The Consolidated Appropriations Act of 2021 (the CAA), which President Trump signed into law on December 27, 2020, amends several provisions of the Bankruptcy Code. While a number of the amendments are applicable only to small businesses (e.g., businesses eligible to file under the new small-business subchapter of the Bankruptcy Code and/or businesses eligible to receive PPP loans), several others have more general application, as discussed below.
The New York Times reports that the National Rifle Association (“NRA”) filed for chapter 11 bankruptcy protection in the United States Bankruptcy Court in Dallas with plans to reincorporate in Texas. The New York attorney general’s office has been conducting an investigation into corruption at the NRA and has been seeking to dissolve the group. The NRA has indicated that its filing is designed to avoid New York’s jurisdiction. [N.Y. Times; Jan 15, 2021]
Fortune reports that the boost in U.S. spending and borrowing designed to combat the ravages of the pandemic has resulted in the U.S. debt reaching levels that rival Italy’s. The percentage of U.S. borrowing to GDP reached 134% in 2020, which is a jump from under 109% in 2019. The new stimulus package and other promised aid may add another $3 trillion to the deficit, which would raise the debt-to-GDP ratio to around 150% in 2021, a figure close to Italy’s 152%. [Fortune; Jan. 14, 2021]
According to Bloomberg’s U.S. bankruptcy tracker, there have been four large bankruptcy filings so far in 2021, a relative slowdown from six filings during the corresponding period of 2020. The total amount of traded distressed bonds and loans also shrank to about $146 billion as of Jan. 8, 2021, significantly less than the $935 billion peak in March, 2020. [Bloomberg; Jan. 12, 2021]
The Wall Street Journal discusses how commercial landlords are reluctantly granting rent concessions and other relief to retail tenants in light of the rise in retail vacancies. Landlords that cannot quickly replace tenants have little leverage in lease negotiations, as they are worried that further tenant departures could trigger more severe financial consequences under their debt documents. [WSJ; Jan. 11, 2021]
In a post for Appellate.net, Restructuring partner Aaron Gavant and associate Samuel Rabuck and Supreme Court & Appellate partner Nicole A. Saharsky summarize the Supreme Court’s recent decision in Chicago v. Fulton.
In a recent decision in In re Nuverra Environmental Solutions, Inc., No. 18-3084, 2021 WL 50160 (3d Cir. Jan 6, 2021), a divided Third Circuit panel held that an appeal of a Chapter 11 plan confirmation order was equitably moot and that the dissenting unsecured creditor who filed the appeal, David Hargreaves, was not entitled to individualized relief. Under the confirmed Chapter 11 plan in Nuverra, secured creditors did not receive payment in full and creditors that were holders of prepetition unsecured notes, including Hargreaves, received cash and securities equal to only six percent of the face value of their note claims, while trade creditors were entitled to be paid in full. The plan proponents described the full payment to these unsecured trade creditors as a “gift” from the secured creditors, who were undersecured based on the debtors’ enterprise value under the plan.
Bloomberg confirms that 2020 was the biggest year for large commercial bankruptcies since the Great Recession in 2009. Led by the energy, retail, and consumer services sectors, 224 companies with liabilities exceeding $50 million filed Chapter 7 and 11 cases, far exceeding the number of large filings each year in the preceding decade. Bloomberg also notes that significant distress has continued into 2021, particularly within retail, entertainment, gyms, and real estate. [Bloomberg; Jan. 5, 2021]
CNBC discusses the historic decreases in retail lease prices in New York City, which were down in 2020 by up to 25% from prices in 2019. The price decreases have been driven in large part by bankruptcies of retailers along with other vacancies that have resulted both from the COVID-19 pandemic and from longstanding trends in brick-and-mortar retail. [CNBC; Jan. 8, 2021]
S&P Global Market Intelligence observes that the coal sector in the U.S. is girding itself for less favorable policies under a Biden administration and Democratic Congress. The already-struggling industry, worried that it is facing extinction in the U.S., plans to work with policymakers to avoid a too-rapid shift away from coal and to promote the continued use of coal in connection with cleaner, modern coal-fired power plants, infrastructure projects that rely on steel produced using coal, and other cutting-edge uses of coal. [S&P Global Market Intelligence; Jan. 7, 2021]
