In a March 2021 decision in the jointly administered bankruptcy cases of Fencepost Productions, Inc. and certain of its affiliates, Judge Dale L. Somers of the Bankruptcy Court for the District of Kansas declined to enforce a voting restriction in subordination agreements between two of the debtors’ creditors, but nonetheless found that the deeply subordinated creditors were barred from voting on the debtors’ plan because they lacked prudential standing. In declining to enforce the contractual voting restriction, the decision defies a trend toward enforcing subordination and intercreditor agreement terms – so long as they are specific and express – even if such terms may limit a party’s statutory rights as a creditor in bankruptcy. Instead, Judge Somers applied a federal court jurisdictional doctrine, the relevance of which can only be determined on a case-by-case basis. Continue Reading In re Fencepost Productions: Prudential Standing Doctrine Blocks a Subordinated Creditor from Voting
The Wall Street Journal reported that the wave of cash raised by special-purpose acquisition companies (SPACs) is fueling activity in the junk debt market at levels not seen since the dot.com-boom from two decades ago. So far this year, SPACs have issued roughly $100 billion of stock to purchase private companies and take them public, with some of that money going toward companies with below investment-grade credit ratings, significantly boosting their gains on paper. [WSJ; April 23, 2021]
Bloomberg reported that bonds issued by Hertz Global Holdings, Inc. have made a drastic turn-around since the Covid-19 pandemic tanked the value of securities due in 2022 and 2028 to an average of less than 10 cents on the dollar on May 4, 2020. Those bonds are now trading at over a dollar, an increase of roughly 1,000 percent. The likely cause for the dramatic turn-around? Predictions of a post-Covid-19 travel and vacation boom, which has spurred a bidding war among investors seeking to capitalize on Hertz’s situation. [Bloomberg; April 22, 2021]
Although cheap credit has masked distress in the markets, Bloomberg reported that BlackRock says it’s nevertheless still out there – if you know where to look. BlackRock, an NYC-based multinational investment management corporation, predicts that, despite the availability of cheap financing, bankruptcy filings will increase in sectors hit hard by the pandemic, like retail and energy. Data compiled by Bloomberg show bankruptcy filings have slowed in recent weeks, with only one new filing from a company with at least $50 million in liabilities. [Bloomberg; April 20, 2021]
Bloomberg and CNN reported on the potential impact the pause in the use of Johnson & Johnson’s Covid-19 shot could have. In the wake of the announcement, stay-at-home company stocks bounced, while travel company stocks fell as investors worried about the potential long-term impact. [Bloomberg; April 13, 2021 & CNN; April 14, 2021]
The Wall Street Journal reported on an intensifying bidding war for Hertz as previously-outbid investors returned to the table with a counteroffer for the car rental company in chapter 11 with a valuation of $6.2 billion. The revised bid by Knighthead Capital Management LLC and Certares Management LLC challenges a restructuring offer that Hertz accepted earlier this month, backed by Centerbridge Partners LP, Warburg Pincus LLC and Dundon Capital Partners LLC valuing the company at about $5.5 billion. [WSJ; April 16, 2021]
Following the death of Bernie Madoff last week, the WSJ reported on the continued fallout from his Ponzi scheme. The Madoff liquidation case, overseen by three bankruptcy judges since it began, could easily continue for years especially after the Supreme Court last year gave the court-appointed trustee the green light to pursue the return of some Ponzi scheme proceeds that passed between foreign institutions. As of February, the trustee had recovered or reached settlements to recover about $14.4 billion of the estimated $17.5 billion of client money. [WSJ; April 14, 2021]
Per reporting from Bloomberg, distressed debt investors are continuing to have a tough time finding opportunities in the United States, where access to cash has enabled more and more companies to borrow their way out of trouble. Chapter 11 filings slowed to just four in the last week, and the total amount of troubled debt outstanding fell below $90 billion from almost $1 trillion at the height of the pandemic. [Bloomberg; April 13, 2021]
