One year ago, we wrote that, unlike in 2019, when the large business bankruptcy landscape was generally shaped by economic, market, and leverage factors, the COVID-19 pandemic dominated the narrative in 2020. The pandemic may not have been responsible for every reversal of corporate fortune in 2020, but it weighed heavily on the scale, particularly for companies in the energy, retail, restaurant, entertainment, health care, travel, and hospitality industries. Mandatory shutdowns beginning in the spring of 2020 wreaked havoc on the bottom lines of thousands of companies confronting a precipitous drop in demand for their products and services. Many were able to weather the worst of the storm with packages of government assistance or by adapting their business models to meet the unique challenges of the pandemic. Others could not and either closed their doors or sought bankruptcy protection to attempt to restructure their balance sheets or sell their assets.
At the end of 2020 and into early 2021, it was widely anticipated that the unprecedented pressure the pandemic brought to bear on the U.S. economy would lead to a boom in corporate bankruptcy filings. That boom never materialized. Instead, business bankruptcy filings in the United States plummeted in 2021. The reasons for the decrease (discussed in more detail in "Recent Trends in Corporate Debt and Reorganizations: Laying the Groundwork for Future Large Chapter 11 Cases or Just More Runway?") included:
- Improvement in the U.S. economy in the spring of 2021 that coincided with the widespread deployment of vaccines;
- A 10 percentage point drop in the unemployment rate from the height of the pandemic;
- Fewer restrictions on businesses and their customers;
- Historically low interest rates, robust capital market access, and other readily available financing;
- The willingness of lenders to forbear and extend maturities on loans; and
- Government assistance during the pandemic.
The drop-off persisted despite the highest inflation rate in 40 years (as of November 2021), a malfunctioning supply chain, and continuing pandemic uncertainty due to variants Delta and Omicron as well as vaccine hesitancy.
Business Bankruptcy Filings
According to New Generation Research, Inc.'s BankruptcyData.com, there were 6,691 commercial bankruptcy filings in 2021, compared to 11,375 in 2020 and 10,056 in 2019. The real estate sector led the charge in 2021, with more than 1,100 filings. Other industries with the greatest volume of filings in 2021 included construction and supplies, health care and medical, banking and finance, restaurant, and transportation.
There were 3,587 commercial chapter 11 filings in 2021, compared to 6,870 in 2020 and 5,236 in 2019. One hundred fifty-seven debtors filed petitions for recognition in the United States of foreign bankruptcy cases under chapter 15 of the Bankruptcy Code in 2021. Three municipalities filed petitions to adjust their debts under chapter 9.
Bankruptcy data and research firm Reorg similarly reported that 2021, with a total of 275 chapter 11 filings by companies with at least $10 million in liabilities, was the slowest since 2012 and the first in at least six years to record fewer than 300 cases. Of those 275 chapter 11 filings, companies in the real estate (28%), consumer discretionary (20%), health care (10%), energy (9%), industrials (8%), and financials (5%) sectors recorded the largest number of cases. Filings by companies in all sectors decreased from 2020, except for the utilities sector, which experienced increased activity in the wake of Winter Storm Uri in Texas.
Public Company Bankruptcies
According to BankruptcyData.com, bankruptcy filings for "public companies" (defined as companies with publicly traded stock or debt), after reaching the highest level in more than a decade in 2020 (with 110 filings), plummeted to 22 in 2021. At the height of the Great Recession, 138 public companies filed for bankruptcy in 2008 and 211 in 2009.
The combined asset value of the 22 public companies that filed for bankruptcy in 2021 was $19.2 billion, compared to $292.7 billion in 2020. By contrast, the 138 public companies that filed for bankruptcy in 2008 had prepetition assets valued at $1.2 trillion in aggregate.
Companies in the oil and gas sector grabbed the brass ring in public company bankruptcy filings in 2021, with 23% (five cases) of the year's 22 public company bankruptcies. The other sector with a significant number of public company filings in 2021 was banking and finance, with four cases (18%). Other industries with public filings in 2021 included telecom, construction and supplies, transportation, computers and software, apparel and textiles, chemicals and allied products, aviation, retail, hotel and gaming, automotive, restaurant, and mining (each with one case).
The year 2021 added only eight public company names to the billion-dollar bankruptcy club (measured by value of assets), compared to 51 in 2020.
