On February 27, 2018, the U.S. Supreme Court resolved a circuit split under the Bankruptcy Code and determined that where funds passed through financial institutions acting as payment conduits, where the ultimate transfer sought to be avoided was not the type of transaction protected by the safe harbor provisions of the Bankruptcy Code, the safe harbor provisions of Bankruptcy Code Section 546(e), shielding transfers through financial institutions from avoidance actions by bankruptcy trustees, was inapplicable.

The Supreme Court found that prior circuit decisions applying the safe harbor simply because financial institutions were intermediaries in the transfer is not consistent with the language or intent of the safe harbor provisions. Continue Reading Supreme Court Narrows Scope of Safe Harbor Exception for Securities Clawbacks

U.S. Bankruptcy Judge Kevin Gross sitting in Delaware recently approved J.G. Wentworth’s (the “Debtor’s”) Chapter 11 plan after overruling an objection from the U.S. Trustee regarding third-party releases. The Debtor’s Chapter 11 reorganization plan was the second it has brought before the Delaware bankruptcy court in the last ten years.

The Debtor is a consumer finance company that specializes in purchasing and selling structured settlements and other assets in exchange for insurance payouts. After restructuring $370 million in term loan debt in 2009, the Debtor filed for bankruptcy on December 12, 2017 and brought another prepackaged chapter 11 plan to Delaware bankruptcy court. The plan called for a restructure of nearly $450 million in secured debt whereby senior secured lenders’ claims would be satisfied by receiving 95.5% of the new common equity in the reorganized J.G. Wentworth in addition to roughly 46% of their claims in a cash payout.

While the Debtor and the U.S. Trustee worked through the vast majority of issues regarding the Debtor’s plan, the U.S. Trustee objected to the way third-party releases could be granted absent any affirmative action by a creditor. The U.S. Trustee argued that consent is typically given by creditors to third-party releases in the form of an opt-in or opt-out clause, but here, no such clause or provision existed. Instead, creditors had to file an objection. The U.S. Trustee argued that requiring creditors to file objections to oppose the release of such consent rights imposed an undue burden on creditors. Such an imposition would require the financial burden of hiring and retaining counsel.

In response, J.G. Wentworth noted that the plan received no opposition from any creditors regarding the releases or the plan generally. J.G. Wentworth further argued that creditors were fully aware of their rights since they received a notice explaining the releases with explanatory definitions of all terms for clarity purposes.  The notice clearly stated releases within the plan could affect the creditors’ rights.

Although Judge Gross had denied certain third-party releases in the past, he approved these releases noting that they seemed consensual in the absence of any objections from creditors.

U.S. Bankruptcy Judge Martin Glenn recently decided that a fully-negotiated agreement would not be enforced in the absence of required signatures. The agreement contemplated a settlement between the General Motors bankruptcy trust and car purchasers and accident victims of General Motors cars following an alleged vehicle defect; both parties fully and unambiguously agreed to be bound by the terms of the agreement.

After filing for Chapter 11 protection in 2009, General Motors received $50 billion to operate its business, and the reorganized company was labeled by some as “New G.M.” While New G.M. resumed its business operations as a car manufacturer, Motors Liquidation Company, or “Old G.M.”, became a trust responsible for paying back creditors.

In 2014, G.M. became the target of a litigation whereby car accident victims accused the carmaker of defective ignition switches which led to the deaths of 124 people. In addition to recalling millions of cars, Old G.M. (or “the trust”) entered into a deal whereby it agreed to accept liability, make a $15 million payment and require the issuance of 30 million shares of common stock by New G.M. to its creditors. The combination of the $15 million payment and issuance of 30 million shares of stock totaled nearly a $1.02 billion settlement. Despite the plaintiffs’ attorneys and the trust agreeing to the deal, shortly thereafter New G.M. refused to cooperate. Instead, New G.M. brokered a deal with the trust whereby New G.M. would pay the trust’s legal fees in upcoming litigation with creditors in exchange for the trust withdrawing from the original agreement.

The plaintiffs argued that the settlement agreement should be binding under New York law.  The plaintiffs argued that the trust’s constant communication regarding its intent to be bound by the settlement constituted partial performance. In opposition, the trust argued that the agreement was never executed and therefore was not binding.

Judge Glenn’s decision turned on whether a provision within the settlement agreement, which called for signatures in order for the agreement to become “effective and binding”, was an essential part of the agreement or merely a boilerplate contractual provision. Judge Glenn held that contract law allows parties to withdraw from unsigned settlements and ruled that he could not enforce the deal without the trust’s signature. Judge Glenn left open whether plaintiffs may have other remedies against the trust.

