THE YEAR IN BANKRUPTCY: 2013
Charles M. Oellermann and Mark G. Douglas
The eyes of the financial world were on the U.S. during 2013. The view was dismaying
and encouraging in roughly equal parts. The U.S. rang in the new year with a postlast-
minute deal to avoid the Fiscal Cliff that kicked negotiations over “sequestration”—$
110 billion in across-the-board cuts to military and domestic spending—two
months down the road, but raised income taxes (on the wealthiest Americans) for
the first time in two decades.
Any spirit of bipartisanship was short-lived. Congress, dysfunctional even by recent
standards, fought tooth and nail over nearly everything during 2013. Early in the year,
lawmakers failed to engage in meaningful dialogue about raising the nation’s debt
ceiling, which led to speculation as to whether the U.S. Treasury, under an obscure
law meant to apply to commemorative coins, would mint a “trillion-dollar coin” to
head off the debt-ceiling battle in Congress.
Legislative gridlock meant that the sequestration “poison pill” began to take effect
on March 1, 2013.
IN THIS ISSUE
1 The Year in Bankruptcy: 2013
6 Highlights of 2013
23 Top 10 Bankruptcies of 2013
27 Legislative/Regulatory Developments
29 Notable Business Bankruptcy
Decisions of 2013
41 From the Top
42 Notable Exits From Bankruptcy
44 Second Circuit Rules That Foreign
Debtor’s Insolvency Proceeding May
Not Be Recognized Under Chapter 15
Unless Debtor Has Place of Business
or Property in the U.S.
46 No Surcharge for You: Third Circuit
Rules That Section 506(c) Surcharge
Is “Sharply Limited”
Among the most memorable business, economic, and financial sound bites
of 2013 were “Fiscal Cliff II,” “trillion-dollar coin,” “sequestration,” “government
shutdown,” “the Volcker Rule,” and “Detroit.”
The Capitol Hill donnybrook escalated into an all-out war
over the implementation of ObamaCare (the Affordable Care
Act) that brought many parts of the U.S. government to a halt
on October 1, 2013, throwing 800,000 federal employees out
of work temporarily. The shutdown lasted 16 days and has
been estimated by Standard & Poor’s (“S&P”) to have drained
$24 billion from the U.S. economy.
U.S. unemployment during 2013 remained stubbornly high,
albeit gradually decreasing, ranging from a high of 7.9 percent
at the end of January to a low of 6.7 percent at yearend,
compared to the 4.9 percent unemployment rate in
December 2007 prior to the Great Recession.
On September 17, the U.S. Census Bureau reported that, years
after the end of the Great Recession and shortly before the
50th anniversary of President Lyndon Johnson’s declaration
of a “war on poverty,” 46.5 million Americans are still living
in poverty. Moreover, U.S. food stamp cuts took effect on
November 1, 2013, affecting nearly 48 million people, or one
in seven Americans. On December 28, long-term unemployment
benefits implemented in 2008 pursuant to a federal
emergency relief program expired for 1.3 million jobless U.S.
workers after an extension of the program was omitted from
a two-year budget deal reached at year-end.
According to the U.S. Consumer Financial Protection Bureau
(“CFPB”), there are more than 38 million U.S. student loan
borrowers, with more than $1.1 trillion in outstanding debt. In
mid-2013, 850,000 private student loans were in default, with
an outstanding balance of approximately $8 billion. On July
1, 2013, interest rates on U.S. federally subsidized Stafford
student loans doubled from 3.4 percent to 6.8 percent after
Congress failed to reach a deal to avert the rate hike. On
August 9, however, President Obama signed a measure rolling
back the increase.
Now for the good news. In April 2013, the U.S. Treasury
announced that, for the first time since 2007—before the
recession—it planned to make a down payment on the federal
The U.S. government reported rare surpluses of $113 billion
and $116.5 billion in April and June, the largest in five years
and a sign of the nation’s improving finances. On October
30, the government reported that the budget deficit for fiscal
year (“FY”) 2013 dropped to $680.3 billion, the first time in
five years that the shortfall was below $1 trillion. Although it
remains the fifth-largest deficit in history, it is the lowest since
2008 ($458.6 billion).
On December 10, five U.S. federal agencies voted to approve
the “Volcker Rule,” the keystone of the most sweeping overhaul
of financial regulations since the Great Depression. At
its core, the rule bans banks from most forms of proprietary
trading for their own accounts, one of Wall Street’s most
Six banks settled charges in 2013 regarding questionable
mortgages packaged and sold to Fannie Mae or Freddie
Mac during the housing crash: Bank of America/Countrywide
Financial ($10 billion), The Royal Bank of Scotland ($153.7 million),
JPMorgan Chase ($13 billion), Deutsche Bank ($1.9 billion),
Wells Fargo ($591 million), and Citigroup ($968 million). In
addition, the U.S. Justice Department filed criminal charges
against S&P accusing the firm of inflating ratings of mortgage
investments that collapsed when the financial crisis struck.
On December 18, the U.S. Federal Reserve announced that
it would reduce its purchases of Treasury bonds and mortgage-
backed securities by $10 billion a month beginning in
January 2014, a signal that it feels confident enough about
the economy that it can dial back its “quantitative easing”
On December 26, President Obama approved a bipartisan
two-year budget that alleviates the harshest effects of automatic
budget cuts on the Pentagon and domestic agencies,
ending the threat of another partial government shutdown in
According to Thomson Reuters, while global deal making was
basically flat for a fourth consecutive year, deal volume in the
U.S. was up 11 percent in 2013 compared with 2012. U.S. companies
announced more than $1 trillion worth of deals during
the year, the most since the financial crisis. That led the U.S.
to account for 43 percent of all deals worldwide, the biggest
proportion since 2001.
With a few notable exceptions in Asia, markets had a banner
year in 2013. The Dow Jones Industrial Average (the “Dow”)
closed at 16,576.66, up 26.5 percent for the year. The NASDAQ
Composite Index (“NASDAQ”) finished the year up 38 percent,
and the S&P 500 Stock Index (“S&P 500”) ended the year
30 percent higher.
Japan’s Nikkei 225 ended 2013 up 56.7 percent, its best performance
in 40 years. Next to Japan, Europe was the surprise
gainer of the year. The Stoxx 600, a pan-European equity
benchmark, gained 17 percent in 2013; the DAX in Germany
ended the year up 25.5 percent; France’s CAC 40 rose 18 percent;
and the FTSE 100 in London was ahead 14.4 percent.
Chinese markets had a disappointing year. The benchmark
Shanghai Composite Index ended 2013 with a decline of
6.8 percent from a year ago.
Europe continued to struggle in 2013. The 17-nation eurozone
and the 28-member European Union (“EU”) continue to be
plagued by high unemployment of as much as 12.2 percent
and 10.9 percent, respectively. The credit ratings of Britain,
Italy, France, and the EU were downgraded by ratings agencies
during 2013—a first for Britain.
In April 2013, the EU was forced to provide Cyprus with a
€10 billion bailout package intended to keep the country in
the eurozone and rebuild its devastated economy. Ireland—
the poster child for the alleged utility of austerity measures
as a path to economic recovery—slid into its second recession
in three years during the first quarter of 2013.
On May 5, 2013, French Finance Minister Pierre Moscovici
declared the era of austerity over. A little more than one
month afterward, France’s National Institute of Statistics
(Insee) reported that Europe’s second-largest economy fell
into recession in the first quarter of 2013.
Even so, 2013 was not without positive developments in
Europe. Eurostat, the EU statistics agency, reported on
August 14 that Europe broke out of recession in the second
quarter of the year amid stronger domestic demand in
France and Germany, ending a six-quarter downturn.
Asia faced its own challenges in 2013. Early in the year, the
Japanese government approved emergency stimulus spending
of more than ¥10.5 trillion ($100 billion) in an aggressive
push to jump-start the moribund performance of the world’s
The manufacturing sector in China—the world’s second-largest
economy—faltered during 2013, underscoring the fragile
nature of the global recovery and the difficulties still facing
the world’s biggest economies.
On August 30, the Central Statistical Office in New Delhi
reported that India’s economy slowed in the summer of 2013
to its weakest pace since the bottom of the global economic
downturn in 2009.
On June 21, Russian President Vladimir Putin announced an
ambitious but risky economic stimulus program that would
dip into the country’s pension reserves for loans of as much
as $43.5 billion for long-term infrastructure projects and
Fewer Americans filed for bankruptcy in 2013. According to
data released by the Administrative Office of the U.S. Courts
(“AOUSC”), 1,072,805 individuals filed for bankruptcy protection
under chapter 7, 11, or 13 in the fiscal year ending September
30, 2013—730,592 under chapter 7 of the Bankruptcy Code,
340,807 under chapter 13, and 1,406 under chapter 11, with an
additional 406 “family farmer” filings under chapter 12 of the
Bankruptcy Code. This represents a 5 percent decrease from
the 1.13 million individual bankruptcy filings in FY 2012.
The calendar year (“CY”) 2013 statistics reflect an even
more pronounced drop-off in individual bankruptcy filings.
According to data provided by Epiq Systems, Inc. (“Epic
Systems”), the 988,215 total noncommercial filings during
CY 2013 represented a 12 percent drop from the noncommercial
filing total of 1,128,173 during CY 2012. Epic Systems
predicts that annual bankruptcy filings will continue to drop
amid sustained low interest rates and high filing costs.
Business bankruptcy filings dropped off in both FY and CY
2013. According to the AOUSC, business bankruptcy filings in
FY 2013 totaled 34,892, down 17 percent from the 42,008 business
filings reported in FY 2012. Chapter 11 filings fell to 9,564
(8,158 business and 1,406 nonbusiness cases), down 10 percent
from the 10,597 chapter 11 filings reported in FY 2012.
According to court data compiled by Epiq Systems, total commercial
bankruptcy filings during CY 2013 were 44,111, a 24 percent
drop from the 57,964 filings during CY 2012. There were
6,577 business chapter 11 filings in CY 2013, compared to 7,783
filings in CY 2012, a decline of approximately 15 percent. Total
chapter 7 commercial filings numbered 27,617 in 2013, compared
to 37,221 in 2012, representing a decline of 26 percent.
Once again, the drop-off can be attributed to a number of
factors, including the continuation of an “amend and extend”
(or “extend and pretend”) mentality by many lenders loath to
redeploy capital in a market with historically low interest rates.
The number of bankruptcy filings by “public companies”
(defined as companies with publicly traded stock or debt) in
2013 was 71, according to data provided by New Generation
Research, Inc. (“NGR”). There were 87 public-company filings
in 2012, whereas 86 public companies filed for bankruptcy in
2011, 106 filed in 2010, and 211 sought bankruptcy protection
in 2009. NGR also reported that, reflecting a growing trend,
there were 17 prepackaged chapter 11 cases in 2013, versus
11 in 2012 and only four in 2011—with combined total asset
figures of $14 billion, $8 billion, and $3 billion, respectively.
The year 2013 added 10 public-company names to the billion-
dollar bankruptcy club, compared to 14 in 2012, 12 in 2011,
19 in 2010, and 52 in 2009. Counting private-company and
municipal filings, the billion-dollar club gained 13 members in
2013. This represents the fewest additions to the roll of billiondollar
bankruptcies since 2007, prior to the Great Recession.
The largest bankruptcy filing of 2013—Cengage Learning
Inc., with $7.5 billion in assets—was not even within the top 50
largest filings of all time, based upon asset value.
Twenty-four public and private companies with assets greater
than $1 billion exited from bankruptcy in 2013—including
seven of the 10 billion-dollar public companies that filed in
2013. Perhaps signaling a trend begun in 2012, more of these
companies reorganized than were liquidated or sold.
Two of the most prominent names on the list were MF Global,
which failed spectacularly on Halloween 2011 to become the
eighth-largest bankruptcy of all time, but ultimately provided
a 100 percent recovery to customers, and AMR Corporation,
the parent of American Airlines, which emerged from bankruptcy
after its $11 billion merger with US Airways Group, Inc.,
as American Airlines Group Inc.—the world’s largest air carrier.
The year 2013 saw the largest bankruptcy filing by a U.S.
city ever—Detroit—juxtaposed with the continuing financial
limbo of a U.S. commonwealth in crisis—Puerto Rico. Under
the protective umbrella of chapter 9, Detroit will attempt to
implement a plan of adjustment to manage $18 billion in longterm
liabilities, including unmanageable employee legacy
debts. Puerto Rico, by contrast, is being crushed by $70 billion
in widely held public debt (at $19,000 per citizen, four
times the per capita debt of the most indebted U.S. state,
Massachusetts) and 15 percent unemployment; yet, due to its
status as an unincorporated territory of the U.S., it is barred
from seeking either protection under the Bankruptcy Code or
international financial assistance.
S&P reported on January 9, 2014, that the number of global
corporate defaults for 2013 tallied 78, compared to 84 corporate
defaults during 2012. Of the 78 defaults in 2013,
34 were due to missed interest, principal, or cash payments;
19 were due to bankruptcy filings; 15 resulted from distressed
exchanges; seven were confidential; two were due to regulatory
supervision (administration); and one resulted from a failure to
refinance or pay off a revolving credit facility. The majority of
the defaulters in 2013 were based in the U.S., with 43 issuers
defaulting in 2013 compared with 47 in 2012. Defaults in Europe,
however, grew substantially, from nine issuers in 2012 to 16 in
2013. The media and entertainment sector—which includes
companies as diverse as Atlantic City, New Jersey, casino
Revel and Yellow Pages directory publisher SuperMedia—put
19 names on the global default tally and is considered among
the most distressed sectors of the economy by S&P.
Twenty-four U.S. banks failed in 2013, compared to 51 in 2012
and 92 in 2011. The 2013 total represents the fewest since
2007, before the financial crisis.
Jones Day’s Business Restructuring & Reorganization Practice was named a Law360 Bankruptcy Practice Group of the
Year for 2013.
David G. Heiman (Cleveland), Paul D. Leake (New York), Bruce Bennett (Los Angeles), Heather Lennox (New York and
Cleveland), Richard L. Wynne (Los Angeles), Michael Rutstein (London), and Corinne Ball (New York) were included
among The International Who’s Who Legal for 2014 in the field of Insolvency & Restructuring.
Heather Lennox (New York and Cleveland) was among Ohio Super Lawyers’ Top 50 Women for 2014.
Joseph M. Tiller (Chicago) was named an Illinois “Rising Star” for 2014 by Super Lawyers.
David G. Heiman (Cleveland), Charles M. Oellermann (Columbus), and Todd S. Swatsler (Columbus–Business and Tort
Litigation) were named Ohio “Super Lawyers” for 2014.
Bruce Bennett (Los Angeles) was named a Bankruptcy MVP for 2013 by Law360.
On December 2, 2013, Mark A. Cody (Chicago) gave a presentation in New York City entitled “Municipal Chapter 9s:
What Have We Learned So Far?” at the Beard Group’s 2013 Distressed Investing Conference.
Christopher M. Healey (Columbus) was named an Ohio “Rising Star” for 2014 in Super Lawyers.
On January 16, 2014, Jones Day hosted a conference entitled “The Puerto Rico Debt Crisis: Navigating Uncharted
Territory.” The speakers included Bruce Bennett (Los Angeles); Beth Heifetz (Washington–Issues & Appeals); Tim
Coleman, senior managing director at Blackstone; Sammy Céspedes, local counsel in Puerto Rico; and Alfredo Salazar,
former president of the Government Development Bank for Puerto Rico. The conference examined Puerto Rico’s fiscal
outlook and the implications for its more than $70 billion in outstanding public debt. Please contact Scott J. Greenberg
(New York) or Jennifer J. O’Neil (New York) with any questions.
Mark A. Cody (Chicago) and Brad B. Erens (Chicago) were named Illinois “Super Lawyers” for 2014.
An article written by Brett J. Berlin (Atlanta) entitled “Involuntary Bankruptcy Standard: Ninth Circuit Splits from Fourth
Circuit” was published in the December 2013 issue of The Bankruptcy Strategist.
An article written by Veerle Roovers (New York) and Mark G. Douglas (New York) entitled “Foreign Representative Alert:
Chapter 15 Gap Period Relief Subject to Preliminary Injunction Standard” appeared in the November/December 2013
edition of Pratt’s Journal of Bankruptcy Law.
An article written by Brett J. Berlin (Atlanta) entitled “Recent Development in S Corporation and Qualified Subchapter
S Subsidiary Tax Status in Bankruptcy: In re Majestic Star Casino” appeared in the Winter 2014 issue of Insights journal.
An article written by Dan B. Prieto (Dallas) and Mark G. Douglas (New York) entitled “Secured Creditor May Choose to
Take No Action During Chapter 11 Case Without Hazarding Lien Stripping” was published in the November/December
2013 edition of Pratt’s Journal of Bankruptcy Law.
An article written by Oliver S. Zeltner (Cleveland) entitled “In re Putnal: Adequately Protecting Postpetition Rents” was
published in the November/December 2013 edition of Pratt’s Journal of Bankruptcy Law.
HIGHLIGHTS OF 2013
January 1 The U.S. Senate, in a predawn vote two hours after the deadline passes to avert automatic tax increases,
overwhelmingly approves legislation—the American Taxpayer Relief Act of 2012—that would allow tax rates
to rise only on affluent Americans while temporarily suspending sweeping, across-the-board spending
cuts. Negotiators agree to put off $110 billion in across-the-board cuts to military and domestic programs
(“sequestration”) for two months while broader deficit-reduction talks continue. The measure, which will be
passed by the House later on January 1 and approved by President Obama on January 2, will allow income
taxes to rise for the first time in two decades.
January 4 The U.S. Labor Department reports that American employers added 155,000 jobs in December, leaving the
unemployment rate unchanged at 7.8 percent. Overall, the country added 1.8 million jobs during 2012.
January 7 Bank of America agrees to pay more than $10 billion to Fannie Mae to settle claims over troubled mortgages
that soured during the housing crash, mostly loans issued by the bank’s Countrywide Financial subsidiary.
Under the terms of the settlement, Bank of America will pay Fannie Mae $3.6 billion and spend $6.75 billion to
buy back mortgages from the housing finance giant at a discount from their original value.
January 9 The third-largest stock exchange operator in the U.S., BATS Global Markets, alerts its customers that a
programming mistake caused about 435,000 trades to be executed at the wrong price over the last four
years, costing traders $420,000. The announcement comes a day after the trading software used by the
New Jersey-based National Stock Exchange stopped functioning properly for nearly an hour, forcing other
exchanges to divert trades around it. The New York Stock Exchange, the nation’s largest exchange, has had
two similar, though shorter-lived, breakdowns since Christmas and two separate problems with its datareporting
system. In addition, traders were left in the dark on January 3 after the reporting system for stocks
listed on the NASDAQ exchange, the second-biggest exchange, broke down for nearly 15 minutes.
January 10 The CFPB unveils new rules imposing a range of obligations and restrictions on home mortgage lenders,
including bans on the risky “interest-only” and “no-documentation” loans that helped inflate the housing bubble.
Under the new rules, which become effective in 2014, lenders will be required to verify and inspect borrowers’
financial records to discourage lenders from saddling borrowers with total debt payments amounting
to more than 43 percent of their annual income, including existing debts like credit cards and student loans.
January 11 The Japanese government approves emergency stimulus spending of more than $100 billion as part of an
aggressive push by Prime Minister Shinzo Abe to kick-start growth in Japan’s long-moribund economy.
January 12 The U.S. Treasury Department announces that it will not mint a trillion-dollar platinum coin to head off an
imminent battle with Congress over raising the government’s borrowing limit. By virtue of an obscure law
meant to apply to commemorative coins, the Treasury Secretary could order the production of a high-denomination
platinum coin and deposit it at the Federal Reserve, where it would count as a government asset and
give the country more breathing room under its debt ceiling. Once Congress raised the debt ceiling, the
Treasury Secretary could then order the coin destroyed.
January 21 Barack Hussein Obama II is sworn in for a second term as President of the U.S.
January 23 British Prime Minister David Cameron promises Britons a decisive referendum within five years on membership
in the EU—provided he wins the next election. The pledge comes a day after the leaders of France and
Germany met in Berlin to celebrate 50 years of sometimes uneasy partnership. (French President Charles de
Gaulle and German Chancellor Konrad Adenaur signed the Elysée Treaty in 1963 to effect a reconciliation
between the two nations.) Mr. Cameron’s plea for acknowledgment of British distinctions reflects some of the
deepest political and philosophical differences between Britain and Continental Europe on integration.
January 31 The U.S. Senate Judiciary Committee approves a new subcommittee, Bankruptcy and the Courts, for the
113th Congress. The jurisdiction of the subcommittee includes: (i) federal court jurisdiction, administration,
and management; (ii) rules of evidence and procedure; (iii) creation of new courts and judgeships; (iv) bankruptcy;
(v) legal reform and liability issues; and (vi) local courts in territories and possessions.
February 1 The U.S. Labor Department reports that the U.S. unemployment rate rose to 7.9 percent from 7.8 percent in
The Dow closes above 14,000 for the first time since 2007.
February 4 The U.S. Justice Department files civil fraud charges against S&P, the nation’s largest credit-ratings agency,
accusing the firm of inflating the ratings of mortgage investments that collapsed when the financial crisis
struck. The suit is the first significant federal action against the ratings industry, which reaped record profits
as it bestowed near–risk-free ratings on complex bundles of home loans that quickly went sour.
February 5 The U.S. Postal Service announces that it intends to stop delivering mail on Saturdays but will continue to
deliver packages six days a week under a plan aimed at saving about $2 billion. The move would accentuate
one of the agency’s strong points—package delivery has increased by 14 percent since 2010, whereas the
delivery of letters and other mail has declined with the increasing use of email and other internet services.
The post office will back away from its plan on April 10, criticizing Congress for taking the cost-cutting proposal
off the table.
