On March 17th, the New York Times reported that SVB Financial Group, the parent company of Silicon Valley Bank, filed for bankruptcy in the Southern District of New York. The filing comes shortly after Silicon Valley Bank was seized by the Federal Deposit Insurance Corporation, following a recent run on deposits. SVB’s collapse is the second largest in U.S. history and the largest since the financial crisis in 2008. Silicon Valley Bank’s Parent Company Files for Bankruptcy – The New York Times (nytimes.com)

On March 15th, The Hill reported that Democrats Elizabeth Warren (from Massachusetts) and Katie Porter (from California) have introduced a new bill, the “Secure Viable Banking Act,” to repeal part of a Trump-era bank regulation rollback law, in the wake of the Silicon Valley Bank collapse. If enacted, the Secure Viable Banking Act would put banks holding at least $50 billion in assets under stricter oversight by the Federal Reserve (i.e., at a level more akin to their larger bank brethren). This would effectively roll back the 2018 bill that loosened Dodd-Frank regulations by increasing the oversight threshold to $250 billion (thereby exempting banks such as Silicon Valley from the strictest level of oversight). While such bill has widespread support among Democrats in the House and the Senate, Republicans are generally opposed to tightening bank rules, and point to other reasons for the deterioration of Silicon Valley Bank. Warren, Porter unveil bill to undo Trump-era Dodd-Frank rollback after Silicon Valley Bank collapse | The Hill

Business Insider reported on March 15th, that Diamond Sports Group, the largest broadcaster of local sports in the US, has filed for bankruptcy. The subsidiary of local TV giant Sinclair Broadcast Group, filed in the Southern District of Texas. The decision to file came after the company missed a $140 million interest payment last month as regional sports networks (or “RSNs”) have been shrinking due to “cord-cutting” and increased streaming practices. The company reported $8 billion in debt. Diamond Sports operates Bally RSNs, responsible for broadcasting games for 14 NBA teams, 14 MLB teams and 12 NHL teams.  Diamond Sports has indicated that it expects to operate normally during the restructuring and that it is already in negotiations for a restructuring agreement (that would result in Diamond being separated from the larger Sinclair Broadcast Group).  Diamond Sports Group, Largest Sports Broadcaster in the US, Files for Bankruptcy (businessinsider.com)

On March 15th, the Wall Street Journal reported that AMC Entertainment Holdings Inc., received shareholder approval to sell more stock. Specifically, shareholders authorized the company to increase the number of common shares that AMC can sell as well as a 10-for-1 reverse stock split that will likely allow it to convert its preferred units into common shares. In 2021, AMC had created a new class of securities called “AMC Preferred Equity units,” or “APEs”, each amounting to one-hundredth of a preferred shared. A Pennsylvania-based pension fund subsequently sued the company in Delaware, alleging that AMC stripped common shareholders of their rights by granting voting powers to these APE units. The Company nonetheless continued with its proposal due to its stunted recovery: despite rebounding from the worst days of the COVID-19 pandemic, AMC still posted a nearly $1 billion net loss for 2022. As of December 31st, it had approximately $631 million of cash, far down from the nearly $1.6 billion it had at the end of 2021. AMC Secures Shareholder Approval to Sell More Stock – WSJ

On March 6th, The Wall Street Journal reported that remote working environments have seriously jeopardized the recovery of business-focused hotels, boosting default risks within the sector. While leisure travel has rebounded since the second half of 2022, the recovery for facilities with large meeting rooms that rely on business trips and conferences, has been much weaker, due in part to many office workers still working remotely. As a result, low occupancy rates for business-focused hotels have driven down their property values, causing lenders to ask for more capital before agreeing to continue to finance their loans. Some experts warn these trends, combined with rising interest rates and slowing economic growth generally, may push these hotels into default. Already, in January 2023 alone, as many as ten hotel owners in the U.S. have filed for bankruptcy, compared with just two a year earlier in January, 2022. Remote Work Threatens Business Hotels’ Recovery, Boosting Default Risks – WSJ