In its recent opinion arising out of the Orexigen Therapeutics Inc. bankruptcy case, the US Court of Appeals for the Third Circuit affirmed that while a creditor retains its direct setoff rights against a debtor under Section 553 of the Bankruptcy Code when both it and the debtor owe debts to one another, so called “triangular” setoffs – setoffs relating to affiliated third party debts – are not similarly protected, even if provided for contractually.1 In so holding, the Third Circuit became the first US circuit court of appeals to reach the issue and affirmed a substantial body of law on the topic developed by numerous lower courts. Continue Reading Opinion of Interest – In re Orexigen Therapeutics Inc.: “Mutual” Means Mutual Third Circuit Confirms that Triangular Setoffs not Entitled to Protection under Section 553 of the Bankruptcy Code
Breaking with a Sixth Circuit decision to the contrary, in a March 2021 decision in Stewart v. Holland, the District Court for the Western District of Pennsylvania held that unfair labor claims brought by the Department of Labor against a debtor under the Fair Labor Standards Act (“FLSA”) were not barred by the automatic stay but could instead proceed under the “police powers exception.”1
A recent New York Times article highlights the challenges oftentimes faced by smaller vendors in large bankruptcy cases. The article profiles a couple, who owns a warehouse leased to Brooks Brothers, who were left holding a $240,000 cleanup fee bill when Brooks Brothers rejected their warehouse lease and refused to clear the equipment and other materials being stored. [The New York Times; April 2, 2021]
Bloomberg reports on Alpha Media’s lawsuit against the Small Business Administration based on the administration’s failure to allow for PPP loans to companies in bankruptcy. Alpha Media, which filed for bankruptcy in January, contends that the SBA is rejecting PPP applications from debtors even though “it was not Congress’ intent for the SBA to use an applicant’s status as a Chapter 11 debtor as a basis to deny it PPP relief.” Several companies in bankruptcy have sued the SBA administrator with similar claims over the past year, with mixed results. [Bloomberg Law; April 7, 2021]
Yahoo Finance reports that China Huarong Asset Management Co. is considering asset sales in an effort to avoid a wholescale restructuring. The state-owned manager of non-performing loans, which spooked investors earlier this month when it delayed its earnings report, is still determining which assets it might consider selling. [Yahoo Finance; April 8, 2021]
Yahoo Finance also reports that the U.S. government posted a March budget deficit of $660 billion, a record high for the month and the third highest U.S. monthly budget deficit on record. Much of the deficit resulted from payments under the recently-approved $1.9 trillion stimulus package and, with more funding from the stimulus package expected to roll out in coming months, U.S. Treasury officials expect deficit levels to remain elevated. [Yahoo Finance; April 12, 2021]
Trial began in the National Rifle Association’s bankruptcy on April 6 on motions seeking appointment of an examiner or an independent trustee over the NRA, or dismissal of the bankruptcy case entirely. The Wall Street Journal reports that, in his testimony, NRA CEO Wayne LaPierre made headlines by acknowledging his failure to disclose overseas yacht trips, paid for by NRA vendors, and other potential conflicts of interest. And Bloomberg Law reports that the NRA is seeking appointment of a chief restructuring officer to help it navigate bankruptcy and other possible reforms. [The Wall Street Journal; April 7, 2021; Bloomberg Law; April 8, 2021]
Bloomberg Law reports that that the U.S. Trustee’s Office is working to combat the recent rise of “pre-packaged” chapter 11 bankruptcy filings. A pre-packaged bankruptcy or a “pre-pack” refers to the circumstances in which a debtor negotiates its reorganizational agreements with key stakeholders before filing its chapter 11 case and then files and confirm its plan of reorganization often within days. This process is theoretically reserved for “extraordinary circumstances”; however, the pace of pre-packaged cases has increased, as has the speed at which they are getting approved. As just two examples in the past year alone, HighPoint Resources Corp. confirmed a reorganization plan in four days in March, while Belk Inc. confirmed a reorganization plan in a mere sixteen hours in February. These expedited cases are attractive to debtors due to the time and cost savings they present, but some academics and judges worry that pre-packs diminish the integrity of the bankruptcy process and do not sufficiently safeguard the rights of creditors. [Bloomberg Law; April 5, 2021].
