Summary of recommended changes to the Bankruptcy Code from the ABI Commission to Study the Reform of Chapter 11

Summary of recommended changes

This chart summarizes the Recommendations in the Commission’s Report that relate to or would have an impact on creditors’ rights.

Background

On December 8, the ABI released the Final Report and Recommendations (the “Report”) by the Commission to Study the Reform of Chapter 11 (the “Commision”). The Report was nearly 3 years in the making, runs almost 400 pages and contains more than 240 recommendations (each a “Recommendation”) for changes to the Bankruptcy Code. The Commission intends to present the Report to Congress as the foundation for wholesale modifications to the Bankruptcy Code; although there is no certainty as to when Congress might undertake reforms of the Bankruptcy Code. While many of the Recommendations are non-controversial technical fixes that would help make the chapter 11 process more efficient, others would seek to fundamentally transform the process and the relative rights and obligations of all stakeholders involved in the chapter 11 process and, as such, will likely face strong opposition from various sectors of the bankruptcy community, most notably secured creditors.

The Commission as a whole believes that secured creditors have become too large a force in chapter 11’s at the expense of debtors and other stakeholders. As a result, many of the Recommendations would negatively affect secured creditors’ rights and, by corollary, provide expanded rights and recoveries to other stakeholders. For example, the Commission proposes in certain situations to transfer value from a senior class to a junior class in violation of the absolute priority rule and would limit the amount and type of adequate protection available to secured creditors. The Commission also recommends a modest rolling back of the bankruptcy safe harbors, although the Commission declined to adopt some of the more radical suggestions, advocated by some of the safe harbors’ critics, such as eliminating the safe harbors entirely. However, the Recommendations are not entirely unfavorable to secured creditors, as the Commission also recommends that, in the event of a cramdown, secured lenders should receive a market rate of interest, rather than a rate determined by a formula approach, which was recently applied in the Momentive case.

The Commission was also focused on reducing the costs associated with a chapter 11 case as a result of (i) prolonged duration, (ii) complexity, (iii) the use of strategic or protective litigation in the case by the debtor or other stakeholders, (iv) the inherent uncertainty about the outcome of certain processes or legal standards that become the subject of litigation and (v) professional fees and expenses. The Commission addressed these goals in many ways, including by making Recommendations that would resolve circuit splits that often cause protracted and expensive litigation in chapter 11 cases. For instance, the Commission proposes to make third party releases expressly permissible when certain factors are satisfied, thereby resolving the split among the circuits regarding whether and when such releases may be granted and presumably mitigating the litigation that has historically gone along with requests for them.