February 11 The American Bar Association adopts a resolution supporting the position that bankruptcy judges can, in
certain circumstances, adjudicate “core” proceedings that go beyond a court’s constitutional authority, in
a response to confusion over the U.S. Supreme Court’s landmark Stern v. Marshall decision. The resolution
says that bankruptcy judges should be allowed to rule on matters in a “core” proceeding even if the matters
underlying the proceeding are beyond the court’s constitutional authority, provided the parties in the proceeding
consent to the bankruptcy court’s jurisdiction.
The U.S. Government Accountability Office (“GAO”) issues a report stating that the loss in U.S. economic output
during the Great Recession could be as much as $13 trillion—on top of trillions more in home equity that
evaporated because of the housing crisis.
Moody’s Investors Service (“Moody’s”) strips the U.K. of its AAA credit rating, predicting that economic
weakness will weigh on public finances for years to come. The downgrade for the U.K. is the first ever from
a major agency.
March 1 Without any agreement among U.S. lawmakers and President Obama, “sequestration,” or $85 billion in acrossthe-
board government spending cuts over seven months (eventually resulting in a reduction of the U.S. deficit
by $1.2 trillion), begins to take effect. The cuts were devised as a “poison pill” during debt-ceiling negotiations
that resulted in a temporary compromise in August 2011.
Eurostat, the statistical office of the EU, reports that unemployment in the 17-nation eurozone stood at 11.9
percent in January, a new record. For the 27 nations of the EU, the January jobless rate stood at 10.8 percent,
up from 10.7 percent in December 2012.
Michigan Governor Rick Snyder announces that the state will intervene to appoint an emergency manager
for the City of Detroit with the power to cut city spending, change contracts with labor unions, merge or eliminate
city departments, urge the sale of city assets and, if all else fails, recommend bankruptcy proceedings.
Once the cradle of the American auto industry and the nation’s fifth-most populous city, Detroit is now less
than half the size that it was decades ago; with only 700,000 residents, it is currently the 18th-largest city in
the U.S., with a $327 million budget deficit, a public sector plagued by more than $18 billion in long-term liabilities,
and annual worries of cash shortfalls. Detroit is the largest U.S. city ever targeted for takeover.
European executive pay comes under attack for the second time in less than a week as Swiss voters overwhelmingly
back curbs on corporate salaries. The move comes on the heels of Europe-wide steps to address
top management pay, which has been a lightning rod for public anger since the financial crisis began. EU
proposals to cap bankers’ bonuses at twice their salaries shocked London, with senior bankers warning that
the cap will drive top personnel to Asia or New York and eventually prompt a shift in operations from London.
The referendum in Switzerland introduces an even broader set of curbs after 68 percent of voters approve
rules that include giving shareholders a binding say on executive pay, banning golden hellos and goodbyes,
requiring annual reelections for directors, and threatening criminal sanctions for noncompliance.
March 4 Forbes releases its list of the world’s richest people in 2013. The list includes 1,426 billionaires, a record number,
with a total net worth of $5.4 trillion, up from $4.6 trillion in the previous ranking. There are 210 new billionaires
from 42 countries, including 27 from the U.S. The U.S. had the most billionaires with 442, followed by
Asia-Pacific with 386; Europe with 366; the Americas, excluding the U.S., with 129; and the Middle East and
Africa with 103. Mexico’s telecom mogul, Carlos Slim, remained the richest person, with a fortune of $73 billion,
and Microsoft cofounder Bill Gates held on to the No. 2 spot, with a net worth of $67 billion. Spain’s Amancio
Ortega, the cofounder of the Inditex fashion group, leaped over Warren Buffett and France’s Bernard Arnault
to become the world’s third-richest person in the 27th annual ranking of billionaires, with an estimated net
worth of $57 billion. Buffett, with a fortune of $53.5 billion, and Oracle Corp’s Larry Ellison, with a fortune of
$43 billion, rounded out the top five in the rankings.
The Dow surpasses its previous record close of 14,164.53, which it achieved nearly five and a half years ago.
The Dow will go on to set record highs 52 times in 2013.
‘Sa’ Nyu Wa Inc., a tribally chartered corporation wholly owned by the Hualapai Indian Tribe, files a chapter
11 petition in Arizona. The petition raises a question of first impression for the bankruptcy court—whether a
tribal corporation (as distinguished from a federally recognized tribe, which is excluded from filing for bankruptcy
relief as a “governmental unit”) is eligible to be a debtor under the Bankruptcy Code.
March 7 The U.S. Federal Reserve reports that the net worth of U.S. families rose by $1.17 trillion at the end of 2012 to
the highest level since late 2007, as rising home values and gains in stock holdings boosted household balance
sheets. U.S. households’ net worth—the value of homes, stocks, and other investments minus debts and
other liabilities—rose 1.8 percent to $66.07 trillion from October through December, the highest level since the
fourth quarter of 2007.
U.S. Federal Reserve stress tests reflect that the biggest banks in the U.S. are better able to withstand a
severe economic shock, having a much stronger capital position than before the financial crisis. The 18 bank
holding companies were tested under a hypothetical stress scenario that included a peak unemployment
rate of 12.1 percent, a drop in equity prices of more than 50 percent, a decline in housing prices of more than
20 percent, and a sharp market shock for the largest trading firms.
March 8 The U.S. Labor Department reports that the unemployment rate fell to 7.7 percent in February, the lowest
since December 2008.
Fitch Ratings, Inc. (“Fitch”) cuts Italy’s sovereign credit rating, citing the abrupt emergence of fresh political
turmoil that could push one of the eurozone’s most pivotal economies, already in a deep slump, into a
March 15 In the largest-ever settlement of an insider-trading action, SAC Capital Advisors (“SAC”), the giant hedge fund
owned by the billionaire investor Steven A. Cohen, agrees to pay U.S. securities regulators $602 million to
resolve a civil lawsuit related to improper trading at the fund. The landmark penalty exceeds the fines meted
out in the 1980s-era scandals involving Ivan F. Boesky and Michael R. Milken. It also underscores SAC’s central
role in the government’s recent push to prosecute illegal conduct on trading desks and in executive
suites, an effort that has yielded about 180 civil actions and more than 75 criminal prosecutions.
March 16 Eurozone leaders and the International Monetary Fund (“IMF”) announce an unprecedented levy on all
deposits in Cypriot banks as the sting in the tail of a €10 billion bailout for the near-bankrupt government in
Nicosia. Intended to apply to everyone from pensioners to Russian oligarchs alleged to have billions stashed
away in what officials say is a bloated Cypriot banking sector, the “stability levy” immediately raises a flood of
concerns among finance experts over a possible bank run in bigger eurozone economies, where fragile public
finances are also under scrutiny. The “upfront, one-off” tax is expected to raise €5.8 billion on top of the
loans still to be finalized by eurozone parliaments. The levy consists of charges of 9.9 percent on deposits
exceeding €100,000 and 6.75 percent on lesser deposits. Pending execution of the levy, all Cypriot banks are
forbidden to allow withdrawals, but cash machines are emptied.
March 25 EU leaders agree on a bailout package intended to keep Cyprus in the eurozone and rebuild its devastated
economy. The deal drastically prunes the size of Cyprus’s oversized banking sector, bloated by billions from
Russia and elsewhere in the former Soviet Union. The deal scraps the highly controversial idea of a tax on
bank deposits, although it would still require forced losses for depositors and bondholders.
March 27 The Bank of England informs U.K. lenders that they need to raise £25 billion ($38 billion) of additional capital
to cover bigger potential losses on commercial real estate and from the eurozone.
A U.S. bankruptcy court approves American Airlines’ historic merger with US Airways Group, Inc., but withholds
approval of a $19.9 million severance payment for Tom Horton, the chief executive of American’s parent, AMR
Corporation. The merger would create the world’s largest airline, with an expected market value of approximately
$11 billion. AMR Corp.’s next step is to file a chapter 11 plan based on the merger, which is still subject
to regulatory approval.
April 1 Automatic adjustments to the dollar amounts specified in various provisions of the U.S. Bankruptcy Code,
other related statutes, accompanying rules, and official forms that are mandated every three years by section
104 of the Bankruptcy Code take effect.
A California bankruptcy court denies a bondholder group’s motion to dismiss the chapter 9 case of Stockton,
California, making the municipality the largest U.S. city ever to successfully file for chapter 9 protection. The
city’s daunting task of drafting a confirmable restructuring plan will test a municipality’s ability to puncture
the California pension system. Stockton is trying to reduce its $900 million liability to the California Public
Employees’ Retirement System (CalPERS), its largest creditor.
April 2 Eurostat reports that unemployment in the eurozone rose to yet another record high in the first two months
of the year, providing confirmation that the economy remains in a deep freeze. The jobless rate reached
12 percent in both January and February, the highest since the creation of the euro in 1999. For the overall EU,
the February jobless rate rose to 10.9 percent from 10.8 percent in January, with more than 26 million people
without work across the 27-nation bloc.
Mortgage giant Fannie Mae reports that it earned $7.6 billion in the last quarter of 2012, the biggest quarterly
profit in its history. The gain was driven by an improving housing market that has lifted home prices and a
$3.6 billion legal settlement with Bank of America. U.S. taxpayers spent $116 billion to rescue Fannie during the
financial crisis. The company has so far paid back $35.6 billion. Its smaller rival, Freddie Mac, earlier reported
a record $11 billion profit. Nearly all of that will be paid as dividends to the Treasury, as partial payback for the
$188 billion in bailout funds the two companies needed after being seized by the government in 2008.
April 4 A report by Louis J. Freeh, the bankruptcy trustee for MF Global Holdings, lays much of the blame for the
company’s 2011 demise at the feet of former chief executive (and ex-New Jersey Governor) Jon S. Corzine,
accusing him of implementing trading strategies with minimal oversight and exceeding board-approved
limits for some European trades the company made under his stewardship.
April 8 Former U.K. Prime Minister Margaret Thatcher dies from a stroke at 87. During her tenure (1979 to 1990),
Thatcher, the longest-serving British Prime Minister in the 20th century and the only female to hold the office,
introduced a series of political and economic initiatives to reverse high unemployment and Britain’s struggles
in the wake of the Winter of Discontent and an ongoing recession. Her political philosophy and economic
policies emphasized deregulation (especially in the financial sector), flexible labor markets, the privatization
of state-owned companies, and reducing the power and influence of trade unions.
April 18 Germany’s Lower House of Parliament approves the bailout package for Cyprus, bringing an end to months
of debate in Berlin. The package includes €9 billion ($11.7 billion) in contributions from EU members. The IMF
is to contribute an additional €1 billion.
April 19 Fitch strips Britain of its top AAA credit score, citing a weaker economic outlook that continues to hinder the
country in its efforts to keep its debt under control.
April 24 An eight-story building housing several garment factories collapses in Dhaka, Bangladesh, killing more than
1,110 workers. It is the worst disaster in the history of the garment industry and forces global retailing giants
such as Walmart, Sears, Target, Walt Disney, Tommy Hilfiger, Calvin Klein, Gap, and H&M to reexamine their
reliance on cheap overseas labor working in sweatshop and unsafe conditions. Bangladesh, the world’s
second-largest apparel exporter after China, has the lowest minimum wage in the world—$37 per month—
which has helped it attract billions of dollars in orders from the West.
April 29 Statistics released by the AOUSC indicate that U.S. bankruptcy filings fell 14.4 percent in the 12-month period
ending on March 31, 2013, as compared to the 12-month period ending on March 31, 2012. There were 1,170,324
bankruptcies filed in the year ending on March 31, 2013, as compared to 1,367,006 in the year ending on
March 31, 2012. Nonbusiness bankruptcy filings totaled 1,132,772, down from the 1,320,613 nonbusiness bankruptcy
filings in the previous year. Business filings also fell, from 46,393 to 37,552. Chapter 11 filings totaled
9,811, down from 11,339 in the previous year. Chapter 12 filings totaled 463, down from 606 in the previous year.
The U.S. Treasury announces that, for the first time since 2007, it is planning to make a down payment on the
federal debt. Due to government spending cuts and higher tax receipts, the Treasury states that it expects to
repay $35 billion in debt during the second quarter of 2013, compared to an earlier forecast that it would have
to borrow $103 billion. The budget deficit has been shrinking more than expected. In the 12 months through
March 2013, the deficit totaled $911 billion, or 5.7 percent of gross domestic product (“GDP”). In the first three
months of CY 2013—that is, since the increase in payroll and income tax rates took effect on January 1—the
deficit averaged just 4.5 percent of GDP on a seasonally adjusted basis, less than half the peak annual deficit
of 10.1 percent of GDP in FY 2009.
April 30 Eurostat reports that the unemployment rate in the 17-nation eurozone ticked up to a record 12.1 percent. For
the 27-nation EU, the jobless rate is unchanged at 10.9 percent. Eurostat estimates that 26.5 million men and
women are unemployed in Europe, including 5.7 million young people. Jobless figures for both the eurozone
and the EU are the highest Eurostat has reported since it began keeping the data in 1995, in the days before
A new claim-trading fee of $25 per claim approved by the Judicial Conference of the U.S. in September 2012
becomes effective in U.S. bankruptcy courts. CY 2012 saw 18,632 claim trades worth more than $41 billion in
500 bankruptcy cases, according to SecondMarket, Inc. If the fees had been in effect, bankruptcy courts
would have collected $465,800 from those trades.
May 3 The U.S. Labor Department announces that the U.S. unemployment rate fell to 7.5 percent in March.
The Dow briefly surges over the 15,000 mark for the first time ever. The S&P 500 closes at 1,613.91, the highest
ever, and the tech-laden NASDAQ composite index closes at 3,377.60, its highest trading level in more
than 12 years.
May 5 French Finance Minister Pierre Moscovici declares the era of austerity over after his German counterpart
offered flexibility on deficit cutting amid renewed bickering between Europe’s two biggest economies.
The gap between the French Socialist finance chief’s view and the election-year positioning of Germany’s
Wolfgang Schäuble underscores the divergence between their economies and the wrangling that has
marked the crisis since François Hollande replaced Nicolas Sarkozy as the French leader a year ago.
May 7 Moody’s reports that the number of U.S. municipal bond defaults has increased since the financial crisis
began, but those defaults remain few in number. In 2012 there were five Moody’s-rated defaults and 23
since the beginning of the recession in 2008, with an average of 4.6 defaults per year, up from 1.3 in the
May 8 Freddie Mac announces that it earned $4.6 billion in the first quarter of 2013, helped by a stronger housing
market. Freddie also states that it will pay a dividend of $7 billion to the U.S. Treasury Department in June and
that it will not request any additional federal aid for the fourth consecutive quarter.
May 9 The CFPB publishes a report (“Student Loan Affordability: Analysis of Public Input on Impact and Solutions”)
warning of the potential domino effect that mounting student loan debt could have on other sectors of the
U.S. economy, most notably the recovering housing market. There are more than 38 million student loan borrowers,
with over $1.1 trillion in outstanding debt, according to the CFPB. While federally guaranteed student
loans through the U.S. Department of Education frequently provide income-based repayment plans for borrowers
with financial hardship, as well as rehabilitation options for borrowers who default on their loans, such
practices are not common among privately backed student loans. There are approximately 850,000 private
student loans in default, with an outstanding balance of roughly $8 billion.
May 10 The financially troubled U.S. Postal Service posts a net loss of $1.9 billion in the second quarter of FY 2013,
compared with a $1.3 billion loss in the previous quarter, when holiday shopping and heavy spending on political
advertising during the 2012 election helped the agency. The Postal Service continues to lose $25 million
per day as it waits for Congress to pass legislation to overhaul the postal system.
A U.S. bankruptcy court approves the merger of chapter 11 debtor AMR Corp. (the parent of American Airlines)
and US Airways. Subject to regulatory approvals and approval by US Airways shareholders, completion of the
merger is expected in the third quarter of 2013.
The U.S. government reports a rare surplus of $113 billion for April 2013, the largest in five years and a sign of
the nation’s improving finances. Steady economic growth and higher tax rates have increased tax revenue in
recent months, keeping the 2013 annual budget deficit on pace to be the smallest since 2008. Through the
first seven months of the budget year, the deficit was $488 billion, less than last year’s deficit of $720 billion
over the same period. Even with the improvement, however, the deficit for the full year will still be large: the
U.S. Congressional Budget Office (“CBO”) expects it will reach $845 billion when the budget year ends on
September 30. Although that would be the first annual deficit below $1 trillion since 2008, it would still be the
fifth-largest deficit in U.S. history.
May 14 The emergency manager for the City of Detroit releases a 44-page report detailing the city’s financial woes.
The report describes long-term obligations of at least $15 billion, unsustainable cash flow shortages, and
miserably low credit ratings that make it difficult to borrow. City operations in Detroit are portrayed as being
in need of significant repair, including overhauls of the city’s police and fire departments. Retirees from the
city now outnumber current workers by more than two to one, and pension and health-care costs must be
addressed. At least 60,000 parcels of land across the city are vacant, as are 78,000 buildings.
A report is issued by the Bipartisan Policy Center stating that the U.S. Congress should consider changes to
the Bankruptcy Code to improve the process of winding down troubled banks, addressing the “too big to fail”
(“TBTF”) issue in an effort to ensure that the problems of systemically important financial institutions can be
resolved without triggering a market panic or bailout. The report states that the TBTF problem arises when government
officials must choose between bailouts or the collapse of the financial system. If those two choices are
the only ones available, officials will typically opt for a bailout, and regulators must have an alternative.
May 23 The CBO lowers its estimate on the lifetime cost of the U.S. government’s Wall Street bailout program to $21 billion
because of stock market gains. In its report on TARP, the CBO states that the cost estimate fell from the
$24 billion included in the agency’s previous report on TARP in October 2012. The $3 billion decrease in the
estimated subsidy cost stems primarily from an increase in the market value of the government’s investments
in carmaker General Motors Co. (“GM”). By the CBO’s estimate, $428 billion of the initially authorized $700 billion
will be disbursed through TARP—the $419 billion already handed out and $9 billion in additional projected
disbursements. The estimated costs stem largely from assistance to insurer American International Group, Inc.
(“AIG”); aid to the automobile industry; and grant programs intended to avoid home mortgage foreclosures.
May 28 The S&P/Case-Shiller Home Price Indices indicate that U.S. home prices jumped 10.9 percent in March 2013
compared with the previous year, the most since April 2006. A growing number of buyers are bidding on a
tight supply of homes, driving prices higher and helping the housing market recover. The indices also show
that all 20 cities measured by the report posted year-over-year gains for the third straight month.
May 29 China’s biggest pork producer, Shuanghui International, agrees to buy Smithfield Foods, the 87-year-old
Virginia-based meat giant with brands like Armour and Farmland, for $7.1 billion in cash and debt. If completed,
the deal would be the biggest takeover of an American company by a Chinese concern, but it must
first overcome close examination by U.S. regulators tasked with clearing deals for national security.
May 31 Eurostat reports that unemployment in the 17 eurozone countries hit another record high (12.2 percent)
June 4 Chapter 9 debtor Jefferson County, Alabama, announces plans to settle its sewer-related debt dispute by
means of three refinancing agreements that will pay $1.8 billion to its major creditors, including JPMorgan
Chase Bank, N.A. The agreements will “form the backbone” of the county’s anticipated plan of adjustment.
The county’s sewer debt weighs in at approximately $3 billion, of which JPMorgan, bond insurers including
Assured Guaranty Municipal Corp., and seven hedge funds hold about $2.4 billion, or 78 percent.
June 6 AIG and GM rejoin the S&P 500, marking a key milestone in the recovery of two companies that needed billions
of dollars to stay afloat during the financial crisis. AIG received $182 billion in U.S. funds, while GM took
$50 billion during the economic recession in 2008 and 2009.
June 7 The U.S. Labor Department reports that the unemployment rate ticked up to 7.6 percent in May.
June 11 The U.S. Trustee issues new guidelines for the payment of attorneys’ fees and expenses in large chapter 11
bankruptcy cases (those with $50 million or more in assets and $50 million or more in liabilities). The updated
guidelines will apply to cases filed on or after November 1, 2013.
June 14 The City of Detroit proposes to pay unsecured lenders less than 10 cents on the dollar as part of a restructuring
plan that would invest $1.25 billion in public safety and blight removal. Detroit emergency manager Kevyn
Orr also announces that the city will stop making payments on billions of dollars in unsecured municipal debt
as part of a move to save cash, but that city employees and vendors will continue to be paid.
June 19 U.S. Federal Reserve Chairman Ben Bernanke announces that the Federal Reserve, increasingly confident
in the durability of economic growth, expects to start pulling back later this year from its efforts to stimulate
the economy. Bernanke states that the central bank intends to gradually scale down its monthly purchases
of Treasury securities and mortgage-backed bonds, beginning later this year and ending when the unemployment
rate hits 7 percent, which the Fed expects to happen by the middle of next year. The central bank
would then take several more years to unwind the rest of its extraordinary stimulus campaign, slowly raising
short-term interest rates from essentially zero to more normal levels after the jobless rate has fallen to
6.5 percent or lower.
June 20 British authorities tell five of the country’s largest banks to raise a combined £13.4 billion ($20.7 billion) in extra
capital by the end of the year to protect against future financial shocks. The demand is part of an effort by
the Prudential Regulatory Authority to strengthen the capital reserves of British banks after many experienced
huge losses during the financial crisis.
S&P reports that the total number of global corporate issuer defaults for 2013 stands at 43. Eighteen of the
defaults are the result of missed interest, principal, or cash payments; 11 are due to bankruptcy filings; seven
are due to distressed exchanges; four are confidential; one is the result of a failure to refinance or pay off a
revolving credit facility; one is due to regulatory supervision; and one is due to subpar bond buybacks.
June 21 Faced with meager growth worldwide and a worrisome ebbing of Russia’s own oil and gas revenues,
President Vladimir Putin announces an economic stimulus program, along with a novel amnesty plan
for imprisoned white-collar criminals, intended to improve investor confidence. He proposes to dip into
the country’s pension reserves for loans of up to $43.5 billion for three big infrastructure projects and
In a departure from long-established practice, the recently confirmed chairwoman of the U.S. Securities and
Exchange Commission (“SEC”), Mary Jo White, announces that defendants will no longer be allowed to settle
some cases while “neither admitting nor denying” wrongdoing. The policy change follows years of criticism that
the SEC has been too lenient, especially with the large institutions that were at the center of the financial crisis.