The largest public company bankruptcy filing of 2021—oil and gas exploration and production company Seadrill Limited, with $7.3 billion in assets—did not even make it onto the top-50 list of the largest public bankruptcies of all time. By asset value, the remaining public companies among the 10 largest bankruptcy filings in 2021 were real estate investment trust Washington Prime Group Inc. ($4.0 billion in assets); internet services and infrastructure company GTT Communications, Inc. ($2.8 billion in assets); gas utility company Ferrellgas Partners, L.P. ($1.7 billion in assets); coffee shop chain Luckin Coffee Inc. ($1.2 billion in assets); multi-utility company Just Energy Group Inc. ($1.09 billion in assets); hotel, resort, and cruise line owner Carlson Travel Inc. ($1.0 billion in assets); application software company Riverbed Technology, Inc. ($1.0 billion in assets); hotel operator Grupo Posadas S.A.B. de C.V. ($946 million in assets); and oil and gas exploration company HighPoint Resources Corp. ($826 million in assets).
Eighteen public companies with assets valued at more than $1 billion exited from bankruptcy in 2021, compared to 25 in the previous year. Continuing a trend begun in 2012, many more of those companies reorganized than were liquidated or sold. More than half of the chapter 11 plans confirmed in 2021 by billion-dollar public companies were in prepackaged or prenegotiated bankruptcy cases.
Notable exits from bankruptcy in 2021 included:
- The Commonwealth of Puerto Rico, which largely wrapped up its four-year restructuring when the island territory's legislature voted on November 7 to approve a deal that settles $35 billion in debt;
- Car rental company Hertz Global Holdings Inc., which obtained confirmation of a chapter 11 plan in June that paid unsecured creditors in full and distributions to stockholders due to the company's rare status as solvent debtor; and
- Pan-regional Latin American multinational airline company LATAM Airlines Group S.A., which exited bankruptcy in December after obtaining confirmation of a chapter 11 plan that restructured $7.3 billion in debt.
Notable Bankruptcy Rulings
Notable bankruptcy and appellate court rulings in 2021 examined, among other things:
- The validity of nonconsensual third-party releases in chapter 11 plans;
- The doctrine of "equitable mootness" precluding appeals of certain bankruptcy court orders;
- The "solvent debtor exception" requiring solvent debtors to pay postpetition interest to unsecured creditors;
- Whether unsecured noteholders are entitled to a contractual "make-whole premium" if a debtor redeems the notes prior to maturity during bankruptcy;
- The automatic stay;
- Cross-border bankruptcy cases under chapter 15 of the Bankruptcy Code;
- The rejection of executory contracts in bankruptcy;
- Subordination agreements and chapter 11 plan voting rights;
- Bankruptcy blocking restrictions in loan and organizational documents;
- Credit bidding in bankruptcy asset sales; and
- "Structured dismissals" of chapter 11 cases.
Automatic Stay. In City of Chicago v. Fulton, 141 S. Ct. 585 (2021), the U.S. Supreme Court held that a creditor in possession of a debtor's property does not violate the automatic stay in section 362(a)(3) of the Bankruptcy Code by retaining the property after the filing of a bankruptcy petition.
Avoidance of Transfers. In In re Trib. Co. Fraudulent Conv. Litig., 10 F.4th 147 (2d Cir. 2021), reh'g denied, No. 19-3049 (2d Cir. Oct. 7, 2021), the U.S. Court of Appeals for the Second Circuit largely upheld lower court dismissals of claims asserted by the debtor's chapter 11 liquidation trustee against various shareholders, officers, directors, employees, and financial advisors for, among other things, avoidance and recovery of fraudulent and preferential transfers, breach of fiduciary duties, and professional malpractice. In so ruling, the Second Circuit adopted the "control test" for determining whether the fraudulent intent of a company's officers can be imputed to its directors for the purpose of avoidance litigation.
