Law360 reports that Coinbase included new bankruptcy-related risk factors in a recent SEC filing, explaining that “custodially held” digital assets (i.e., cryptocurrency) could be considered property of a bankruptcy estate if the company were to file for bankruptcy and that Coinbase customers could be treated as general unsecured creditors, which would decrease their likelihood of recovery.  Coinbase’s CEO subsequently explained that Coinbase currently has “no risk of bankruptcy” and that these additional disclosures were included only because of new guidance issued by the SEC.  Nonetheless, such disclosures could result in customers finding cryptocurrency custodial services less attractive. [Law360; May 11, 2022]

The Wall Street Journal reports that the U.S. Court of Appeals for the Third Circuit will hear argument on direct appeal (bypassing the District Court) as to whether the bankruptcy of Johnson & Johnson affiliate LTL Management should be dismissed as a bad faith filing.  The appeal is being pursued by the Official Committee of Tort Claimants, which comprises roughly 40,000 tort claimants who allege damages in connection with Johnson & Johnson’s talc products.  The bankruptcy court previously denied the Tort Claimants’ Committee’s motion to dismiss, which was based on LTL Management’s and Johnson & Johnson’s use of a controversial Texas divisional merger statute which led to LTL Management’s creation prior to the bankruptcy (i.e., the “Texas Two Step”).  [WSJ; May 11, 2022]

Reporting from Reuters indicates that Google’s Russian subsidiary plans to file for bankruptcy after Russian authorities seized its bank account, stifling its ability to pay workers and business vendors.  The reporting reveals that the Alphabet Inc., which owns Google, has been under pressure from Russia for not deleting content Russian authorities have deemed illegal. [Reuters; May 18, 2022]

The Wall Street Journal reports that Pennsylvania-based Armstrong Flooring Inc. filed for chapter 11 bankruptcy relief in Delaware on May 8, 2022, citing supply chain disruptions and increased costs for materials and transportation.  Armstrong Flooring, a publicly-traded company that was founded in 1860, stated that it intends to pursue a sale of its business through the bankruptcy process. [WSJ; May 9, 2022]

Reporting from Reuters on the LTL Management, LLC chapter 11 bankruptcy case indicates that a mediator will be appointed by May 24, 2022, to resolve allegations that Johnson & Johnson violated state consumer protection laws in connection with its talc products.  The claims asserted by various states exceed the $2 billion that Johnson & Johnson initially set aside for LTL-related settlements, and at least 40 states have sought to join the mediation.  LTL Management, LLC is an affiliate of Johnson & Johnson that was formed to resolve thousands of lawsuits against Johnson & Johnson and filed for chapter 11 bankruptcy relief in October 2021. Some talc claim plaintiffs have argued that the filing was an abuse of the bankruptcy system and are appealing the judge’s decision to allow the case to proceed in bankruptcy. [Reuters; May 4, 2022]

The Wall Street Journal reports that the Federal Reserve’s half point interest-rate increase it announced last week is expected to further raise borrowing costs for troubled companies as the sustained period of ultralow interest rates appears to be nearing its end. In 2021, U.S. companies borrowed a record $1.8 trillion in junk-rated loans.  However, bond and loan defaults are nevertheless expected to remain low because of the large amounts of private capital available, and it is possible that the effects of higher interest rates will not be seen for several years. [WSJ; May 5, 2022]

Yahoo! Finance reports that the total number of U.S. bankruptcy filings in April 2022 was down 21 percent compared to April of last year, according to data provided by Epiq Bankruptcy.  Additionally, commercial bankruptcy filings specifically were down 16 percent year-over-year, and April 2022 saw a 3 percent drop-off in commercial filings compared to March 2022. [Yahoo! Finance; May 4, 2022]

The Wall Street Journal reports on the surprise Thursday announcement from the U.S. Commerce Department that the U.S. gross domestic product unexpectedly shrank at a 1.4% annualized rate during the first quarter of 2022.  The WSJ does not expect the GDP report to alter the Federal Reserve’s plan to raise interest rates this year, including at its upcoming meeting this week.  Meanwhile, some are concerned that that this could be the start of a period of stagflation—stagnant economic growth combined with high inflation that, together, significantly weakens purchasing power. [WSJ; April 28, 2022]