June 26 EU finance ministers agree on a plan that would require shareholders and creditors (rather than governments)
to take significant losses when banks collapse. The new system specifies the order in which banks’ investors
and creditors, and then their uninsured depositors (with deposits exceeding €100,000), will face losses.
The agreement to “bail in” rather than bail out failing banks represents a new approach to the way the EU will
address crises like the ones that crippled Cyprus and Ireland in recent years and threatened to sink the euro.
The draft bill still needs the approval of the European Parliament before it can become European law.
June 27 The Irish government reports that Ireland slid into its second recession in three years during the first quarter
of 2013. Consumers and businesses, still reeling from steep tax increases, government spending cuts, and
a long stretch of sluggish economic activity, have sharply curbed spending. The announcement is sobering
news, as Ireland prepares to become the first European country to exit its international bailout and politicians
across Europe have promoted it as a model for the use of austerity measures to help countries emerge
stronger from the crisis.
July 1 Interest rates on U.S. federally subsidized Stafford student loans double, soaring from 3.4 percent to 6.8 percent
after Congress fails to reach a deal to avert the rate hike. If not for the rollback that President Obama
will sign on August 9, the rate increase would have cost the average college student an additional $2,600.
Thomson Reuters reports that, despite a strong start that yielded several blockbuster transactions—Dell’s
proposed $24.4 billion sale to its founder; H.J. Heinz’s planned $23 billion takeover by Berkshire Hathaway and
3G Capital; and Thermo Fisher Scientific’s $13.6 billion purchase of Life Technologies—the first half of 2013
was the slowest first six months for mergers in four years. Deals worth about $996.8 billion were announced in
that period, a sum that was down 13 percent compared with the year earlier. The number of deals announced
worldwide for the first six months was 16,808, the fewest for the period since 2003. Many analysts are confused
by the drop-off, as the price of borrowing money remains near historic lows, giving corporate buyers
and private equity firms alike relatively low costs for acquisitions.
July 2 The U.S. Federal Reserve and the FDIC release “living wills” for four banks: Wells Fargo & Company, HSBC
Holdings plc, The Royal Bank of Scotland Group plc, and BNP Paribas S.A., all of which fall under the category
of nonbank financial institutions and bank holding companies with assets between $100 billion and $250 billion.
The banks’ plans divide their assets into several material entities, which would undergo various bankruptcy
or receivership proceedings if the bank as a whole were to fail, giving the regulators a basic road map
for the supposed worst-case scenario. The first wave of banks to file resolution plans occurred in July 2012,
with the global behemoths with $250 billion or more in consolidated assets submitting their living wills, including
Bank of America Corp., Barclays PLC, Citigroup Inc., Credit Suisse AG, Deutsche Bank AG, the Goldman
Sachs Group Inc., JPMorgan Chase & Co., Morgan Stanley, and UBS AG.
July 9 The parent company of the New York Stock Exchange wins a contract to administer and improve the London
Interbank Offered Rate (“Libor”), the benchmark interest rate, which has long been set by the British Bankers’
Association. The move is a symbolic blow to a British financial industry that has been rocked by scandals and
forced to look to the outside for leadership.
The U.S. Financial Stability Oversight Council, making its first nonbank financial company designations,
selects American International Group and General Electric Capital Corporation for heightened supervision,
citing the firms’ interconnectedness within the financial system. The announcement by the council marks
the first use of its authority under Title I of the Dodd-Frank Act to subject a nonbank financial company to
consolidated supervision and enhanced prudential standards. Designation of the two firms subjects them to
supervision by the Federal Reserve and to enhanced prudential standards.
July 10 The European Commission proposes creating a single entity for winding down failed eurozone banks.
Under the Single Resolution Mechanism proposed, the European Central Bank (“ECB”) would take the lead
in determining when a bank within the group of countries that use the euro as their currency needs to be
dismantled and would then supervise the process of winding down that financial institution in conjunction
with national authorities.
July 11 U.S. Federal Reserve Chairman Ben Bernanke announces that the central bank will not begin to pare back its
QE3 bond-buying program.
The U.S. Treasury reports that the U.S. posted a $116.5 billion budget surplus in June, the biggest surplus since
July 12 Fitch cuts France’s credit rating to AA+ from AAA on the basis of the country’s uncertain economic outlook
amid the ongoing eurozone crisis and the need for structural reform.
July 18 The financially embattled City of Detroit files for bankruptcy protection in the largest-ever chapter 9 case for
a city in U.S. history.
The GAO releases a report examining the advantages and disadvantages of certain proposed bankruptcy
reforms, including the possibility of “giving financial regulators a greater role in financial company bankruptcies.”
The report, entitled “Financial Company Bankruptcies: Need to Further Consider Proposals’
Impact on Systemic Risk,” found that proposals to increase the role of financial regulators in order to manage
systemic risk may have “limited impact and raise certain implementation issues.” The GAO is required
under Dodd-Frank to report on ways to make the Bankruptcy Code “more effective in resolving certain
failed financial companies.”
July 19 A Michigan state court rules that Detroit’s chapter 9 filing violates the state constitution because it threatens
the accrued benefits of retirees.
July 20 At a summit in Moscow, G20 nations pledge to put growth before austerity, seeking to revive a global economy
that “remains too weak” and adjusting stimulus policies with care so that recovery is not derailed by volatile
financial markets. Finance ministers and central bankers sign off on a communiqué that acknowledges
the benefits of expansive policies in the U.S. and Japan but highlights the recession in the eurozone and a
slowdown in emerging markets.
August 2 The U.S. Labor Department reports that the unemployment rate decreased to 7.4 percent in July.
August 8 Michigan’s Saginaw County calls off a planned $60 million bond offering in an indication that Detroit’s
unprecedented chapter 9 case is having reverberating effects on the $3.7 trillion municipal bond market.
August 9 U.S. President Obama signs into law a measure restoring lower interest rates for student loans. The legislation
links student loan interest rates to the financial markets. If the economy improves as expected, it will become
more costly for the government to borrow money, and that cost would be passed on to students.
August 13 After a decade of supporting consolidation in the airline industry, the U.S. Justice Department sues to block
the proposed merger between American Airlines and US Airways. The move, joined by attorneys general from
six states and the District of Columbia, surprises industry officials, who had expected little resistance to the
deal, but it underscores a newly aggressive approach by the Justice Department’s Antitrust Division, which
has been more closely scrutinizing proposed mergers as the economy recovers.
August 14 Eurostat reports that Europe broke out of recession in the second quarter of the year amid stronger domestic
demand in France and Germany, ending a six-quarter downturn. The GDP of the 17-nation eurozone grew by
0.3 percent in the April–June period from the previous three months. On an annualized basis, the eurozone
grew by 1.2 percent in the second quarter, short of the second-quarter showing of 1.7 percent by the U.S. and
2.6 percent by Japan. This figure is nonetheless a relief to Europe, which has weathered an unemployment rate
that has risen to 12.1 percent and a sovereign debt crisis that raised existential questions about the euro. The
economy of the EU as a whole, which consists of 28 nations, also grew by 0.3 percent in the second quarter.
August 22 A study conducted by accounting experts at Duke University suggests that companies are reasonably good
predictors of their own bankruptcies, lending weight to an unpopular new accounting rule that would require
management to discuss company insolvency prospects in securities filings. The study looked at the “management
discussion and analysis” section of SEC filings for 262 companies that went bankrupt between 1995
and 2011. The researchers looked for either an explicit mention of insolvency or subtler language that suggested
a rocky future, such as “liquidate,” “deficit,” and “challenging.” It found an 85 percent correlation, 50
percent being pure chance and 100 percent being the ability to pinpoint bankruptcies. Other indicators, such
as auditor opinions and working capital ratios, bumped the precision to 91 percent. According to the authors,
the findings support the new rule proposed by the Financial Accounting Standards Board, which sets generally
accepted accounting rules for U.S. companies, mandating these “red flag” disclosures in 10-K filings.
August 26 The City of Harrisburg, Pennsylvania, reaches an agreement with its creditors to restructure the city’s debt
outside bankruptcy. A 357-page restructuring plan dubbed the “Harrisburg Strong Plan” is filed with the
state appellate court that is expected to consider the plan’s confirmation in the next two to three weeks.
The two key components of the plan are the sale of Harrisburg’s garbage incinerator and the leasing of its
August 30 The Central Statistical Office in New Delhi releases statistics showing that India’s economy slowed in early
summer to its weakest pace since the bottom of the global economic downturn in 2009. The accumulating
signs of economic distress—slower growth, a widening current-account deficit, higher oil prices, and rising
inflation in general—suggest that the month-long fall of the Indian rupee in currency markets may be a symptom
of fundamental troubles in the Indian economy and not just part of the broader difficulties experienced
by Asian emerging-market currencies in recent weeks. Broader investor disenchantment with emerging markets
has been compounded by worries about India’s economy, the third-largest in Asia after China’s and
Japan’s. Manufacturing and mining have been hit the hardest.
September 3 The U.S. Federal Reserve and the FDIC release a guide to be followed by smaller banks (those with $50 million
to $100 million in assets) as they prepare Dodd-Frank–mandated “tailored resolution plans.” In the plans,
the banks must provide hedging strategies, lists of counterparties, and other information that could be important
to winding down a bank during a crisis.
September 6 The U.S. Labor Department reports that the unemployment rate decreased to 7.3 percent in August.
September 12 A U.S. bankruptcy court confirms a chapter 11 plan for AMR Corp. that hinges on the now uncertain $11 billion
merger with US Airways Group, Inc.
EU legislators overwhelmingly approve a law that puts 130 of the eurozone’s largest banks under the direct
scrutiny of the ECB. To take effect, however, the measure still needs approval from the EU governments,
although that is expected to be a formality. The Single Supervisory Mechanism, the body it creates, is
expected to start work during the autumn of 2014 after the ECB conducts a “stress test” on the lenders coming
within its purview.
September 16 Forbes publishes its 34th annual listing of the richest people in America—“The Forbes 400.” The combined
wealth of those on the list is $2 trillion, up from $1.7 trillion in 2012, and the highest ever, due in part to the
strength of both the U.S. stock and real estate markets. Bill Gates retains the top spot on the Forbes 400 for
the 20th straight year, at $72 billion. He is once again the world’s richest person, having passed up Mexico’s
Carlos Slim in May. Warren Buffett (No. 2) is the biggest dollar gainer this year at $58.5 billion, up $12.5 billion
from last year. Larry Ellison (No. 3) remains unchanged on the list with $41 billion. Mark Zuckerberg is the
second-biggest gainer; ranked 20th with $19 billion, he returns to the Top 20 after dropping to No. 36 last
year, while Carl Icahn is back in the Top 20 for the first time since 2008, ranked 18th with $20.3 billion.
The World Economic Forum releases its Global Competitiveness Index for 2012–2013, which ranks Switzerland
atop the list of the world’s strongest economies. The list is based upon 12 pillars, including institutions, infrastructure,
microeconomic environment, health and primary education, higher education and training, goods
market efficiency, labor market efficiency, financial market development, technological readiness, market
size, business sophistication, and innovation. Rounding out the Top 10 on the list are Singapore, Finland,
Sweden, the Netherlands, Germany, the U.S., the U.K., Hong Kong, and Japan.
September 17 The U.S. Census Bureau reports that 46.5 million Americans are still living in poverty. Meanwhile, median
household income fell slightly to $51,017 per year in 2012, down from $51,100 in 2011. Income has tumbled
since the recession hit and is still 8.3 percent below where it was in 2007. Americans were richest in 1999,
when median household income was $56,080, adjusted for inflation. Women made 77 percent of what men
made, unchanged from the year before but up from 61 percent in 1960. The recession pushed many more
people into poverty. In 2010, the poverty rate equaled 15.1 percent and has barely fallen since then, the first
time since 1965 that the poverty rate has remained at or above 15 percent three years running. Those making
$23,492 per year for a family of four, or $11,720 for an individual, were considered to be living in poverty. While
the ranks of the poor are still elevated from the recession, overall poverty remains far below the 1959 rate of
22.4 percent, when the Census first began tracking the data. Over the last 25 years, the poverty rate has averaged
just over 13 percent.
September 18 The U.S. Federal Reserve announces that it has decided not to begin tapering off the third round of its QE3
program, sending markets soaring. The S&P 500 and the Dow close at all-time highs of 1,725.53 and 15,676.94,
September 19 A Pennsylvania Commonwealth Court judge announces that she will approve a financial recovery plan aimed
at bringing the City of Harrisburg out from under the shadow of hundreds of millions of dollars in debt and
allowing it to avoid a chapter 9 bankruptcy filing. The plan addresses more than $350 million in debt by providing
for, among other things, the sale of a debt-laden trash-to-energy incinerator facility and the monetization
of city parking facilities through their lease to a private company.
September 27 The Obama administration announces a plan committing at least $320 million in federal aid to the City of
Detroit as it attempts to reorganize in chapter 9.
September 29 The U.S. government barrels toward its first shutdown in 17 years after the Republican-run House, choosing
a hard line, votes to attach a one-year delay of President Obama’s health-care law and the repeal of a tax to
pay for it to legislation to keep the government running. The House’s vote all but ensures that large parts of
the government will be shuttered as of 12:01 a.m. on October 1. More than 800,000 federal workers deemed
nonessential face furloughs; millions more could be working without paychecks.
September 30 The U.S. Postal Service defaults on a $5.6 billion payment for retiree health benefits. Postal officials have long
complained about a congressional mandate that requires them to set aside billions of dollars for a retiree
health-care fund each year, pointing out that no other federal agencies are required to prefund for retirees
this way. The Postal Service defaulted on these prefund payments last year as well. In FY 2012, the Postal
Service lost a total of $15.9 billion, including $11.1 billion in defaulted payments that it owes to prefund health
benefits for retirees. In addition, the Postal Service hit its debt limit last year, which means that it cannot borrow
any more money from the U.S. Treasury. The Postal Service plans to cut 150,000 workers through 2015
and recently proposed a price hike for stamps, but officials have said that the crisis will not go away until
Congress eliminates the prefunding requirement.
October 1 At midnight, 800,000 U.S. federal workers are thrown temporarily out of work as the U.S. government partially
shuts down for the first time in 17 years in a standoff between President Obama and congressional
Republicans over health-care reform. However, the standoff does not prevent the Obama administration from
rolling out enrollment in health insurance marketplaces, the centerpiece of the most ambitious U.S. social
program in five decades. Republicans in the House of Representatives are trying to block the Affordable
Care Act by tying continued government funding to measures that would undermine it, but the Democraticcontrolled
Senate has repeatedly rejected those efforts.
October 8 U.S. President Obama nominates Janet L. Yellen to lead the U.S. Federal Reserve System. If confirmed by the
Senate, Ms. Yellen, 67, would be the first woman to lead the Fed.
October 9 In its “Global Financial Stability Report,” the IMF warns that the world’s financial system is still not as safe as it
should be five years after the fall of investment bank Lehman Brothers. One of the main reasons for the concerns
is the winding down of the U.S. Federal Reserve’s $85 billion-a-month QE3 strategy. The report states
that the primary challenge will be managing the side effects after the eventual withdrawal of accommodative
monetary policy in the U.S.
October 15 Wilbur Ross, whose Talmer Bancorp agreed to invest $97 million to take over Capitol Bancorp’s stakes in
its four remaining banks, announces that such deals without government assistance are fast becoming the
model for rescuing troubled banks. His private equity arm, WL Ross & Co., has invested more than $2 billion
in recent years to buy up struggling regional banks in the U.S. The use of chapter 11 to acquire banks before
they fail could also provide a welcome respite to weary bank regulators such as the Federal Reserve, which
is in charge of bank holding companies, and the FDIC, the agency in charge of taking over what is left of the
banks after their assets are seized and sold.
October 16 Puerto Rico’s Governor, Alejandro García Padilla, denies that Puerto Rico is near bankruptcy or might need
U.S. federal intervention. The territory is struggling with $70 billion in public debt and a 13.9 percent unemployment
rate, higher than that of any U.S. state.
October 17 U.S. President Obama signs a bill that opens the government, summons more than 300,000 government
employees back to work, and raises the nation’s $16.7 trillion borrowing limit, putting an end to a 16-day federal
government shutdown and ending the threat of a potential default on U.S. obligations.
October 18 The Centre for Economic Policy Research, a network of more than 700 economists based primarily in
European universities, issues a report stating that: (i) it is too early to declare that the eurozone has emerged
from recession; and (ii) the single-currency area’s return to growth in the second quarter may prove temporary.
By contrast, figures released in August 2013 by the EU’s official statistics agency, Eurostat, showed that
Europe broke out of recession in the second quarter of the year amid stronger domestic demand in France
and Germany, ending a six-quarter downturn.
October 22 The U.S. unemployment rate ticks down to 7.2 percent, reflecting continuing lackluster job growth and suggesting
that the U.S. Federal Reserve will continue its QE3 bond-buying stimulus program.
October 23 Bank of America is found liable by a jury for having sold defective mortgages, a victory for the government in
its aggressive effort to hold banks accountable for their role in the housing crisis. The jury also found a top
manager at Bank of America’s Countrywide Financial unit personally liable. Prosecutors have asked that Bank
of America pay a fine of $848 million.
October 29 The Dutch lender Rabobank admits to criminal wrongdoing by its employees and agrees to pay more than
$1 billion in criminal and civil penalties to settle investigations by U.S., British, and other authorities into the
Libor scandal. The bank is the fifth financial firm to settle accusations that its employees manipulated Libor.
October 30 The U.S. government reports that the budget deficit for FY 2013 dropped to $680.3 billion, less than half of what
it was when President Obama first took office; it is the first time in five years that the shortfall has been below
$1 trillion. While it remains the fifth-largest deficit in history, it is the lowest since the figure of $458.6 billion in
2008. Among the reasons cited are a growing economy, the end of a temporary Social Security tax cut, higher
tax rates on wealthy Americans, and the series of across-the-board spending cuts known as “sequestration.”
October 31 Eurostat reports that the number of unemployed in the 17-nation eurozone reached a record high of 12.2 percent
in September as the bloc’s nascent recovery failed to generate jobs.
November 1 U.S. food stamp cuts take effect, affecting nearly 48 million people, or one in seven Americans. The change in
the food stamp program, officially known as the “Supplemental Nutrition Assistance Program,” or “SNAP,” cuts
monthly benefits by 13.6 percent—or, more precisely, ends a 13.6 percent increase in SNAP benefits from the
American Recovery and Reinvestment Act of 2009. The food stamp cuts, which are projected to reduce federal
spending by $5 billion in the current fiscal year and $6 billion over the next two years, are separate from
additional cuts that House and Senate negotiators are considering as they work out a farm bill, of which the
food stamp program is a component.
November 7 The Royal Bank of Scotland agrees to pay the SEC $153.7 million to settle charges that it misled investors into
buying a risky mortgage-backed security offering, the latest move in a crackdown on the mortgage practices
that fueled the financial crisis.
Typhoon Haiyan (known in the Philippines as “Typhoon Yolanda”), unofficially the strongest recorded tropical
cyclone to make landfall, with wind speeds up to 315 km/h (195 mph), strikes the Philippines, killing thousands,
displacing millions, and wreaking havoc on the island nation’s economy.
November 8 In the wake of the 16-day U.S. government shutdown, the U.S. Labor Department reports that the unemployment
rate rose from 7.2 percent to 7.3 percent.
S&P downgrades France’s credit rating one notch from AA+ to AA, saying the government’s current policy
initiatives do not appear capable of addressing impediments to economic growth.
November 12 The U.S. Justice Department reaches a preliminary agreement to settle its fight with American Airlines and
US Airways over their proposed merger.
November 13 The U.S. Energy Information Administration reports that U.S. domestic oil production in October exceeded
imports for the first time in nearly two decades and that total crude oil imports were the lowest since
November 19 JPMorgan Chase and the U.S. Justice Department finalize a $13 billion settlement (the largest fine paid
by a bank in U.S. history), punctuating a long legal battle over the risky mortgage practices that became
synonymous with the financial crisis. The civil settlement resolves an array of state and federal investigations
into JPMorgan’s sale of troubled mortgage securities to pension funds and other investors from 2005 through
2008. Of the $13 billion total settlement, $7 billion will go to the Federal Housing Finance Agency, which oversees
Fannie Mae and Freddie Mac, and to other investors that sustained losses on securities sold by JPMorgan and
by two banks it bought during the financial crisis, Bear Stearns and Washington Mutual. Another $4 billion is
earmarked for mortgage relief for homeowners. The only penalty would be $2 billion to $3 billion for the dubious
securities sold by JPMorgan itself. The $13 billion deal comes just days after the bank struck a separate $4.5 billion
deal with a group of investors over the sale of soured mortgage-backed securities.
November 20 The Dow closes above 16,000, its first daily finish over that threshold.
November 22 A bankruptcy judge confirms a chapter 9 plan for Jefferson County, Alabama, that cuts its $3.1 billion sewer
debt nearly in half but places a heavy repayment burden on residents for decades to come. The plan incorporates
a sewer bond–repayment strategy and difficult cost-cutting measures that elected leaders have
implemented since putting the 658,000-resident county under chapter 9 protection two years ago. The plan
is premised upon a negotiated reduction of the county’s bond debt by approximately $1.4 billion.
November 29 Eurostat reports that unemployment in the 17-member eurozone dropped to 12.1 percent in October, the first
drop in the unemployment rate since February 2011. The unemployment rate in the 28 EU countries was
unchanged at 10.9 percent.
