The invisible hand of real bankruptcy reform

Category: Bankruptcy Law
Published: Monday, 09 February 2015
Written by Admin
One hallmark of a rational, competitive market is the rule of law, predictability based on the enforcement of commercial agreements.  Lenders and other creditors who provide credit or goods and services based on a promise to pay will be reluctant to do so if there are not meaningful ways to enforce this promise.  If lenders, for instance, cannot recover collateral securing a loan, lenders will perceive an increase in risk and reduce the availably of credit or raise the cost of credit to compensate for increased risk.

Outside of bankruptcy, parties to a commercial dispute can resort to state and federal courts to enforce contract rights.  In this way, providers of credit (whether in the form of loans or products and services) have assurance that credit extended will be repaid in the event the borrower is unwilling to do so voluntarily.  In addition, the failure of a borrower to honor its promises will limit future access to credit, creating a market discipline that puts additional, informal pressure on parties to honor business agreements.

The central policy question for commercial bankruptcy law is how a rules-based marketplace should respond when a borrower is unable to honor its obligations.  Unlike typical commercial disputes, where one party fails to keep its promise and could face legal or informal consequences, the scenario of insolvency involves the inability to pay one or more obligations where the typical enforcement methods do not provide an effective solution.  Insolvency, which can result from poor business planning or unforeseen changes in the business climate such as lower revenue or higher input costs, requires a separate system for sorting out the rights of affected parties. In such situations, policy makers should favor rules and outcomes that do the least violence to rules-based competition.

When a business fails, federal bankruptcy laws should provide a predicable way for creditors to minimize losses so that financial resources can be redeployed in the most efficient manner.  Losses can be limited using several approaches.  First, to the extent a bankrupt business has inherent value as a going concern, market actors may be incented to purchase the business.  This judgment can be made quickly, perhaps even before the filing of a formal bankruptcy case.

On the other hand, if the parts of a bankrupt business are worth more than the whole, the role of bankruptcy law should be to arrange an expeditious liquidation with equal distributions to creditors.  Bankruptcy should not, as is the case now, be a legal tool for interrupting the natural flow of capital based on outmoded theories of centralized planning.

In sum, the first principle of sound bankruptcy policy is to let the market work.  If an insolvent company has inherent worth, there will be a buyer.  Short of that, federal law should spell out rules for distributing assets to creditors.  Secured debt, because it represents a rational, market-based decision by both borrower and lender, should be respected as contemplated by the Constitution's protection of property rights.  For contracts that are not fully performed by either party at the time of a bankruptcy, each party should have full access to bargained-for remedies.  Finally, for all remaining creditors, assets should be distributed pro rata with no interest group favored or disfavored.  In this way, bankruptcy law can assist the American economy by facilitating the most efficient and rational allocation of resources.

McMickle is the founder of JDM Public Strategies, a consulting firm that works in financial services and government relations.  He was the bankruptcy counsel to the US Senate Judiciary Committee from 1994 to 2001, working extensively on bankruptcy reform legislation

Coming and Going Concerns

Category: Bankruptcy Law
Published: Saturday, 07 February 2015
Written by Admin

    Emanuel Grillo has joined the bankruptcy and workouts group at Baker Botts. Mr. Grillo, who will be a partner at the firm, has represented creditors, debtors and trustees in restructurings. He has worked on such bankruptcy cases as Lehman Brothers Holdings Inc., Delphi Corp. and Silicon Graphics Inc. Most recently, Mr. Grillo was a partner with Goodwin Procter. He is a member of the American Bankruptcy Institute and the Turnaround Management Association.

    Marc S. Kirschner has joined Goldin Associates as senior managing director and member of the management committee. He has been an adviser and trustee in bankruptcy matters and has worked with companies like Tribune Co., Yellowstone Mountain Club and Refco. Mr. Kirschner is a fellow of the American College of Bankruptcy.

    Mette Kurth has joined the bankruptcy law group at law firm Fox Rothschild as a partner. Ms. Kurth, a former Arent Fox partner, has represented debtors, creditors and others in reorganizations and liquidations. She has worked in industries including retail, fitness, entertainment, telecommunications and gaming. Ms. Kurth has worked on cases including Walking Co., Todd-Soundelux LLP and Contessa Premium Foods Inc. She is involved with the Turnaround Management Association's executive committee.

