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). 

On October 19th, the Wall Street Journal reported that the electric vehicle startup Mullen Automotive Inc., gained court approval to buy an Indiana manufacturing plant and assets from Electric Last Mile Solutions for $92 million. Such deal, which boosted Mullen’s share prices by 64%, includes Electric Last Mile Solutions’ manufacturing plant in Mishawaka, Indiana and its inventory and intellectual property. Mullen is paying $55 million in cash and assuming roughly $37 million in contractual liabilities. Electric Last Mile Solutions had filed for bankruptcy in the District of Delaware in June, 2022 due to ongoing investigations by the Securities and Exchange Commission, after merging with a special-purpose acquisition company last year.

The Wall Street Journal also reported on October 18th, that Bed Bath & Beyond has made a debt-exchange offer to unsecured noteholders to help extend debt maturities and reduce interest expenses. Specifically, Bed Bath & Beyond has offered to exchange its unsecured notes maturing in 2034 and 2044 for new third-lien debt carrying a 12% interest rate. Bondholders have until November 15th to accept the offer and those who do will take a roughly 78% discount to face value. Some investors in Bed Bath & Beyond are wary of potentially coercive exchange deals that could raise new secured debt and weaken other claims on the retailer’s assets. Ultimately, the move appears to be part of a larger strategy to ease the company’s financial burden amid dropping sales.

On October 17th, Bloomberg reported that the city of Chester, Pennsylvania, is considering filing for bankruptcy. Chester is a city just outside of Philadelphia which has a population of approximately 33,000 residents, 30% of whom live below the poverty line. A state-appointed receiver, who was appointed in 2020, has noted that the city’s debt has “piled up” as the city has faced a deepening downward financial spiral. A potential bankruptcy decision also comes as the city police pension fund is set to run out of cash in the coming months. The city had underpaid its pension funds amid budget deficits, an issue magnified by a purported miscalculation of benefits. Chester currently owes $53.9 million in pension contributions.

On October 15th, Reuters reported that LATAM Airlines, the biggest airline in Latin America, announced that it will exit bankruptcy on November 3, 2022. LATAM, like many travel services, suffered significant challenges resulting from COVID-related travel disruptions. It entered bankruptcy in May, 2020 in the Southern District of New York. LATAM’s Chapter 11 Plan of Reorganization was confirmed in June, 2022 but was challenged by certain claimholders. Now, the company plans to emerge with approximately $10.3 billion in equity and close to $6.9 billion in debt.

On October 12th, Bloomberg reported that Alex Jones will join his bankrupt media production company, Free Speech Systems, in a court-supervised settlement with the families of the Sandy Hook school shooting victims. Specifically, Jones’ media company had filed a chapter 11 petition for bankruptcy in July of this year, in the Southern District of Texas. Such filing had been precipitated due to a plethora of court settlements in which Jones was found to have made inflammatory comments that the Sandy Hook Elementary School shooting was a hoax and a conspiracy by the Democratic party and, to have used these comments to build an audience and make profit. Last month, the bankruptcy court had already expanded the powers of the trustee overseeing the case and ordered an investigation of the company. The mediation will therefore proceed while the trustee continues to investigate the company’s finances. [Bloomberg; Oct. 12, 2022]

On October 12th, Yahoo! News reported that the Archdiocese of Santa Fe filed its long awaited Plan of Reorganization, nearly four years after the filing of its initial petition. The Archdiocese had filed its chapter 11 petition in the District of New Mexico in an attempt to resolve mounting abuse claims and stem financial losses that resulted from the corresponding suits. As part of the Plan, the clergy abuse survivors will receive a $121 million settlement and six insurers will pay $46.5 million, with the remaining $75 million being contributed by the archdiocese, which has already put more than $69 million into an escrow account, with a $5.4 million promissory note, to be paid in full by March 31. Such contribution is considered to be among the largest settlements paid by an archdiocese in the country. The hearing on the Plan will take place on October 19th, in front of Judge David Thuma. [Yahoo; Oct. 12, 2022]

On October 11th, the New York Times reported that U.S. Department of Treasury fined cryptocurrency exchange, Bittrex, $24 million for breaking U.S. sanctions, which is the largest penalty the government has imposed on a crypto business for violating sanctions. According to the Treasury, Bittrex allowed customers in Cuba, Iran, Sudan, Syria and Crimea region of Ukraine to make virtual currency transactions worth more than $263 million and committed over 116,421 sanctions violations. The $24 million penalty is part of an expanding effort by the Treasury Department to crack down on crypto crimes and money laundering. [NYT; Oct. 11, 2022]