December 3 A U.S. bankruptcy court rules that the City of Detroit is eligible to file for chapter 9 bankruptcy and that
employee pensions are not entitled to any “heightened” protection in chapter 9, notwithstanding provisions
under the Michigan Constitution. Meanwhile, Alabama’s Jefferson County closes on a $1.78 billion sewer bond
deal, ending what had been the biggest U.S. municipal bankruptcy before Detroit filed for chapter 9 protection
The EU fines a group of global financial institutions (including, for the first time, two American banks)
a combined €1.7 billion to settle charges that they colluded to fix Libor and the Euro Interbank Offered
The Illinois legislature passes a deal to shore up the state’s debt-engulfed pension system by trimming
retiree benefits and increasing state contributions. With one of the U.S.’s worst-financed state employee pension
systems—some $100 billion in arrears—Illinois has been the focus of attention across the country as
states and municipalities struggle to come to grips with their own public pension problems.
December 6 The U.S. Department of Labor reports that the unemployment rate for November fell to 7 percent, down from
its most recent peak of 10 percent in October 2009.
December 9 AMR Corp. and US Airways Group, Inc., announce the completion of their merger to officially form American
Airlines Group Inc., the world’s largest airline, with a global network of nearly 6,700 daily flights to more than
330 destinations in over 50 countries and employing more than 100,000 people worldwide.
The U.S. Treasury sells the last of its remaining 31.1 million shares of GM stock. The taxpayer loss on the GM
bailout is $10.5 billion.
December 10 Five U.S. federal agencies vote to approve the “Volcker Rule,” the keystone of the most sweeping overhaul of
financial regulation since the Great Depression. The rule bans banks from most forms of proprietary trading.
It also requires banks to shape compensation so that it does not reward “prohibited proprietary trading” and
requires chief executives to attest that they have established programs for complying with the rule.
U.S. House and Senate budget negotiators agree on a budget deal that would raise military and domestic
spending over the next two years, shifting the pain of across-the-board cuts to other programs over the coming
decade and raising fees on airline tickets to pay for airport security. The agreement, which would finance
the government through September 30, 2015, would eliminate $63 billion in across-the-board domestic and
military cuts but would provide $23 billion in deficit reduction by extending a 2 percent cut to Medicare providers
December 16 Euler Hermes, the global leader in trade credit insurance, publishes its latest research on global business
insolvencies, forecasting that global insolvencies will increase by 2 percent in 2014, but that, by volume, the
total number of 2014 insolvencies will be 24 percent higher than the pre-crisis (2000–2007) average.
December 18 The U.S. Federal Reserve announces that it will reduce its purchases of Treasury bonds and mortgagebacked
securities by $10 billion a month beginning in January 2014. The Fed will still buy $75 billion worth
of these assets every month, but the $10 billion reduction is a sign that it feels confident enough about the
economy to dial back its QE3 strategy.
EU finance ministers reach an agreement on a general approach to winding down failed lenders. The future
Single Resolution Mechanism and Single Resolution Fund are key pillars of the planned banking union for the
eurozone, as well as an overhaul of financial rules throughout the 28-nation EU to keep countries from being
dragged down by weak financial institutions. The agreement still has to pass muster with EU legislators, who
have voiced concerns about being cut out of financing decisions concerning collapsing banks.
December 20 S&P strips the EU of its AAA credit rating in the wake of a bitter budget battle and the debt problems afflicting
a number of its members.
The U.S. Commerce Department reports that the U.S. economy grew at a surprisingly robust 4.1 percent
annual pace in the third quarter, the strongest advance in nearly two years and only the third time since 2006
that the economy had expanded so quickly from one quarter to the next. It is the latest evidence that the
generally sluggish recovery is gaining strength.
Deutsche Bank agrees to pay $1.9 billion to settle claims that it misled Fannie Mae and Freddie Mac over the
quality of home loans bundled into mortgage-backed securities, becoming the latest big bank to reach a
settlement with federal housing regulators. The Germany-based bank is the sixth entity to reach a settlement
with the Federal Housing Finance Agency, which had sued 18 banks and financial institutions in September
2011, alleging that the institutions misled Fannie and Freddie before the financial crisis over the creditworthiness
of borrowers and the quality of the loans that were packaged into securities.
December 26 U.S. President Obama gives his imprimatur to a two-year budget that alleviates the harshest effects of automatic
budget cuts on the Pentagon and domestic agencies, ending the threat of another partial government
shutdown in January 2014.
December 27 S&P reports that the number of corporate defaults for 2013 rose to 75, compared to 84 corporate defaults
during the full year of 2012.
December 28 Long-term unemployment benefits implemented in 2008 pursuant to a federal emergency relief program
expire for 1.3 million jobless U.S. workers after an extension of the program is omitted from the two-year budget
deal approved by President Obama on December 26.
December 29 France’s top court approves a proposal for companies to pay a 75 percent tax on annual salaries
exceeding €1 million, in line with President François Hollande’s drive to limit executive pay at a time of
TOP 10 BANKRUPTCIES OF 2013
As in 2012, banking and financial services companies were
conspicuously absent from the Top 10 List of public-company
bankruptcy filings for 2013. Only one brokerage firm and a
single bank holding company made the cut, further demonstrating
that the chaff in the banking and financial services
sectors has largely been winnowed in the aftermath of the
2008 financial crisis. Four of the Top 10 filings in 2013 involved
publishing or advertising media companies still struggling
to adapt to the rapid transformation from print to web- and
phone-based forms of media. The remaining Top 10 filings
were made by companies in the shipping, manufacturing,
distilling, and entertainment industries. Each company gracing
the Top 10 List for 2013 entered bankruptcy with assets
valued at more than $1 billion. Seven of the 10 both filed for
and emerged from bankruptcy in 2013.
Cengage Learning Inc. (“Cengage”), a textbook-publishing
company based in Stamford, Connecticut, with 5,500
employees, grabbed the brass ring for the largest publiccompany
bankruptcy filing of 2013. Cengage filed for chapter
11 protection on July 2, 2013, in New York with $7.5 billion
in assets. The filing was part of a restructuring agreement
with lenders that will eliminate approximately $4 billion of its
$5.8 billion in debt, much of it incurred in connection with the
2007 acquisition of Cengage by a partnership led by private
equity company Apax Partners LLP. One of the nation’s largest
publishers of textbooks and other educational content,
Cengage also sought bankruptcy protection to support its
long-term business strategy of transitioning from traditional
print models to digital educational and research materials.
Plano, Texas-based Penson Worldwide, Inc. (“Penson”), a provider
of financial clearing services and related products, traded
into the No. 2 position on the Top 10 list for 2013 when it filed
for chapter 11 protection in Delaware on January 11, 2013, with
$6.2 billion in assets and plans to sell off its assets, including
U.S. operating subsidiary Nexa Technologies, Inc. Once a major
handler of securities trades for U.S. brokerages, Penson never
recovered from the global financial crisis. The company stated
that its bankruptcy filing was triggered by lower equity trading
volume that, combined with historically low interest rates, led to
a liquidity crisis. The Delaware bankruptcy court confirmed a
liquidating chapter 11 plan for Penson on July 31, 2013.
Yellow Pages company Dex One Corporation (“Dex One”)
took the No. 3 spot on the Top 10 List for 2013 when it
(re)turned the page into chapter 11 in Delaware on March
17, 2013, with $2.8 billion in assets. Dex One filed a prepackaged
bankruptcy as part of a previously announced all-stock
merger deal with rival SuperMedia LLC (“SuperMedia”)—
No. 9 on the 2013 Top 10 List. Dex One was created as the
successor to directories-publishing giant R.H. Donnelley
Corp., which emerged from chapter 11 protection in February
2010. Like the newspaper industry, the Yellow Pages business
has not benefited from a broader advertising recovery,
since more consumers and advertising dollars have
migrated to the internet, accelerating the decline for the
industry over the past few years. Now known as Dex Media,
Inc., the merged companies exited from bankruptcy on April
30, 2013, as a marketing services company that helps local
businesses reach potential customers. The merger brought
together directory operations formerly part of Ameritech in
Illinois, Qwest and Verizon, for the first time since the Bell
System divestiture. Since merging, the two companies have
continued to conduct business at the local market level
under the SuperMedia and Dex One brands.
Athens-based Excel Maritime Carriers Ltd. (“Excel”) steamed
into the No. 4 berth on the Top 10 List for 2013 when it filed
a prenegotiated chapter 11 case in New York on July 1, 2013,
with $2.7 billion in assets to implement a restructuring with
the help of a capital infusion of up to $50 million and the
release of another $30 million in restricted cash. Excel owns
and operates dry bulk carriers and provides worldwide seaborne
transportation services for dry bulk cargoes, such as
iron ore, coal, and grain, as well as bauxite, fertilizer, and steel
products. The company owns a fleet of 39 vessels with a total
stowage capacity of approximately 3.6 million dead-weight
tonnage (DWT). Secured lenders were vastly under water at
the time of the filing due to volatility and overall declines in
Under the chapter 1 1 plan originally proposed by Excel,
secured lenders were to receive a restructured $771 million
credit facility and 100 percent of the reorganized company’s
stock. Through a side agreement, 60 percent of that
stock would be transferred to Ivory Shipping Co., which is
controlled by Excel chairman Gabriel Panayotides, allowing
him to retain control of Excel. Unsecured bondholders
initially challenged the fairness of the plan, which proposed
a 3 percent recovery to bondholders while effectively allowing
Panayotides to maintain control of the company. However,
Excel and its bondholders agreed on the terms of a revised
plan in late November, and a confirmation hearing was
scheduled for January 27, 2014.
Madison, Wisconsin-based Anchor BanCorp Wisconsin Inc.
(“Anchor BanCorp”) vaulted into the No. 5 position on the
Top 10 List for 2013 when it filed for chapter 11 protection in
Wisconsin on August 12, 2013, with $2.4 billion in assets and
$2.43 billion in debt. Anchor BanCorp filed a prepackaged
chapter 11 case, the highlight of which is an agreement
whereby investors infused $175 million of new capital into
the company in exchange for 96.7 percent of new common
stock in the reorganized company. Anchor BanCorp’s sole
preferred shareholder, the U.S. Department of the Treasury,
received 3.3 percent of the new common stock in the
restructured company. Anchor BanCorp owed $110 million in
Troubled Asset Relief Program (“TARP”) funds as of July 31,
2013, the fifth-largest outstanding TARP investment. The new
capital infusion was the keystone of a chapter 11 plan that the
bankruptcy court confirmed on August 30, 2013. The funding
allowed Anchor BanCorp to recapitalize AnchorBank, its bank
subsidiary and Wisconsin’s third-largest depository, with 55
branches. AnchorBank did not file for bankruptcy.
Milton, Georgia-based lead-acid battery manufacturer Exide
Technologies (“Exide”) powered into the No. 6 spot on the
Top 10 List for 2013 when it filed for chapter 11 protection for
the second time in little more than a decade in Delaware on
June 10, 2013, with $2.2 billion in assets. With nearly 10,000
employees, Exide manufactures and supplies lead-acid batteries
for transportation and industrial applications worldwide
under the Centra, DETA, Exide, Exide Extreme, Exide
NASCAR Select, Orbital, Fulmen, and Tudor brand names,
among others. Rising production costs, intense competition,
and reduced access to credit drained the battery maker’s
earnings and liquidity in recent years. In addition, Exide was
hurt by the global economic retraction and trouble with toxic
substance regulators in connection with its battery-recycling
facility in California. In 2002, Exide filed a chapter 11 case to
deal with $2.5 billion in acquisition debt. Its confirmed chapter
11 plan in that case eliminated $1.3 billion in debt.
The No. 7 position on the Top 10 List for 2013 went to Warsawbased
(but Mount Laurel, New Jersey-headquartered)
Central European Distribution Corp. (“CEDC”), one of the largest
producers of vodka in the world as well as Central and
Eastern Europe’s largest integrated spirit beverages business.
Headed by Russian billionaire Roustam Tariko, CEDC
filed for chapter 11 protection in Delaware on April 7, 2013,
with $2.1 billion in assets to manage heavy bond debt by
means of a prepackaged restructuring plan aimed at cutting
approximately $700 million in liabilities. The distiller lost
nearly 50 percent of its market value in 2012 amid slumping
sales, rising debt, and management transitions. On May 13,
2013, CEDC obtained confirmation of its prepackaged chapter
11 plan. Under the plan, Tariko received 100 percent of
CEDC’s newly issued stock in return for a new $277 million
capital infusion. Confirmation of the plan created an alliance
between CEDC and Russian Standard, the rival vodka maker
also owned by Tariko.
No. 8 on the Top 10 List for 2013 was dog-eared by RDA
Holding Co. (“RDA Holding”), a New York City-based company
that, through its subsidiaries, produces, publishes, and sells
print and digital magazines (including the iconic, 91-yearold
pocket-sized publication, Reader’s Digest, the highestcirculated
paid magazine in the world), along with books,
music, and videos, through various media channels. RDA
Holding reopened its chapter 11 book when it filed for bankruptcy
protection for the second time in four years in New
York on February 17, 2013, with $1.6 billion in assets. Having
emerged from an earlier bankruptcy in February 2010 with a
healthier balance sheet and a smaller publication footprint,
RDA Holding returned to chapter 11 in an effort to further
pare down its debt. RDA Holding was also hurt by continuing
changes in the print media industry that caused declines
in its North American book and home entertainment businesses,
as well as certain portions of its European business.
RDA Holding reprised its exit from chapter 11 after obtaining
confirmation of a plan on June 28, 2013, that ceded control of
the company to bondholders in exchange for the cancellation
of $231 million in debt.
SuperMedia LLC (“SuperMedia”) (formerly Idearc Media LLC
(“Idearc”)), a marketing company based in Dallas that provides
print, mobile, and internet advertising to small- and
medium-sized businesses, snagged the No. 9 position on
the Top 10 List for 2013. As discussed above, ninth-ranked
SuperMedia, which emerged from the bankruptcy of Idearc
in January 2010, filed a prepackaged chapter 11 case in
Delaware on March 17, 2013, with $1.4 billion in assets for the
purpose of consummating a merger with Yellow Pages company
Dex One—No. 3 on 2013’s Top 10 List. Since its merger
with Dex One Corporation and exit from bankruptcy in April
2013, SuperMedia has operated as a subsidiary of Dex Media,
Inc., the postmerger entity. Since merging, the two companies
have continued to conduct business at the local market level
under the SuperMedia and Dex One brands.
Atlantic City casino and resort owner Revel AC, Inc. (“Revel”)
folded into the final position on the Top 10 List for 2013
when it filed a prepackaged chapter 11 case in New Jersey
on March 25, 2013, with $1.2 billion in assets. Built at a cost
of $2.4 billion, Revel opened for business in April 2012 and
began to falter almost immediately. Revel misread customer
demand in the downtrodden New Jersey gambling mecca—
consumers wanted inexpensive, fast, and simple options
rather than over-the-top glamour. Revel exited bankruptcy
on May 23, 2013, after the court confirmed a debt-for-equityswap
reorganization plan that pared more than $1.2 billion, or
80 percent, of $1.5 billion in debt from the company’s balance
sheet. Revel has 1,399 hotel rooms and a casino with more
than 2,400 slot machines and 130 table games.
Other notable debtors (public and private) in 2013 included:
The City of Detroit, which became the largest U.S. city ever to
seek bankruptcy protection when it filed a chapter 9 petition
in Michigan on July 18, 2013. Detroit—which has lost 300,000
residents since 1995—is overwhelmed by as much as $18 billion
in long-term liabilities, including $9.4 billion in special revenue
bonds as well as debt related to the city’s general fund
and health-care benefits. Faced with a shrunken tax base, a
139-square-mile metropolitan area to maintain, and unsustainable
health-care and pension costs, the city’s expenditures
have exceeded revenues in each of the last four years
by an average of $100 million annually.
STX Pan Ocean Co. Ltd. (“STX”), a South Korean cargo-shipping
company on behalf of which a chapter 15 petition was
filed in New York on June 20, 2013, seeking recognition of the
company’s South Korean rehabilitation proceedings shortly
after four STX vessels were detained in Washington, California,
and Texas. The chapter 15 petition for STX, which suffered from
a decrease in cargo traffic volume and ocean freight fares due
to the global financial crisis, as well as an increased supply
of ships from Chinese shipbuilders, listed $6.0 billion in assets
and $4.4 billion in debt. The U.S. bankruptcy court entered an
order recognizing STX’s Korean reorganization as a “foreign
main proceeding” on July 12, 2013.
Privately held Taiwanese (but Houston-headquartered) shipping
company TMT USA Shipmanagement (“TMT”), which
filed for chapter 11 protection in Texas on July 20, 2013, listing
$1.5 billion in assets and $1.46 billion in debt, after the holders
of $800 million in bank debt seized seven of its 17 vessels in
ports from Antwerp to China. Owned by Taiwanese shipping
magnate Nobu Su, TMT has suffered from the same drop in
shipping rates that has plagued the entire industry since 2008.
Hoku Corp. (“Hoku”), a Pocatello, Idaho-based company that
operates as a solar energy products and services company
primarily in the U.S. Hoku filed a chapter 7 petition on July 2,
2013, in Idaho for the purpose of liquidating assets listed at
$670 million. With Chinese backing, Hoku invested more than
$600 million in a polysilicon plant in Pocatello that was never
completed and has now been abandoned. Two failed auctions
in the bankruptcy court yielded bids of no more than
$5 million for the mothballed facility until the court sanctioned
an $8.3 million offer for the plant on December 23, 2013, by a
Washington State construction company.
St. Louis-based Furniture Brands International, Inc. (“Furniture
Brands”), one of the largest U.S. furniture manufacturers—
its brands include Broyhill, Lane, Drexel Heritage, and
Thomasville. The company filed for chapter 11 protection in
Delaware on September 9, 2013, with $618 million in assets
and a plan to sell all but its Lane business to investment
firm Oaktree Capital Management for $166 million. Like other
domestic furniture manufacturers, Furniture Brands has been
hurt by the lingering effects of the recession and by foreign
competition. The company had sales of approximately $1 billion
in 2012, roughly half of what it generated a decade ago,
and has not made a profit since 2006. After an auction, the
bankruptcy court approved the sale on November 22, 2013,
but to a different purchaser, private equity firm KPS Capital
Partners LP, for $280 million.
Oklahoma City-based independent oil and natural gas
exploration and production company GMX Resources Inc.
(“GMX”), which filed for chapter 11 protection on April 1, 2013,
in Oklahoma with $542 million in assets. GMX was a victim of
depressed natural gas commodity prices and needed capital
expenditures for oil and gas operations. It has proposed
a chapter 11 plan whereby new common stock would be
exchanged for approximately $500 million in bond debt, ceding
control of the company to creditors.
Global Aviation Holdings Inc. (“Global Aviation”), a Peachtree,
Georgia-based company that, through its subsidiaries, World
Airways and North American Airlines, provides customized,
nonscheduled passenger and cargo air transport services
worldwide (both military and civilian). Global Aviation reprised
its role as chapter 11 debtor for the second time in less than
a year when it filed for bankruptcy on November 12, 2013, in
Delaware, listing between $500 million and $1 billion in assets.
The company traced its most recent financial difficulties to
decreased demand for military cargo and passenger services
and the shutdown of the U.S. government in October
2013, which significantly delayed payments owed to the carrier
for military flights.
Fairport, New York-based newspaper publisher GateHouse
Media, Inc. (“GateHouse”), which filed for chapter 11 protection
in Delaware on September 27, 2013, with $470 million in
assets and a prenegotiated plan to restructure approximately
$1.2 billion in debt. At the end of 2012, GateHouse owned and
operated 406 publications located in 21 states, including
daily and weekly newspapers, shoppers, and Yellow Pages
directories, as well as locally focused websites and mobile
sites. On November 6, 2013, the bankruptcy court confirmed
GateHouse’s chapter 11 plan, which canceled existing stock
and ceded control of the company to creditors. The plan,
however, awarded warrants to old shareholders to purchase
shares in New Media Investment Group Inc., a new holding
company that also includes Local Media Group, a chain of 33
local papers in seven states run by GateHouse.
Boca Raton, Florida-based FriendFinder Networks, Inc.
(f.k.a. Penthouse Media Group) (“FriendFinder”), publisher
of the late Bob Guccione’s iconic Penthouse magazine and
the operator of numerous adult-entertainment and dating
websites, which filed for chapter 11 protection in Delaware
on September 17, 2013, with $452 million in assets to consummate
a deal with noteholders that would reduce debt
by $300 million in exchange for ownership of the company.
While social media sites like Facebook and LinkedIn have
boomed in recent years, FriendFinder has not turned a net
profit since at least 2008. FriendFinder obtained confirmation
of its debt-for-equity-swap chapter 11 plan on December
16, 2013, and emerged from bankruptcy, now known as PMGI
Holdings Inc., on December 20, 2013.
Privately held, Mexico City-based telecommunications company
Maxcom Telecomunicaciones S.A.B. de C.V. (“Maxcom”),
which, together with 14 affiliates, filed for chapter 11 protection
in Delaware on July 23, 2013, with $400 million in assets
and $402 million in debt. Maxcom proposed a prepackaged
plan for recapitalization and debt restructuring involving a
$45 million cash infusion and tender offer for all its shares
from private equity firm Ventura Capital Privado, S.A. The
bankruptcy court confirmed Maxcom’s prepackaged chapter
11 plan on September 10, 2013.
United States—Commission to Study Proposed Changes to
Chapter 11. On April 19, 2012, a commission established by
the American Bankruptcy Institute (the “ABI Commission”) to
study the reform of chapter 11 of the Bankruptcy Code convened
its first public meeting in Washington, D.C. The ABI
Commission, which comprises nearly 130 corporate restructuring
experts serving on 13 advisory committees, conducted
11 public field hearings during 2013. The wide range of testimony
addressed proposals to: (i) change bankruptcy venue
rules; (ii) abolish the hard deadline on chapter 11 plan exclusivity;
(iii) reduce reorganization costs in small- to middlemarket
cases; (iv) establish a uniform structure and process
for section 363 sales; (v) recognize the new value corollary to
the absolute priority rule; (vi) adopt uniform procedures for
filing section 503(b)(9) claims for administrative expenses;
(vii) change the rules governing section 524(g) asbestos
trusts; (viii) amend rules governing pensions and retiree benefits;
(ix) change rules governing claims trading; (x) alter rules
governing nonresidential real property leases, intellectual
property licenses, trademarks, and patents; and (xi) revise
the safe-harbor provisions for financial contracts.
