After nearly three years of study and 16 public field hearings, a commission established by the American Bankruptcy Institute (the “ABI Commission”) to study the reform of chapter 11 of the Bankruptcy Code issued its Final Report and Recommendations on December 8, 2014 (the “Report”). The ABI Commission comprises nearly 130 corporate restructuring authorities serving on 13 advisory committees. The approximately 400-page Report, which the ABI Commission hopes to present to Congress in 2015, contains more than 260 recommendations for amendments to the now 36-yearold Bankruptcy Code, necessitated by fundamental changes that have undermined the effectiveness of the current statutory framework (e.g., expansion of the use of secured credit, the growth of distressed-debt markets, and other externalities).
Some of the more significant recommendations are as follows:
- In connection with debtor-in-possession (“DIP”) financing, “roll-ups,” liens on estate avoidance actions, and “benchmarks” or “milestone” deadlines during the initial 60 days of the case should be prohibited, and any prepetition contractual prohibition on subordinated junior secured creditors providing DIP financing should be invalid.
- A DIP or trustee should not be permitted to conduct an auction of, or to receive final approval of a sale transaction involving, all or substantially all of the debtor’s assets within 60 days of the petition date, with certain exceptions.
- Section 546(e) should be amended to remove protection from avoidance actions for participants in prepetition LBOs involving privately issued securities.
- A DIP or trustee should be able to assume and assign an intellectual property (“IP”) license, notwithstanding applicable nonbankruptcy law or a provision to the contrary in the license.
- U.S. trademarks, service marks, and trade names, as well as foreign patents, copyrights, and trademarks, should be included within the Bankruptcy Code’s definition of IP and therefore entitled to the protections set forth in section 365(n) in the event that a license of such IP is rejected.
- The ultimate deadline for the DIP or trustee to assume or reject unexpired nonresidential real property leases should be extended from 210 days to one year after the petition date.
- Except in the context of a sale of all or substantially all of a debtor’s assets, an “enhanced business judgment standard” should apply to a proposed nonordinarycourse use, sale, or lease of a debtor’s assets.
- The court should approve a sale of all or substantially all of a debtor’s assets only if the court finds by a preponderance of the evidence that the proposed sale is in the best interests of the estate and satisfies certain specified requirements that otherwise apply to confirmation of a chapter 11 plan.
- In a section 363 sale, the trustee or DIP should be able to sell assets free and clear of any successor liability claims (including tort claims) other than certain specifically excluded interests (e.g., easements, covenants, use restrictions, and environmental obligations that “run with the land”).
- In a section 363 sale of a secured creditor’s collateral, the secured creditor should be permitted to credit bid up to the amount of its allowed claim relating to such collateral unless the court orders otherwise for “cause.” The potential bid-chilling effect of a credit bid alone should not constitute “cause,” but the court should attempt to mitigate any such chilling effect in approving the process.
- The rejection of a collective bargaining agreement under section 1113 should be treated as a breach of the agreement giving rise to a prepetition claim for monetary damages arising from rejection (unless the agreement has been previously assumed).
- The DIP or trustee should comply with the requirements of section 1114 for all retiree benefits, even if the DIP or trustee contends that such benefits are terminable at will under the terms of the benefit plan or applicable nonbankruptcy law.
- A DIP’s board of directors should be able to act on behalf of the DIP in the chapter 11 case without seeking or obtaining approval of the debtor’s shareholders.
- Out-of-the-money creditors should be provided with some recovery—“redemption option value”—either under a chapter 11 plan or in connection with a sale of substantially all of the debtor’s assets if the bankruptcy court determines that the debtor’s business might be worth more over a three-year period following confirmation or approval of the sale transaction.
- A prepetition interest holder, including an insider, should be permitted to retain or purchase an interest in the reorganized debtor without violating the absolute priority rule, provided that such interest holder contributes new money or money’s worth to the debtor’s reorganization efforts in an aggregate amount which is reasonably proportionate to the interest retained or purchased and which is subject to a reasonable market test.
- The DIP or trustee should not be permitted to waive the ability to surcharge collateral to the extent permitted under section 506(c), nor should the DIP or trustee be able to waive the right to argue under section 552(b) that “the equities of the case” warrant a finding that property acquired by the estate is not subject to a lender’s prepetition liens.
- In selecting the appropriate discount rate to apply to deferred cash payments made to a secured creditor under a chapter 11 plan, the court should use the cost of capital for similar debt issued to companies comparable to the debtor as a reorganized entity. If such a market rate is not available, the court should use an appropriate risk-adjusted rate that reflects the actual risk posed in the case of the reorganized debtor. The court should not apply the “prime plus” formula adopted by the Supreme Court in Till v. SCS Credit Corp., 541 U.S. 465 (2004), in the chapter 11 context.
- Senior creditors should not be permitted to “gift” consideration (make class-skipping, class-discriminating, or intraclass-discriminating transfers to junior creditors or interest holders) under a chapter 11 plan if such transfers would violate the absolute priority rule.
- A plan proponent should be permitted to include third-party releases in a chapter 11 plan under certain specified conditions.
- The confirmation of a chapter 11 plan should not require the acceptance of the plan by at least one class of claims impaired under the plan (as currently required).
- A contractual assignment or waiver of voting rights in favor of senior creditors under an intercreditor, subordination, or similar agreement should be unenforceable.
- The Bankruptcy Code should be amended to clarify that a chapter 11 case can be resolved only in the following three ways: (i) confirmation of a plan; (ii) conversion of the case; and (iii) dismissal of the case, subject to section 349. This would effectively end structured dismissals that involve dismissal of the case after a section 363 sale, but without all of the protections afforded in these other contexts.
- New rules should be implemented for a debtor that is a small-or medium-sized enterprise (“SME”) in place of existing rules governing “small business debtors,” including, with certain exceptions, the following: (i) the debtor should be permitted to remain in possession; (ii) no unsecured creditors’ committee should be appointed; (iii) the debtor should file a timeline for soliciting acceptances to a plan within 60 days of the petition date, after which the court should establish a schedule, subject to the time exclusivity deadlines in section 1121 (as distinguished from the existing requirements for a small business debtor to file a plan within 300 days of the petition date and obtain confirmation of the plan within 45 days after the filing date); and (iv) new consensual and nonconsensual plan confirmation requirements should apply to SMEs, including the ability to retain equity under the “new value” exception.
Certain significant matters were not addressed in the Report by design, including: (i) changes to the bankruptcy venue rules; the “core” versus “non-core” controversy and recent U.S. Supreme Court pronouncements on the issue; (iii) claims trading and the disclosure rules of Fed. R. Bankr. P. 2019; (iv) matters arising in individual chapter 11 cases, such as whether postpetition income is estate property and whether the absolute priority rule applies in individual chapter 11 cases; (v) mechanisms to wind up or liquidate systemically important financial institutions (SIFIs), some of which are presently being considered by Congress; and (vi) issues affecting cross-border bankruptcy cases under chapter 15.