Per Forbes, after six consecutive years of losses totaling more than $4.5 billion, LG has announced its intention to exit the mobile phone business. Although LG still ranks as the third largest smartphone brand in the U.S. and accounted for 11% of smartphone sales in 2020, it has fallen significantly behind some of its larger rivals. The company had indicated that, going forward, it will be focusing on its electric vehicle components, connected devices, smart home and artificial intelligence businesses. LG expects to have fully exited the mobile phone sector by the end of July. [Forbes; April 5, 2021].
The Wall Street Journal reports that GameStop Corp. – of Reddit and Wall Street Bets fame (or infamy) – has announced plans for an at-the-market stock sale of up to $1 billion over the next several months. Although the exact timing and amount of the sale “will depend on various factors,” the company will look to sell up to 3.5 million shares in the near-term. GameStop’s announcement follows other successful efforts by “meme” companies such as AMC to use their recent popularity among retail investors to raise money through additional stock issuances. WSJ; April 5, 2021].
The Wall Street Journal also reports that the committee representing sex-abuse victims in the Boy Scouts of America bankruptcy case is seeking to gain further leverage in the case by attempting to propose its own reorganization plan. Specifically, in objecting to the debtors’ request for the continued, exclusive opportunity to propose and solicit acceptances of a reorganization plan, the committee, which represents nearly 84,000 sex-abuse victims, argues that the plan most recently proposed by the debtors does not adequately compensate those who suffered abuse and is thus unconfirmable. That plan proposes up to $6,100 in compensation for each victim while the committee has suggested that each victim may be entitled to over $800,000 each. [WSJ; April 2, 2021]
On Friday, March 19, 2021, Congressional lawmakers introduced a bill that would amend the U.S. Bankruptcy Code to prohibit bankruptcy judges from permanently enjoining or releasing legal claims of states, tribes, municipalities or the U.S. government against non-debtors.
According to media reports, the bill, which is named the “SACKLER Act,” (i.e., the “Stop Shielding Assets from Corporate Known Liability by Eliminating Non-Debtor Releases Act”) is specifically designed to prevent members of the Sackler family, who own OxyContin-maker Purdue Pharma LP, from using the bankruptcy process to obtain legal releases from government lawsuits. Purdue Pharma LP filed for bankruptcy in September 2019, but none of the members of the Sackler family have filed for bankruptcy as individuals. Nevertheless, the Sacklers have offered to contribute roughly $4.28 billion as part of a proposed bankruptcy plan to fund payouts to victims who suffered injuries linked to Purdue Pharma’s opioids over the next decade in exchange for legal releases that would enjoin claims against the Sackler family. If approved, those legal releases would shield the Sackler family from further liability related to the opioid crisis, something that many state attorneys general have ardently opposed. Continue Reading Wither Non-Debtor Releases? Purdue Pharma and the Proposed SACKLER Act
The American Bankruptcy Institute reported that President Biden signed the “COVID-19 Bankruptcy Relief Extension Act” into law Saturday, March 27, 2021, which extends through March 27, 2022, provisions providing financially distressed consumers and small businesses with greater access to bankruptcy relief. The provisions were included in the original CARES Act that was passed in the wake of the Covid-19 outbreak and were originally set to expire this month. [ABI; March 29, 2021].
In mid-February, Winter Storm Uri brought frigid air across the US from the Pacific Northwest to the Gulf Coast. Most notably, Winter Storm Uri passed through Texas, resulting in large snowfalls and reducing temperatures to historic levels. In advance of the storm, plants and utilities responsible for providing vital electricity and natural gas to Texas residents sought to prepare for the extreme conditions—but then, diesel fuel began to gel, generators and turbines froze, and electricity became scarce—leaving many market participants and end-user consumers with astronomical bills for power. Some entities have since disputed the bills, while others have even declared bankruptcy or indicated the need for future bankruptcy court protection.
Continue Reading Texas Utilities Continue to Deal With Aftermath of Winter Storm Uri: CPS Energy Sues the Electric Reliability Council of Texas Alleging One of the “Largest Illegal Wealth Transfers” in Texas History