2014 has been a tumultuous year, filled with tragedy and interstellar triumphs: Ebola; Sochi; Ukraine; Flight 370; ISIS; Flight 17; Comet 67P. Life in the corporate bankruptcy and restructuring world was considerably more sedate than in the world at large. Now five and six years removed, some of the mega cases of the 2008 and 2009 era linger on and continue to generate interesting legal developments.
Despite the relative paucity of mega cases, 2014 was not a year to forget. With every passing month, new and interesting special situations arose. In case you missed them, here’s a look back at the bankruptcy and restructuring highlights of 2014, as well as a look ahead to what 2015 might have in store.
January: Credit Bidding
We started 2014 with Judge Gross’s decision in the Fisker Automotive case, limiting the right to credit bid in bankruptcy asset sales. Although Judge Gross’s decision surprised many in the restructuring community, with some observers questioning whether the court set a new standard for what constitutes cause sufficient to abrogate a lender’s right to credit bid, others argued that the Fisker decision was nothing more than an application of long-established law to unfavorable facts. In light of these unanswered questions, and despite several other decisions in the credit bidding arena, some predict that we may see another credit bidding decision make its way up to the Supreme Court in the near future.
February: Puerto Rico, Bitcoin, and Bongs
February saw the downgrade of the Commonwealth of Puerto Rico’s debt due to, among other things, liquidity concerns and a lack of economic growth to support the Commonwealth’s heavy debt burden. The Commonwealth’s financial problems continued to plague it throughout the year.
The year’s shortest month also saw the world’s first bitcoin bankruptcy, followed soon thereafter by a related chapter 15 filing. In early 2014, unidentified hackers may have broken into Mt. Gox and stolen approximately 850,000 bitcoins from the Tokyo-based exchange that was once the world’s largest bitcoin exchange. On February 28, 2014, Mt. Gox commenced a civil rehabilitation proceeding in Tokyo and shortly thereafter petitioned the United States Bankruptcy Court for the Northern District of Texas for chapter 15 relief, giving rise to a whole host of interesting issues about how modern technology interacts with the Bankruptcy Code.
In certain sectors, some of the big news this year relates to the legalization of marijuana in Colorado, Oregon, and Washington (with legislation on the horizon in other states). Notwithstanding the uptick in sales for pizza and other munchies, even marijuana dispensaries are prone to failure. But it seems that bankruptcy is not one of the emerging markets in states that have legalized marijuana for recreational purposes. Several potential chapter 11 cases, including one filed in February, have gone to pot in light of the continued federal prohibition on the sale and distribution of marijuana. As the tide of legalization continues to roll on, we may yet hit a new high for chapter 11. Currently, it appears that U.S. Trustees are taking the position that debtors that appear to be engaged in the marijuana industry should not receive the protections of the Bankruptcy Code to aid violations of the federal Controlled Substances Act.
Over the past several years, an important debate has continued to evolve regarding the finality of auctions in bankruptcy. Even though bidding procedures generally contemplate some degree of finality at the end of the auction when a bidder is declared the winner, a number of courts have recognized that greater value can be realized when losing bidders (or new suitors) come along after the conclusion of the auction, but before the court gets a chance to approve the final bid and sale. In March, the New Mexico Bankruptcy Court joined the debate in the Sunland case, serving as just one more example of some courts’ efforts to maximize value for the estate by rejecting a winning bid in favor of a new, better, and higher offer. Other courts and professionals have argued that such new bids must be rejected if parties are ever to expect any certainty in the sale process and to ensure that auctions can actually elicit the highest and best offers at the appropriate time. Courts will continue to weigh in on this tension between the best interests of one estate and the best interests of the bankruptcy sale process. Indeed, the ABI Commission to Study the Reform of chapter 11 recently recommended that courts should not be permitted to reopen auctions absent “extraordinary circumstances or material procedural impediments . . . to the auction process.”
April: Low Battery: 10% of Assets Remaining
April saw four of the ten largest bankruptcy filings of 2014, reflecting some of the key industries currently facing distress: coal, shipping, manufacturing, and energy.
