The Bankruptcy Court for the Southern District of New York (the “SDNY”) has been a longstanding epicenter of Chapter 11 filings. Historically seen as one of the more pro-debtor forums in the country, large companies often filed in the SDNY to take advantage of that stance. Some debtors appear to have attempted to direct their cases to specific judges within the district who were seen as particularly pro-debtor. One recent example was the bankruptcy filing by OxyContin producer, Purdue Pharma. Facing a historic indictment by the Department of Justice, along with mounting tort claims relating to the marketing of its drugs, Purdue—a company headquartered in Connecticut—changed the mailing address of one of its units from Albany to White Plains six months before filing for bankruptcy. As a result, Purdue was able to file its petition in the bankruptcy court in Westchester (within the Southern District) so that it could be heard by Judge Robert Drain, a longtime judge with extensive experience over cases for large-chapter 11 debtors and the only commercial bankruptcy judge in Westchester. Purdue rationalized its decision by stating that “White Plains is about 15 miles from our corporate headquarters and is the closest federal Bankruptcy courthouse,” yet many took issue with this supposed rationale. Purdue was also not an isolated case. Nationwide, a subset of three judges (including Judge Drain)—out of the total three hundred and seventy-five bankruptcy court judges—heard 57% of all large public company Chapter 11 filings in 2020.
Recapping 2021, Bloomberg reported that last year saw the fewest annual bankruptcy filings in nearly four decades, falling 24% from 2020. A total of 3,596 chapter 11 cases were filed in 2021, about 3,000 fewer than the year before. The stimulus funds and easy access to liquidity combined with debt forbearance were pointed as the driving forces behind the drop in bankruptcy filing. As a result, distressed investors found themselves looking at increasingly unusual opportunities for returns, a trend that is set to continue in 2022. The year 2022 started with just $62 billion of distressed bonds and loans outstanding, down substantially from nearly $150 billion at the end of 2020.
According to WSJ, Puerto Rico’s bankruptcy plan, which analysts expect to be approved in the next several weeks, would end defined-benefit retirement programs covering tens of thousands of active teachers and judges in Puerto Rico. Retirement ages would be increased, delaying when pensions can be tapped. Spiraling pension obligations are not unique to Puerto Rico, with burdens having ballooned for many other U.S. cities and states in the last two decades. For example, Chicago has $11 billion in bond debt and net pension liabilities of $53 billion.
Per Reuters, the Sackler family has until January 14 to make a deal with nine states and the District of Columbia and to negotiate changes to the Purdue bankruptcy plan after the settlement was rejected by the U.S. District Court in December. The short-term mediation efforts, with Judge Shelley C. Chapman as mediator, come after Purdue and the Sacklers filed challenges to the district court decision reversing the bankruptcy court approval.
On Tuesday, December 21, Bloomberg Economics reported that the latest strain of COVID-19, Omicron, is set to halve fourth quarter global economic growth. According to Bloomberg, the global economy is expanding at just 0.7% in the final three months, which is half the pace of the third quarter. The European economy is on pace for a 0.8% expansion this quarter while the United States is on track to register a 1.2% growth. Experts are warning that as the year closes, this variant—which is said to be far more transmissible than its predecessors—has the potential to throw off gains enjoyed by the global economy earlier in the year due to the efficacy of vaccines and available treatments in particular as it is coupled with accelerating inflation worldwide. [Bloomberg; Dec. 21, 2021]
Also on Tuesday, Yahoo! Finance reported that Credit Suisse has downgraded its views on the U.S. equities market from “overweight” to “neutral”, citing the near-term risks associated with the Omicron variant. Credit Suisse’s investment committee noted that the market could face a situation “in which the growth prospects are waning while central banks are forced to tighten liquidity at the same time” in light of rising inflation. The investment bank also cut UK stocks to “neutral” citing a deterioration of earnings. [Yahoo! Finance; Dec. 21, 2021]