On March 6th, the New York Post reported that Binance, the world’s biggest cryptocurrency exchange, is facing mounting scrutiny from regulators and lawmakers, after the very public bankruptcy filing of its rival crypto platform, FTX. Binance is currently composed of two divisions: Binance and Binance US, with the former being shielded from exposure to U.S. oversight. When FTX fell into bankruptcy in November 2022, Binance became “the undisputed giant of the crypto world.”  However, that giant is now facing closer scrutiny from U.S. regulators as they examine evidence that the exchange’s U.S. and global arms are more interconnected than previously described. A bipartisan group of U.S. lawmakers is also demanding more information from Binance, citing evidence “that the exchange is a hotbed of illegal financial activity that has facilitated over $10 billion in payments to criminals”. Regulators Put More Pressure on Binance, the Crypto Giant – The New York Times (nytimes.com).

On March 3rd, Yahoo! Finance reported that the financial lifeline that pulled Bed Bath & Beyond Inc. from the brink of bankruptcy last month may be at risk due to tumbling stock prices. Hedge fund Hudson Bay Capital had provided Bed Bath & Beyond with $225 million upfront and promised to pay out another $800 million over the next eight months. Such deal was being characterized as a “transformative transaction”. However, the cash infusion had certain covenants that required Beth Bath & Beyond to maintain an average stock price of at least $1.25-$1.50, a metric that has become increasingly challenging for Bed Bath & Beyond to meet. Failure to secure the delayed cash infusion has certain investors again fearing the retailer’s bankruptcy filing. Bed Bath & Beyond’s Tanking Stock Puts Hedge Fund Rescue at Risk (yahoo.com).

On March 2nd, CNN Business reported that Target, Macy’s and Best Buy are seeing consumer demand starting to buckle from the strain of inflation impacting the way that customers shop. As a result, these chains and others are generally pulling back on merchandising discretionary goods like clothing, electronics and home improvement and have instead shifted to merchandising items such as groceries and other household basics. Some experts predict the slowdown and shift may result in more discounts for customers as stores attempt to discard excess inventory but that nonetheless, these changes in consumer behavior will likely lead to an overall sales decline in 2023. Target, Macy’s and Best Buy say consumers are strained | CNN Business

On February 13, 2023, Ultra Petroleum Corporation (“Ultra”) filed a petition for a writ of certiorari with the US Supreme Court seeking review of the Fifth Circuit’s October 2022 ruling that, in solvent-debtor cases, debtors must pay unsecured creditors applicable contractual make-whole premiums and postpetition interest at contractual default rates in order for such unsecured creditors to be considered unimpaired.  The cert petition requests the Supreme Court to resolve what Ultra says is an “exceptionally important” question of bankruptcy law and statutory interpretation, namely, wwhether “an unwritten ‘solvent-debtor exception’ overrides the Bankruptcy Code’s statutory text and allows creditors in solvent-debtor cases to recover amounts that the Code disallows.” 

By way of background,[1] in the Fifth Circuit decision that Ultra seeks to challenge, the court held that, while make-whole premiums constitute unmatured interest expressly disallowed under 11 U.S.C. § 502(b)(2), the “solvent-debtor exception” operates to suspend section 502(b)(2)’s disallowance of such premiums.  According to the Fifth Circuit, under the “solvent-debtor exception,” “when a debtor is able to pay its valid contractual rights, traditional doctrine says it should—bankruptcy rules notwithstanding.”  For similar reasons, the Fifth Circuit also held that Ultra’s unsecured creditors were entitled to post-petition interest at contractual default rates rather than the federal judgment rate. 

