 B.R. 192 (Bankr. D. Del. Sept. 15, 2015), even if a foreign debtor is eligible to file for chapter 11 protection in the U.S., a U.S. bankruptcy court may exercise its discretion to abstain from the case under section 305 of the Bankruptcy Code.
In Northshore, the debtor, which owns the Baha Mar resort in the Bahamas, filed for chapter 11 protection in the U.S. shortly after opening U.S. bank accounts to establish eligibility for a U.S. bankruptcy filing. It simultaneously sought recognition of the U.S. bankruptcy case from a Bahamian court, which refused to grant it; instead, the court appointed liquidators entrusted with devising a plan that could reverse the debtor’s insolvency. Given the company’s strong contacts with the Bahamas, rather than with the U.S., and the U.S. bankruptcy court’s conviction that allowing the chapter 11 case to proceed would not bring stakeholders to the table and would invite further litigation in multiple forums, the bankruptcy court abstained from exercising jurisdiction over the U.S. chapter 11 case. The ruling suggests that, at least in some circumstances, foreign debtors’ access to U.S. bankruptcy courts may be limited to chapter 15, where the scope of relief is more limited.
Cross-Border Restructurings—Avoidance Actions Under Foreign Law
In Hosking v. TPG Capital Management LP (In re Hellas Telecomms. (Luxembourg) II SCA), 524 B.R. 488 (Bankr. S.D.N.Y. 2015), the bankruptcy court presiding over the chapter 15 case of a London-based company dismissed claims asserted by the company’s U.K. liquidators against private equity companies to avoid nearly $1 billion in payments made in connection with a 2006 “debt refinancing.” The cross-border transactions involved entities in Luxembourg, the U.K., and the U.S. (principally New York), as well as agreements and securities governed by the different laws of those jurisdictions.
The court ruled that the liquidators’ cause of action under New York law alleging constructive fraudulent transfers must be dismissed under choice of law principles because: (i) an actual conflict exists between New York law and the laws of the U.K. and Luxembourg, which do not provide for the avoidance of constructively (as distinguished from actually) fraudulent transfers; and (ii) the U.K. and Luxembourg have a more significant interest in applying their laws to the dispute. The court also concluded that it need not decide whether New York fraudulent transfer law may be given extraterritorial effect or whether the liquidators could assert the avoidance claims in light of section 1521(a)(7) of the Bankruptcy Code, which expressly precludes a U.S. bankruptcy court from granting relief in a chapter 15 case that would allow a foreign representative to seek avoidance of transfers under section 544(b) of the Bankruptcy Code (which generally authorizes the prosecution of avoidance actions under nonbankruptcy statutes such as the N.Y. Debtor and Creditor Law).
In Hosking v. TPG Capital Mgmt., L.P. (In re Hellas Telecomms. (Luxembourg) II SCA), 535 B.R. 543 (Bankr. S.D.N.Y. 2015), the bankruptcy court granted the liquidators’ motion to amend their complaint to add causes of action against the defendants under U.K. law for avoidance of actual fraudulent transfers. Among other things, the bankruptcy court ruled that, even though U.K. law governed the actual fraudulent transfer claims, a U.S. bankruptcy court has jurisdiction to resolve them applying U.K. law.
Cross-Border Restructurings—Chapter 15 Eligibility
The bankruptcy court in In re Berau Capital Resources Pte Ltd, 2015 BL 353631 (Bankr. S.D.N.Y. Oct. 28, 2015), considered what qualifies as U.S. property for the purposes of chapter 15 eligibility and venue. The court ruled that a debtor subject to a Singapore debt moratorium was eligible to file a chapter 15 case in the Southern District of New York, even though the debtor did not have a place of business in the U.S., because, among other things, the debtor had deposited a retainer with its New York City attorneys and the debtor had $450 million in U.S. dollar-denominated debt issued under an indenture governed by New York law with a New York choice of forum clause. A more detailed discussion of the ruling can be found elsewhere in this edition.
Out-of-Court Restructurings—The Trust Indenture Act
In a pair of 2015 decisions—BOKF, N.A. v. Caesars Entm’t Corp., 2015 BL 277004 (S.D.N.Y. Aug. 27, 2015), and MeehanCombs Global Credit Opportunities Funds, LP v. Caesars Entm’t Corp., 80 F. Supp. 3d 507, 2015 BL 9980 (S.D.N.Y. Jan. 15, 2015)—the district court broadly interpreted section 316(b) of the Trust Indenture Act (the “TIA”) to restrict the ability of parties to strip guarantees from dissenting bondholders in out-of-court restructurings without the bondholders’ unanimous consent.
