Law360 reported that the U.S. Trustee’s Office filed a motion opposing a “death trap” provision contained in Avianca Holdings’ Chapter 11 plan of reorganization. In bankruptcy, so-called “death trap” provisions reward classes of creditors for voting in favor of plans of reorganization with higher payouts as an incentive for them to vote to accept a given plan of reorganization that would nevertheless pay out less than what a given class is arguably owed under other provisions of the Bankruptcy Code. Pursuant to Avianca’s plan disclosure statement, Avianca’s general unsecured creditors, which, as a class, are owed between $2.5 and $3.5 billion, would receive their choice of either $36 million in cash or 2.5% of the equity in the reorganized Avianca if the class votes in favor of the plan as opposed to $30 million in cash and 1.75% of the equity if the class votes against the plan. The U.S. Trustee’s Office argued that Avianca, the second-largest airline in Latin America, failed to justify its use of the death trap provision in the plan.  [Law 360; September 8, 2021]

Federal Reserve officials have indicated they could begin tapering their $120 billion in monthly purchases of Treasurys and mortgage-backed securities in November, according to the Wall Street Journal.  Plans taking shape could reduce such purchases at a rate that would conclude asset buying sometime in the middle of 2022.  [WSJ; September 10, 2021]

Reuters reported that luxury furniture retailer ABC Carpet & Home gained approval to access $2.25 million of a $5.7 million loan on an interim basis to fund its continued operations during bankruptcy. ABC, which filed for Chapter 11 bankruptcy last week, is reportedly seeking to sell its assets by the end of October and already has a $15.3 million lead bid from 888 Capital, an entity controlled by Regal Investments. [Reuters; September 10, 2021]

Energy prices are soaring in Europe, which the Wall Street Journal reported was spurred by a sudden slowdown in wind-driven electricity production off the coast of the United Kingdom in recent weeks. To make up for the wind shortfall, gas and coal plants emerged to fill in the gaps, raising prices. For electricity, prices in the U.K. more than doubled at their peak and were almost seven times higher than the same time last year. The European markets could see even greater price shocks this winter, when energy demand is significantly greater, presenting possible system-wide stability issues. [WSJ; September 13, 2021]

The Wall Street Journal reports on bond managers’ continued chase for yield, in the continuing, historically low-rate environment, in which yields on even junk bonds have reached record lows not seen in over 30 years. In particular, the Journal notes that some fund managers have even started investing in unrated, illiquid bonds, increasing the risk to their portfolios given the potential for illiquidity in times of distress, while at least temporarily pumping up returns. [WSJ; September 5, 2021]

USA Gymnastics proposed a plan of reorganization that would include a $425 million settlement for the victims of Larry Nassar, the former national team doctor who has been convicted of sexually assaulting young gymnasts under the guise of medical treatment. According to the New York Times, while the survivors’ committee pushed for even greater financial compensation for victims to cover the cost of things like medical care and therapy, it nonetheless signaled its support for the plan based on USA Gymnastics’ commitment to reforming the organization to make its athletes safer. [NYT; August 31, 2021]

Reporting from Reuters indicates that the COVID-19 pandemic will cause the main U.S. Social Security trust fund reserves to be depleted in 2033, a year ahead of predictions made last year. After 2033, the Old Age and Survivors Trust Fund will only be able to pay 76% of scheduled retirement benefits. [Reuters; August 31, 2021]

A New York judge denied a motion by Trimark USA and certain of its lenders to dismiss claims brought by minority lenders alleging that certain new debt issued by the company violated the terms of the preexisting credit agreements and improperly allowed majority lenders to take priority over minority lenders.  The lawsuit has been tracked closely by the industry as another example of lender-on-lender violence. The case is Audax Credit Opportunities Offshore Ltd. v. TMK Hawk Parent Corp., 565123/2020, New York State Supreme Court, New York County. Stay tuned for a more fulsome analysis of the court’s decision in an upcoming post… [Bloomberg; August 17, 2021]

 

Per SCOTUSblog, on Friday, August 20, property owners and real estate groups asked the Supreme Court to halt the Biden administration’s new eviction moratorium after a federal appeals court let it stay in effect. The realtors argue that the Biden administration ignored an earlier Supreme Court decision signaling that the Centers for Disease Control and Prevention did not have authority to impose the latest ban on August 3. The Biden administration issued the new moratorium anyway indicating its hope that, even if the moratorium was eventually struck down, while the issue was being litigated, additional rent relief could be distributed. [SCOTUSblog; August 20, 2021]

 

