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 post-last-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.
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 year-end, 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 debt.
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 lucrative—and riskiest—activities.
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" ("QE3") strategy.
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 January 2014.
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 third-largest economy.
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 other investments.
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 billion-dollar 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 long-term 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.
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 public-company 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 charter rates.
Under the chapter 11 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 Warsaw-based (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-year-old pocket-sized publication, Reader's Digest, the highest-circulated 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 Holdings 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-equity-swap 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 middle-market 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 cases."
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 1113 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 short-term." 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 Rulings of 2013
Allowance/Disallowance/Priority/Discharge of Claims
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 face-value 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 injury).
Avoidance Actions/Trustee's Avoidance and Strong-Arm Powers
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 11 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 constitutional difficulty."
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 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 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 11 plan is sometimes an invitation for creative machinations designed to muster adequate support for confirmation of the plan. "Strategic" classification can entail, 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 bankruptcy cases.
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, Australia-based 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 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 contractual obligations."
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 multi-employer 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 lower-court 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.