In these rulings, the court held that section 316(b) protects bondholders “against non-consensual debt restructurings” which, as a practical matter, materially impair bondholders’ ability to collect their debt and rejected the narrower interpretation that section 316(b) protects bondholders only from “majority amendment of certain ‘core terms.’ ” Moreover, the rulings are significant because they establish that the TIA protects a bondholder’s substantive right to receive actual payment and not merely the bondholder’s procedural right to sue under the indenture. They thus continue a recent trend that emerged with the late 2014 ruling in Marblegate Asset Mgmt. v. Educ. Mgmt. Corp., 2014 BL 366259 (S.D.N.Y. Dec. 30, 2014).
As a consequence of these decisions, minority bondholders may have increased leverage when negotiating with issuers and other creditors, including the ability to delay or disrupt the consummation of some types of out-of-court restructurings. In addition, issuers seeking to implement a restructuring may be more willing to resort to chapter 11, where unanimity is not required. A draft of the conference report prepared by the lead House and Senate committees working to reach a resolution on the federal transportation bill that was enacted on December 4, 2015 (the “Fixing America’s Surface Transportation Act,” or the “FAST Act”) included language which would have amended section 316(b) of the TIA to provide that bondholders’ rights would not be impaired under the circumstances present in Marblegate andCaesars. The provision was not included in the final text of the FAST Act, nor, due to an outpouring of opposition from legal scholars and other parties, was the proposed TIA modification attached to the fiscal year 2016 Omnibus Appropriations bill to continue funding the government, which was passed on December 18.
Priority of Claims—Mandatory Subordination
In Pensco Trust Co. v. Tristar Esperanza Props., LLC (In re Tristar Esperanza Props., LLC), 782 F.3d 492 (9th Cir. 2015), the Ninth Circuit held that a claim asserted by a former member of a limited liability company based on a several-year-old judgment affirming an arbitration award establishing the value of her membership interest upon withdrawal should be subordinated under section 510(b) of the Bankruptcy Code. Under section 510(b),
a claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor . . . [or] for damages arising from the purchase or sale of such a security, or for reimbursement or contribution . . . on account of such a claim, shall be subordinated to all claims or interests that are senior to or equal the claim or interest represented by such security.
The holding arguably departs from precedent set by courts in both the Second and Third Circuits, which have previously severed the causal link between a debt claim and an equity interest where the connection was attenuated.
In ANZ Sec., Inc v. Giddens (In re Lehman Brothers, Inc.), 2015 BL 408529 (2d Cir. Dec. 14, 2015), the debtor, Lehman Brothers Inc. (“LBI”), was the lead underwriter for unsecured notes issued by its affiliate and parent, Lehman Brothers Holdings Inc. (“Lehman Holdings”). After Lehman Holdings filed for bankruptcy and a case under the Securities Investor Protection Act was commenced for LBI, junior underwriters that incurred defense and settlement costs in connection with noteholder losses filed claims for contribution or reimbursement against LBI.
The Second Circuit affirmed lower court rulings subordinating the contribution and reimbursement claims under section 510(b). In discussing the extent to which a claim for contribution or reimbursement should be subordinated under section 510(b), the court wrote:
We hold that in the affiliate securities context, [section 510(b)’s reference to] “the claim or interest represented by such security” means a claim or interest of the same type as the affiliate security. Claims arising from securities of a debtor’s affiliate should be subordinated in the debtor’s bankruptcy proceeding to all claims or interests senior or equal to claims in the bankruptcy proceeding that are of the same type as the underlying securities (generally, secured debt, unsecured debt, common stock, etc.; and in some circumstances potentially a narrower sub-category).
Professionals retained in a bankruptcy case by a trustee, a chapter 11 debtor-in-possession, or an official committee may be awarded “reasonable compensation” under section 330 of the Bankruptcy Code for “actual, necessary services” performed on behalf of their clients. In assessing whether particular services should be compensable, most courts, including the Second, Third, and Ninth Circuits, examine whether “the services were objectively beneficial toward the completion of the case at the time they were performed”—an approach sometimes referred to as the “reasonableness” test.