Reuters provides an update on the Sackler family’s latest efforts to finalize settlements and obtain releases of opioid-related claims in connection with the Purdue Pharma bankruptcy.  The Sacklers had originally promised to contribute $5 billion to Purdue Pharma to pay claims under Purdue’s confirmed chapter 11 plan, but the District Court, on an appeal of the Bankruptcy Court’s plan confirmation order, rejected the plan, holding that the non-consensual releases in favor of the Sackler family were unlawful.  Purdue appealed further to the Court of Appeals for the Second Circuit, which held oral argument this past Friday.  At the argument, the Sackler family representatives noted that their contribution had been increased to $6 billion while also arguing that settlements of this nature, including non-consensual releases of claims under a chapter 11 plan, are not prohibited under the U.S. Bankruptcy Code.  A decision from the Second Circuit could have widespread implications, not just for the Purdue bankruptcy case but as to the lawfulness of non-consensual plan releases more broadly. [Reuters; April 29, 2022]

Law360 discusses recent developments in the chapter 11 bankruptcy cases of three non-operating affiliates of Alex Jones’ InfoWars enterprise.   Bankruptcy Judge Lopez of the Southern District of Texas scheduled the U.S. Trustee’s and tort claimants’ motions to dismiss the three bankruptcy cases for May 27, and stated that those motions would be heard before the InfoWars debtors’ motion to appoint trustees for litigation trusts.  The U.S. Trustee argues that the cases should be dismissed for cause as bad-faith filings because the cases “serve no valid bankruptcy purpose and were filed to gain a tactical advantage in the Sandy Hook Lawsuits.” Meanwhile, under the debtors’ proposal, Alex Jones and another related entity would fund up to $10 million into the litigation trusts, over time, for the settlement of defamation claims brought against Jones and InfoWars. [Law360; April 29, 2022]

SCOTUSBlog notes that the U.S. Supreme Court just agreed to hear a case that poses the question of whether Section 523(a)(2)(A) of the Bankruptcy Code may be used to exclude debts from an individual debtor’s discharge on the basis of “imputed fraud.” This provision of the Bankruptcy Code allows creditors to seek to exclude debts incurred via “false pretenses, a false representation, or actual fraud” from an individual debtor’s bankruptcy discharge, rendering such debts permanently nondischargeable.  By granting certiorari as to this case, the Supreme Court is positioned to resolve a circuit split as to whether fraud can be imputed to an individual who was entirely unaware of any wrongdoing, thereby rendering the innocent individual permanently liable for the fraud of another individual despite obtaining a discharge of other debts.  [SCOTUSBlog; May 2, 2022]

The Wall Street Journal reports that Russia has taken another step closer to defaulting on its sovereign debts after an industry watchdog overseeing the credit-default swaps market ruled Wednesday that Russia failed to meet its obligations to foreign bondholders when it paid them in rubles earlier this month.  While Russia has continued to deny reports that it is close to default on its sovereign debts, analysts say that payments for the subject bonds in any currency other than the US dollar would constitute a breach of contract.  Following the decision, credit-default swaps tied to Russia’s creditworthiness can be triggered if Russia fails to make dollar payments before a grace period expires on May 4.  The current upfront cost of buying a five-year contract for a Russian credit-default swap is roughly 73% of the total value of the debt to be insured, implying a default probability of 93%.

The bankrupt Roman Catholic Diocese of Camden, New Jersey, has agreed to pay $87.5 million to more than 300 sexual-abuse victims, as reported by The New York Times.  Under the settlement agreement, the diocese will establish a trust to be funded over a four-year period, with claims against certain of the diocese’s insurance carriers to be assigned to the trust.  The parties are seeking bankruptcy court approval of the settlement agreement by early June.

According to Law360, Ireland-based aircraft lessor Nordic Aviation Capital obtained bankruptcy court approval for its chapter 11 plan following support from 99% of the company’s voting creditors.  Under the confirmed plan, which also had support of all existing shareholders, will wipe out more than $4 billion of debt by equitizing approximately $3.6 billion in secured debt and converting those obligations into 100% of the equity in the reorganized company, while also infusing $377 million into the reorganized company through a new equity rights offering.  The company expects to emerge from bankruptcy by the end of May.

US mortgage rates hit 5% this week for the first time in more than a decade, continuing a rapid ascent since the start of 2022.  According to The Wall Street Journal, interest on the average 30-year fixed-rate mortgage climbed from 4.72% a week ago to its highest level since early 2011.  Now, bankers and economists predict that the pricier mortgages may finally be cooling a hot housing market, with two of the nation’s largest home lenders reporting this week that mortgage originations fell 27% and 37%, respectively, from a year ago.  [WSJ; April 14, 2022].