James River Coal Company was the first to go. With reported assets of $1.07 billion and debts of $818.7 million, the canary in its coal mine croaked as a result of the combination of a highly levered capital structure and the continued downturn in the U.S. coal market.
Momentive Performance Materials, manufacturer of silicone and quartz products, was the next to wobble, with $2.9 billion in assets and $4.1 billion in debts. Later in 2014, Momentive’s bankruptcy roiled the restructuring market as Judge Drain handed down his decision on cramdown interest rates (see August).
Genco Shipping & Trading, an operator of dry-bulk cargo ships, sunk shortly thereafter. With $2.4 billion in assets and $1.5 billion in debt, the company filed for bankruptcy as a result of sustained weakness in charter rates that flow from the current glut of vessels in the shipping industry. Later in 2014, Eagle Bulk Shipping, another operator of dry-bulk cargo ships and also in the top ten filings of 2014, filed for bankruptcy protection.
In April, Energy Future Holdings ran out of juice. Seven years after the largest leveraged buyout ever created the biggest power company in Texas, the company filed for bankruptcy protection. Formerly known as TXU, Energy Future Holdings was the biggest bankruptcy of 2014 and the second largest energy company bankruptcy of all time, with $49.7 billion in liabilities at the time of its filing.
May: The End of Several Eras
In May, Delaware Bankruptcy Judge Walsh announced his retirement from the bench, following hot on the heels of Bankruptcy Judges Peck and Gropper, who had, at the end of 2013, announced their retirement from the bench in Bankruptcy Court for the Southern District of New York. In November, Judge Gerber, also of the Bankruptcy Court for the Southern District of New York, announced his retirement from the bench and that he will assume recall status in 2015. Only Judge Peck has formally stepped down thus far, but the impending changes to the New York and Delaware bankruptcy courts will certainly change the landscape for large chapter 11 cases in the coming years. Last, and certainly not least, we note the passing of Judge Burton R. Lifland in January of this year. Judge Lifland was a titan of the bankruptcy bar, having served for 33 years on the bench, overseeing some of the most momentous bankruptcy cases since the enactment of the Bankruptcy Code and guiding much of the developments in bankruptcy law and practice throughout that time. A tribute to Judge Lifland is available here.
June: Stern: Two Years Later, and It’s Still Causing Trouble
In June, we were disappointed by the Supreme Court’s narrow decision in Executive Benefits Insurance Agency v. Arkison, in which the Court held that there is no “statutory gap” regarding core claims as to which the bankruptcy courts lack final constitutional authority and that bankruptcy courts may enter reports and recommendations to the district courts with respect to these so-called “Stern claims.” Just a few weeks later, our prayers were answered when the Supreme Court granted certiorari in Wellness Int’l Network v. Sharif, promising to clarify some of the important open questions in the wake of Stern and its progeny, including the controversial issue of whether litigant consent can cure constitutional deficiencies and permit bankruptcy courts to enter final judgment on Sternclaims. Argument is scheduled for January 15, 2015.
International special situations were in the headlines throughout the summer. Challenges to Argentina’s 2005 debt restructuring continued to rumble on, and in July, Argentina defaulted for the second time in 13 years on its sovereign debt, this time on a $539 million interest payment on its bonds. This latest twist in the ongoing legal dispute followed the Supreme Court’s denial of the troubled sovereign’s bid to hear its appeal of a Second Circuit ruling that it had to pay $1.4 billion to the so-called “holdout bondholders.” Hopes are rapidly fading that Argentina will be able to resolve its current troubles and resume borrowing in international capital markets in 2015, which it has been unable to do since its 2001 default. The country may be able to close a $3 billion issue of local law bonds by the end of 2014, thereby allowing it to avoid (or further delay) paying holdout bondholders as it is required to do by a U.S. court ruling. Have no doubt – Argentina will continue to be in the headlines in 2015.