In In re Bernard L. Madoff Inv. Sec. LLC, 12 F.4th 171 (2d Cir. 2021), the U.S. Court of Appeals for the Second Circuit revived litigation filed by the trustee administering the assets of defunct investment firm Bernard L. Madoff Inv. Sec. LLC seeking to recover hundreds of millions of dollars in allegedly fraudulent transfers made to former customers and certain other defendants as part of the Madoff Ponzi scheme. The court of appeals vacated a 2019 bankruptcy court ruling dismissing the trustee's claims against certain defendants because he failed to allege that they had not received the transferred funds in "good faith." The Second Circuit also reversed a 2014 district court decision in holding that:
- "Inquiry notice," rather than "willful blindness," is the proper standard for pleading a lack of good faith in fraudulent transfer actions commenced as part of a stockbroker liquidation case under the Securities Investor Protection Act ("SIPA"); and
- A defendant, rather than the SIPA trustee, bears the burden of pleading on the issue of good faith. The ruling, which involves test cases for approximately 90 dismissed actions, breathed new life into avoidance litigation seeking recovery of $3.75 billion from global financial institutions, hedge funds, and other participants in the global financial markets.
In Holliday, Liquidating Trustee of the BosGen Liq. Trust v. Credit Suisse Secs. (USA) LLC, 2021 WL 4150523 (S.D.N.Y. Sept. 13, 2021), appeal filed, No. 21-2543 (2d Cir. Oct. 8, 2021) (discussed elsewhere in this edition), the U.S. District Court for the Southern District of New York affirmed a bankruptcy court ruling that:
- The securities transactions safe harbor in section 546(e) of the Bankruptcy Code preempts intentional fraudulent transfer claims under state law; and
- Payments made to the members of limited liability company debtors as part of a prebankruptcy recapitalization transaction were protected from avoidance under section 546(e) because, for that section's purposes, the debtors were "financial institutions," as customers of banks that acted as their depositories and agents in connection with the transaction.
U.S. Trustee Bankruptcy Fees. Several court rulings in 2020–21 addressed the constitutionality of 2017 legislation that, beginning in 2018, significantly increased fees levied in chapter 11 cases by the U.S. Trustee Program, which oversees bankruptcy cases filed in all federal districts except for those in the two states (Alabama and North Carolina) that are covered by the Bankruptcy Administrator ("BA") Program. That same increase was not imposed in BA districts until nine months after the January 1, 2018, effective date of the legislation, and the BA fee increase applied only to cases filed after that date. The four circuits that had addressed the question at the end of 2021 were evenly divided. A fifth circuit—the Eleventh Circuit—broke the deadlock in early 2022 when it ruled that the fee increase was constitutionally sound. See In re Mosaic Management Group, Inc., 2022 WL 136707 (11th Cir. Jan. 14, 2022).
The Second and Tenth Circuits found violations of the uniformity requirement of the Bankruptcy Clause of the U.S. Constitution (Art. I, § 8, cl. 4) because the increase did not apply immediately to chapter 11 debtors in the two states with BAs rather than U.S. Trustees. See Clinton Nurseries Inc. v. Harrington (In re Clinton Nurseries Inc.), 998 F.3d 56 (2d Cir. 2021), and John Q. Hammons Fall 2006 LLC v. U.S. Trustee (In re John Q. Hammons Fall 2006 LLC), 15 F.4th 1011 (10th Cir. 2021). By contrast, the Fourth and Fifth Circuits found no constitutional infirmity. See Siegel v. Fitzgerald (In re Circuit City Stores Inc.), 996 F.3d 156 (4th Cir. 2021), and Hobbs v. Buffets LLC (In re Buffets LLC), 979 F.3d 366 (5th Cir. 2020). The debtor in the Fourth Circuit case filed a petition asking the U.S. Supreme Court to resolve the circuit split. The Court agreed to hear the appeal on January 10, 2022. See Siegel v. Fitzgerald, No. 21-441 (U.S. Jan. 10, 2022).
Bankruptcy Filing Restrictions. In In re 3P Hightstown, LLC, 631 B.R. 205 (Bankr. D.N.J. 2021), the U.S. Bankruptcy Court for the District of New Jersey dismissed a chapter 11 case filed by a Delaware limited liability company ("LLC") because the LLC agreement precluded a bankruptcy filing without the consent of a holder of preferred membership interests whose capital contributions had not been repaid. According to the court, the bankruptcy blocking provision was not void as a matter of public policy because, under both Delaware law and the express terms of the LLC agreement, the holder of the preferred membership interests, which held a noncontrolling position, had no fiduciary duties.