The Detroit Free Press reports that Loves Furniture has filed for Chapter 11 bankruptcy less than a year after going into business. Although not quite a “Chapter 22” serial restructuring, Loves was formed to purchase stores and other assets from Art Van Furniture during its 2020 bankruptcy. Out of the 32 stores Loves previously operated, only 13 remained open at the time of the bankruptcy filing, which the company hopes to keep open through the bankruptcy process. [Detroit Free Press; Jan. 7, 2021]
As reported in Yahoo Finance, the first trading day of 2021 was off to a rocky start in the U.S. Despite progress on COVID vaccine distribution, markets reacted to the discovery of a highly transmissible strain of COVID in the US, which comes with a greater risk of lockdowns, along with uncertainty surrounding the Georgia runoff elections and the composition of the 117th Congress. [Yahoo Finance; Jan. 4, 2021]
The Houston Chronicle notes the continued rise of Texas as a center of major commercial bankruptcy activity in 2020. In the first 11 months of 2020, commercial bankruptcy filings in Texas nearly tripled over the same period in 2019. While this filing boom was led by the oil & gas sector, major and minor retailers also opted to file in Texas, including big names like J.C. Penney, Neiman Marcus, and Tuesday Morning. [Houston Chronicle; Dec. 30, 2020]
The Wall Street Journal reports on the growing trend of startup companies going public via SPACs—special purpose acquisition companies. These so-called “blank-check companies” go public holding no assets before merging with a startup or growth business, reducing the SEC reporting and compliance obligations on the business that would otherwise go along with a traditional IPO. Among other things, startup companies have taken to YouTube to promote investments in their companies, particularly among younger, less sophisticated investors. [Wall Street Journal; Jan. 3, 2021]
CNBC is reporting that U.S. home price growth is the fastest in smaller metropolitan areas between the coasts, like Indianapolis, Austin, and Memphis, which is attributed to the effects of COVID, including “work from anywhere” policies, continuing to push workers away from major urban centers towards smaller communities. [CNBC; Jan. 4, 2021]
Reporting from S&P Global shows that from January 1, 2020 through December 13, 2020, there were 610 commercial bankruptcy filings by public and private entities with at least $2 million in reported assets or liabilities at the time of the bankruptcy filing. Entities in the consumer discretionary, industrial, energy, and healthcare industries made up over half of those filing entities. [S&P; Dec. 15, 2020]
On December 21, 2020, the United States Congress passed the Bankruptcy Administration Improvement Act of 2020, which, among other things, extends 25 temporary judgeships on the bankruptcy bench and provides for a temporary increase in United States Trustee fees. [U.S. Congress; Dec. 21, 2020]
Forbes reports that in connection with the reopening of the Paycheck Protection Program with an additional $285 billion in funding, the U.S. Bankruptcy Code will be amended to add sections 364(g)(1) and 503(b)(10), which authorize bankruptcy courts to permit debtors to obtain loans under the Paycheck Protection Program and grant an administrative expense priority to such loans. [Forbes; Dec. 19, 2020]
The Chicago Sun-Times reports that the U.S. Bankruptcy Court for the Southern District of Texas has approved the sale of substantially all of Ebony Media Operations’ assets to Bridgeman Sports and Media, which is owned by former NBA player Ulysses “Junior” Bridgeman, for approximately $14 million. Bridgeman Sports and Media was reportedly the only bidder for the assets and plans to revive Ebony magazine as a digital publication. [Chicago Sun-Times; Dec. 22, 2020]
The Wall Street Journal reports on the growth of dividend recapitalization transactions during the COVID-19 pandemic by private equity controlled companies. That growth stands in contrast to prior economic downturns. [WSJ; Dec 17, 2020]
Reporting from Yahoo Finance addresses the growing control that investment firms and hedge funds exert over commercial restructuring efforts as a result of increasingly favorable terms granted to such entities in connection with providing critical liquidity during periods of financial hardship. The reporting further indicates that between 1995 and 2005, 10% of bankruptcy loans given to publicly traded firms were linked to a specific chapter 11 exit plan while, between 2015 and 2018, that figure rose to 50%. [Yahoo Finance; Dec. 17, 2020]
BC Hospitality Group Inc., the parent company of vegan restaurant chain By Chloe, has sought bankruptcy protection under the new subchapter V of chapter 11 of the bankruptcy code applicable to small businesses, reports Business Insider. The company will reportedly seek to sell substantially all of its assets in connection with its bankruptcy filing. [Business Insider; Dec. 16, 2020]