The CEO of one of the nation’s largest banks warns of “powerful forces” threatening to drive the US economy into a recession later this year, as reported by CNBC.  Although a relatively strong US economy is predicted for the next two quarters, “storm clouds” appear to be brewing in the distance—namely, rising interest rates, the reversal of Fed bond-buying policies, high inflation, the ongoing war in Ukraine, and COVID’s potential resurgence and its effect on supply. [CNBC; April 13, 2022].

US inflation surged to a new four-decade high of 8.5% in March from the same month a year ago.  According to The New York Times, the consumer-price index—which measures how much US consumers pay for goods and services—rose last month at its fastest 12-month pace since December 1981, driven by a surge in grocery and energy costs, supply shortages and strong consumer demand.  While some economists and investors report signs that inflation has hit its peak, many remain weary in the face of growing supply-chain constraints caused by Russia’s continued invasion of Ukraine and the rise of COVID in China.  [The New York Times; April 12, 2022].

State-owned Russian Railways JSC has been ruled in default by the Credit Derivatives Determinations Committee after missing a bond interest payment, the first such decision since the implementation of sanctions in response to Russia’s invasion of Ukraine.  According to The Wall Street Journal, new sanctions against Russia were largely to blame for the missed payment, as the US included Russian Railways on a February list of the 13 most critical Russian enterprises for sanctions that prevents the state-owned company from raising money in the US market.  [WSJ; April 11, 2022].

Recently, the Second Circuit became the first federal circuit court to rule that the federal government could deny a Paycheck Protection Program (“PPP”) loan to a debtor in bankruptcy solely because of an applicant’s bankruptcy status.[1] Prior to the Second Circuit’s decision in Springfield Hospital, Inc. v. Guzman, multiple lower federal courts were divided on the issue, although the majority of those courts reached the same conclusion as the Second Circuit.

Continue Reading Opinion of Interest – Springfield Hospital, Inc. v. Guzman: Second Circuit Upholds Federal Government’s Ability to Deny PPP Loans to Bankrupt Companies

Bloomberg describes the latest example of a priming transaction that left minority lenders “fuming.” Recently, Incora, an aerospace supplier, announced a transaction with Silver Point Capital and Pacific Investment Management Co. in which it received new financing and will potentially save up to $90 million in interest expense. The transaction includes what Bloomberg characterized as “unusually aggressive moves” by its private-equity sponsor in which the sponsor’s existing unsecured debt was rolled up into secured debt.  [Bloomberg; April 5, 2022]

Russia missed bond payments due to foreign bondholders earlier this week. If the amount remains unpaid, Russia will default on its bonds in early May. According to the Wall Street Journal, new sanctions against Russia were largely to blame for the missed payment, as the U.S. government blocked Russia from using U.S. banks to channel payments on its foreign-currency bonds. Russia’s sovereign bonds are currently trading between 5 and 25 cents on the dollar. [WSJ; April 7, 2022]

The senior living industry (and healthcare more generally) continues to be under the watch for potential distress, as reported by McKnight Senior Living. The industry, which was operating at the margin prior to the pandemic, benefited from PPP and other stimulus funds, which are now rolling off. A BDO survey of 100 healthcare CFOs revealed that 50% of long-term / post-acute care and home health organizations defaulted on bond or loan covenants in the past 12 months (42% of healthcare organizations more generally defaulted on their covenants).  [McKnights; April 7, 2022]

The U.S. Senate has passed legislation that will raise the debt eligibility limit on small business filings back to $7.5 million, as reported by the American Bankruptcy Institute. The Small Business Reorganization Act (SBRA), which became effective in February 2020, provides small businesses with debts that fall within the eligibility cap a more streamlined path to restructure debts than typical Chapter 11 proceedings. The cap was increased in March 2020 to $7.5 million in response to the COVID pandemic, but that cap recently expired. The new legislation, if approved by the U.S. House of Representatives, will extend the $7.5 million limit for two years. [ABI; April 8, 2022]

Talc claimants should have their appeal of a decision permitting J&J-subsidiary LTL Management to continue its Chapter 11 proceedings heard as soon as possible, according to the same bankruptcy judge that issued the decision. In February, Judge Michael Kaplan of the U.S. Bankruptcy Court of New Jersey permitted the company to stay in Chapter 11, finding that bankruptcy proceedings were a legitimate tool to resolve mass tort liability. Judge Kaplan’s recent decision will allow talc claimants to bypass the federal district court and have their appeal of that decision heard directly by the Third Circuit Court of Appeals, as reported by the Wall Street Journal.