Chapter 11 Plan Provisions. In In re Purdue Pharma, L.P., 2021 WL 5979108 (S.D.N.Y. Dec. 16, 2021), appeal certified, No. 21 cv 7532 (CM) (S.D.N.Y. Jan. 7, 2022), the U.S. District Court for the Southern District of New York vacated a bankruptcy court order confirming the chapter 11 plan of pharmaceutical company Purdue Pharma, Inc. and its affiliate debtors ("Purdue"). The district court ruled that the bankruptcy court did not have the authority under the Bankruptcy Code to approve nonconsensual releases granted under the plan to Purdue's owners, the Sackler family, from liabilities associated with Purdue's sale of OxyContin in exchange for the Sacklers' ownership interest in the companies and more than $4 billion to settle OxyContin litigation claims. According to the district court, "Contrary to the bankruptcy judge's conclusion, Sections 105(a) and 1123(a)(5) & (b)(6) [of the Bankruptcy Code], whether read individually or together, do not provide a bankruptcy court with such authority; and there is no such thing as 'equitable authority' or 'residual authority' in a bankruptcy court untethered to some specific, substantive grant of authority in the Bankruptcy Code."
In In re Nuverra Environmental Solutions, Inc., 834 Fed. App'x 729 (3d Cir. 2021), cert. denied, 142 S. Ct. 337 (2021), the U.S. Court of Appeals for the Third Circuit handed down a long-awaited ruling that could have, but ultimately did not, address the validity of "gifting" chapter 11 plans under which a senior creditor class gives a portion of its statutorily entitled recovery to one or more junior classes as a means of achieving consensual confirmation. By avoiding the merits and holding that an appeal of an order confirming a "horizontal gifting" plan was equitably moot, the Third Circuit skirted a question that continues to linger in the aftermath of the U.S. Supreme Court decision in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), which invalidated final distributions to creditors departing from the Bankruptcy Code's priority scheme as part of a nonconsensual "structured dismissal" of a chapter 11 case.
In In re Mullins, 2021 WL 2948685 (Bankr. D. Mass. July 13, 2021), the U.S. Bankruptcy Court for the District of Massachusetts held that the "solvent debtor exception" established under the former Bankruptcy Act and common law, which required a solvent debtor to pay its creditors in full, survived the enactment of the Bankruptcy Code in 1978. According to the court, certain provisions of the Bankruptcy Code—namely, the "absolute priority rule" and the "best interests test"—"incorporate and implement the 'solvent debtor exception' established over the course of hundreds of years of insolvency jurisprudence." The court also held that the appropriate rate of postpetition "pendency" interest is the federal judgment rate.
In In re The Hertz Corp., 2021 WL 6068390 (Bankr. D. Del. Dec. 22, 2021), the U.S. Bankruptcy Court for the District of Delaware similarly ruled that solvent chapter 11 debtors must pay postpetition interest to unsecured creditors under a chapter 11 plan at the federal judgment rate rather than the higher contract rate. The court also held that:
- An indenture trustee plausibly stated a claim that a make-whole premium was due to some (but not all) of the debtors' noteholders because the debtors voluntarily redeemed the notes prematurely during the bankruptcy case;
- The court was not prepared at that juncture to conclude as a legal matter that make-whole premiums can be disallowed as the economic equivalent of "unmatured interest" under section 502(b)(2) of the Bankruptcy Code;
- Any modification of the noteholders' claim to a make-whole premium was an impairment of the noteholders' contract claims by operation of section 502(b)(2) rather than the debtors' chapter 11 plan; and
- The court was "convinced that the solvent debtor exception survived passage of the Bankruptcy Code only to a limited extent," and that in the rare case of a solvent debtor, a chapter 11 plan need pay postpetition interest on unsecured claims only at the federal judgment rate to render the claims "unimpaired" within the meaning of section 1124(1) of the Bankruptcy Code.
Creditors' Rights. In In re Orexigen Therapeutics, Inc., 990 F.3d 748 (3d Cir. 2021), the U.S. Court of Appeals for the Third Circuit ruled as a matter of first impression that "triangular setoff" does not satisfy the Bankruptcy Code's "mutuality" requirement. In a typical triangular setoff, "A" might have a business relationship with "B" and "C," where B and C are related parties. Triangular setoff occurs when A owes B, and A attempts to set off that amount against amounts C owes to A. The validity of triangular setoff in the bankruptcy context, as distinguished from under state contract or common law, is subject to debate.