In its certiorari petition, Ultra argues the Fifth Circuit’s ruling is “exceptionally wrong,” as it deviates from bedrock principles of statutory construction by elevating “judicial gloss” on superseded statutes (i.e., the “solvent-debtor exception”) over the clear text of the Bankruptcy Code (i.e., 11 U.S.C. § 502(b)(2)).  Specifically, Ultra takes issue with the Fifth Circuit’s pivot from expressly acknowledging section 502(b)(2)’s disallowance of claims for unmatured interest to favoring the unwritten “solvent-debtor exception” just because section 502(b)(2) does not specifically address the solvent-debtor scenario and, thus, does “not override pre-Code ‘traditional bankruptcy practice’ allowing creditors in solvent-debtor cases to recover unmatured interest.  The Fifth Circuit’s reasoning, according to Ultra, cannot be squared with basic principles of statutory interpretation, including the fundamental rule that, as stated by the Supreme Court, statutory interpretation begins with statutory text and when that text is unambiguous, ends there as well.  To wit, Ultra emphasizes its view that the Fifth Circuit did not even attempt to identify any actual ambiguity in the text of section 502(b)(2) that prior practice could clarify.  In favoring the “solvent-debtor exception” over the plain text of 11 U.S.C. § 502(b)(2) then, Ultra argues that the Fifth Circuit plainly erred by “allowing history to trump statutory text.” 

In further support, Ultra points to the “vigorous dissent” to the Fifth Circuit’s decision in which Judge Oldham explained that the Bankruptcy Code’s plain text makes unmistakably clear that section 502(b)(2) disallows all claims for unmatured interest and, thus, is incompatible with the pre-existing “solvent debtor exception.”  Given the grave difference between section 502(b)(2) and the “solvent-debtor exception”—coupled with the fact that the Bankruptcy Code’s plain text offers no alternative interpretation—only one result is possible, according to the dissent—“The [Bankruptcy] Code overrides the solvent-debtor exception.” 

With respect to the payment of post-petition interest, Ultra takes issue with the Fifth Circuit’s invocation of the “solvent-debtor exception” from pre-Bankruptcy Code practice to hold that unsecured creditors are entitled to post-petition interest at their contractual default rates rather than the federal judgment rate.  According to Ultra, the proper analysis again begins with section 502(b)(2), which explicitly disallows any “claim…for unmatured interest.”  Because post-petition interest is, by definition, unmatured on the petition date, the Bankruptcy Code squarely prohibits any claim for post-petition interest at the contractual default rate.  Ultra then points to section 1129(a)(7)(A)(ii), which entitles impaired Chapter 11 creditors in solvent-debtor cases to post-petition interest at the federal judgment rate on their allowed claims.  No Bankruptcy Code provision similarly provides any basis by which unimpaired creditors in solvent-debtor cases may assert entitlement to post-petition interest at more than the federal judgment rate.  As such, unimpaired creditors are (at most) entitled to post-petition interest at the federal judgment rate pursuant to section 726(a)(5) of the Bankruptcy Code.

Ultimately, Ultra argues that review would permit the Supreme Court to resolve this “critically important and recurring question of bankruptcy law,” as a split of authority continues to grow in numerous jurisdictions across the county confronting the question of whether the pre-Bankruptcy Code “solvent-debtor exception” overrides the Bankruptcy Code’s plain-text disallowance of claims for unmatured interest.  See, e.g., In re PG&E Corp., 46 F.4th 1047 (9th Cir. 2022); In re LATAM Airlines Grp., 2022 WL 2206829 (Bankr. S.D.N.Y. June 18, 2022); In re RGN-Grp. Holdings, LLC, 2022 WL 494154 (Bankr. D. Del. Feb. 17, 2022); In re Hertz Corp., 637 B.R. 781 (Bankr. D. Del. 2021).

For creditors and bankruptcy practitioners alike, that question implicates far more than academic interest.  As this case demonstrates, the Supreme Court’s potential review will determine the distribution of hundreds of millions of dollars.