Bloomberg reports that 20 large real estate companies have filed for chapter 11 bankruptcy relief in 2020, with two real estate companies with assets over $50 million filing during the week ending December 12, 2020. The pace at which real estate companies are seeking bankruptcy relief is the highest it has been since 2011. [Bloomberg; Dec. 15, 2020]
In a new opinion issued in the Chuck E. Cheese bankruptcy cases, In re CEC Entertainment, Inc., Case No. 20-33163 (Bankr. S.D. Tex.),1 Judge Marvin Isgur of the U.S. Bankruptcy Court for the Southern District of Texas ruled2 that CEC Entertainment, Inc. (“CEC”), the parent company of the Chuck E. Cheese pizza chain, could not defer its rent obligations due to ongoing COVID-19 disruptions beyond the initial 60-day period authorized by section 365(d)(3) of the Bankruptcy Code. While CEC had initially sought rent relief with respect to dozens of its store locations, it was able to settle with the landlords for all but six locations in North Carolina, Washington, and California; the non-settling landlords continued to insist that CEC was required to pay rent despite the global pandemic and CEC’s bankruptcy filing. In its December 14, 2020 opinion, the court agreed with these landlords and rejected each of CEC’s arguments for its proposed relief, including that: (1) sections 105 and 365 of the Bankruptcy Code authorized the Bankruptcy Court to suspend CEC’s rent obligations beyond the 60-day period included in Section 365(d)(3); (2) the COVID-19 pandemic—and related restrictions put in place by state and local governments—constituted a force majeure event under each of the six leases at issue; and (3) CEC’s inability to fully utilize the leased premises as a result of state and local restrictions on indoor dining and entertainment entitled CED to a “frustration of purpose” defense with respect to each lease.
AMC Entertainment Holdings Inc. announced that it is exploring financing alternatives to address the financial strain on the company resulting from the COVID-19 pandemic, including an at-the-market sale of 178 million shares, reports The Street. This announcement comes after Walt Disney Co. announced that approximately 80% of its new content in 2021 would be released online and not in theaters. The Company reportedly needs around $750 million of additional liquidity in order to remain viable through the whole of 2021. [The Street; Dec. 11, 2020]
The Dallas Morning News reports that, while approving a settlement between Dan Kamensky (the founder of Marble Ridge Capital LP) and the Neiman Marcus estate, Judge David Jones of the United States Bankruptcy Court for the Southern District of Texas referred to Kamensky as a “thief” and a “liar” who tried to steal from other creditors of Neiman Marcus out of “pure greed.” As the chairperson of Neiman Marcus’s unsecured creditors committee, Kamensky allegedly attempted to suppress bidding for Neiman Marcus’s e-commerce platform, MyTheresa, for the benefit of Marble Ridge; these attempts came to light in phone conversations that were recorded and ultimately brought to the attention of Judge Jones and federal investigators. Marble Ridge is now being wound down as a result of Mr. Kamensky’s action in the Neiman Marcus bankruptcy case. [Dallas Morning News; Dec. 10, 2020]
The Wall Street Journal reports that Ed Altman, the creator of the Z-score (a metric used to predict defaults on commercial debt obligations), anticipates a substantial number of commercial and consumer bankruptcy filings during the third and fourth quarters of 2021. One of the key indicators Altman relied on in making his prediction is the ratio of non-financial corporate debt to GDP, which reached 57% during the first half of 2020. According to Altman, spikes in this ratio have historically preceded a corresponding spike in corporate debt defaults within 12 months. [WSJ; Dec. 10, 2020]
Senator Elizabeth Warren and House Judiciary Committee Chairman Jarrold Nadler recently proposed a new consumer bankruptcy bill that would replace chapters 7 and 13 of the bankruptcy code with a new chapter 10. The bill’s future will likely largely depend on the outcome of the Georgia Senatorial runoff elections, next month, in which control of the Senate is up for grabs. If passed, chapter 10 would be divided into two sections: one allowing for a discharge without payments made to unsecured creditors and one allowing debtors to address repayment over time of specific types of debt on more favorable terms, which are intended to provide more targeted relief to financially distressed consumers. The bill would also permit student loans to be discharged in bankruptcy in the same manner as most other consumer debts, instead of requiring consumer debtors to meet the exacting undue hardship standard currently required to discharge student loan debt. [U.S. Senate; Dec. 7, 2020]