In In re Fencepost Productions Inc., 629 B.R. 289 (Bankr. D. Kan. 2021), the U.S. Bankruptcy Court for the District of Kansas addressed the enforceability of a provision in a prebankruptcy subordination agreement under which a subordinated creditor assigned to a senior creditor its right to vote on any chapter 11 plan proposed for the borrower. The bankruptcy court ruled that such a provision is not enforceable because it conflicts with the Bankruptcy Code. In a twist, however, the court concluded that the subordinated creditor lacked "prudential standing" to participate in the confirmation process because it was extremely out-of-the-money and therefore had no stake in the outcome of the case, but rather was attempting to assert the rights of third parties.
In In re Figueroa Mountain Brewing, LLC, 2021 WL 2787880 (Bankr. C.D. Cal. July 2, 2021), the U.S. Bankruptcy Court for the Central District of California denied a secured lender the right to "credit bid" its disputed claim in a bankruptcy sale of its collateral based on colorable allegations that, among other things, its loan agreement and all payments made by the debtor under it were fraudulent transfers and the lender had dominated and controlled the debtor in an effort to take control of its assets.
Cross-Border Bankruptcy Cases. In In re PT Bakrie Telecom TBK, 628 B.R. 859 (Bankr. S.D.N.Y. 2021), the U.S. Bankruptcy Court for the Southern District of New York entered an order recognizing an Indonesian "suspension of payments proceeding" under chapter 15 of the Bankruptcy Code. However, the court refused to grant a foreign representative's request for "additional relief" in the form of enforcement of an Indonesian court order approving a restructuring plan because the order included third-party releases (a nonstandard practice under Indonesian law). According to the court, there was "nothing in the record about the justification for any third-party release" or any indication "the foreign court considered the rights of creditors when considering this third-party release."
In In re Bankr. Est. of Norske Skogindustrier ASA, 629 B.R. 717 (Bankr. S.D.N.Y. 2021), the U.S. Bankruptcy Court for the Southern District of New York held that a foreign representative in a case under chapter 15 of the Bankruptcy Code can rely on the Bankruptcy Code's statute of limitations tolling provision to extend the deadline under foreign bankruptcy law to commence avoidance litigation. The decision illustrates the increasing extent to which chapter 15 has become an invaluable resource for the representatives of foreign debtors in cross-border bankruptcy cases.
In In re Condor Flugdienst GMBH, 627 B.R. 366 (Bankr. N.D. Ill. 2021), the U.S. Bankruptcy Court for the Northern District of Illinois ruled that, if requested relief is not specifically authorized under chapter 15 of the Bankruptcy Code, a bankruptcy court still has the discretion to grant such relief provided it would have been authorized in a cross-border "ancillary" bankruptcy proceeding under chapter 15's repealed predecessor, section 304. In this case, the court held that it was expressly authorized under section 1521 of the Bankruptcy Code, as guided by section 1522, to recognize and enforce a foreign court order confirming a German debtor's liquidation plan. The court also permanently enjoined prepetition litigation commenced by certain creditors because such relief was necessary to effectuate the liquidation plan.
In Moyal v. Munsterland Gruppe GmbH & Co., 2021 WL 1963899 (S.D.N.Y. May 17, 2021), the U.S. District Court for the Southern District of New York dismissed litigation against a German company, finding that, under principles of comity, the lawsuit was stayed by operation of German law when the company filed for bankruptcy in Germany, even though a U.S. bankruptcy court had not entered an order recognizing the German bankruptcy proceeding under chapter 15 of the Bankruptcy Code.
In In re Culligan Ltd., 2021 WL 2787926 (Bankr. S.D.N.Y. July 2, 2021), the U.S. Bankruptcy Court for the Southern District of New York court granted recognition under chapter 15 to the liquidation proceeding of a Bermuda company despite allegations that the company's court-appointed liquidators filed the chapter 15 petition solely to enjoin shareholder litigation pending in a New York state court. According to the bankruptcy court, although the Bankruptcy Code gives a U.S. court the discretion to deny any chapter 15 relief that is "manifestly contrary" to U.S. public policy, "this exception is not met by a simple finding that the Chapter 15 Petition has been filed as a litigation tactic."