Mayer Brown will continue to monitor the situation…


[1] Mayer Brown has been analyzing and writing on the various Ultra decisions for several years.  Further background can be viewed by accessing the following Mayer Brown articles:  Prepayment Premium/Make-Whole Enforceability in Bankruptcy: The Details Matter (Dec. 13, 2019); US Bankruptcy Code Defines Right to Receive “Make-Whole” Premium under Chapter 11 Plan (Dec. 13, 2019); 5th Circ. Ultra Petroleum Ruling Poses Key Debtor Question (Jan. 10, 2020); In re Ultra Petroleum Corp., the Next Chapter: Bankruptcy Court Holds Make-Whole Premiums Allowed, Solvent Debtors Must Pay Interest at Contractual Default Rate (Nov. 19, 2020); and New Bankruptcy Rulings May Give Solvent Debtors Leverage (Oct. 25, 2022).

Telecom giant Avaya, Inc. filed a “Chapter 22” bankruptcy petition earlier this month (colloquially referred to as such given that it is Avaya’s second Chapter 11 filing since 2017) with the intent to exit bankruptcy within 90 days.  According to Law360, the company reentered Chapter 11 with support from approximately 90% of its secured lenders pursuant to a restructuring support agreement that contemplates slashing the company’s debt from $3.4 billion to $800 million (or about 75% of its outstanding debt) and “position Avaya to better compete in the rapidly changing telecom space that it has struggled to adapt to in the last two years.”  To date, the company has already received court approval for two rounds of debtor-in-possession financing, totaling approximately $628 million, which is expected to convert to exit financing once the company leaves bankruptcy.  A confirmation hearing on the company’s plan of reorganization is scheduled for March 22nd.  [Law360; Feb. 14, 2023, Feb. 15, 2023]

The Supreme Court is set to hear oral arguments beginning on Tuesday, February 28th, regarding President Biden’s federal student-loan forgiveness plan.  According to The Wall Street Journal, at stake is the fate of the administration’s $400-billion loan forgiveness program and the limits of presidential power.  The Supreme Court agreed to take up the matter late last year after a federal judge in Texas struck down the administration’s plan, calling it “an unconstitutional exercise of Congress’s legislative power.”  The Supreme Court has now taken up appeals in that case and a related one, putting both cases on a fast-track timeline that should produce a final ruling by the end of its term in June.  [WSJ; Feb. 28, 2023]

According to Bloomberg, home prices in the US fell for the sixth month in a row in December, as rising mortgage rates and a potential recession continued to push prospective buyers out of the housing market in the latter half of 2022.  All 20 cities included in the latest S&P CoreLogic Case-Shiller US National Home Price Index reported lower price increases in the year ending December 2022 compared to the year ending in November 2022, with a median decline of 1.1%.  Further good news may be on the horizon for prospective purchasers, too, as slightly-lower mortgage rates at the beginning of 2023 provided buyers some incentive to get back into the market.  Indeed, the National Association of Realtors reported Monday that contracts to purchase previously-owned US homes rose 8.1% in January from December, the biggest jump since June 2020.  [Bloomberg; Feb. 28, 2023]

In a recent article, Mayer Brown’s Matthew Wargin, Aaron Gavant, Jade Edwards, and Lauren Wray examine a new iteration of coercive sanctions imposed on potentially “double dipping” foreign creditors in Latin American airline Avianca’s chapter 11 case in the Southern District of New York.  Avianca sought to sanction over 150 foreign creditors, asserting that their continued litigation against Avianca in Brazil and Colombia violated the discharge and injunction provisions of the confirmed Avianca plan and the Bankruptcy Code.  Notably, Avianca asserted that the foreign creditors submitted to the bankruptcy court’s jurisdiction by filing proofs of claim in the case, but that they would be unfazed by an injunction merely directing them to discontinue their foreign claims, having already flouted prior orders.  Agreeing that the foreign creditors had failed to abide by his prior orders, Judge Glenn granted the motion for sanctions, acknowledging that the unique circumstances warranted a unique, equitable solution:  provisionally disallowing each of the foreign creditors’ claims in the bankruptcy case, to become permanent unless they dropped their foreign claims within 30 days.