The Fifth Circuit, however, established a different standard for professional compensation in Andrews & Kurth LLP v. Family Snacks, Inc. (In re Pro-Snax Distribs., Inc.), 157 F.3d 414 (5th Cir. 1998). In Pro-Snax, the Fifth Circuit ruled that, to be compensable, services must result in “an identifiable, tangible, and material benefit to the bankruptcy estate.” The “material benefit” test, which focuses on outcomes rather than reasonable expectations, endured for 17 years.
The Fifth Circuit finally abandoned the material benefit test in Barron & Newburger, P.C. v. Tex. Skyline, Ltd. (In re Woerner), 783 F.3d 266 (5th Cir. 2015). In Woerner, the court, after agreeing to a rehearing en banc of a previous panel ruling upholding Pro-Snax, reasoned that both the text of section 330 and its legislative history require a court to consider the reasonableness of services provided at the time the services were performed, rather than to evaluate the material benefit of the services with the assistance of hindsight.
Section 363 Sales—Distribution of Proceeds
In In re LCI Holding Company, Inc., 802 F.3d 547 (3d Cir. 2015), a secured lender purchased the debtor’s assets by means of a credit bid in an auction sale under section 363(b) of the Bankruptcy Code. The lender separately funded trusts for the payment of administrative fees, wind-down costs, and unsecured claims. The court ruled that those funds need not be distributed in accordance with the Bankruptcy Code’s priority rules because they were not property of the debtor’s estate.
With LCI Holding and its ruling in Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), reh’g denied, No. 14-1465 (3d Cir. Aug. 18, 2015) (discussed elsewhere in this article), the Third Circuit has provided debtors flexibility to utilize section 363 sales or settlements outside the plan content to expedite the resolution of chapter 11 cases.
A “structured dismissal” of a chapter 11 case following a sale of substantially all of the debtor’s assets has become increasingly common as a way to minimize costs and maximize creditor recoveries. However, only a handful of rulings have been issued on the subject, perhaps because bankruptcy and appellate courts are unclear as to whether the Bankruptcy Code authorizes the remedy.
The Third Circuit weighed in on this issue in Official Committee of Unsecured Creditors v. CIT Group/Business Credit Inc. (In re Jevic Holding Corp.), 787 F.3d 173 (3d Cir. 2015), reh’g denied, No. 14-1465 (3d Cir. Aug. 18, 2015). The court ruled that “absent a showing that a structured dismissal has been contrived to evade the procedural protections and safeguards of the plan confirmation or conversion processes, a bankruptcy court has discretion to order such a disposition.” The court also held that “bankruptcy courts may approve settlements that deviate from the priority scheme of [the Bankruptcy Code],” but only if the court has “specific and credible grounds” to justify the deviation.
The Third Circuit affirmed lower court rulings approving, as part of a structured dismissal of a chapter 11 case, a settlement providing for payments to unsecured creditors but providing no recovery to priority wage claimants. The Third Circuit agreed with the bankruptcy court’s findings that: (a) absent approval of the settlement, there was “no realistic prospect” of a meaningful distribution to anyone other than secured creditors; (b) there was “no prospect” of a confirmable chapter 11 plan (of either reorganization or liquidation); and (c) conversion to a chapter 7 liquidation would have been unavailing because a chapter 7 trustee would not have sufficient funds “to operate, investigate or litigate.”
From the Top
The U.S. Supreme Court issued six rulings in 2015 involving issues of bankruptcy law.
In Bullard v. Blue Hills Bank, 135 S. Ct. 1686 (2015), the Court unanimously affirmed a First Circuit ruling that an order of a bankruptcy appellate panel affirming a bankruptcy court’s denial of confirmation of a chapter 13 plan is not a final order and therefore is not appealable under 28 U.S.C. § 158(d), so long as the debtor remains free to propose an amended plan. In so ruling, the Supreme Court resolved a circuit split in favor of the majority position adopted by the Second, Sixth, Eighth, Ninth, and Tenth Circuits.
In Harris v. Viegelahn, 135 S. Ct. 1829 (2015), the Court considered whether undistributed funds held by a chapter 13 trustee after the debtor’s case is converted from a chapter 7 liquidation must be distributed to creditors or revert to the debtor, a question that has divided courts for 30 years and created a circuit split between the Third and Fifth Circuits. The court unanimously ruled that, on the basis of the Bankruptcy Code’s statutory framework, including section 348(f), postpetition wages must be returned to the debtor in the absence of bad faith.