The ABI Commission expects to issue a written report
of its recommendations during ABI’s Winter Leadership
Conference in December 2014.
United States—Proposed Chapter 14 of the Bankruptcy
Code for Failing Banks. On December 19, 2013, Senators
John Cornyn (R-Texas) and Pat Toomey (R-Pennsylvania)
introduced legislation that would eliminate a section of the
Dodd-Frank Wall Street Reform and Consumer Protection Act
of 2010 (the “Dodd-Frank Act” or “Dodd-Frank”) and create
“chapter 14” of the Bankruptcy Code to prevent any systemically
important financial institution (“SIFI”) from being bailed
out with taxpayer funds. The bill, denominated the “Taxpayer
Protection and Responsible Resolution Act” (“TPRRA”), would
create the new chapter 14 as a vehicle for resolving failing
SIFIs in lieu of Title II of the Dodd-Frank Act, also known as
the Orderly Liquidation Authority (OLA) provision, which
would be repealed. TPRRA would authorize the Federal
Deposit Insurance Corporation (“FDIC”) to be appointed as
a receiver to carry out the liquidation of a failing financial
institution. A bank could file for chapter 14 protection if it
were insolvent, unable to pay its debts as they mature, or
left with depleted capital, or if one of these circumstances
were likely “sufficiently soon,” such that filing for bankruptcy
would prevent substantial harm to the financial stability of the
U.S. Failed banks’ risky assets would be transferred to bridge
companies, which would operate as new, solvent companies
that could continue to meet the failed banks’ financial obligations.
Shareholders of the banks and long-term creditors
would bear responsibility for the banks’ “bad decisions.” The
U.S. government would be prohibited from providing bailout
financing to a chapter 14 debtor.
United States—Proposed Changes to Bankruptcy Asbestos
Trust Rules to Promote Transparency. On November 13,
2013, the U.S. House of Representatives approved H.R. 982,
the Furthering Asbestos Claim Transparency Act of 2013
(the “FACT Act”). If enacted, the Fact Act would amend the
Bankruptcy Code to require all trusts established under
section 524(g) of the Bankruptcy Code in order to deal with
asbestos claims against chapter 11 debtors to file publicly
available reports on a quarterly basis, disclosing the details
of payment demands and disbursements, including the
names and exposure histories of claimants, except as provided
in a protective order or as necessary to prevent disclosure
of confidential medical records or protect against
identity theft. As proposed, the FACT Act would apply retroactively
to bankruptcy cases commenced and bankruptcy
trusts established before its passage.
United States—Final Bankruptcy-Fee Guidelines Issued.
Following the culmination of two public comment periods
spanning more than a year, the Office of the United States
Trustee, a unit of the U.S. Department of Justice (“DOJ”)
assigned to oversee bankruptcy cases, issued final guidelines
on June 11, 2013, governing the payment of attorneys’
fees and expenses in large chapter 11 cases—those with
$50 million or more in assets and $50 million or more in
liabilities. The guidelines, which apply to cases filed on or
after November 1, 2013, are intended to “enhance disclosure
and transparency in the compensation process and to help
ensure that attorneys’ fees and expenses are based on market
rates,” according to a June 11 press release from the DOJ.
According to the DOJ, the new guidelines reflect “significant
changes that have occurred in the legal industry as well as
the increasing complexity of business bankruptcy reorganization
United States—Proposed Changes to Treatment of
Collective Bargaining Agreements and Retiree Benefits in
Bankruptcy. On January 3, 2013, the Protecting Employees
and Retirees in Business Bankruptcies Act of 2013 (H.R.
100) was introduced by Representative John Conyers
(D-Michigan). The proposed legislation would amend sections
1 113 and 1114 and various other provisions of the
Bankruptcy Code to improve employee and retiree recoveries
for unpaid wages, severance pay, stock losses, and
Worker Adjustment and Retraining Notification Act damage;
would promote good-faith bargaining in connection
with motions to reject or revise collective bargaining agreements;
and would revise the standards for court approval of
executive and management retention, incentive, and other
bonus programs. Among other things, the bill proposed
that collective bargaining agreements could be modified
only to create the “minimum savings essential to permit
the debtor to exit bankruptcy, such that confirmation of a
chapter 11 plan would not be likely to be followed by the
liquidation, or the need for further financial reorganization,
of the debtor (or any successor to the debtor) in the shortterm.”
The bill is identical to bills proposed in the House of
Representatives and the Senate in 2012.
United States—Proposed Student Loan Relief. On January
24, 2013, Senator Richard Durbin (D-Illinois) introduced the
Fairness for Struggling Students Act of 2013 to address the
growing student loan crisis. The bill is intended to restore
fairness in student lending by treating privately issued
student loans the same as other types of private debt for
purposes of discharge in bankruptcy. Since 1978, government-
issued or guaranteed student loans have been nondischargeable
under the Bankruptcy Code. In 2005, the law
was changed to give private student loans the same status
in bankruptcy as government student loans. A companion
bill, the Know Before You Owe Private Student Loan Act of
2013 (H.R. 3612), would require schools to counsel students
before they incur expensive private student loan debt and
to inform them if they have any untapped eligibility for federal
student aid. It would also require the prospective borrower’s
school to confirm the student’s enrollment status,
cost of attendance, and estimated federal financial aid
assistance before a private student loan is approved.
Spain—Bank Restructuring Progresses. The capital structure
of the Asset Management Company for Assets Arising from
Bank Restructuring (“SAREB”) established in late November
2012 by the Fund for Orderly Bank Restructuring (Fondo de
Reestructuración Ordenada Bancaria (“FROB”)) in connection
with the Spanish banking sector’s recapitalization and
restructuring process was completed in 2013. The exclusive
purpose of SAREB is the ownership, management, and
administration (whether direct or indirect), as well as the
acquisition and sale, of distressed assets that have been
transferred to it by: (i) financial institutions that required public
assistance from FROB; and (ii) institutions that require
public funds, according to the Bank of Spain’s judgment and
independent analysis of the capital needs and the quality
of the assets of the Spanish financial system. SAREB will be
managing total assets of more than €50 billion.
Germany—Coordination of Affiliated Insolvency Cases. On
January 3, 2013, the German Ministry of Justice circulated
draft legislation that would establish procedures to govern
the coordination of insolvency proceedings of affiliated
companies. Existing German law does not provide for a joint
approach to such insolvencies, but is instead structured to
accommodate companies on an individual basis. The proposed
legislation is intended to change this, consistent with
broader EU legislative activity promoting closer cooperation
between courts and officeholders in the insolvency proceedings
of group companies engaged in economic activity in different
EU member states. Among other things, it provides for
a single insolvency court to have jurisdiction over all members
of an affiliated group.
France—New Law Governing Systemically Important
Financial Institutions. On July 26, 2013, Law No. 2013-672
was enacted to regulate banking activities in response to
lessons learned from the 2007–2008 financial crisis, which
highlighted the limited number of tools available to supervisory
authorities to limit the risks created in the financial
system by systemically important financial institutions. The
provisions of the law extend over a broad array of issues,
such as the ring-fencing of certain proprietary trading
activities, anti–tax haven rules, money laundering, high-frequency
trading, mandatory clearing, and central supervision
of counterparties. The law creates a new banking resolution
regime that applies to most financial institutions. Among
other powers, the French Prudential Control and Resolution
Authority (Autorité de contrôle prudentiel et de résolution)
now has the ability to implement a number of resolution
measures with respect to a failing institution, including
changing governance, recapitalizing, and suspending or
prohibiting certain business operations.
The Netherlands—Proposal for Prospective Insolvency
Trustees. The Minister of Justice proposed legislation in
2013 that would authorize the court appointment of a prospective
trustee (beoogd curator) for a company prior to
the commencement of formal insolvency proceedings for
the purpose of exploring potential restructuring and/or sale
opportunities. The proposal is part of a broader legislative
initiative that includes a proposal for compulsory extrajudicial
compositions and various measures designed to encourage
the continuation and reorganization of insolvent companies.
NOTABLE BUSINESS BANKRUPTCY DECISIONS
In Official Committee of Unsecured Creditors v. UMB Bank, N.A.
(In re Residential Capital, LLC), 2013 BL 317120 (Bankr. S.D.N.Y.
Nov. 15, 2013), the court held that unamortized original issue
discount (“OID”) arising from fair-market-value debt exchanges
should not be disallowed as unmatured interest under section
502(b) of the Bankruptcy Code. According to the court,
there existed “no commercial or business reason, or valid theory
of corporate finance, to justify treating claims generated
by face value and fair value exchanges differently in bankruptcy”
because: (i) the market value of the old debt is likely
depressed in both a fair-value and a face-value exchange; (ii)
OID is created for tax purposes in both fair-value and facevalue
exchanges; and (iii) there are concessions and incentives
in both fair-value and face-value exchanges. Furthermore,
the court emphasized, both kinds of exchanges offer companies
out-of-court restructuring opportunities to avoid the cost
and expense of a bankruptcy filing. Accordingly, the court held
that the Second Circuit’s ruling in LTV Corp. v. Valley Fidelity
Bank & Trust Co. (In re Chateaugay Corp.), 961 F.2d 378 (2d Cir.
1992), which addressed the bankruptcy treatment of OID generated
in connection with a face-value exchange (i.e., one in
which the principal amount of the debt is not reduced), should
control in fair-value and face-value situations.
Section 1111(b) provides that a secured claim will be treated
as a recourse claim even if it is not actually recourse to the
debtor by contract or under applicable state law. This means
that the creditor will have a secured claim to the extent of the
value of its collateral and an unsecured claim for any deficiency,
unless the class of claims of which the secured creditor
is a member makes a “section 1111(b) election” to have
all claims in the class treated as fully secured. In In re B.R.
Brookfield Commons No. 1, LLC, 2013 BL 305268 (7th Cir. Nov.
4, 2013), the Seventh Circuit concluded that “under § 1111(b)(1)
(A), the existence of a valid and enforceable lien is the only
prerequisite for § 1111(b)(1)(A) to apply,” and hence, regardless
of whether a nonrecourse second-lien claim is secured by
any value in the collateral, section 1111(b)(1)(A) treats the nonrecourse
claim as if it had recourse against the estate.
In In re MDC Systems, Inc., 488 B.R. 74 (Bankr. E.D. Pa. 2013),
the court rejected the majority view concerning which law
should be consulted to calculate the cap on future rent
claims under section 502(b)(6) of the Bankruptcy Code. The
court ruled that “[i]n no sense should the state law determination
of whether a ‘surrender’ or ‘repossession’ occurred
such as would eliminate any future claim for rent reserved
control the [Bankruptcy Code’s limitation on landlord claims].”
In In re Pax Am. Dev., LLC, 2013 BL 317133 (Bankr. C.D. Cal.
Nov. 15, 2013), the bankruptcy court, relying on the Ninth
Circuit’s ruling in Tilley v. Vucurevich (In re Pecan Groves of
Arizona), 951 F.2d 242 (9th Cir. 1991), held that, because the
only legal beneficiaries of the automatic stay are the debtor
and the bankruptcy trustee, a creditor does not have standing
to seek damages for violation of the automatic stay.
By contrast, in In re Killmer, 2013 BL 317124 (Bankr. S.D.N.Y.
Nov. 15, 2013), the court ruled that “[s]ince the automatic stay
is meant to prevent creditors from racing to the courthouse
to the detriment of other creditors, the Court sees no reason
why a creditor who has been harmed by a stay violation
should not be able to seek redress for its injury.”
In In re Ampal-American Israel Corp., 2013 BL 345421 (Bankr.
S.D.N.Y. Dec. 16, 2013), the court similarly concluded that a
creditor has standing to seek damages for violation of the
automatic stay and that, if the creditor is an individual, he or
she may seek damages for willful violation of the stay under
section 362(k) of the Bankruptcy Code. However, because
the complaining individuals were former officers and directors
of the debtor (i.e., potential litigation defendants), the
court ruled that the movants lacked “prudential” standing,
since they: (i) lacked creditor status; and (ii) were complaining
about a third party’s potential assertion of estate claims
(which, if true, would cause only generalized rather than specific
AVOIDANCE ACTIONS/TRUSTEE’S AVOIDANCE AND STRONGARM
In re Tronox Inc., 2013 BL 344086 (Bankr. S.D.N.Y. Dec. 12,
2013), raised “issues of first impression regarding the application
of the fraudulent conveyance laws in the face of significant
environmental and tort liability.” The bankruptcy court
ruled that entities which orchestrated the divestiture of a
group of companies’ oil and gas assets valued at approximately
$14 billion, while leaving the companies with billions
in legacy environmental and tort liabilities, acted with intent
to “hinder and delay” the companies’ creditors and that the
spinoff transaction was consequently avoidable in the chapter
11 cases of the debtor companies as an actual fraudulent
transfer under Oklahoma’s version of the Uniform Fraudulent
Transfer Act and section 544(b) of the Bankruptcy Code. The
court also ruled that the transaction was avoidable as a constructively
fraudulent transfer because the debtors were rendered
insolvent as a consequence of the spinoff transaction
and did not receive reasonably equivalent value in exchange.
The court determined that the debtors were entitled to
recover damages but that the transferee defendants would
be entitled to a claim against the bankruptcy estates under
section 502(h) of the Bankruptcy Code in the amount of
whatever damages they could prove they suffered as a
consequence of avoidance. The bankruptcy court rejected
the defendants’ argument that the transferee of an avoided
fraudulent transfer is always entitled to a section 502(h)
claim equal to the amount of the avoided transfer, but it left
for another day a calculation of the allowed amount of the
claim. That calculation will require consideration of, among
other things, the percentage dividend realized by general
unsecured creditors under the debtors’ confirmed chapter
11 plan and whether the percentage dividend should be
adjusted to account for the “dilutive effect” of inclusion of the
section 502(h) claim in the creditor pool.
In The Majestic Star Casino, LLC v. Barden Development, Inc.
(In re The Majestic Star Casino, LLC), 716 F.3d 736 (3d Cir.
2013), the Third Circuit considered as a matter of first impression
whether a nondebtor company’s decision to abandon its
classification as an “S” corporation for federal tax purposes—
forfeiting the pass-through tax benefits that the parent company
and its chapter 11 debtor subsidiary had enjoyed—is
void as a postpetition transfer of “property of the bankruptcy
estate” or is avoidable under sections 362, 549, and 550 of
the Bankruptcy Code. Rejecting the rationale of In re Trans-
Lines West, Inc., 203 B.R. 653 (Bankr. E.D. Tenn. 1996), and its
progeny, the Third Circuit ruled that S-corp status is neither
“property” nor “property of the estate” within the meaning of
section 541 of the Bankruptcy Code and, consequently, that
the parent company’s actions were not void or avoidable.
In Paloian v. LaSalle Bank, N.A., 619 F.3d 688 (7th Cir. 2010),
the Seventh Circuit ruled as a matter of first impression
that the trustee of a securitized investment pool can be a
“transferee” within the meaning of section 550(a)(1) of the
Bankruptcy Code for the purpose of avoiding transfers.
However, the court of appeals rejected a bankruptcy court’s
finding that a chapter 11 debtor was insolvent by valuing its
contingent liabilities at 100 percent, while valuing contingent
assets at zero, and it remanded the case below for further
findings on the issue of solvency. As part of that analysis,
the bankruptcy court had considered whether a purportedly
bankruptcy-remote special purpose entity (“SPE”) formed as
a subsidiary of the chapter 11 debtor whose sole purpose
was to purchase and hold the debtor’s receivables was truly
a separate entity and therefore bankruptcy-remote.
On remand, the bankruptcy court ruled in Paloian v. LaSalle
Bank, N.A. (In re Doctors Hosp. of Hyde Park, Inc.), 2013 BL
273656 (Bankr. N.D. Ill. Oct. 4, 2013), that the SPE was indeed
“operationally” separate and distinct from the debtor.
Cognizant of the repercussions for the distressed lending
industry if it concluded otherwise, the court wrote that “[an
SPE’s] status as an independent economic unit is the entire
basis on which the lender chooses to extend credit” and that
there is “good reason to avoid judicial disruption of commercial
transactions based on a balancing of factors susceptible
to subjective interpretation.” The bankruptcy court dismissed
the fraudulent transfer claims because the trustee failed to
establish that the debtor was insolvent or that the payments
the trustee sought to recover were made with the debtor’s
property (as distinguished from the SPE’s property).
In Richardson v. Checker Acquisition Corp. (In re Checker
Motors Corp.), 495 B.R. 355 (Bankr. W.D. Mich. 2013), the
court held that: (i) insolvency for the purpose of avoiding a
constructive fraudulent transfer under section 548(a)(1)(B)
of the Bankruptcy Code is determined solely on the basis
of claims within the meaning of the definition of “claim” in
section 101(5); and (ii) a chapter 11 debtor’s withdrawal liability
from a multi-employer pension plan does not become a
“claim” within the meaning of section 101(5) until the debtor
has actually withdrawn from the plan. The court ruled that
the chapter 1 1 trustee could not rely upon the debtor’s
potential withdrawal liability to establish constructive fraud
under section 548(a)(1)(B) because the debtor had not withdrawn
from the multi-employer plan prior to the commencement
of its bankruptcy case.
BANKRUPTCY COURT POWERS/JURISDICTION
The ability of a bankruptcy court to reorder the priority of
claims or interests by means of equitable subordination or
recharacterization of debt as equity is generally recognized.
Even so, the Bankruptcy Code itself expressly authorizes
only the former of these two remedies. This has led to uncertainty
in some courts concerning the extent of their power to
recharacterize claims as equity and the circumstances warranting
recharacterization. The Ninth Circuit had an opportunity
to consider this issue in Official Committee of Unsecured
Creditors v. Hancock Park Capital II, L.P. (In re Fitness Holdings
International, Inc.), 714 F.3d 1141 (9th Cir. 2013). The court ruled
that “a court has the authority to determine whether a transaction
creates a debt or an equity interest for purposes of § 548,
and that a transaction creates a debt if it creates a ‘right to
payment’ under state law.” By its ruling, the Ninth Circuit overturned
long-standing Ninth Circuit bankruptcy appellate panel
precedent to the contrary and became the sixth federal circuit
court of appeals to hold that the Bankruptcy Code authorizes
a court to recharacterize debt as equity.
In Lindsey v. Pinnacle Nat’l Bank (In re Lindsey), 726 F.3d 857
(6th Cir. 2013), the Sixth Circuit contributed to a growing split
in authority by holding that it did not have appellate jurisdiction
to review a district court’s affirmance of a bankruptcy
court order confirming a chapter 11 plan. The Sixth Circuit
joined the Second, Eighth, Ninth, and Tenth Circuits in foreclosing
an automatic right of appellate review from an order
denying confirmation of a plan. See In re Lievsay, 118 F.3d
661 (9th Cir. 1997); In re Lewis, 992 F.2d 767 (8th Cir. 1993); In
re Simons, 908 F.2d 643 (10th Cir. 1990); Maiorino v. Branford
Savings Bank, 691 F.2d 89 (2d Cir. 1982). By contrast, the
Third, Fourth, and Fifth Circuits have held that a debtor may
seek immediate appellate review of an order denying confirmation
of its proposed plan when, on balance, consideration
of certain pragmatic factors, such as judicial economy and
expeditious resolution of the bankruptcy case, lean in the
debtor’s favor. See Mort Ranta v. Gorman, 721 F.3d 241 (4th
Cir. 2013); In re Armstrong World Indus., 432 F.3d 507 (3d Cir.
2005); In re Bartee, 212 F.3d 277 (5th Cir. 2000).
The U.S. Supreme Court’s 2011 ruling in Stern v. Marshall,
132 S. Ct. 56 (2011), continues to complicate the day-to-day
operation of bankruptcy courts scrambling to deal with a deluge
of challenges—strategic or otherwise—to the scope of
their “core” authority to issue final orders and judgments on
a wide range of disputes. In Stern, the court ruled that, to the
extent that 28 U.S.C. § 157(b)(2)(C) purports to confer authority
on a bankruptcy court to finally adjudicate a state law
counterclaim against a creditor which filed a proof of claim,
the provision is constitutionally invalid. The mayhem among
bankruptcy and appellate courts continued throughout 2013.
In Wellness Int’l Network, Ltd. v. Sharif, 727 F.3d 751 (7th Cir.
2013), the Seventh Circuit sided with the Sixth Circuit (see
Waldman v. Stone, 698 F.3d 910 (6th Cir. 2012)), by ruling
that: (i) a constitutional objection based on Stern is not
waivable because it implicates separation-of-powers principles,
and thus, the objection may be raised for the first
time on appeal; and (ii) consent cannot cure such a constitutional
deficiency. The Seventh Circuit based its ruling on
many of the same principles articulated in Waldman, noting
that Stern did not raise questions of subject matter jurisdiction
(which is not waivable), but instead called into question
the structural division of authority between Article III courts
and non-Article III courts (e.g., bankruptcy courts), as contemplated
by the U.S. Constitution.
The Seventh Circuit also questioned the current practice of
many courts of resolving Stern issues by permitting appellate
courts to “construe” orders of bankruptcy courts as reports
and recommendations, subject to adoption by the district
court, should the district court decide that the bankruptcy
court lacked the constitutional authority to enter a final order.
The Seventh Circuit suggested in dicta that bankruptcy
courts may not hear pretrial matters because there is no
explicit statutory authorization for bankruptcy courts to hear
such matters, as is the case with magistrate judges.
In Peterson v. Somers Dublin Ltd., 729 F.3d 741 (7th Cir. 2013),
the Seventh Circuit ruled that a waiver of the right to a
judgment by an Article III court is enforceable and that the
court’s decision in Wellness Int’l (issued only two weeks earlier)
had involved the issue of “forfeiture” rather than “waiver,”
or “a belated objection rather than unanimous consent.” The
Seventh Circuit also noted the following about the effect of
the defendant’s filing of a proof of claim:
The current dispute comes within a bankruptcy
judge’s authority, notwithstanding Stern, because all
of the defendants submitted proofs of claim as the
Funds’ creditors and thus subjected themselves to
preference-recovery and fraudulent-conveyance
claims by the Trustee. See 11 U.S.C. § 502(d). The
Supreme Court held in [Katchen v. Landy, 382 U.S.