In a decision likely to have significant impact on certain types of bankruptcy filings going forward, this morning, the Third Circuit Court of Appeals ordered the dismissal of the Chapter 11 bankruptcy case filed by Johnson & Johnson affiliate LTL Management LLC.

After completing a multi-step divisional merger under Texas law (which led to LTL holding J&J’s legacy talc liabilities along with certain funding arrangements, but no operating assets), LTL filed a chapter 11 bankruptcy petition in October 2021.  Concurrent with its filing, LTL asked the bankruptcy court to issue an injunction shielding J&J and its other affiliates from continued talc litigation.  An Official Committee of Talc Claimants and other parties moved to dismiss LTL’s bankruptcy case and opposed the issuance of a third-party injunction.

Following a five-day trial held in February 2022, the bankruptcy court denied the motions to dismiss and, in addition, granted LTL’s request for a third-party injunction. With respect to the motion to dismiss, the court held that LTL’s bankruptcy was filed in good faith because it served the valid purpose of managing and resolving LTL’s talc liabilities through a means consistent with the Bankruptcy Code.  The court also held that LTL was in financial distress given the significant burdens of defending against talc litigation in thousands of separate lawsuits, notwithstanding that LTL had access to cash held by a J&J affiliate pursuant to a funding agreement.

On appeal, the Third Circuit reversed the bankruptcy court’s denial of the motions to dismiss.  The court first stated that, while the bankruptcy court’s factual findings of financial distress were subject to highly-deferential clear error review, the court’s ultimate finding of good faith could be reviewed de novo and the Third Circuit therefore could evaluate whether it believed LTL’s financial distress was sufficient to entitle it to the protections of the Bankruptcy Code.  The Third Circuit held that the good faith test “asks whether the debtor faces the kinds of problems that justify Chapter 11 relief” and in that regard, a debtor’s financial distress “must not only be apparent, but it must be immediate enough to justify a filing.”  In applying this test, the court concluded that only the financial condition of LTL, and not of J&J and its other affiliates, was relevant to the analysis.  The Third Circuit then compared the significant financial resources available to LTL (including up to $61.5 billion potentially available to it under the funding agreement) against the potential scope of talc-related costs and liabilities, particularly in light of LTL’s apparent successes at avoiding sizeable judgments and settlements, and held that LTL was not in the kind of immediate financial distress that could support a bankruptcy filing.

In holding that LTL’s bankruptcy case was not filed in good faith, the Third Circuit appears to have narrowed the justifications that permit a company to utilize the benefits of Chapter 11, emphasizing that merely managing litigation risk is not necessarily sufficient.  The decision is likely to have a significant impact, particularly with respect to corporate entities previously considering using bankruptcy as a shield by implementing a “Texas two-step” made popular by LTL, among others. 

More to come…  

The Wall Street Journal reports that on November 17, the Biden Administration released new guidelines that may make it easier for student loan borrowers to discharge their debt in bankruptcy. The guidelines from the Justice Department and Education Department delineate specific requirements for borrowers to prove they are experiencing economic distress. The  government will calculate whether a debtor’s expenses equal or exceed a debtor’s income, and if they do, the Justice Department will declare the that the borrower is unable to pay their debts. The guidelines are likely to make it easier for some student loan borrowers to discharge their student loans in bankruptcy (whereas, under the prior system such discharges were virtually impossible).

According to reporting from The Guardian, many top privacy and security executives recently left their positions at Twitter following an all-employee address by new owner Elon Musk in which he suggested that “bankruptcy isn’t out of the question.”  The departures prompted warnings from the Federal Trade Commission, which Twitter previously reached a settlement with in May over privacy issues.

Law360 Reports that NGV Global Group Inc., a Dallas-based company that makes natural-gas run truck engines filed with three affiliates for Chapter 11 in Texas. The debtors claimed more than $50 million in liabilities and $10 million to $50 million in assets.