The S.E.C. voted on March 30 to propose new rules for special purpose acquisition companies (SPACS) that would bring disclosure requirements for SPACs more in line with traditional I.P.O.s, according to the New York Times. Activity in the SPAC market has significantly cooled, with only 50 SPACs raising $10 billion so far this year, compared with more than 600 SPACs raising about $160 billion in 2021. Additionally, a fund that is indexed to hundreds of SPACs has lost about half of its value since it peaked in early 2021.

Insurers are opposing a Chapter 11 plan proposed by the Boy Scouts of America arguing that they were improperly excluded from plan negotiations and will be left to shoulder the burden of paying out on claims that they will not have the ability to verify, according to Bloomberg. The insurers’ experts testified that each individual should go through a sexual-abuse evaluation, in order to cull out “the bogus cases that have kind of jumped on the wagon because they saw something on Facebook” and make sure that the actual victims are compensated.

Forbes discusses what the Fed’s current and planned interest hikes will mean for private equity portfolios, and the potential for increased bankruptcies among private-equity backed companies.  Such companies have largely avoided bankruptcy of late, with only 79 private-equity backed companies having filed for bankruptcy in 2021 and only 18 so far in 2022.

Per Law360, a Delaware bankruptcy judge ruled that Art Van Furniture did not violate the Worker Adjustment and Retraining Notification (“WARN”) Act, which requires large employers to provide least 60 days’ notice to workers before mass layoffs, when Art Van laid off 700 workers when COVID-19 shutdown orders were in effect. The court found that the shortened notice afforded by Art Van met the “unforeseen business circumstances” and “natural disaster” exceptions to the WARN Act because the layoffs were a response to the COVID-19 pandemic. [Law360; March 21, 2022].

Reuters reports on BlackRock’s letter to shareholders regarding how the Russia-Ukraine war may accelerate the use of digital currencies in international transactions. BlackRock also noted that it planned to focus more on digital currencies, going forward, due to increased client interest.  [Reuters; March 24, 2022].

Per Bloomberg, the Jekyll & Hyde Club, a popular horror-themed restaurant in New York, filed for chapter 11 bankruptcy. In its bankruptcy filing, the restaurant listed liabilities of at least $7 million that includes $1.5 million in unpaid rent.  Since it is a smaller business, the Club seeks to have a less costly reorganization by using certain chapter 11 rules to rearrange debt quickly. [Bloomberg, March 23, 2022].

Bloomberg reports that Puerto Rico ended its five-year bankruptcy this week by restructuring $22 billion of debt. This was accomplished through a bond transaction in which certain investors exchanged their prepetition debt securities for new general obligations. The exchange reduced Puerto Rico’s funded debt to approximately $7 billion and dedicated $1.4 billion for public employees’ pensions. But the Commonwealth’s debt held by Puerto Rico’s Electric Power Company, which is in its own bankruptcy proceeding, remains unresolved. [Bloomberg; March 15, 2022].

Per Reuters, Chilean-based Latam Airlines obtained court approval of a so-called backstop agreement under which certain creditors will guarantee the debtor’s exit financing if it is not able to obtain sufficient interest from third party investors. The deal provides that 15 backstop creditors would receive $734 million in fees to ensure that $5.4 billion in stock and debt offerings are financed in full. The decision furthers Latam’s plan to exit bankruptcy.  [Reuters; March 16, 2022].

According to Law360, the Second Circuit overturned a bankruptcy court’s decision that denial of a Paycheck Protection Act (“PPP”) loan to a bankrupt hospital violated section 525(a) of the Bankruptcy Code (which prohibits the government from denying grants based on bankruptcy status). Instead, the Second Circuit found that the PPP loan was a loan, even if the government could waive repayment. As a result, the government’s denial of the hospital’s PPP loan application did not violate section 525(a) of the Code. The PPP loan program was established to allow businesses to continue to make payroll during COVID-19 shutdowns. [Law360; March 16, 2022].