In Wellness Int’l Network, Ltd. v. Sharif, 135 S. Ct. 1932 (2015), a divided Supreme Court resolved the circuit split regarding whether a bankruptcy court may, with the consent of the litigants, adjudicate a claim that, though statutorily denominated as “core,” is not otherwise constitutionally determinable by a bankruptcy judge. The 5-4 majority held that so long as consent—whether express or implied—is “knowing and voluntary,” Article III of the U.S. Constitution is not violated by a bankruptcy court’s adjudication of such a claim. The ruling builds upon the Supreme Court’s recent decisions in Stern v. Marshall, 131 S. Ct. 2594 (2011), andExecutive Benefits Insurance Agency v. Arkison, 134 S. Ct. 2165 (2014).Wellness nonetheless leaves many significant jurisdictional and constitutional questions unanswered, including: (i) what constitutes “knowing and voluntary” consent or when such consent (express or implied) must be given in order to cure any constitutional deficiency; and (ii) which claims, as a constitutional matter, can be finally determined by a bankruptcy judge.
In a pair of related bankruptcy cases—Bank of Am., N.A. v. Caulkett, 135 S. Ct. 1995 (2015), and Bank of Am., N.A. v. Toledo-Cardona, 135 S. Ct. 1995 (2015), the Supreme Court ruled that, under section 506(d) of the Bankruptcy Code, a chapter 7 debtor may not “strip off” a junior mortgage lien in its entirety when the outstanding debt owed to a senior lienholder exceeds the current value of the collateral. In reversing Eleventh Circuit rulings, the court unanimously held that its previous ruling in Dewsnup v. Timm, 502 U.S. 410 (1992)—that a chapter 7 debtor could not “strip down” a partially secured lien under section 506(d)—cannot be read to permit lien stripping of a wholly unsecured junior lien in a chapter 7 case. The Supreme Court later vacated the judgments in 13 Eleventh Circuit bankruptcy cases addressing the same issue as Caulkett and Toledo-Cardona and remanded each case to the Eleventh Circuit for further consideration in light of the rulings.
In Baker Botts LLP et al. v. ASARCO LLC, 135 S. Ct. 2158 (2015), the Court, in a 6-3 decision, affirmed a Fifth Circuit ruling that the Bankruptcy Code does not authorize compensation for the costs bankruptcy professionals bear to defend their fee applications. Writing for the majority, Justice Clarence Thomas explained that, in accordance with the “American Rule,” each litigant pays its own attorney’s fees, win or lose, unless a statute or contract provides otherwise. According to Justice Thomas, the text of section 330(a)(1) of the Bankruptcy Code cannot displace the American Rule because the language of the statute “neither specifically nor explicitly authorizes courts to shift the costs of adversarial litigation from one side to the other—in this case, from the attorneys seeking fees to the administrator of the estate.”
On November 6, 2015, the Supreme Court granted certiorari in Husky Int’l Elecs., Inc. v. Ritz (In re Ritz), No. 15-00145, 2015 BL 366786 (Nov. 6, 2015), to review a Fifth Circuit decision that barring the discharge of a debt for “actual fraud” under section 523(a)(2)(A) of the Bankruptcy Code requires a false representation by the debtor. See Husky Int’l Elecs., Inc. v. Ritz (In re Ritz), 787 F.3d 312 (5th Cir. 2015). The Fifth Circuit’s ruling is at odds with a Seventh Circuit case from 2000—McClellan v. Cantrell, 217 F.3d 890 (7th Cir. 2000)—where the court held that fraudulent conduct can be enough to constitute “actual fraud” even if no false representation is made. Shortly after the Fifth Circuit’s decision, the First Circuit also weighed in on this issue and adopted the Seventh Circuit’s approach. See Sauer Inc. v. Lawson (In re Lawson), 791 F.3d 214 (1st Cir. 2015).
On December 4, 2015, the Supreme Court granted certiorari inCommonwealth of Puerto Rico v. Franklin California Tax-Free Trust, Nos. 15-233 and 15-255, 2015 BL 398499 (Dec. 4, 2015), to review the First Circuit’s affirmance of a district court ruling that Puerto Rico’s Recovery Act establishing a mechanism patterned on chapter 9 and chapter 11 to restructure the obligations of Puerto Rico’s public corporations is unconstitutional. See Franklin California Tax-Free Trust v. Commonwealth of Puerto Rico, 2015 BL 215414 (1st Cir. July 6, 2015).