On November 8th, Fortune reported on the sudden implosion of FTX, the second biggest crypto exchange.  The value of FTX’s proprietary token — FTT — started dropping precipitously this week as various news reports came out about it and more and more owners began to sell. The owner of FTX, known as SBF, tried to defend its value by selling other assets in order to buy up the FTTs flooding the market, but to no avail, and by Tuesday his companies were facing insolvency. [Fortune; Nov. 8, 2022]. The New York Times reported on November 11th that SBF resigned as CEO of FTX, and FTX filed for bankruptcy. This filing is the latest, and by far the largest, in a series of crypto related bankruptcies this year.  [New York Times; Nov 11, 2022].

On November 9th, Reuters reported that cancer drug maker, Clovis Oncology, had stated it was likely to file for bankruptcy in the near term. Clovis has been struggling to sell its cancer drug Rubraca. Sales of Rubraca have been hit by intensifying competition from rival ovarian cancer treatments, and also by lower cancer diagnoses during Covid lockdowns. Rubraca sales fell by 10% to $148.8 million in the 2021 financial year, compared to $164.5 million a year earlier. [Reuters; Nov. 9, 2022].

According to Yahoo Finance, recent layoffs by Facebook parent company Meta mark a turning point for the company. Meta’s stock dropped close to 70% last year, and earnings over the last several quarters have also been down In the second quarter of this year, Meta reported its first year-over-year drop in sales, and in the following quarter, it reported its second ever decline. Many are attributing the recent loss in value to the company’s singular focus on the immersive “metaverse” experience, the rise of rival social media platform TikTok, privacy changes by Apple that have hurt advertising revenue and the lack of Gen Z users. [Yahoo; Nov. 10, 2022].

  • In an October 31, 2022 article, Reuters reports that the movie theater chain Cineworld Group has reached a settlement with its landlords and lenders through which Cineworld has agreed to pay at least $20 million in rent that will accrue after September 30, 2022.  Cineworld Group, which operates close to 800 movie theaters in ten countries, filed its chapter 11 case in the Southern District of Texas Bankruptcy Court in September 2022, and the case is currently pending before Judge Marvin Isgur.  Following the announcement of the settlement, Judge Isgur stated that the agreement was “pretty amazing” given how far apart Cineworld and its landlords and creditors were on the issue at the outset of the case.  [Reuters; Oct. 31, 2022]
  • Reporting from Bloomberg indicates that distress is growing in the U.S. corporate bond market.  During the last full week of October 2022, the amount of dollar-denominated bonds and loans trading at distress levels reached $271.3 billion, the largest volume since September 2020, and representing the fifth straight week of growth. [Bloomberg; Oct. 28, 2022]
  • The Wall Street Journal reports that Core Scientific Inc., which is one of the largest bitcoin miners in the world, has engaged restructuring advisors in recent weeks, continuing a trend of restructuring activity in the crypto industry.  Core Scientific stated that it would miss upcoming debt payments due to ongoing legal disputes with crypto lender Celsius Network LLC, which Core Scientific said has impacted its performance and liquidity.  [WSJ; Oct. 27, 2022]  

In a recent article published by Law360, Mayer Brown’s Sean Scott, Aaron Gavant and Lisa Holl Chang break down recent decisions by the Fifth and Ninth Circuits relating to whether, in solvent debtor cases, unsecured creditors are entitled to postpetition interest in order to be deemed “unimpaired” under a plan of reorganization, and if so, what the proper rate of interest should be. The Fifth and Ninth Circuits ruled in the Ultra Petroleum and PG&E cases, respectively, that when a debtor has enough assets to pay creditors in full and make distributions to equity, unsecured creditors should receive postpetition interest at the full contractual or state judgment rates in order to be deemed unimpaired.  Whereas, a Delaware bankruptcy court recently ruled in the Hertz bankruptcy that the debtors were not required to pay unimpaired unsecured creditors more than the federal judgment rate (which is typically much lower than the contractual or state judgment rates).