Back in July, Federal Reserve officials indicated they were on track to begin tapering some of their stimulus programs later this year, despite lingering differences over when exactly to pull back support. The WSJ followed up and reported that minutes of the Fed’s July 27-28 meeting, which were released last week, revealed an emerging consensus to support scaling back at one of the the Fed’s three remaining policy meetings this year. The Fed’s next meeting is on September 21-22, and several Fed officials have said they would argue in favor of beginning to taper bond purchases shortly after that meeting if the recent run of strong hiring continues. But the July minutes don’t necessarily indicate that such a step will happen in September, and the WSJ suggests a reduction is more likely come after the Fed’s November 2-3 meeting. [WSJ; August 18, 2021]

In its August 5th, 2021 VeroBlue Farms decision,[1] the Eighth Circuit lent its voice to a growing body of criticism of the equitable mootness doctrine contending that its use to bar challenges to confirmed reorganization plans should be circumscribed.  Laying out a new investigation that must be undertaken before using the doctrine to bar confirmation order appeals, the Eighth Circuit emphasized that reviewing courts must: (1) make “at least a preliminary review of the merits” of an appeal to determine the strength of the claims at issue; (2) assess the “amount of time that would likely be required” to resolve the merits of such claims on an expedited basis; and (3) consider the potential equitable remedies that might still be available even after a plan’s implementation, should the appeal prove successful, which would not undermine the plan or harm third parties.

Continue Reading Mootness Muted? – Eighth Circuit Circumscribes Use of Equitable Mootness Doctrine to Bar Bankruptcy Plan Appeals

The Wall Street Journal reports on Purdue Pharma’s continuing confirmation hearing covering the company’s proposed reorganization plan centered around a $4.5 billion settlement with its founders, the Sackler family.  Currently, the Sackler family is named in civil litigation which alleges that the family knowingly fueled opioid addiction through the marketing of OxyContin, an opioid painkiller. A restructuring specialist who had joined the Purdue board before its chapter 11 filing testified on the first day of the confirmation hearing that the Sackler family required releases so as “to be able to put all of the litigation behind them.” The settlement, and related third-party releases of the Sackler family, are being challenged by state and federal authorities as well as some members of Congress. If the plan is approved, the Sacklers would make an immediate payment of $300 million as well as yearly installments until 2030. [WSJ; Aug. 12, 2021]

The Associated Press reports on an ongoing hearing in the Boy Scouts of America bankruptcy regarding a proposed settlement that would be the centerpiece of a proposed reorganization.   The settlement would consist of an $850 million distribution to sex abuse victims, $250 million of which would be paid by Boy Scouts of America itself with remaining $600 million to be contributed by local councils.  On the first day of the hearing, to Judge Silverstein’s surprise, the Boy Scouts noted that their national board had never adopted a resolution approving the settlement.  However, the debtor claims the agreement is nonetheless a valid exercise of its business judgment and should be accepted as the cornerstone of its final bankruptcy plan. [AP; Aug. 12, 2021]

Forbes reports on a recent trend of major financial institutions (in this case Bank of America) losing their status as their millennial consumers “primary” account banks to digital banks.  Top platforms, in this regard, include PayPal, Current, Dave, and Square Cash. Forbes chalks up the continuing shift to the more personalized nature of digital banks and the changing nature of what consumers consider to be their primary “checking account.” [Forbes; Aug. 16, 2021]

The Wall Street Journal reports that the creators of South Park have made a deal to purchase Casa Bonita, a Mexican restaurant and family entertainment center outside Denver which was featured on the pilot of the popular cartoon. The creators announced they would purchase the restaurant, which filed for bankruptcy earlier this year due to the Covid-19 pandemic, pending court approval. Casa Bonita is a Mexican resort-themed restaurant with 30 foot high waterfalls in which cliff divers famously jump to entertain guests. The deal comes after South Park was renewed for another six seasons with Viacom-CBS. The show is expected to earn the creators more than $900 million. [WSJ; Aug. 13, 2021]

Mayer Brown Restructuring lawyers Lucy Kweskin and Tyler Ferguson recently published an article in Westlaw Today highlighting key bankruptcy trends in the first half of 2021, including recent court pushback on granting debtors “extraordinary” relief from rent obligations in light of the COVID-19 pandemic, lofty valuations placing equity holders in the money, and developments in recent high profile mass tort cases. The article also discusses industries to watch over the remainder of the year.

The article, titled “Key Bankruptcy Trends in the First Half of 2021,” is available here.