The Second Circuit recently issued its decision on an appeal to the Momentive Performance Materials Inc. (“MPM”) bankruptcy case. Amongst other issues, the Court found that when determining the appropriate interest rate in a Chapter 11 cramdown, courts should consider market factors rather than strictly apply the Till formula. The Court’s decision will benefit secured creditors when a market rate is ascertainable, as they will no longer have to accept below-market take-back debt.

Continue Reading Impact of Second Circuit’s Momentive decision on interest rates under Chapter 11

What has the U.S. Fish and Wildlife Service got in common with the U.S. banking agencies?  Simple: the U.S. Government Accountability Office (the “GAO“), which investigates financial matters on behalf of Congress, has opined that both have wrongly published general statements of policy which are in fact rules under the Congressional Review Act (the “CRA“). The GAO issued an opinion on 19 October 2017 that the Leveraged Lending Guidance (being the final interagency guidance on Leveraged Lending issued on 22 March 2013 jointly by the US banking agencies) (“LLG”) is a rule subject to the requirements of the CRA, meaning that it should have been submitted to each House of Congress before it was implemented, and opening the door for the possibility of it being overturned. This is notwithstanding that the LLG explicitly states that it is not a rule – the GAO has reiterated that an agency’s characterization is not determinative of whether it is a rule under the CRA, and the LLG does not meet any of the CRA exceptions.

What does this mean? Read our full bulletin to find out!

Private equity firms routinely appoint directors to boards of their privately held portfolio companies and other investment vehicles, some of which will eventually face financial distress. Often, a person appointed to a board by a private equity firm has a relationship with the firm (e.g., they work there or are a trusted friend) but limited experience when it comes to what to do under troubled circumstances. Such individuals may worry about their personal liability in such a situation. What should such an individual do?

Click here to read more.

Despite a modest uptick in recent years, it is still a relatively rare occasion for the Supreme Court of the United States to tackle issues involving bankruptcy. This term, however, the Supreme Court has granted certiorari in two bankruptcy appeals that could have important consequences for the financial community. In FTI Consulting, Inc. v. Merit Management Group, LP, the Court will define the parameters of the safe harbor of Bankruptcy Code section 546(e), which excludes certain financial transactions from the debtor’s avoidance powers. In PEM Entities LLC v. Levin, the Court will also determine whether federal or state law should apply when analyzing whether debt should be recharacterized as equity. Both cases could alter how financial transactions are structured and documented.

Continue Reading Dabbling in distress: U.S. Supreme Court to hear two important bankruptcy issues next term

These days, the threat of counterparty insolvency looms over the energy sector: whether it is a natural disaster or precipitous decline in the price of oil, perhaps no industry is more susceptible to the financial decline and potential default of contracting parties.  Continue Reading Energy disputes: Countering counterparty insolvency

 

Bond indentures and loan agreements often include make-whole provisions to provide protection to lenders and investors in the event of debt repayment prior to maturity. Make-whole provisions work to compensate the investor/lender for any future interest lost when the issuer/borrower repays the note prior to a specific date.

The make-whole premium is based on a present value calculation that discounts the payments that would have been received had the debt not been repaid, and is intended to make the investor/lender whole for the payments remaining on the bond/note. A recent Third Circuit decision suggests that the way make-whole provisions are drafted in debt instruments can be crucial in determining the applicability and enforceability of make-whole premiums.

Continue Reading Third Circuit enforces make-whole premium for secured lenders in Energy Future Holdings bankruptcy

The Singapore parliament recently passed a bill bringing in U.S. Chapter 11-inspired changes to its debt-restructuring framework, including provisions allowing (i) courts to approve financing with priority ahead of existing senior secured facilities; (ii) courts to approve a scheme even if there are dissenting creditor classes; and (iii) international assistance proceedings.

These provisions borrow heavily from the existing provisions in the U.S. Bankruptcy Code.

In light of these changes and the impact on future restructurings, we hosted a webinar on the current and coming use of U.S. Chapter 11 and Chapter 15 proceedings in Asian restructurings.

Some of the topics discussed included:

  • Why Asian debtors might look to a Chapter 11 solution over other procedures such as Schemes of Arrangements;
  • How the equivalent provisions in the U.S. Bankruptcy Code are applied and the key concepts parties will need to be familiar with; and
  • The likely need for U.S. counsel to provide expert testimony in Singapore proceedings regarding the application and interpretation of the new U.S.-based provisions.

Click here to view the webinar.