On Sunday, December 19, Bloomberg Economics reported salary increases in several professions, most notably occupational recruiters—which experienced a 14% increase in salaries this year. Other professions that had salary increases when adjusted for inflation include: educators and corporate trainers, public relations experts, restaurant managers, cleaners, and coordinators. On the whole these professions appear to be white collar or managerial, with the biggest gains being in sectors that suffered large exits in the workforce due to the pandemic. This phenomena occurred despite the nationwide fall in wages overall when adjusting for inflation. The salary increases of professional recruiters seem to suggest the high demand for different jobs and that “job switchers and new hires” in sought-after industries are getting raises that outpace the recent surge in consumer prices. Furthermore, such data spotlights the contrast between new hires and existing workers at this time of high inflation, an issue predicted to linger for some time. [Bloomberg; Dec. 19, 2021]
Fox Business reports that Boy Scouts of America’s insurer Chubb Ltd. has pledged to contribute $800 million to the Boy Scouts of America’s bankruptcy settlement deal. Boy Scouts of America, which filed for bankruptcy in February 2020, is currently on track to settle with approximately 82,500 tort claimants who claim they were sexually abused as children by troop leaders. The latest contribution by Chubb raises the total amount of available funds to resolve the claims to more than $2.7 billion. The fund is also backed by Boy Scouts of America’s primary insurer, the Hartford Financial Group, as well as the Church of Jesus Christ of Latter-day Saints. Ultimately, Boy Scouts of America’s emergence from Chapter 11 hinges on a settlement with tort claimants, and, while several victims have voiced support for the settlement deal, a separate committee of claimants voiced concerns that the deal compromises too much in exchange for a quick exit. The abuse claimants have until December 28th to vote on the reorganization. [Fox Business; Dec. 13, 2021]
The Economist discusses how the Omicron variant has exacerbated potential threats to the world economy, including that tightening of domestic and global travel restrictions in response to Omicron will harm growth, that the variant will cause further supply chain bottlenecks that may result in inflation heading even higher, and that the variant may cause a further slowdown in the Chinese economy. [Economist; Dec. 4, 2021]
The Wall Street Journal reports that auto suppliers face an outlook nearly as distressed as the Great Recession of 2008-2009, due to labor shortages, rising costs, and manufacturing disruptions. [WSJ; Dec. 5, 2021]
Bloomberg Law reports on the approval of Aeromexico’s disclosure statement, which will allow the company to begin soliciting votes on its chapter 11 plan. [Bloomberg; Dec. 6, 2021]
Johnson & Johnson’s newly-created subsidiary, LTL Management LLC (“LTL”), filed for bankruptcy in the Western District of North Carolina on October 14, 2021, with the primary goal of resolving thousands of tort claims (and nearly 40,000 pending lawsuits) related to the company’s talcum powder-based products – LTL’s only liabilities. LTL was formed two days before the filing under a Texas law which allowed Johnson & Johnson subsidiary Johnson & Johnson Consumer Inc. to split into two new entities: one (LTL) assigned its billions in talc liability and one (“New JJCI”) assigned with its remaining assets. As part of the transaction, LTL also received certain assets, including approximately $6 million in cash and certain royalty streams, which the debtor projects will generate approximately $50 million in revenue per year over the next five years. Additionally, Johnson & Johnson and New JJCI committed to: (a) fund a trust with an aggregate amount of $2 billion to pay for current and future tac-related claims asserted against LTL; and (b) pay all costs and expenses of LTL in the normal course of business (up to the full value of New JJCI).
Los Angeles Business Journal reports on the anticipated increase in bankruptcy filings by hotels in light of the uneven economic recovery and reduction of government support, as lender patience is expected to wear thin.
The Wall Street Journal writes that businesses are taking a wait-and-see approach to the new Omicron variant of Covid-19 that emerged last week.
The Economist assesses Jerome Powell’s agenda for his second term as chairman of the Federal Reserve.
LATAM Airlines announced on Friday that it has filed a chapter 11 plan of reorganization that the airline says has the support of its largest unsecured creditor group and various shareholders, and which will provide more than $8 billion of new equity, convertible notes, and debt to enable the company to emerge from chapter 11.