The Wall Street Journal reports on OxyContin-manufacturer Purdue Pharma LP’s efforts to defend its proposed chapter 11 plan including its proposed multibillion-dollar settlement with the Sackler family, Purdue’s former owners.  The confirmation hearing on Purdue’s proposed plan is set to begin on Thursday, August 12th.  The plan is supported by the unsecured creditors’ committee, a committee representing the interests of opioid victims, and 40 different states.  However, nine states and the District of Columbia have opposed the plan as have the U.S. Department of Justice and the U.S. Trustee’s office.  The outcome of the bankruptcy currently hinges on the proposed settlement with the Sacklers via which the family has offered to contribute approximately $4.5 billion to Purdue’s estate in exchange for nearly complete legal protection against all future claims for all Sackler family members and related entities.  If approved, the Sackler family would make an immediate payment of $350 million and continue payments through 2030.  Purdue filed for chapter 11 protection in 2019 and plead guilty to federal felonies over sale and marketing of opioids last year.  [WSJ; August 6, 2021]

The New York Times reports on Treasury Secretary Janet Yellen’s continued efforts to have Congress raise the debt ceiling.  In a letter to Congress, Secretary Yellen warns that the country’s “failure to meet its obligations would cause irreparable harm to the U.S. economy and the livelihoods of all Americans.”  [NYT; August 9, 2021]

Per reporting from Bloomberg, last Friday, August 6th, District Judge William Alsup ordered utility company PG&E Corp. to explain its involvement in the ongoing California wildfires.  Specifically, PG&E must explain its role in igniting the “Fly fire” that has merged with the “Dixie blaze” and burned more than 447,000 acres since its ignition on July 13 and is only about 21% contained.  PG&E had been driven into bankruptcy in 2019 because its equipment contributed to wildfires in California that destroyed more than 22,000 structures and killed more than 100 people.  Although the utility emerged from bankruptcy last year, any subsequent involvement in new wildfires will test the company’s solvency.  Judge Alsup is demanding information on PG&E circuits suspected of igniting fires as well as the names of PG&E officers, employees or contractors who allowed the circuit to remain energized as part of PG&E’s criminal probation.  [Bloomberg; August 6, 2021]

The Wall Street Journal also reports that chip inspection firm SVXR Inc., which filed for chapter 11 protection in the U.S. Bankruptcy court in San Jose California, is now planning on selling itself out of bankruptcy to its competitor.  Formerly known as Silicon Valley X-Ray, SVXR mainly provides data analytics tools and warranty services in addition to the manufacturing of “X200” which allows customers to monitor and detect defects as semiconductors are being made.  The early-stage company had apparently never been cash-flow positive and entered bankruptcy with only $100,000 on hand. SVXR had been pursuing a debt refinancing for roughly a year and defaulted on its secured obligations.  Now, SVXR has roughly $10.5 million in debt, $8.2 million of which is owed to secured bondholders.  The company plans on selling itself to its competitor, Bruker Nano Inc. for $11.8 million but the failure of the deal, or any comparable proposal, would “very likely” lead the debtor to convert its case into a chapter 7 liquidation.  [WSJ; August 6, 2021]

In a recent opinion from the Delaware Bankruptcy Court in the Dura Automotive Systems bankruptcy case,[1] Judge Karen Owens held that executory contracts cannot be impliedly assumed through course of conduct by the parties, under binding Third Circuit precedent, notwithstanding that a minority of courts outside of the Third Circuit have allowed it under certain circumstances.  The decision left a purchaser of certain contract claims in the case out of luck, with the bankruptcy court ruling that such purchaser retained its right to share pro rata in distributions to unsecured creditors (if any), but it did not have any “cure claim” rights under the contract that might entitle it to a greater recovery.

In October of 2019, Dura and certain of its affiliates filed for chapter 11 bankruptcy protection in the Middle District of Tennessee. The case was subsequently transferred to Delaware in November of 2019 and converted to chapter 7 in December of 2020 following a Section 363 sale of substantially all of debtors’ assets in June of 2020. As part of the Section 363 sale, the debtors assumed certain designated, executory contracts and assigned them to the purchaser, DUS Operating Inc..  The debtors did not, however, expressly assume and assign their contracts with Plasti-Paint, Inc., a long-time provider of roof rail painting services to the debtors.

The debtors’ relationship with Plasti-Paint was governed by two master contracts that each permitted the continual addition of purchase orders on a weekly basis to meet the debtors’ needs. From the petition date through September 2020, Plasti-Paint continued to do regular business under these agreements first with the debtors, and then, following the Section 363 sale, with DUS Operating.  Plasti-Paint was owed $1.8 million for services rendered during this period. In September of 2020, DUS Operating and Plasti-Paint agreed to new contracts, primarily to substitute DUS Operating in as the new counterparty, though also to incorporate a new painting process that Plasti-Paint had adopted in the interim.  But for the sale to DUS Operating, however, it was acknowledged that the new contracts would not have been necessary and the parties likely would have just amended the existing agreements.