In In re Talal Qais Abdulmunem al Zawawi, 2021 WL 3890597 (Bankr. M.D. Fla. Aug. 31, 2021) (discussed elsewhere in this edition), the U.S. Bankruptcy Court for the Middle District of Florida distanced itself from a 2013 decision by the U.S. Court of Appeals for the Second Circuit, which 2013 decision concluded that, like debtors in cases under other chapters of the Bankruptcy Code, a chapter 15 debtor must reside or have assets or a place of business in the United States to be eligible for chapter 15 relief. According to the bankruptcy court, chapter 15 has its own eligibility requirements, and the eligibility requirements for debtors in cases under other chapters of the Bankruptcy Code do not apply in chapter 15 cases.
Executory Contracts. In Caliber North Dakota, LLC v. Nine Point Energy Holdings, Inc. (In re Nine Point Energy Holdings, Inc.), 2021 WL 3269210 (D. Del. July 30, 2021) (discussed elsewhere in this edition), the U.S. District Court for the District of Delaware held that the U.S. Supreme Court's holding in Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 1652 (2019), did not prevent a chapter 11 debtor from eliminating a midstream services provider's exclusive right to provide services to the debtor under a rejected contract. According to the district court, the exclusivity provisions' only value was the leverage it created for the midstream provider to force the debtor to perform its rejected executory obligations, which would defeat the purposes of section 365 of the Bankruptcy Code. The case is an important clarification on the implications of Mission Product, as it confirms that creative contracting cannot prevent a debtor from exercising, and receiving the benefits of, its rejection rights under the Bankruptcy Code.
Priority of Claims and Interests. In In re KG Winddown, LLC, 628 B.R. 739 (Bankr. S.D.N.Y. 2021), the U.S. Bankruptcy Court for the Southern District of New York held that the Supreme Court's 2017 ruling in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), that the Bankruptcy Code does not allow courts to approve distributions to creditors in a "structured dismissal" of a chapter 11 case that violate the Bankruptcy Code's ordinary priority rules without the consent of creditors, "left the door open where such dismissals do not violate the absolute priority rule and otherwise comply with the applicable provisions of the Bankruptcy Code." "Here," the court wrote, "the Debtors' request for structured dismissals fits neatly through that open door."
In In re Energy Future Holdings Corp., 990 F.3d 728 (3d Cir. 2021), the U.S. Court of Appeals for the Third Circuit ruled that even though a "stalking horse" bidder failed to obtain necessary regulatory approvals to close an anticipated bankruptcy asset sale, the bidder could receive an administrative claim for a break-up fee and expenses if it could demonstrate that its efforts provided value to the estate.
Issues the U.S. Supreme Court Declined to Consider. The U.S. Supreme Court declined petitions to review several notable cases addressing bankruptcy issues in 2021. Those cases involved, among other issues:
- The doctrine of "equitable mootness," which precludes an appellate court from hearing an appeal of certain bankruptcy court orders (principally, but not exclusively, chapter 11 plan confirmation orders) (see GLM DFW Inc. v. Windstream Holdings Inc., No. 20-1275 (U.S. Oct. 4, 2021); Hargreaves v. Nuverra Environmental Solutions Inc., No. 21-17 (U.S. Oct. 12, 2021)).
- The "safe harbor" in the Bankruptcy Code shielding from avoidance transfers made in connection with certain securities, commodity, or forward contracts in the absence of actual fraud (see Deutsche Bank Trust Co. Americas v. Robert R. McCormick Foundation, No. 20-8 (U.S. Apr. 19, 2021)).
- The Bankruptcy Code's provisions authorizing the avoidance and recovery of fraudulent prebankruptcy transfers as well as the defense available to transferees who receive such transfers in good faith and for value (see Gettinger v. Picard, No. 20-1382 (U.S. May 3, 2021)).
- The Bankruptcy Code's rules and procedures for modifying contractual retiree and health care benefits provided by a chapter 11 debtor-employer (see Holland v. Westmoreland Coal Co., No. 20-880 (U.S. May 24, 2021)).
- Whether the doctrine of federal preemption bars a non-debtor third party's tortious interference claims against other non-debtor third parties for actions taken in anticipation of a debtor's chapter 11 filing (see Pilevsky v. Sutton 58 Associates LLC, 20-1483 (U.S. Sept. 24, 2021)).