    Jennifer Marines has been named as a partner with Morrison amp; Foerster. Ms. Marines, who works with the law firm's business restructuring and insolvency group, has represented debtors, creditors, investors and other in Chapter 11 cases and out-of-court restructurings. She has worked on well-known cases including Energy Future Holdings Corp. and Residential Capital LLC.

    -Compiled by Melanie Cohen

    NH bankruptcy filings reach 25-year low in January

    Category: Bankruptcy Law
    Published: Saturday, 07 February 2015
    Written by Admin

    New Hampshire started 2015 at alow, and thatsgood news when it comes to bankruptcies

    According to preliminary January figures, 155 households and businesses filed for bankruptcy protection, the lowest number filed in a quarter of a century, unless you count 2006, the year after federal bankruptcy law changes made it more difficult for people to file.

    The 155 total is two fewer than the previous low of 157, which was reached last August. Before that, you have to go back to the beginning of 1990, when 135 people filed for bankruptcy in January and 148 in February.

    There were 15 fewer filings in January 2015 then in December 2014 and 26 percent fewer compared to January 2014.

    There were eight filings related to a business. Two were filed specifically as businesses and six households filed with recent business-related debt. As in past practice, NHBR will list the related businesses, but not the individual:

    bull; EDS Appraisal Services, Derry, filed Jan. 8, Chapter 13. Assets: $240,476. Liabilities: $376,157.

    bull; Doubleday Custom Wood Products, Lochmere, filed Jan. 20, Chapter 7. Assets: $19,120. Liabilities: $192,763.

    bull; Halliday Pipeline Inc., Hancock, filed Jan 22, Chapter 7. Assets and Liabilities: $100,000 to $500,000. (Business filing).

    bull; Just Labor, Milford, filed Jan. 23, Chapter 7. Assets: $156,947. Liabilities: $577,723.

    bull; Cocheco Communications, Dover, filed Jan. 27, Chapter 13. Assets: $293,108. Liabilities: $337,801.

    bull; Baker River Realty, Rumney, filed Jan. 30, Chapter 7. Assets: $582,518. Liabilities: $586,795.

    bull; WebTronyx LLC., Tilton, filed Jan. 30, Chapter 7. Assets: $0. Liabilities: $4,781. (Business filing).

    bull; Antczak Building amp; Remodeling, Salem, filed Jan. 30, Chapter 7. Assets: $32,585. Liabilities: $68,640.

    Panelists discuss changes to Bankruptcy Code

    Category: Bankruptcy Law
    Published: Saturday, 07 February 2015
    Written by Admin
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    Panelists discuss changes to Bankruptcy Code
    by contributor Andrew Hedlund|Published January 30, 2015 at 2:01 PM

    The debate Thursday, Jan. 29, at an American Bankruptcy Institute event centered not on whether to alter the Bankruptcy Code but on specific changes of everything from real estate lease rejection timelines to plan voting requirements.

    Still, the general consensus of the panelists at the New York event -- put on by the association of bankruptcy professionals to discuss the recommendations in its recent report on revising Chapter 11 statutes -- was that any adjustments to the Code would not be large.

    Wachtell, Lipton, Rosen amp; Katz partner Harold S. Novikoff, one of the panelists in an opening discussion, said the Dec. 8 report was not a teardown of the Code. The events moderator, Bill Rochelle of Bloomberg News, later called many of the changes not radical.

    University of Maryland Francis King Carey School of Law professor Michelle M. Harner said the special commission formed by the ABI for the report began its three-year process in January 2011 asking if the rules governing bankruptcy even needed updating.

    As research took place, Harner said the commission members learned small and midsize companies sometimes avoided Chapter 11, which she called a red flag. By the end of the process, it was clear the Bankruptcy Code could be updated, she said.

    Part of the discussion dealt with the treatment of executory contracts and leases. A suggestion outlined in the commissions report was extending the period to reject real estate leases from the current seven months to a year.