323 (1966), and Langenkamp v. Culp, 498 U.S. 1043
(1991)] that Article III authorizes bankruptcy judges to
handle avoidance actions against claimants. Stern
stated that its outcome is consistent with those decisions.
[Wellness Int’l] likewise observes . . . that there
is no constitutional problem when a bankruptcy
judge adjudicates a trustee’s avoidance actions
against creditors who have submitted claims.
On June 24, 2013, the U.S. Supreme Court agreed to review
the Ninth Circuit’s 2012 ruling that a Stern objection is waivable.
See Executive Benefits Insurance Agency, Inc. v. Arkison
(In re Bellingham Insurance Agency, Inc.), 702 F.3d 553 (9th
Cir. 2012), cert. granted, 133 S. Ct. 2880 (2013). In Bellingham
Insurance, the Ninth Circuit ruled that, even though a federal
statute empowers bankruptcy judges to enter final judgments
in fraudulent conveyance actions against a “nonclaimant”
(i.e., someone who has not filed a proof of claim),
the U.S. Constitution forbids entry of a final order because
those claims do not fall within the “public rights exception.”
However, the court explained, defendants in such avoidance
proceedings may (and in this case did) consent to the entry
of a final judgment by the bankruptcy court, even if that consent
was implied from the defendants’ failure to assert their
right to entry of final judgment by an Article III court. In addition,
the Ninth Circuit emphasized that a bankruptcy court
may still hear and make recommendations regarding any
statutorily “core” proceedings in which the court lacks the
authority to enter a final judgment.
In Frazin v. Haynes & Boone, LLP (In re Frazin), 732 F.3d 313
(5th Cir. 2013), the Fifth Circuit held that, under Stern, the
bankruptcy court lacked jurisdiction to enter a final judgment
on a chapter 13 debtor’s state law negligence, deceptive
trade practices, and breach-of-fiduciary-duty counterclaims
against attorneys seeking payment of fees for services performed
in connection with the representation of the debtor
in nonbankruptcy litigation. The court noted that “[a]lthough
the [Supreme] Court stated that its decision [in Stern] was
‘narrow,’ its reasoning was sweeping.” The Fifth Circuit concluded
that, with respect to state law counterclaims that are
not necessarily resolved in the claims-allowance process,
Stern unequivocally overruled circuit precedent holding that
a bankruptcy court can enter final judgments in all statutorily
core proceedings. The Fifth Circuit rejected the argument
that a debtor can consent to final adjudication in a bankruptcy
court, writing that when “separation of powers is implicated
in a given case, the parties cannot by consent cure the
In BP RE, LP v. RML Waxahachie Dodge, LLC (In re BP RE,
LP), 2013 BL 313900 (5th Cir. Nov. 11, 2013), the Fifth Circuit
held that, on the basis of Stern, if the parties to a noncore
state law adversary proceeding brought by a debtor against
a third party consent to bankruptcy court adjudication, the
bankruptcy court has statutory power to adjudicate the case
but lacks constitutional authority to enter a final judgment.
According to the court, “Parties cannot consent to circumvention
of Article III that impinges on the structural interests
of the judicial branch,” and “notions of consent and waiver
cannot be dispositive because the limitations serve institutional
interests that the parties cannot be expected to
protect.” The Fifth Circuit vacated the bankruptcy court’s
putative final judgment and remanded the case below for the
court to issue proposed findings of fact and conclusions of
law as to the debtor’s state law claims that were related to
the bankruptcy estate.
In Nortel Networks Inc. v. Joint Adm’rs for Nortel Networks UK
Ltd., 2013 BL 339861 (3d Cir. Dec. 6, 2013), the Third Circuit
declined to compel arbitration between divisions of Nortel
Networks Corp. (“Nortel”) and their creditors in a battle over
the division of $7.5 billion in liquidation proceeds of the
defunct Canadian telecom company, ruling that the agreement
at the heart of the dispute does not require arbitration.
The court affirmed a bankruptcy court ruling (see In re Nortel
Networks Inc., 2013 BL 92666 (Bankr. D. Del. Apr. 3, 2013)),
rejecting a request by the U.K. division of Nortel to prevent
the bankruptcy court from deciding the dispute over the
company’s asset allocation.
Nortel liquidated substantially all of its assets in 2009 after
seeking court protection in the U.S., the U.K., and Canada,
raising approximately $9 billion. The company, its global
affiliates, and other creditors reached an agreement at the
outset of the bankruptcy proceedings to expedite the sale
process by deferring any decision regarding allocation of
the sales proceeds among the stakeholders involved. Of
those proceeds, approximately $7.5 billion are being held
in an escrow account in New York. According to the Third
Circuit, the absence of any express use of the word “arbitration”
in the agreement demonstrated that there was no
intent to use arbitration as a means of resolving disputes
over sales proceeds. The administrators of Nortel’s U.K. division
argued that the parties agreed to arbitration because
the contract used the term “dispute resolver.” However, the
Third Circuit concluded that the term could encompass
many things, including arbitrators, mediators, or the courts.
The court also rejected the U.K. administrators’ contention
that the bankruptcy court authorized arbitration when it
approved the agreement.
CHAPTER 11 PLANS
Until 2013, no circuit court of appeals had weighed in on the
implications of the U.S. Supreme Court’s pronouncement in
Bank of Amer. Nat’l Trust & Savings Ass’n v. 203 North LaSalle
Street P’ship, 526 U.S. 434 (1999), that property retained by
a junior stakeholder under a cram-down chapter 11 plan in
exchange for new value “without benefit of market valuation”
violates the “absolute priority rule.” That changed with
In re Castleton Plaza, LP, 707 F.3d 821 (7th Cir. 2013), where
the Seventh Circuit reversed a bankruptcy court ruling that a
proposed plan under which an “insider” of the debtor would
receive 100 percent of the equity in the reorganized company
in exchange for a cash contribution passed muster under the
absolute priority rule despite less than full payment of senior
creditors. As a matter of first impression, the Seventh Circuit
ruled that: (i) a distribution under the plan of new equity to
the insider (the sole former shareholder’s spouse) conferred
necessary to trigger extinguishment of a lien under section
1141(c) “requires more than mere passive receipt of effective
notice” of the chapter 11 case. The ruling is a cautionary tale
for plan proponents intent upon ensuring that the terms of a
chapter 11 plan providing for the treatment of secured creditor
claims are binding.
The importance of finality in the context of confirmation of a
chapter 11 plan that provides for the reorganization or liquidation
of a debtor was the subject of the Fifth Circuit’s ruling
in Anti-Lothian Bankr. Fraud Comm. v. Lothian Oil, Inc. (In re
Lothian Oil, Inc.), 2013 BL 17873 (5th Cir. Jan. 23, 2013). The
court ruled that the 180-day limitation period in section 1144
of the Bankruptcy Code for seeking revocation of a plan confirmation
order on the basis of fraud may not be tolled.
In In re Indianapolis Downs, LLC, 486 B.R. 286 (Bankr. D. Del.
2013), the debtor’s equity holders attempted to thwart confirmation
of a prenegotiated chapter 11 plan by arguing that
a “lockup,” or plan support, agreement among the debtors
and a large group of secured creditors violated the solicitation
requirements of the Bankruptcy Code and that the votes
of the signatory creditors should therefore be disallowed, or
“designated.” The bankruptcy court rejected the argument in
an important ruling that may finally put to rest any lingering
doubts about the validity of postpetition lockup agreements,
at least in Delaware.
In In re Residential Capital, LLC, 2013 BL 171624 (Bankr.
S.D.N.Y. June 27, 2013), the court concluded that the business
judgment standard applies when considering whether
a postpetition plan support agreement among chapter 11
debtors and various stakeholders should be approved. It also
held that the “solicitation” prohibition in section 1125 of the
Bankruptcy Code did not apply to the plan support agreement
because approval of such an agreement does not
ensure that a plan embodying its terms will be confirmed,
nor does it bind the objecting parties from challenging, or
the court from rejecting, a plan substantially on the terms set
forth in the agreement.
The process of classifying claims and interests under a
chapter 1 1 plan is sometimes an invitation for creative
machinations designed to muster adequate support for
confirmation of the plan. “Strategic” classification can entail,
a benefit on the former shareholder; and (ii) the sufficiency of
the “new value” proffered by the insider had not been tested
by competition and thus violated the absolute priority rule.
Soon after the Seventh Circuit handed down Castleton Plaza,
a bankruptcy court in the Seventh Circuit applied the ruling
to preclude confirmation of a new value plan providing for
distribution of new equity to an insider without competition.
See In re GAC Storage Lansing, LLC, 2013 BL 53422 (Bankr.
N.D. Ill. Feb. 27, 2013) (“In light of the Castleton decision, the
Court determines that the absolute priority rule applies,
despite the fact that Schwartz is not a direct owner or investor.
The Debtor’s Plan proposes to give Schwartz, an insider
of the Debtor, preferential access to an investment opportunity
in the Reorganized Debtor and is therefore subject to
competitive bidding, as the holding in Castleton instructs.”),
amended sub nom. In re GAC Storage El Monte, LLC, 489 B.R.
747 (Bankr. N.D. Ill. 2013).
In In re RTJJ, Inc., 2013 BL 31910 (Bankr. W.D.N.C. Feb. 6, 2013),
the court held that market valuation is not necessary when
the debtor’s exclusive right to propose and solicit acceptances
for a plan has expired. “[W]hen exclusivity has expired
and there is no option value to the right to propose a plan,”
the court wrote, “the value of the property being retained
should be determined based on normal valuation basis (i.e.,
the balance sheet of the reorganized debtor or by capitalizing
its projected income).”
A long-standing legal principle is that liens pass through
bankruptcy unaffected. Like every general rule, however, this
tenet has exceptions. One of them can be found in 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.”
Although the language of the provision is unambiguous,
several courts have added a judicial gloss by requiring the
creditor to “participate in the reorganization” as a prerequisite
to the application of section 1141(c).
Precisely what constitutes such “participation,” however, is an
unsettled question. This controversial issue was addressed
by the Fifth Circuit in Acceptance Loan Co., Inc. v. S. White
Transp., Inc. (In re S. White Transp., Inc.), 725 F.3d 494 (5th Cir.
2013), wherein the court ruled that the level of participation
among other things, “artificial impairment,” or the discretionary
“manufacturing” of an impaired class as a way to
satisfy section 1129(a)(10) of the Bankruptcy Code, which
provides that a plan may be confirmed only if a class of
impaired claims accepts the plan. In Western Real Estate
Equities, LLC v. Village at Camp Bowie I, LP (In re Village
at Camp Bowie I, LP), 710 F.3d 239 (5th Cir. 2013), the Fifth
Circuit joined the Ninth Circuit (see L & J Anaheim Assocs.
v. Kawasaki Leasing Intl., Inc. (In re L & J Anaheim Assocs.),
995 F.2d 940 (9th Cir. 1993)), in holding that section 1129(a)
(10) “does not distinguish between discretionary and economically
driven impairment.” However, the court held that
artificial impairment may be relevant in assessing whether a
chapter 11 plan has been proposed in bad faith.
In In re Texas Grand Prairie Hotel Realty, LLC, 2013 BL 56845
(5th Cir. Mar. 4, 2013), the Fifth Circuit clarified its position
regarding the applicability of the Supreme Court’s decision in
Till v. SCS Credit Corp., 541 U.S. 465 (2004), to the selection of
an appropriate cram-down interest rate in a chapter 11 plan.
The court affirmed a lower-court ruling in which the debtors
and their secured creditor stipulated to the use of Till’s
“prime rate plus” method, but it emphasized that Till, which
was a plurality decision construing cram-down confirmation
in a chapter 13 case, does not provide the exclusive methodology
by which chapter 11 cram-down interest rates are set.
The Fifth Circuit explained that Till’s “prime-plus approach”
was endorsed by a plurality of the Supreme Court and many
bankruptcy courts, and thus, the court could not find that
relying on Till constituted reversible error. However, the court
wrote that “we do not suggest that the prime-plus formula is
the only—or even the optimal—method for calculating the
Chapter 11 cram down rate.”
In re KB Toys Inc., 2013 BL 317570 (3d Cir. Nov. 15, 2013), added
yet another chapter to the ongoing controversy concerning
whether sold or assigned claims can be subject to disallowance
under section 502(d) of the Bankruptcy Code on the
basis of the seller’s receipt of a voidable transfer. The decision
was an unwelcome missive for claims traders. For the
first time since the enactment of the Bankruptcy Code in 1978,
a circuit court of appeals concluded that “because § 502(d)
permits the disallowance of a claim that was originally owned
by a person or entity who received a voidable preference that
remains unreturned, the cloud on the claim continues until the
preference payment is returned.” By its ruling, which the court
was careful to emphasize “only concerns trade claims,” the
Third Circuit staked out what now can fairly be characterized
as the majority approach to this issue.
In Westcon Grp. N. Am., Inc. v. RBS Citizens, N.A. (In re
NobleHouse Techs., Inc.), 2013 BL 355106 (Bankr. N.D.N.Y. Dec.
24, 2013), the court denied a motion under section 510(c)
of the Bankruptcy Code to equitably subordinate a claim
asserted by an assignee of bank debt based in part on misconduct
alleged to have been committed by the assignor.
Even so, the court, citing Enron Corp. v. Avenue Special
Situations Fund II, LP (In re Enron Corp.), 333 B.R. 205 (Bankr.
S.D.N.Y. 2005), noted that “[t]he parties agree that Citizens
did not engage in inequitable conduct. [But] [t]he transfer of
CAC’s claim to Citizens . . . was subject to all defenses and
liabilities, including, equitable subordination.”
The latest salvo regarding “triangular setoff” in bankruptcy
was fired by a Delaware bankruptcy court in Sass v. Barclays
Bank PLC (In re American Home Mortgage Holdings, Inc.),
501 B.R. 44 (Bankr. D. Del. 2013). The court ruled that, without
moving for relief from the stay, the nondebtor counterparty
to a swap or repurchase agreement cannot exercise control
over estate property by retaining funds in exercising alleged
triangular setoff rights because the mutuality required by
section 553 of the Bankruptcy Code is lacking.
Section 552(b)(2) of the Bankruptcy Code provides that if
a creditor prior to bankruptcy obtained a security interest
in rents paid to the debtor, that security interest extends
to postpetition rents, to the extent provided in the security
agreement. Courts have disagreed, however, on the question
of whether the debtor must provide “adequate protection”
with respect to such postpetition rents. In Putnal v. SunTrust
Bank, 489 B.R. 285 (M.D. Ga. 2013), the court joined what
appears to be a growing majority of courts in holding that a
secured creditor’s interest in postpetition rents is entitled to
separate and independent adequate protection, even if the
creditor’s interest in the rent-producing real property itself is
adequately protected. In so ruling, the district court expressly
rejected two approaches—the “replacement lien” and “dual
valuation” theories—which some courts have employed in
holding that no separate adequate protection with respect to
postpetition rents is required.
CROSS-BORDER BANKRUPTCY CASES
October 17, 2013, marked the eight-year anniversary of
the effective date of chapter 15 of the Bankruptcy Code.
Governing cross-border bankruptcy and insolvency cases,
chapter 15 is patterned after the Model Law on Cross-
Border Insolvency (the “Model Law”), a framework of legal
principles formulated by the United Nations Commission
on International Trade Law in 1997 to deal with the rapidly
expanding volume of international insolvency cases. The
Model Law has now been adopted in one form or another
by 20 nations or territories. There were several notable rulings
handed down in 2013 in connection with cross-border
In a matter of first impression, the Second Circuit ruled in
Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.),
714 F.3d 127 (2d Cir. 2013), that a foreign debtor’s center of
main interests (“COMI”) must be determined on the basis of
the debtor’s “activities at or around the time the Chapter 15
petition is filed,” rather than on the commencement date of
the foreign proceeding. The court also held that the “public
policy” exception to chapter 15 relief in section 1506 of the
Bankruptcy Code is to be narrowly construed.
In Jaffé v. Samsung Electronics Co., Ltd., 2013 BL 335753
(4th Cir. Dec. 3, 2013), the bankruptcy court had entered an
order in July 2009 recognizing the German insolvency proceeding
of Qimonda AG (“Qimonda”), once one of the world’s
largest manufacturers of dynamic random access memory,
as well as a supplemental order pursuant to section 1521 of
the Bankruptcy Code (authorizing discretionary relief) that
made section 365 of the Bankruptcy Code, which does not
normally apply to cases under chapter 15, “applicable in this
proceeding.” The German administrator informed licensees
of Qimonda’s 4,000 cross-licensed U.S. patents that their
licenses were being canceled in the German insolvency proceeding
pursuant to a provision in the German Insolvency
Code akin to section 365. Thereafter, certain U.S. patent
licensees asserted that they were entitled to the protections
of section 365(n), which, unlike section 365’s counterpart in
German law, limits a bankruptcy trustee’s ability to unilaterally
reject licenses to the debtor’s intellectual property by giving
licensees the option to retain their rights under the licenses.
The administrator then sought modification of the U.S. bankruptcy
court’s supplemental order to remove the reference
to section 365 altogether or to qualify it by inserting
a proviso that section 365 would apply “only if the Foreign
Representative rejects an executory contract pursuant
to Section 365 (rather than simply exercising the rights
granted . . . pursuant to the German Insolvency Code).” In
In re Qimonda AG, 2009 BL 249856 (Bankr. E.D. Va. Nov. 19,
2009), the court ruled that deference to German law was
appropriate, and it entered an amended supplemental order
that maintained the general applicability of section 365 but
included the proviso (somewhat modified) requested by
the administrator. The licensees appealed to the district
court, which affirmed the ruling in part in In re Qimonda
AG Bankruptcy Litigation, 433 B.R. 547 (E.D. Va. 2010), but
remanded the case below to determine whether restricting
the applicability of section 365(n) was “manifestly contrary
to the public policy of the United States” and whether the
licensees would be “sufficiently protected” if section 365(n)
did not apply.
On remand, the bankruptcy court ruled in In re Qimonda
AG, 462 B.R. 165 (Bankr. E.D. Va. 2011), that the protections
of section 365(n) are available to licensees of U.S. patents
in a chapter 15 case, even when those protections are not
available under the foreign law applicable to the foreign
debtor. The court found that a refusal to apply section 365(n)
was “manifestly contrary to the public policy of the United
States” within the meaning of section 1506 and resulted in
the licensees’ not being “sufficiently protected.” The court
accordingly denied the foreign representative’s motion to
strike section 365(n) from the amended supplemental order.
Due to the importance of the issue, the district court certified
a direct appeal of the ruling to the Fourth Circuit. See Jaffé
v. Samsung Electronics Co., Ltd. (In re Qimonda AG), 470 B.R.
374 (E.D. Va. 2012).
The Fourth Circuit affirmed in Jaffé v. Samsung. At the outset,
the court observed that:
[t]his appeal presents the significant question under
Chapter 15 of the U.S. Bankruptcy Code of how to
mediate between the United States’ interests in recognizing
and cooperating with a foreign insolvency
proceeding and its interests in protecting creditors
of the foreign debtor with respect to U.S. assets, as
provided in 11 U.S.C. §§ 1521 and 1522.
The Fourth Circuit ruled, among other things, that the bankruptcy
court reasonably exercised its discretion in balancing
the interests of the licensees against the interests of the
debtor and in finding that application of section 365(n) was
necessary to ensure that licensees of Qimonda’s U.S. patents
were sufficiently protected.
In In re Drawbridge Special Opportunities Fund LP, 2013 BL
341634 (2d Cir. Dec. 11, 2013), the Second Circuit, on direct
appeal from a bankruptcy court, held that a foreign debtor
must have either a business or property in the U.S. to make the
debtor’s foreign bankruptcy or insolvency proceeding eligible
for recognition under chapter 15. The court reversed a bankruptcy
court’s 2012 order granting chapter 15 recognition to the
Australian bankruptcy proceeding of Queensland, Australiabased
property finance group Octaviar Administration Pty Ltd.
(“Octaviar”), concluding that the bankruptcy court: (i) erroneously
found that section 109(a) of the Bankruptcy Code, which
requires a debtor to either own property or conduct business
in the U.S., does not apply to a foreign entity seeking relief
under chapter 15; and (ii) improperly granted chapter 15 recognition
to Octaviar’s Australian bankruptcy proceeding in the
absence of any evidence that Octaviar was domiciled, did
business, or had assets in the U.S.
Section 103(a) of the Bankruptcy Code, the Second Circuit
explained, clearly states that “this chapter”—i.e., chapter 1,
which includes section 109(a)—and “sections 307, 362(o),
555 through 557, and 559 through 562 apply in a case under
chapter 15.” Among other things, the court rejected arguments
by Octaviar’s foreign representatives that: (i) Octaviar
need not comply with section 109(a) because technically
it is a debtor not under the Bankruptcy Code, but under
Australian law, noting that “the presence of a debtor is inextricably
intertwined with the very nature of a Chapter 15 proceeding,
both in terms of how such a proceeding is defined
and in terms of the relief that can be granted”; and (ii) to
qualify for recognition of its Australian bankruptcy proceeding
under chapter 15, Octaviar was required only to meet the
definition of “debtor” in section 1502(1) (i.e., “an entity that is
the subject of a foreign proceeding”) and not section 109(a).
In re Fairfield Sentry Limited, 484 B.R. 615 (Bankr. S.D.N.Y. 2013),
contributed to the ongoing debate about the role of “comity”
(the recognition that one sovereign nation extends within its
territory to the legislative, executive, or judicial acts of another
sovereign, with due regard for the rights of its own citizens) in
cross-border bankruptcy cases under chapter 15. Recourse to
chapter 15 generally, and the utilization of section 363 of the
Bankruptcy Code in chapter 15, can be especially valuable
in cases where the representative of a foreign debtor wants
to monetize assets located in the U.S. and where the foreign
insolvency scheme involved does not provide for “free and
clear” sales. In Fairfield Sentry, the court emphasized the
preeminent role of comity in chapter 15, ruling that plenary
review by a U.S. court under section 363 of a sale transaction
approved by a foreign tribunal is not appropriate.