The Wall Street Journal reports that the US Senate passed a bill to require lawyers, accountants, consultants and other professionals hired by Puerto Rico in its bankruptcy proceedings to make additional disclosures of their various connections, in order to shed light on potential conflicts of interest. In February 2021, a companion version of this bill unanimously passed the House of Representatives. [WSJ; Nov. 18, 2021]
Reporting from Bloomberg discusses how distressed debt funds have sought to rebrand in response to government stimulus and low interest rates, which have substantially decreased the overall level of distress in the market. The reporting highlights how some traditional distressed debt investors are now highlighting investments in “global opportunities,” “opportunistic real estate,” and “special situations,” among others, while overall distress remains low. [Bloomberg; Nov. 17, 2021]
Reuters reports that two shareholders of Eagle Hospitality Real Estate Investment Trust, a bankrupt Singaporean hotel real estate trust, could face jail time over a purportedly fraudulent scheme in which the debtor obtained loans through the US government’s Paycheck Protection Program that was established to help small businesses during the COVID-19 pandemic. [Reuters; Nov. 15, 2021]
Bloomberg reports that Judge Christopher Sontchi from the US Bankruptcy Court for the District of Delaware, who has served as chief judge of the court since 2018, will retire from the bench in 2022. [Bloomberg; Nov. 15, 2021]
Reporting from the Wall Street Journal indicates that plaintiffs in price fixing lawsuits against generic drugmaker Teligent Inc. have sought court authority to continue that litigation despite Teligent’s October bankruptcy filing. The litigation, which commenced in 2016, alleges that Teligent artificially inflated the costs of certain generic drugs and is being pursued primarily by attorneys general for 54 states, territories, and commonwealths. [WSJ; Nov. 11, 2021]
Reuters reports on the decision by U.S. Bankruptcy Judge Craig Whitley to transfer Johnson & Johnson subsidiary LTL Management’s bankruptcy case from North Carolina to New Jersey. Judge Whitley determined that New Jersey is the proper forum for the case, since Johnson & Johnson is based in the state and because much of talc litigation involving Johnson & Johnson is pending there. In at least a temporary reprieve for Johnson & Johnson, Judge Whitley did stay all personal injury claims against Johnson & Johnson – and not just those against LTL Management – for 60 days. But the judge emphasized that he was doing so only so that the case could be transferred in an orderly manner without it being “on fire” in the recipient, the New Jersey bankruptcy court. Once transferred, it will be up to the New Jersey bankruptcy court whether to further extend the stay. [Reuters; Nov. 10, 2021]
Bloomberg reports on the U.S. Supreme Court’s decision not to revisit its 1992 Dewsnup v. Timm decision, which held that homeowners cannot reduce a partially underwater mortgage through the Bankruptcy Code. The petitioners, a couple from North Carolina, argued that their secured lender’s claim should be reduced from the approximately $240,000 left on their mortgage to the approximately $220,000 that their home was worth arguing that that Bankruptcy Code’s definition of “allowed secured claim” can only be equal to the value of the collateral. The Supreme Court, however, decided not to revisit the decisions of the lower courts who agreed with the petitioner’s secured lender. [Bloomberg; Nov. 8, 2021]
Whether—and in what circumstances—a debtor should pay creditors a make-whole premium continues to be litigated in bankruptcy courts. Last week, as reported by Bloomberg, Judge Dorsey (Delaware) ruled that the debtor – Mallinckrodt Plc – did not need to pay a make whole premium to first lien lenders in order to reinstate such obligations under the debtor’s chapter 11 plan. And in Hertz’s Delaware bankruptcy case, Judge Walrath heard oral argument on whether Hertz was obligated to pay noteholders post-petition interest and a make-whole premium when the plan paid down the bondholders’ claim and designated it as unimpaired, as reported by the Wall Street Journal.
G.E. announced this week that it will split into three companies, separating its healthcare, aviation and power divisions, as reported by the Wall Street Journal. The move follows several years of corporate and debt restructurings that G.E. has undertaken since the financial crisis and reflects how large conglomerates, such as G.E., have fallen out of favor with investors.
Economic news continues to focus on the supply chain issues, and the New York Times covers an important link in the chain: truck drivers. The current shortage in truck drivers is predicted to grow as more truckers retire. Potential solutions being discussed include relaxing restrictions against drivers under the age of 21 crossing state lines.
In litigation that is emblematic of the financial distress that the movie theatre business continues to experience, Cineplex sued its former suiter Cineworld in Canadian court when it walked away from a potential acquisition after the pandemic. Cineplex alleged that Cineworld got “buyer’s remorse” and the actions it took after the pandemic to cut costs should be considered “ordinary course” for the industry. A decision by the Ontario Superior Court of Justice is expected soon, according to The Canadian Press.