At the end of August, Judge Drain issued several bench rulings in the Momentive Performance Materials chapter 11 cases on cramdown interest rates, the availability of a make-whole premium, third party releases, and the extent of the subordination of senior subordinated noteholders. Judge Drain’s ruling on cramdown interest rates was particularly notable, suggesting that the allowed claim of a secured creditor may be satisfied by a long-dated replacement note with a below-market interest rate. Commentators are divided as to whether the Momentive rulings are as momentous as they first appeared and what the long-term effects will be on the dynamics of negotiating a chapter 11 plan. Looking forward, the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 recently suggested that any change to the Bankruptcy Code as it relates to cramdown interest rates should specifically reject the approach for calculating a cramdown interest rate as set by the Supreme Court and used in Momentive, in favor of adopting a general market approach to determining an appropriate discount rate.
September: Atlantic City
Atlantic City, which famously served as the inspiration for the original board gameMonopoly, did not exactly win second prize in a beauty contest this year. In September, Trump Entertainment Resorts Inc.’s Taj Mahal Hotel and Casino, once feted (by its publicists) as “the Eighth Wonder of the World,” filed for bankruptcy with a potential shutdown in December. This bankruptcy followed the earlier “chapter 22” bankruptcy of Revel Casino Hotel in June, as well as the closing of the Trump Plaza, the Showboat, and the Atlantic Club casinos. With five casinos going out of business this year, the loss of 11,000 jobs, and tax revenue folding like a house of cards, the State of New Jersey is currently considering a recent report from the Governor’s Advisory Commission on Gaming, which calls for the appointment of an emergency manager to oversee the troubled city.
October: Oil & Gas
October heralded the start of what may be the next trend in the restructuring world, oil and gas. Endeavour International Corporation, a U.S.-based oil and gas exploration firm with operations in the North Sea, filed for bankruptcy with $1.2 billion in debt, and soon thereafter oil prices started to nose-dive.
A number of chapter 9 cases were completed in 2014. In November, Judge Steven Rhodes of the Bankruptcy Court for the Eastern District of Michigan confirmed the plan of adjustment of debts of the City of Detroit, resolving a variety of complex financial and operational issues faced by the city, including over $18 billion in accrued obligations, approximately $11.9 billion in unsecured obligations to lenders and retirees, and over $6.4 billion in revenue bonds. Notably, at the outset of its chapter 9 proceedings in July 2013, the city was paying more than 38 cents of every tax dollar to servicing legacy and other obligations. In December, Governor Rick Snyder approved ending emergency management in Detroit, Emergency Manager Kevyn Orr resigned his tenure, and Detroit emerged from bankruptcy.
The previous month, Stockton’s chapter 9 plan of adjustment was approved by Judge Christopher Klein of the Bankruptcy Court for the Eastern District of California. Stockton, which filed for bankruptcy in July 2012, was, before Detroit, the largest city in U.S. history to file for bankruptcy protection. Looking forward, are we likely to see more municipal bankruptcies in 2015? Here are eight reasons why we may not, but we take no position on the matter…yet.
December: Bankruptcy Reform
On December 8, the American Bankruptcy Institute Commission to Study the Reform of Chapter 11 released its long-awaited, and much-anticipated, Final Report and Recommendations. The ABI Commission was established in recognition of the “general consensus among restructuring professionals” that the time has come to evaluate U.S. business reorganization laws as a result of numerous changes that have occurred since the Bankruptcy Code was enacted in 1978. The Final Report and Recommendations will not, in and of itself, effect any specific changes to the Bankruptcy Code. Only time will tell what, if any, actions will be taken by Congress in response to this carefully crafted report prepared by, and in consultation with, some of the most prominent bankruptcy practitioners and scholars of our generation.
2015 and Beyond
Looking forward, we anticipate the continued weakness in oil prices to have a profound effect on the oil and gas sector and related industries. The holiday season is upon us, and big-name retailers (yes, you all know the list) are constant presences on distressed watch lists. With the end of quantitative easing, and the potential for rising interest rates, default rates are likely to start to revert to the mean. That being said, restructuring industry professionals have been saying that for a while. If there’s one thing we can predict, it’s that we have no idea what’s coming. Other than the annual fruitcake from Aunt Sally. Happy holidays!
A version of this Bankruptcy Blog post was originally published on Law360, and can be accessed here.