By contrast, the bankruptcy court in In re Kemsley, 489 B.R.
346 (Bankr. S.D.N.Y. 2013), was more critical of a foreign court’s
determinations that would support a finding of COMI or an
“establishment” for purposes of recognition under chapter 15.
In Kemsley, the U.S. bankruptcy court concluded that the COMI
of an individual chapter 15 debtor should be determined as
of the date of the commencement of his foreign bankruptcy
proceeding, rather than the chapter 15 petition date. Because
the debtor was living in the U.S. at the time he commenced
an insolvency proceeding in the U.K., the bankruptcy court
ruled that his COMI was in the U.S. at that time, despite the U.K.
court’s determination that he was eligible to file for insolvency
in the U.K. The bankruptcy court accordingly refused to recognize
the debtor’s U.K. bankruptcy case as a “foreign main
proceeding” under chapter 15. Also, on the basis of its conclusion
that the debtor did not even have a “place of operations”
in the U.K. for carrying out nontransitory economic activity, the
court denied the petition for recognition of the U.K. bankruptcy
case as a “foreign nonmain proceeding.”
In In re Worldwide Educ. Services, Inc., 494 B.R. 494 (Bankr.
C.D. Cal. 2013), the court ruled that “the standard of proof
for preliminary injunctive relief should apply” to a foreign
representative’s emergency motion during the “gap” period
between the filing of a chapter 15 petition and the court’s
entry of an order of recognition for implementation of a
provisional stay under sections 105, 362, and 1519 of the
Bankruptcy Code. However, the court also noted that an
adversary proceeding subject to the procedural rules set
forth in Part VII of the Federal Rules of Bankruptcy Procedure
is not required to request provisional injunctive relief during
the gap period.
In In re ABC Learning Ctrs. Ltd., 728 F.3d 301 (3d Cir. 2013),
the Third Circuit held that an Australian liquidation proceeding
should be recognized as a “foreign main proceeding”
under chapter 15 even though: (i) the debtor’s assets were
fully encumbered by liens; and (ii) an Australian receivership
was pending concurrently with the liquidation. The court
also ruled that the automatic stay prevented the efforts of
an unsecured judgment creditor to levy on the debtor’s U.S.
assets because, although fully leveraged, the assets were
“property of the debtor.”
In In re AJW Offshore, Ltd., 488 B.R. 551 (Bankr. E.D.N.Y. 2013),
the court ruled that the Bankruptcy Code does not prohibit a
bankruptcy court from authorizing a foreign representative in
a chapter 15 case to employ turnover powers available under
sections 542 and 543 of the Bankruptcy Code. According to
the court, access to turnover powers under section 1521(a)(7)
is conditioned upon the provision of sufficient protections to
creditors and other stakeholders under section 1522, which
requires a balancing of the respective parties’ interests.
In In re Millard, 2013 BL 325599 (Bankr. S.D.N.Y. Nov. 21, 2013),
the court ruled that a foreign debtor need not be insolvent as
a condition to recognition of the debtor’s foreign bankruptcy
or insolvency proceeding under chapter 15 of the Bankruptcy
Code. According to the court, a ruling to the contrary “would
require a rewriting of [chapter 15].”
In In re Sino-Forest Corporation, 2013 BL 328891 (Bankr.
S.D.N.Y. Nov. 25, 2013), the bankruptcy court, addressing the
issue for the first time since the Fifth Circuit’s decision in Ad
Hoc Group of Vitro Noteholders v. Vitro S.A.B. de C.V. (In re
Vitro S.A.B. de C.V.), 701 F.3d 1021 (5th Cir. 2012), ruled that an
order of a foreign insolvency court approving a third-party
nondebtor release as part of a global settlement is entitled to
comity in a chapter 15 case.
In Rajala v. Gardner, 709 F.3d 1031 (10th Cir. 2013), the Tenth
Circuit joined the Second Circuit and departed from the Fifth
Circuit by holding that an allegedly fraudulently transferred
asset is not property of the estate until recovered pursuant
to section 550 of the Bankruptcy Code and therefore is
not covered by the automatic stay. According to the court,
its decision “gives Congress’s chosen language its ordinary
meaning, and abides by a rule against surplusage.”
EXECUTORY CONTRACTS AND UNEXPIRED LEASES
In In re Eastman Kodak Co., 495 B.R. 618 (Bankr. S.D.N.Y.
2013), the court, in an apparent matter of first impression,
held that a commercial lease timely assumed under section
365(d)(4) of the Bankruptcy Code may be assigned at a later
date after the expiration of the provision’s 210-day deadline.
According to the court, interpreting the Bankruptcy Code to
permit the assignment of a previously assumed commercial
lease beyond the deadline for assumption “reasonably balances
the goal of providing protection to landlords and the
goal of maximizing the value of a debtor’s estate.”
Section 365(d)(3) of the Bankruptcy Code mandates a
trustee or chapter 11 debtor in possession to timely satisfy
postpetition “obligations” under any unexpired lease
of commercial property with respect to which the debtor
is the lessee pending a decision to assume or reject the
lease. The timing of certain “obligations” arising under an
unexpired lease has created some controversy. In a matter
of first impression, the court held in WM Inland Adjacent
LLC v. Mervyn’s LLC (In re Mervyn’s Holdings, LLC), 2013 BL
5408 (Bankr. D. Del. Jan. 8, 2013), that a claim arising from
an indemnification obligation under a commercial lease
was entitled to administrative expense status under section
365(d)(3). According to the court, although the indemnification
“claim” arose prepetition because it was contained in a
prepetition contract, the indemnification “obligation” for purposes
of section 365(d) did not arise until litigation was filed
for breach postpetition.
In Marciano v. Chapnick (In re Marciano), 708 F.3d 1123 (9th
Cir. 2013), the Ninth Circuit disagreed with the Fourth Circuit’s
approach in Platinum Fin. Servs. Corp. v. Byrd (In re Byrd), 357
F.3d 433 (4th Cir. 2004), ruling that an unstayed, enforceable
state court judgment—despite an appeal—is per se a claim
against the debtor that is not contingent as to liability or the
subject of a bona fide dispute as to liability or amount for the
purpose of determining whether the claimant is eligible to
be a petitioning creditor in an involuntary bankruptcy case
under section 303(b)(1) of the Bankruptcy Code.
By contrast, in In re Fustolo, 2013 BL 347141 (Bankr. D. Mass.
Dec. 16, 2013), the court adopted the minority Byrd approach
to the question on the basis of: (i) First Circuit bankruptcy
and appellate panel precedent adopting the burden-shifting
approach set forth in Byrd, although not specifically with
respect to unstayed state court judgments on appeal; and
(ii) evidence that a bona fide dispute existed in the case
before it regarding the amount of the judgment, which satisfied
the standard articulated in Byrd. Although respectful of
the rationale of the Ninth Circuit in Marciano, the court wrote
that “the instant case exemplifies the rare circumstance
where the amount of the judgment is in bona fide dispute.”
The court also held that, where only part of a claim is subject
to dispute, the claimant can nevertheless qualify as a petitioning
creditor, provided the undisputed portion of the claim
exceeds the statutory threshold in section 303(b)(1).
“Safe harbors” in the Bankruptcy Code designed to minimize
“systemic risk”—disruption in the securities and commodities
markets that could otherwise be caused by a counterparty’s
bankruptcy filing—have been the focus of a considerable
amount of judicial scrutiny in recent years. A ruling handed
down by the Second Circuit in 2013 widens a rift among the
federal circuit courts of appeal concerning the scope of the
Bankruptcy Code’s “settlement payment” defense to avoidance
of a preferential or constructively fraudulent transfer.
In Official Committee of Unsecured Creditors v. American
United Life Insurance Co. (In re Quebecor World (USA) Inc.),
719 F.3d 94 (2d Cir. 2013), the Second Circuit held that securities
transfers may qualify for this section 546(e) safe harbor
even if the financial institution involved in the transfer is
“merely a conduit.”
In Grayson Consulting, Inc. v. Wachovia Securities, LLC (In re
Derivium Capital LLC), 716 F.3d 355 (4th Cir. 2013), the Fourth
Circuit, in addition to finding that the transfer of certain
securities as part of a Ponzi scheme could not be avoided
because it did not involve “property of the debtor,” ruled as
a matter of first impression at the court of appeals level that
commission payments can be shielded from recovery by the
“settlement payment” defense of section 546(e).
In Whyte v. Barclays Bank PLC, 494 B.R. 196 (S.D.N.Y. 2013), the
trustee of a chapter 11 plan litigation trust to which certain
creditors’ state law claims had been assigned attempted to
avoid payments made to a swap participant as constructive
fraudulent transfers under state law and section 544(b) of
the Bankruptcy Code, despite the safe harbor for such transfers
in section 546(g). The trustee argued that, because section
546(g) applies only to “an estate representative who is
exercising federal avoidance powers under [section 544 of]
the Bankruptcy Code,” section 546(g) should not apply to
“claims asserted by creditors” or by a litigation trustee acting
on their behalf. The court rejected this contention, holding
that section 546(g) impliedly preempted the trustee’s attempt
to resuscitate fraudulent-avoidance claims as the assignee
of certain creditors “where, as here, she would be expressly
prohibited by section 546(g) from asserting those claims as
assignee of the debtor-in-possession’s rights (or, indeed, as
the functional equivalent of a bankruptcy trustee).”
In re Lehman Brothers Holdings Inc., 2013 BL 349216 (Bankr.
S.D.N.Y. Dec. 19, 2013), is the most recent decision considering
the scope of the safe harbor for liquidating, terminating,
and accelerating swap agreements. The court examined
what it means for a nondefaulting swap counterparty to have
the unlimited contractual right to liquidate a swap agreement
and whether that protected right extends to the contractually
prescribed procedures for calculating amounts due and
owing from one counterparty to another. It concluded that
“the right of the non-defaulting party to rely upon contractual
norms for disposing of collateral is an integrated aspect of
what it means to cause the liquidation of a swap agreement
and necessarily is protected by the language of Section 560
of the Bankruptcy Code.” A contrary ruling, the court wrote,
“would strip away the defining characteristics of a contractual
right to liquidation that by statute may not be limited in
any manner,” relegating the nondefaulting party “to the bare
ability to cause a liquidation without reference to the related
provisions of the swap agreement that enable counterparties
to achieve a predictable, agreed resolution of their respective
LABOR AND EMPLOYMENT ISSUES
In Sun Capital Partners III, LP v. New England Teamsters &
Trucking Indus. Pension Fund, 724 F.3d 129 (1st Cir. 2013), the
First Circuit held as a matter of first impression that a private
equity fund which exercised management control over one
of its portfolio companies qualified as a “trade or business”
that could be held jointly and severally liable for the multiemployer
pension plan withdrawal liability incurred by the
portfolio company under the Employee Retirement Income
Security Act of 1974.
Angles v. Flexible Flyer Liquidating Trust (In re Flexible Flyer
Liquidating Trust), 2013 BL 35609 (5th Cir. Feb. 11, 2013),
examined a debtor-employer’s responsibilities under the
federal Worker Adjustment and Retraining Notification Act,
29 U.S.C. § 2101 et seq. (“WARN”). The Fifth Circuit affirmed
a bankruptcy court determination that a debtor-employer
was not required to give 60-day WARN notification to its
employees because a sudden, unanticipated termination
of financing which forced the company to file for bankruptcy
protection satisfied WARN’s notification exception for
“unforeseeable business circumstances.”
In In re Motions for Access of Garlock Sealing Technologies
LLC, 488 B.R. 281 (D. Del. 2013), the court reversed lowercourt
rulings denying a chapter 11 debtor access to exhibits
accompanying statements filed under Rule 2019 of the
Federal Rules of Bankruptcy Procedure by attorneys representing
multiple asbestos claimants in 12 separate bankruptcy
cases. According to the court, “As the 2019 Exhibits
are judicial records that were filed with the Bankruptcy Court,
there is a presumptive right of public access to them,” and
the appellees failed to rebut that presumption. The ruling
reflects a growing trend promoting the public interest in
transparency in asbestos-related bankruptcy cases.
In In re City of Detroit, 2013 BL 337226 (Bankr. E.D. Mich.
Dec. 5, 2013), the bankruptcy court ruled that the City of
Detroit is eligible to be a debtor under chapter 9 of the
Bankruptcy Code, making Detroit the largest U.S. city ever
to be adjudged eligible for bankruptcy protection. Among
other things, the court concluded that: (i) chapter 9 does
not violate the uniformity requirement of the Bankruptcy
Clause (Art. I § 8) or the Contract Clause (Art. I § 10) of the
U.S. Constitution; (ii) chapter 9 does not violate the Tenth
Amendment in accordance with long-standing U.S. Supreme
Court precedent; (iii) the Michigan law (§ 18 of P.A. 436, M.C.L.
§ 141.1558 (“P.A. 436”)) specifically authorizing a municipality
to file for chapter 9 protection is not unconstitutional;
(iv) the state court’s ruling in Webster v. State of Michigan,
No. 13-734-CZ (Mich. July 19, 2013), that P.A. 436 violates the
Michigan Constitution is void because it was entered after
the chapter 9 filing date in violation of the automatic stay; (v)
Detroit is insolvent within the meaning of section 101(32)(C)
of the Bankruptcy Code; (vi) the size of Detroit’s debts and
problems made it “impracticable” for Detroit’s emergency
manager to negotiate concessions from creditors before
recommending the chapter 9 filing; and (vii) Detroit filed its
chapter 9 petition in good faith, as required by section 921(c).
The court also made it clear that the Pensions Clause of
the Michigan Constitution (Art. IX § 24) simply ensures that
public employee pensions are treated as contractual obligations
rather than gratuitous promises. According to the
court, “Because under the Michigan Constitution, pension
rights are contractual rights, they are subject to impairment
in a federal bankruptcy proceeding” like other contractual
obligations. The court cautioned, however, that it would be
careful before approving any cuts in monthly payments to
retirees, noting that it “will not lightly or casually exercise the
power under federal bankruptcy law to impair pensions.”
On December 17, 2013, the bankruptcy court certified that
Detroit’s eligibility for bankruptcy involves a matter of public
importance, so that if an appeal is authorized, it should go
directly to the Sixth Circuit. At the same time, however, the
bankruptcy court recommended that no appeal should be
authorized at this time because it would disrupt the progress
of the ongoing bankruptcy case.
Jones Day is representing the City of Detroit in connection
with its chapter 9 filing.
In In re City of Stockton, 486 B.R. 194 (Bankr. E.D. Cal. 2013),
the court ruled that Rule 9019 of the Federal Rules of
Bankruptcy Procedure, which applies to settlements in cases
under other chapters of the Bankruptcy Code, does not
apply to chapter 9 debtors due to the jurisdictional limitations
imposed on a bankruptcy court by section 904 of the
Bankruptcy Code. Section 904 provides that, absent the consent
of a chapter 9 debtor, a bankruptcy court “may not . . .
interfere with . . . any of the political or governmental powers
of the debtor . . . [or] any of the property or revenues of the
debtor.” The court reasoned that a settlement and payments
made pursuant thereto would fall within the purview of section
904 because it would necessarily involve the use of the
debtor’s property and revenues. On the basis of the provision’s
plain language, the court held that, although a chapter
9 debtor may seek court approval of a settlement with creditors,
it is not required to do so.
On October 7, 2013, the U.S. Supreme Court (see Argentina v.
NML Capital, Ltd., 2013 BL 277670 (Oct. 7, 2013)), denied the
Republic of Argentina’s seemingly premature petition for the
court to review a nonfinal 2012 ruling by the Second Circuit
(NML Capital, Ltd. v. Republic of Argentina, 699 F.3d 246 (2d
Cir. 2012)). That ruling upheld a lower court’s orders barring
Argentina from paying holders of debt restructured in 2005
and 2010 without also paying holdout bondholders in full, but
it remanded to the trial court on the issue of implementation
of the remedy.
On November 1, 2013, in a summary order without explanation,
a three-judge panel of the Second Circuit refused to
lift a stay of execution, pending possible en banc or U.S.
Supreme Court review, of its August 23, 2013, ruling upholding
a lower court’s order directing Argentina to pay holdout
bondholders $1.33 billion. See NML Capital, Ltd. v. Republic of
Argentina, 727 F.3d 230 (2d Cir. 2013).
On November 18, 2013, the Second Circuit rejected
Argentina’s request that the court reconsider its August 23
ruling en banc. The court also denied requests by groups
holding restructured bonds to reconsider the case.
FROM THE TOP
The U.S. Supreme Court handed down only one bankruptcy
decision in 2013. In a unanimous ruling, the court held in
Bullock v. BankChampaign N.A., 133 S. Ct. 1754 (2013), that
the term “defalcation” for purposes of denying discharge
of a debt under section 523(a)(4) of the Bankruptcy Code
includes a “culpable state of mind” requirement involving
knowledge of, or gross recklessness with respect to, the
improper nature of a fiduciary’s behavior.
On June 17, 2013, the Court granted a petition for a writ of certiorari
in Law v. Siegel (In re Law), 2011 BL 148411 (9th Cir. June
6, 2011), cert. granted, 133 S. Ct. 2824 (2013), a case involving
the question of whether a bankruptcy trustee has the power
to impose an “equitable surcharge” against exempt property
as a result of a chapter 7 debtor’s misconduct in fabricating
a lien on his homestead to deceive creditors. The First and
Ninth Circuits have held that, under certain circumstances,
bankruptcy courts have the power to impose an equitable surcharge
on otherwise exempt property which a debtor shielded
from creditors, but the Tenth Circuit has ruled otherwise.
On June 24, 2013, the Supreme Court agreed to review a
Ninth Circuit decision that a party may waive its right to
object, on the basis of the Supreme Court’s ruling in Stern
v. Marshall, 132 S. Ct. 56 (2011), to a bankruptcy court’s entry
of a final order resolving a matter outside the court’s “core”
jurisdiction. See Executive Benefits Insurance Agency, Inc. v.
Arkison (In re Bellingham Insurance Agency, Inc.), 702 F.3d
553 (9th Cir. 2012), cert. granted, 133 S. Ct. 2880 (2013).
On November 26, 2013, the Supreme Court granted a writ
of certiorari in Clark v. Rameker, 714 F.3d 559 (7th Cir. 2013),
cert. granted, 2013 BL 328399 (Nov. 26, 2013), to decide
whether an inherited individual retirement account (“IRA”)
is exempt from a bankruptcy estate under section 522 of
the Bankruptcy Code, which exempts “retirement funds to
the extent that those funds are in a fund or account that is
exempt from taxation” under certain provisions of the Internal
Revenue Code. In Clark, the Seventh Circuit ruled that an IRA
which the debtor inherited from her mother was not exempt
from the bankruptcy estate. The ruling conflicted with a Fifth
Circuit decision, creating a circuit split that may now be
resolved by the Supreme Court.
NOTABLE EXITS FROM BANKRUPTCY IN 2013
Company Filing Date (Bankr. Court) Effective Date Assets Industry Result
MF Global Holdings Ltd. and 04/05/2013 CD
MF Global Finance USA, Inc. 10/31/2011 (S.D.N.Y.) 06/04/2013 ED $40.5 billion Financial Services Liquidation
AMR Corporation 11/29/2011 (S.D.N.Y.) 12/09/2013 ED $25.0 billion Airline Reorganization/Merger
Ambac Financial Group, Inc. 11/08/2010 (S.D.N.Y.) 04/29/2013 ED $18.9 billion Financial Services Reorganization
Residential Capital LLC 05/14/2012 (S.D.N.Y.) 12/17/2013 ED $15.7 billion Mortgage Banking Liquidation
FirstFed Financial Corp. 01/06/2010 (C.D. Cal.) 01/02/2013 ED $7.5 billion Bank Holding Reorganization
Eastman Kodak Co. 01/19/2012 (S.D.N.Y.) 09/03/2013 ED $6.2 billion Imaging Reorganization
Penson Worldwide, Inc. 01/11/2013 (D. Del.) 08/15/2013 ED $6.2 billion Banking and Finance Liquidation
Jefferson County, Alabama 11/09/2011 (N.D. Ala.) 12/03/2013 ED $4.3 billion debt Municipality Adjustment
Dex Media, Inc.