On October 11th, Reuters reported that the U.S. Supreme Court declined to hear McKinsey & Co.’s bid to escape a lawsuit in which it is accused of concealing potential conflicts when seeking permission from bankruptcy courts to perform lucrative work on corporate restructurings. Turnaround specialist Jay Alix, filed a suit accusing the firm of running “ a criminal enterprise” by hiding its ties to lenders and clients’ competitors. Alix further accused McKinsey of violating the Racketeer Influenced and Corrupt Organizations (RICO) Act, which targets organized crime. Originally Judge Furman in the Southern District of New York dismissed the lawsuit but that was overturned by the Second Circuit. McKinsey then filed a petition to the Supreme Court, but that was ultimately denied. Accordingly, the case will proceed in New York. [Reuters; Oct. 11, 2022]

Reuters reports that the markets in the US have faced their third straight quarterly decline, the longest period of decline for the S&P 500 and Nasdaq indices since 2008.  This comes amid a period of rising interest rates and persistently high inflation (including double-digit inflation in the Eurozone), contributing to fears that a recession is imminent or even ongoing. [Reuters, Sept. 30, 2022; WSJ, Sept. 30, 2022]

It’s been a busy week in the crypto world.  Bankrupt cryptocurrency lender Celsius Network filed a motion for approval of a two-step auction process for separate sales of its retail platform and crypto holdings, which comes just days after its CEO suddenly resigned.  Meanwhile, Voyager Digital announced that crypto exchange FTX US was the prevailing bidder in Voyager’s bankruptcy auction, netting approximately $1.4 billion in consideration.  Finally, Bitcoin miner Compute North just commenced its own Chapter 11 case, seeking approval of a sale of substantially all of its assets. [Law360, Sept. 30, 2022; Morningstar, Sept. 29, 2022; CNBC, Sept. 30, 2022; Forbes, Sept. 30, 2022]

The Wall Street Journal reports that, after years of pandemic-influenced gains in the housing market, a slowdown appears to have begun.  Sales of luxury homes dropped nearly 30% during June through August 2022 compared with the same period in 2021, while sales in the rest of the housing market dropped almost 20%.  According to the WSJ, inflation, recession fears, and rising interest rates have all contributed to the slowdown, although home prices have so far remained relatively stable.  [WSJ, Sept. 22, 2022]

CBS News reports that Senator Elizabeth Warren is planning to reintroduce a bill aimed at, among other things, making it easier for student loan borrowers to have their student loans discharged in bankruptcy.  If enacted, the Consumer Bankruptcy Reform Act of 2022 would eliminate Chapter 13’s payment plan process and bar individuals from filing Chapter 7 cases and eliminate Chapter 13 payment plans in favor of a new Chapter 10 intended to be more streamlined than existing alternatives available to individual debtors, while treating student loans the same as other consumer debts. [CBS News, Sept. 28, 2022]

CNN reports on the Federal Reserve’s decision to raise its target interest rate by an additional 75 basis points to a range of 3.00% to 3.25% in an effort to combat persistent inflation in the US. This is the fifth time the Federal Reserve has raised rates this year. [CNN; Sept. 21, 2022]

ABC News reports that a mediation to restructure Puerto Rico’s government owned and operated power company, the Puerto Rico Electric Power Authority, did not result in a resolution. As a result, litigation against the power company will move forward. [ABC News; Sept. 17, 2022]

Borrego Community Health Foundation filed for chapter 11 bankruptcy on Monday, September 12, 2022 amidst regulators suspending its Medi-Cal reimbursements and ongoing criminal fraud investigations, reports the San Diego Union Tribune. [Sept. 17, 2022]

Yahoo reports that bankrupt cryptocurrency lender Celsius Network is seeking bankruptcy court authorization to sell its stablecoin holdings in order to generate liquidity to fund its operations while in chapter 11. [Yahoo; Sept. 16, 2022]

Reporting from Reuters indicates that the German government plans to relax certain corporate insolvency rules in response to rising energy costs so that companies with financially sound business plans can avoid being required to file for protection under Germany’s insolvency laws. [Reuters; Sept. 9, 2022]

Bloomberg reports that the United States Court of Appeals for the Second Circuit ruled in favor of Citibank in an appeal of a lower court’s ruling from 2020 that certain lenders to Revlon were permitted to keep approximately $504 million in payments mistakenly wired to them by Citibank. [Bloomberg; Sept. 8, 2022]

Reporting from Yahoo News indicates that Cineworld’s request for approval of its DIP financing facility was approved by the U.S. Bankruptcy Court for the Southern District of Texas. Cineworld is now authorized to access approximately $785 million in DIP financing on an interim basis. [Yahoo; Sept. 9, 2022]

CNN reports that the U.S. Bankruptcy Court for the District of Delaware approved confirmation of the Boy Scouts of America’s plan of reorganization on Thursday, September 8, 2022. [CNN; Sept. 8, 2022]