Commercial Bankruptcy Legislative Developments
A handful of measures of business bankruptcy legislation were enacted in 2021.
On January 12, 2021, former President Trump signed into law the "Bankruptcy Administration Improvement Act of 2020" (Public Law No. 116-325). The law extended 25 temporary bankruptcy court judgeships for an additional five years in an effort to ensure the integrity and effectiveness of the country's bankruptcy system during a period of increased filings by large corporations in the wake of the COVID-19 pandemic. The law also extended a temporary increase in fees owed to the U.S. Trustee Program for its work in overseeing chapter 11 cases. Originally set to expire in 2022, the new fee structure was extended through 2025.
On February 1, 2021, amendments to Part 190 of the bankruptcy regulations of the Commodity Futures Trading Commission ("CFTC") for commodity brokers became effective. The amendments represented the first comprehensive update to the CFTC's bankruptcy rules since the Part 190 rules were initially adopted in 1983. They modernize and revise the CFTC's regulations to reflect changes in the commodity brokerage industry over that time.
On March 27, 2021, President Biden signed into law the "COVID-19 Bankruptcy Relief Extension Act" (Public Law No. 117-5) to extend provisions providing financially distressed consumers and small businesses greater access to bankruptcy relief, which provisions were originally due to sunset on March 27, 2021. The legislation extended personal and small-business bankruptcy relief provisions that were part of the Coronavirus Aid, Relief and Economic Security Act of 2020 through March 27, 2022.
Business bankruptcy legislation that was proposed in 2021, but never enacted, included:
- The "PROTECT Asbestos Victims Act" (S. 574, introduced March 3, 2021), which would reform the asbestos bankruptcy trust system by providing oversight of asbestos bankruptcy trusts, ensuring those harmed by asbestos receive fair and just compensation, and eliminate fraud and abuse within the trust system. It would empower the U.S. Trustee Program of the Department of Justice to investigate fraud against asbestos trusts, make it a crime to knowingly submit a false claim to a trust, and require trusts to comply with subpoenas from state courts seeking information related to trust payments, to better help prevent fraudulent claims in both state and federal proceedings. The act would also provide for the appointment of a special, disinterested representative to advise future victims in a bankruptcy case.
- The "Bankruptcy Venue Reform Act of 2021" (H.R. 4193, introduced June 28, 2021, and S. 2827, introduced Sept. 23, 2021), which would require that chapter 11 bankruptcy cases be filed in the district where the principal place of business or principal assets of the corporation are located.
- The "Nondebtor Release Prohibition Act of 2021" (S. 2497 and H.R. 4777, introduced July 28, 2021), which would prohibit provisions in chapter 11 plans or bankruptcy court orders releasing (or enjoining litigation against) non-debtor insiders of bankrupt companies from liabilities. It would also empower a bankruptcy court to dismiss a chapter 11 case if the debtor was involved in certain restructuring activity that, during the 10-year period preceding a bankruptcy filing, was intended or had the foreseeable effect of separating a debtor's assets from its liabilities and causing the debtor to assume or retain liabilities.
- The "No Bonuses Ahead of Bankruptcy Filing Act of 2021" (H.R. 428, introduced Jan. 21, 2021) and the "No Bonuses in Bankruptcy Act of 2021" (H.R. 5554, introduced Oct. 12, 2021), which would prohibit debtors from paying "retention, incentive, or reward" bonuses to insiders and employees, consultants, or contractors making more than $250,000 per year and would allow the debtor to recover as preferences any such bonuses paid in the 180 days prior to filing.
- The "Stop Wall Street Looting Act of 2021" (H.R. 5648 and S. 3022, introduced Oct. 20, 2021), which would make private investment funds bear the debt and employee benefit obligations of their acquisitions, put a two-year ban on post-acquisition dividends, and require private equity firms to disclose their fees and returns. It would also prioritize employee pay in bankruptcy, bolster the ability of workers to collect severance and pension payments, end private funds' immunity from liability when portfolio companies break the law, and extend the Bankruptcy Code's statute of limitations for litigation to claw back funds transferred out of a bankruptcy company from two to eight years for transfers connected to a change of corporate control. The bill would also give creditors' committees the exclusive right to bring or settle fraudulent transfer actions instead of a chapter 11 debtor.