In January of 2020, Plasti-Paint sold any claims it had against the debtors for unpaid amounts under its original contracts – including whatever rights it had to the $1.8 million in unpaid amounts it had incurred from the petition date through September 2020 – to Hain Capital. Hain Capital subsequently brought a motion to compel DUS Operating to pay $1.8 million in “cure costs” arguing that, in continuing to accept Plasti-Paint’s services from the petition date through September 2020 under the parties’ original contracts, the debtors had impliedly assumed those contracts. Hain Capital also argued that Plasti-Paint and DUS Operating intentionally structured their new contracts, covering the exact same services as the original contracts, in an effort to avoid paying cure costs that were properly owing to Hain Capital in its capacity as claims purchaser.

In rejecting Hain Capital’s claims, the court emphasized that section 365 of the Bankruptcy Code and Federal Rules of Bankruptcy Procedure 6006 and 9014, collectively provide that a debtor (or its successor) can not become liable for cure costs under an assumed executory contract until after  proper notice and a hearing.  Under governing Third Circuit case law, “implied” assumption is not sufficient.[2]  During the pendency of debtors’ bankruptcy case, none of the debtors, DUS Operating, Plasti-Paint or Hain Capital sought to assume, or compel assumption of the Plasti-Paint contracts.  Indeed, the bankruptcy court made a point to note that Hain Capital was aware that the agreements had not been assumed as part of the Section 363 sale and yet made no effort over a number of months to compel assumption and payment of the applicable cure costs.  As a result, the court held, such contracts were, by definition, not assumed, so neither the debtors, nor DUS Operating, could be compelled to pay any cure costs.  Assumption, the court emphasized “must be approved. It cannot be presumed. While courts outside the Third Circuit have held otherwise, they are in a small minority.”[3]

The Dura decision serves as an important reminder to contract counterparties to diligently protect their rights in a bankruptcy case in a procedurally proper way.  Even if a debtor or its purchaser accepts services following a petition date or a Section 363 sale, it is not clear that the counterparty will actually be paid what it is owed.  To the extent there is any ambiguity, the counterparty should make certain to confirm with the debtor—or with the bankruptcy court, as necessary—that payment will be made.

[1] In re Dura Auto. Sys., LLC, No. 19-12378 (KBO), 2021 WL 2456944 (Bankr. D. Del. June 16, 2021),

[2] See University Medical Center v. Sullivan (In re University Medical Center), 973 F.2d 1065, 1077 (3d Cir. 1992).

[3] Supra note 1 at *5. For cases permitted implied assumption, see, e.g., In re Clavis Smith Bldg., Inc., 112 B.R. 768, 769-70 (Bankr. D. Va. 1990) (“it is well settled law that a debtor in possession cannot assume the benefits of an executory contract without assuming its burdens as well”).

Bloomberg reports that the decrease in large U.S. bankruptcy filings may be attributable in part to the use of distressed exchanges in which creditors accept discounts on their debt in exchange for better claims on a borrower’s assets, a later maturity, or both.

The Wall Street Journal reports that Senator Elizabeth Warren plans to introduce legislation prohibiting owners of bankrupt businesses and individuals who have not filed bankruptcy from receiving non-consensual releases of claims that prevent governmental entities and private citizens from suing them. The legislation is prompted by the ongoing Purdue Pharma bankruptcy proceeding, in which the company has proposed a chapter 11 plan that, if approved, would shield the Sackler family from liability stemming from the opioid crisis. The legislation is broader than legislation proposed earlier this year, known as the “SACKLER Act” (discussed in a prior post here), which would only have prohibited non-consensual releases of claims of governmental authorities.

An article in Yahoo Finance describes trends that may drive distress in the commercial real estate market following the COVID-19 pandemic, including the rise of remote work and shorter lease terms as tenants gain negotiating leverage with office landlords.

Perhaps proving the maxim that people should be careful what they wish for, in a second significant ruling stemming from the Jevic Holding Corp. bankruptcy case, on May 5, 2021, the US Bankruptcy Court for the District of Delaware found that Jevic’s Chapter 7 trustee, appointed following the conversion of the debtors’ cases from Chapter 11 to Chapter 7, did not have standing to continue claims originally brought against the debtors’ prepetition lenders by the Chapter 11 creditors’ committee. Assuming it is upheld on appeal, the decision leaves Jevic’s unsecured creditors without any further remedy against Jevic’s prepetition lenders—in other words, leaving those employees who successfully fought approval of a prior settlement offer by the same lenders all the way to the United States Supreme Court with no recovery from those lenders. Indeed, the decision appears to be a significant victory for secured lenders generally, underscoring the importance of “challenge” provisions typically included in DIP and cash collateral orders.

Continue Reading Be Careful What You Wish For: Jevic Court Denies Chapter 7 Trustee’s Substitution Request, Potentially Ending Action Versus Prepetition Lenders