(formerly Dex One Corp. 04/29/2013 CD
and SuperMedia, Inc.) 03/17/2013 (D. Del.) 04/30/2013 ED $4.2 billion Marketing Reorganization/Merger
The PMI Group, Inc. 11/23/2011 (D. Del.) 10/01/2013 ED $4.2 billion Mortgage Insurance Reorganization
Dynegy Inc. 07/06/2012 (S.D.N.Y.) 11/04/2013 ED $4.1 billion Energy Reorganization
PFF Bancorp, Inc. 12/05/2008 (D. Del.) 08/29/2013 ED $4.0 billion Financial Services Liquidation
07/09/2012 (S.D.N.Y., 12/17/2013 CD
Patriot Coal Corp. moved to E.D. Mo.) 12/18/2013 ED $3.8 billion Mining Reorganization
TOUSA, Inc. 01/29/2008 (S.D. Fla.) 08/22/2013 ED $2.8 billion Homebuilding Liquidation
Hawker Beechcraft, Inc. 05/03/2012 (S.D.N.Y.) 02/15/2013 ED $2.8 billion Aircraft Manufacturing Reorganization
First Regional Bancorp 06/19/2012 (C.D. Cal.) 11/05/2013 ED $2.5 billion Bank Holding Liquidation
Anchor BanCorp Wisconsin Inc. 08/12/2013 (D. Wis.) 09/27/2013 ED $2.4 billion Bank Holding Reorganization
Central European Distribution Corp. 04/07/2013 (D. Del.) 06/05/2013 ED $2.1 billion Distilling Reorganization
Ames Department Stores, Inc. 08/20/2001 (S.D.N.Y.) 11/19/2013 ED $2.0 billion Retail Liquidation
AmericanWest Bancorporation 10/28/2010 (E.D. Wash.) 10/04/2013 ED $1.7 billion Bank Holding Reorganization
RDA Holding Co. 06/28/2013 CD
(Reader’s Digest Association) 02/17/2013 (S.D.N.Y.) 07/31/2013 ED $1.6 billion Media Reorganization
Pinnacle Airlines Corp. 04/01/2012 (S.D.N.Y.) 05/01/2013 ED $1.5 billion Air Transport Reorganization
TerreStar Corp. 10/24/2012 CD
(Parent of TerreStar Networks) 02/16/2011 (S.D.N.Y.) 03/07/2013 ED $1.4 billion Telecom Reorganization
Revel AC, Inc. 03/25/2013 (D.N.J.) 05/23/2013 ED $1.2 billion Entertainment Reorganization
Global Aviation Holdings Inc. 02/05/2012 (E.D.N.Y.) 02/13/2013 ED $690 million Air Transport Reorganization
Ahern Rentals, Inc. 12/22/2011 (D. Nev.) 06/24/2013 ED $628 million Constr. Equip. Rental Reorganization
A123 Systems, Inc. 10/16/2012 (D. Del.) 06/28/2013 ED $626 million Automotive Liquidation
Omega Navigation Enterprises, Inc. 07/08/2011 (S.D. Tex.) 05/22/2013 ED $527 million Marine Transport Reorganization
Geokinetiks Inc. 03/10/2013 (D. Del.) 05/10/2013 ED $514 million Geosciences Reorganization
Rural/Metro Corp. 08/04/2013 (D. Del.) 12/31/2013 ED $500 million+ Health-Care Services Reorganization
Physiotherapy (Assocs.) Holdings Inc. 11/12/2013 (D. Del.) 12/31/2013 ED $500 million+ Health-Care Services Reorganization
Indianapolis Downs, LLC 04/07/2011 (D. Del.) 04/11/2013 ED $500 million Entertainment Sale
GateHouse Media, Inc. 09/27/2013 (D. Del.) 11/26/2013 ED $470 million Media Reorganization
School Specialty, Inc. 01/28/2013 (D. Del.) 06/11/2013 ED $464 million Educational Products Reorganization
FriendFinder Networks, Inc. 12/16/2013 CD
(f.k.a. Penthouse Media Group) 09/17/2013 (D. Del.) 12/20/2013 ED $452 million Adult Entertainment Reorganization
LodgeNet Interactive Corp. 01/27/2013 (S.D.N.Y.) 03/28/2013 ED $409 million Interactive Media Sale
Maxcom Telecomunicaciones 09/10/2013 CD
S.A.B. de C.V. 07/23/2013 (D. Del.) 10/11/2013 ED $400 million Telecom Reorganization
Conexant Systems, Inc. 02/28/2013 (D. Del.) 07/12/2013 ED $387 million Microchip Developer Reorganization
Grubb & Ellis Company 02/20/2012 (S.D.N.Y.) 04/01/2013 ED $287 million Real Estate Sale
Dewey & LeBoeuf 03/28/2012 (S.D.N.Y.) 03/22/2013 ED $193 million Law Liquidation
Company Filing Date (Bankr. Court) Effective Date Assets Industry Result
SECOND CIRCUIT RULES THAT FOREIGN DEBTOR’S
INSOLVENCY PROCEEDING MAY NOT BE
RECOGNIZED UNDER CHAPTER 15 UNLESS DEBTOR
HAS PLACE OF BUSINESS OR PROPERTY IN THE U.S.
Veerle Roovers and Jordan M. Schneider
The U.S. Court of Appeals for the Second Circuit recently
held in Drawbridge Special Opportunities Fund LP v. Barnet
(In re Barnet), 2013 BL 341634 (2d Cir. Dec. 11, 2013), that section
109(a) of the Bankruptcy Code, which requires a debtor
“under this title” to have a domicile, a place of business, or
property in the U.S., applies in cases under chapter 15 of
the Bankruptcy Code. In Barnet, the Second Circuit vacated
a bankruptcy court order granting recognition under chapter
15 to a debtor’s Australian liquidation, concluding that
the court erred in ruling that section 109(a) does not apply
in chapter 15 cases and that it improperly recognized the
debtor’s Australian liquidation in the absence of any evidence
that the debtor had a domicile, a place of business,
or property in the U.S.
RECOGNITION OF FOREIGN INSOLVENCY PROCEEDINGS BY
U.S. BANKRUPTCY COURTS
Enacted in 2005, chapter 15 of the Bankruptcy Code is patterned
on the 1997 UNCITRAL Model Law on Cross-Border
Insolvency (the “Model Law”), which was designed to provide
effective mechanisms for dealing with cross-border insolvency
cases. The basic requirements for recognition of a
“foreign proceeding” in the U.S. under chapter 15 are outlined
in section 1517(a) of the Bankruptcy Code: (i) the proceeding
must be “a foreign main proceeding or foreign nonmain proceeding”
within the meaning of section 1502; (ii) the foreign
representative applying for recognition must be “a person or
body”; and (iii) the petition must be supported by the documentary
evidence specified in section 1515.
“Foreign proceeding” is defined in section 101(23) of the
Bankruptcy Code as:
a collective judicial or administrative proceeding in a
foreign country, including an interim proceeding, under
a law relating to insolvency or adjustment of debt in
which proceeding the assets and affairs of the debtor
are subject to control or supervision by a foreign court,
for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be
pending with respect to the same foreign debtor in different
countries. Chapter 15 therefore contemplates recognition in
the U.S. of both a “main” proceeding—a proceeding pending
in the country where the debtor’s “center of main interests”
is located—and “nonmain” proceedings, which may have
been commenced in countries where the debtor merely has
an “establishment,” i.e., “any place of operations where the
debtor carries out a nontransitory economic activity.”
WHO MAY BE A DEBTOR UNDER CHAPTER 15?
Section 109(a) of the Bankruptcy Code provides that,
“[n]otwithstanding any other provision of this section, only a
person that resides or has a domicile, a place of business,
or property in the United States, or a municipality, may be
a debtor under this title.” Section 103(a) provides that “this
chapter”—i.e., chapter 1, including section 109(a)—“appl[ies]
in a case under chapter 15.”
Even so, chapter 15, unlike chapters 7, 9, 11, 12, and 13, contains
its own definition of “debtor.” Section 1502(1) of the
Bankruptcy Code defines a “debtor,” “[f]or the purposes of
[chapter 15],” as “an entity that is the subject of a foreign proceeding.”
The Second Circuit addressed the apparent inconsistency
between sections 109(a) and 1502(1) in Barnet.
In July 2009, Octaviar Administration Pty Ltd. (“OA”), a company
incorporated in Queensland, Australia, had been
ordered to liquidate by an Australian court. As part of an
investigation into OA’s affairs, various Australian affiliates of
Drawbridge Special Opportunities Fund LP (“Drawbridge”)
were sued in Australia.
In August 2012, the OA liquidators, as foreign representatives,
sought recognition of the Australian liquidation as a foreign
main proceeding under chapter 15 in a New York bankruptcy
court. Drawbridge objected on the basis that OA did not
meet the requirements for a debtor set forth in section 109(a)
of the Bankruptcy Code.
The bankruptcy court entered an order recognizing OA’s
Australian liquidation on September 6, 2012. It overruled
Drawbridge’s objection, ruling that the definition of “debtor” in
section 1502(1) determines whether a foreign debtor can be
granted relief under chapter 15 and that the debtor need not
have a domicile, property, or a place of business in the U.S.
See Transcript of Hearing at 30, l. 1–13, In re Octaviar Admin.
Pty Ltd., No. 12-13443 (Bankr. S.D.N.Y. Sept. 6, 2012) [Document
No. 22]. In response to a joint request by Drawbridge and
OA’s foreign representatives, the bankruptcy court certified a
direct appeal of the recognition order to the Second Circuit,
which agreed to review the case.
THE SECOND CIRCUIT’S RULING
After determining that it had jurisdiction over Drawbridge’s
appeal of the recognition order, the Second Circuit considered
whether section 109(a) applies in a chapter 15 case. The court
ruled that it does, on the basis of a “straightforward” interpretation
of the statute, because section 103(a) expressly provides
that chapter 1—of which section 109(a) is a part— applies in
a case under chapter 15. “Section 109, of course,” the Second
Circuit wrote, “is within Chapter 1 of Title 11 and so, by the plain
terms of the statute, it applies ‘in a case under chapter 15.’ ”
The court emphasized that “[s]ection 109(a) . . . creates a
requirement that must be met by any debtor.” Because OA’s
foreign representatives had made no attempt to establish that
OA had a domicile, a place of business, or property in the U.S.,
the Second Circuit explained, the bankruptcy court should not
have granted recognition to OA’s Australian liquidation.
The Second Circuit rejected the foreign representatives’
argument that section 109(a) does not apply because OA is
a “debtor” under the Australian Corporations Act (rather than
under the Bankruptcy Code) and the foreign representatives
(rather than the debtor) were seeking recognition of the foreign
proceeding. According to the court:
[T]he presence of a debtor is inextricably intertwined
with the very nature of a Chapter 15 proceeding
. . . [and] [i]t stretches credulity to argue
that the ubiquitous references to a debtor in both
Chapter 15 and the relevant definitions of Chapter 1
do not refer to a debtor under the title [title 11] that
contains both chapters.
In addition to the statutory definitions of “foreign representative,”
“foreign main proceeding,” “debtor,” and “foreign
proceeding,” the court noted, the automatic and discretionary
relief provisions that accompany recognition of a foreign
main proceeding (see sections 1520 and 1521) are similarly
“directed towards debtors.”
The Second Circuit flatly rejected the foreign representatives’
argument that, even if OA were required to qualify as
a debtor under the Bankruptcy Code, it need satisfy only the
chapter 15-specific definition of “debtor” in section 1502(1),
and not the section 109 requirements. “This argument also
fails,” the court wrote, “as we cannot see how such a preclusive
reading of Section 1502 is reconcilable with the explicit
instruction in Section 103(a) to apply Chapter 1 to Chapter 15.”
According to the Second Circuit, not only a “plain meaning”
analysis but also the context and purpose of chapter 15 support
the application of section 109(a) to chapter 15. The court
explained that Congress amended section 103 to state that
chapter 1 applies in cases under chapter 15 at the same time
it enacted chapter 15, which strongly supports the conclusion
that lawmakers intended section 103(a) to mean what it says—
namely, that chapter 1 applies in cases under chapter 15.
The court acknowledged that the strongest support for the
foreign representatives’ arguments lies in 28 U.S.C. § 1410,
which provides a U.S. venue for chapter 15 cases even when
“the debtor does not have a place of business or assets in
the United States.” However, the Second Circuit explained
that this venue statute “is purely procedural” and that, “[g]iven
the unambiguous nature of the substantive and restrictive
language used in Sections 103 and 109 of Chapter 15, to allow
the venue statute to control the outcome would be to allow
the tail to wag the dog.”
Finally, the Second Circuit found that the purpose of chapter
15 is not undermined by making section 109(a) applicable
in chapter 15 cases. Section 1501(a) of the Bankruptcy Code
provides that the purpose of chapter 15 “is to incorporate
the Model Law . . . so as to provide effective mechanisms
for dealing with cases of cross-border insolvency.” Although
section 109(a), or its equivalent, is not included in the Model
Law, the Second Circuit emphasized, the Model Law allows a
country enacting it to “modify or leave out some of its provisions.”
In any case, the court concluded, the omission of a
provision similar to section 109(a) from the Model Law does
not suffice to outweigh the express language Congress used
in adopting sections 103(a) and 109(a).
The Second Circuit accordingly vacated the recognition
order and remanded the case to the bankruptcy court for
further proceedings consistent with its ruling.
It remains to be seen what impact, if any, Barnet will have
on the availability of chapter 15 to assist foreign companies
in their cross-border restructurings. In many, if not most,
complex cross-border restructurings, the foreign debtor
maintains a presence, or owns property located, in the U.S.
As such, the holding in Barnet would not be implicated.
Similarly, the requirement for a U.S. presence or assets contained
in section 109(a) has been broadly interpreted by
courts in the U.S. to mean the presence of any property in
the U.S., no matter how small. See, e.g., In re Global Ocean
Carriers Ltd., 251 B.R. 31 (Bankr. D. Del. 2000). Therefore, foreign
debtors should not meet any significant obstacle in
satisfying this requirement.
It also remains to be seen whether courts in other circuits
will follow the Second Circuit’s lead. However, at least one
bankruptcy court in another circuit has already disagreed
with Barnet. Six days after the Second Circuit handed down
its ruling, a Delaware bankruptcy court (which is in the
Third Circuit) issued a bench ruling to the contrary in In re
Bemarmara Consulting A.S., Case No. 13-13037(KG) (Bankr.
D. Del. Dec. 17, 2013). Bankruptcy judge Kevin Gross ruled
that section 109(a) does not apply in chapter 15 because it
is the foreign representative, and not the debtor in the foreign
proceeding, who petitions the court. Moreover, the
judge wrote, “there is nothing in [the] definition [of “debtor”]
in Section 1502 which reflects upon a requirement that [a]
Debtor have assets.” See Transcript of Hearing at 9, l. 11–18, In
re Bemarmara Consulting A.S., Case No. 13-13037(KG) (Bankr.
D. Del. Dec. 17, 2013) [Document No. 39]. “A Debtor,” he noted,
“is an entity that is involved in a foreign proceeding.”
It bears noting that chapter 15’s predecessor—section 304
of the Bankruptcy Code (repealed in 2005), which gave U.S.
bankruptcy courts discretion to grant a limited range of
ancillary (principally injunctive) relief by way of assistance
to the duly appointed representatives of foreign debtors
with U.S. assets—did not require a foreign debtor to qualify
as a “debtor” under section 109(a) as a condition to relief.
See, e.g., Goerg v. Parungao (In re Goerg), 844 F.2d 1562 (11th
Cir. 1988); Saleh v. Triton Container Intl., Ltd. (In re Saleh), 175
B.R. 422 (Bankr. S.D. Fla. 1994). Barnet suggests that chapter
15 departed from section 304 on this point, whereas
Bemarmara adopts a contrary view.
NO SURCHARGE FOR YOU: THIRD CIRCUIT
RULES THAT SECTION 506(c) SURCHARGE IS
Lauren M. Buonome and Mark G. Douglas
The ability to “surcharge” a secured creditor’s collateral in
bankruptcy is an important resource available to a bankruptcy
trustee or chapter 11 debtor in possession (“DIP”),
particularly in cases where there is little or no equity in the
estate to pay administrative costs, such as the fees and
expenses of estate-retained professionals. However, as demonstrated
by a ruling handed down by the Third Circuit Court
of Appeals, the circumstances under which collateral may be
surcharged are narrow. In In re Towne, Inc., 2013 BL 232068
(3d Cir. Aug. 29, 2013), the court of appeals affirmed an order
denying a motion by special counsel to direct payment of
its fees and expenses by surcharging the proceeds of a
secured creditor’s collateral because the law firm’s services
did not directly benefit—and in some cases sought to disadvantage—
the secured creditor.
SURCHARGE OF COLLATERAL
Section 506(c) of the Bankruptcy Code provides an exception
to the general rule that the payment of expenses associated
with administering a bankruptcy estate, including the
administration of assets pledged as collateral, must derive
from unencumbered assets. Under section 506(c), a trustee
or DIP “may recover from property securing an allowed claim
the reasonable, necessary costs and expenses of preserving,
or disposing of, such property to the extent of any benefit
to the holder of such claim.” The purpose of the provision
is to prevent secured creditors from obtaining a financial
windfall at the expense of the estate and unsecured creditors
by ensuring that the secured creditors are responsible
for the same collateral disposition costs within a bankruptcy
case that normally would arise in a foreclosure or similar
state law proceeding outside bankruptcy. See Loudoun
Leasing Development Co. v. Ford Motor Credit Co. (In re K & L
Lakeland, Inc.), 128 F.3d 203 (4th Cir. 1997); In re TIC Memphis
RI 13, LLC, 498 B.R. 831 (Bankr. W.D. Tenn. 2013).
Three elements must be satisfied in order to surcharge collateral
under the terms of section 506(c): (i) the expenditure
must be necessary; (ii) the amounts expended must be reasonable;
and (iii) the secured creditor must benefit from the
expense. The inquiry into what costs are reasonable and
necessary, and the extent to which they benefit the party
being surcharged, is factual, and the party seeking recovery
has the burden of establishing those elements. See 4 COLLIER
ON BANKRUPTCY ¶ 506.05 (16th ed. 2014). If an expense satisfies
the requirements of section 506(c), the proceeds from
the sale or other disposition of the collateral must be used
first to pay the surcharged expense, with any excess applied
to payment of the claim(s) secured by the property. In Towne,
the Third Circuit considered whether the sale proceeds of
collateral in a chapter 7 case could be surcharged to pay the
fees and expenses of special counsel retained by the DIP
before the case was converted from chapter 11 to chapter 7.
Towne, Inc., and its affiliate, DMD Towne, LLC (collectively,
the “Debtors”), owned and operated a franchised BMW car
dealership in Oyster Bay, New York. The Debtors’ assets,
which consisted of the franchise agreement, the real property
on which the dealership was located, and various inventory,
were fully encumbered by liens securing approximately
$9 million owed to BMW Financial Services, NA, LLC (“BMW”).
The Debtors filed for chapter 11 protection in New Jersey in
April 2009. The bankruptcy court later authorized the Debtors
to retain The Margolis Law Firm (“Margolis”) as special counsel
for the purpose of finding prospective purchasers.
Shortly after the petition date, BMW sought relief from the
automatic stay to foreclose on its collateral. In opposing the
motion, Margolis represented that it had received an offer to
purchase the Debtors’ assets for $6 million. The bankruptcy
court granted relief from the stay, but BMW agreed to forbear
from foreclosing immediately to allow the Debtors to pursue
the proposed sale transaction.
On the Debtors’ behalf, Margolis commenced litigation
against BMW, seeking, among other things, to reduce the
amount of BMW’s secured claim to $6 million, which relief
would have allowed the proposed $6 million sale of the
assets to proceed free and clear of BMW’s liens under section
363(f)(3) of the Bankruptcy Code. Margolis also conducted
an investigation that led to the commencement of a
state court administrative proceeding against BMW regarding
its lending and franchise relationship with the Debtors.
Due to the ongoing litigation, BMW, which could have blocked
the proposed sale because it was significantly undersecured,
refused to consent to the transaction unless the Debtors, as
a quid pro quo, released BMW from the claims that had been
asserted against it. The Debtors refused to do so, and the
sale fell through.
Towne reinforces the Third Circuit’s prior decisions
that surcharging collateral under section 506(c) is
possible only under “sharply limited” circumstances.
In August 2009, the bankruptcy court converted the Debtors’
cases to chapter 7 and appointed a trustee to liquidate the
estate. Shortly afterward, BMW contacted prospective purchasers
of the Debtors’ assets, and the trustee and BMW
selected a buyer willing to pay $5.5 million from several bidders.
As part of the proposed transaction, the trustee agreed
to execute releases in favor of BMW on behalf of the estate.
The bankruptcy court approved the sale in early 2010. The
court’s order included a consensual carve-out from the
sale proceeds in the amount of $177,000 for the benefit of
the trustee, as well as a 10 percent distribution to general
Margolis subsequently filed a motion under section 506(c)
seeking payment from the sale proceeds of approximately
$90,000 in fees and expenses for services provided as special
counsel to the Debtors prior to conversion of the cases.
The bankruptcy court denied the request, concluding that
Margolis’s services benefited primarily the Debtors and their
principals and that any benefit to BMW was “purely incidental
and thus outside the scope of section 506(c).” The district
court affirmed on appeal.
THE THIRD CIRCUIT’S RULING
Margolis fared no better with the Third Circuit. In its unpublished
ruling, the court of appeals acknowledged its prior
decisions holding that, ordinarily, an attorney’s fees and
expenses “may be charged only against the surplus of the
debtor’s estate.” Section 506(c), the Third Circuit explained,
“provides a limited exception to this rule” that permits a
claimant to recover expenses from secured collateral “only
under ‘sharply limited’ circumstances” (quoting In re Visual
Indus., Inc., 57 F.3d 321, 325 (3d Cir. 1995)).
The Third Circuit concluded that Margolis failed to meet the
requirements of section 506(c) because it did not prove that
its legal services and related expenses were necessary to
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preserve or dispose of the collateral or that such services
provided a direct benefit to BMW. Although Margolis detailed
its efforts to market the Debtors’ assets to potential purchasers
and to consummate purchase agreements for the sale
of the collateral, the Third Circuit explained, such “efforts did
not result in an actual sale.”
Moreover, the court added, Margolis was not responsible for,
or involved in any way in, the sale transaction that was later
consummated. The Third Circuit agreed with the bankruptcy
court’s “purely speculative” characterization of Margolis’s
contention that it “prevented termination of the Franchise”
and thereby benefited BMW by preserving the value of the
collateral. In fact, the court of appeals emphasized, Margolis’s
legal services benefited primarily the Debtors rather than
BMW and were “actually contrary to [BMW’s] interests” in
The Third Circuit rejected Margolis’s remaining arguments,
including the contention that BMW consented to a surcharge
of its collateral to pay the law firm’s fees and expenses.
According to the court, Margolis demonstrated nothing
more than BMW’s “limited cooperation with [Margolis’s] initial
efforts to effectuate a sale of the Collateral,” which would not
support a finding that BMW consented to be surcharged for
Margolis’s fees and expenses.
Towne reinforces the Third Circuit’s prior decisions that surcharging
collateral under section 506(c) is possible only
under “sharply limited” circumstances. Unless a secured
creditor explicitly consents to a carve-out, a trustee or DIP
attempting to surcharge collateral must be prepared to demonstrate
that the costs of preserving or disposing of collateral
are necessary and reasonable and provide a direct
benefit to the secured creditor.