    The three panelists discussing the topic -- Novikoff, Harner and Seton Hall University School of Law professor Stephen Lubben -- emphasized the upside of this potential change for retailers.

    Novikoff said the commission believed giving companies only 210 days to make decisions on assuming or rejecting real estate leases harms retailers because it does not guarantee the companies will go through a holiday season, which would allow them to see if their tweaks to strategy paid off.

    No one is happy with the number of retail liquidations, Harner said.

    In a recent example, teen retailer Deb Stores Holding LLC on Jan.7 won approval from Judge Kevin Gross of the US Bankruptcy Court for the District of Delaware in Wilmington to liquidate inventory at close to 300 stores. DELiA*s Inc. entered Chapter 11 on Dec. 7 to liquidate as well, and Body Central Corp. (BODY) on Jan. 9 opted to liquidate through an assignment for the benefit of creditors, skipping Chapter 11 altogether. (The report also noted a common critique of Chapter 11 is that it is too expensive.)

    Novikoff said the suggested one-year time frame to make a decision on real estate leases was a fair balance between the concerns of landlords, who might not want a struggling business in their shopping centers, for example, and companies that want more time to decide on the contracts. A one-year period still would be shorter than the potentially unlimited time frame for lease decisions under the Bankruptcy Code before 2005.

    Another minor alteration proposed by the commission would change references in the Bankruptcy Code to an examiner to a more flexible concept of an estate neutral. Such an individual would retain the duties an examiner performs under the current system but also be given more latitude in dealing with the unique circumstances of a case and the particular needs of a debtor.

    Jack Butler of Hilco Global, Robert Keach of Bernstein, Shur, Sawyer amp; Nelson PA and Albert Togut of Togut, Segal amp; Segal LLP discussed the notion in a second panel.

    Butler said courts already were appointing individuals that performed the role of an estate neutral, though not necessarily with that express authority. He pointed to Judge Steven Rhodes, who oversaw the municipal bankruptcy of the City of Detroit, Michigan. Butler said Rhodes brought in many different outside opinions and required city leaders, including the mayor, to testify on the plan.

    Togut said the commission settled on the term estate neutral to show it wanted someone with no bias and no preference for an outcome, in the hope the person could come up with an answer that everyone can embrace and run with.

    Some recommendations the commission offered, however, did a little more than slightly revamp the Code, namely with respect to small and midsize companies.

    This is where we did more than tweak, Butler said.

    Small-business provisions exist in the Bankruptcy Code, but Butler asserted the statutes dont work. The commissions proposals would broaden the reach of the provisions.

    Costs often present a large problem in smaller cases, he noted. Keach added later that getting financing for smaller businesses can be harder [than getting financing] for American Airlines Inc.

    Keach detailed how the commissions proposals tried to make securing debtor-in-possession financing easier while also respecting creditor rights. As an example, he pointed to a recommendation that would allow second-lien creditors to supply postpetition funding but give first-lien creditors a right of first refusal.

    Another suggestion would put a 60-day moratorium on all debtors executing sales of substantially all their assets following a petition, with certain exceptions. Butler called it a cooling-off period.

    Butler, Keach and Togut each noted that sometimes a quick sale would leave parties with a stake in the process out of the negotiating and decision process; Togut pointed to official committees of unsecured creditors as an example.

    The two-month moratorium would prevent the shotgun sale of a business, Togut said. Chapter 11 works best when a consensus is reached, he added.

    Two other areas in the report with significant changes address cramdowns under Chapter 11 plans and creditor voting procedures.

    The commission recommended the Bankruptcy Code drop its requirement that one impaired voting class must accept the plan for it to be confirmed -- and then crammed down on any classes that rejected the plan.

    New York University Law School professor Arthur J. Gonzalez, former chief judge of the US Bankruptcy Court for the Southern District of New York, spoke in favor of the change.

    It was so easy to get an impaired accepting class, he said. What does it mean?

    The commission in the report asserted the requirements potential delay, cost, gamesmanship and value destruction outweighed its benefits as a threshold for confirmation.

    Finally, panelists discussed a proposed change that would give one creditor one vote in a particular class, no matter how many claims in the class it and its affiliates held, with some exceptions. James P. Seery of hedge fund River Birch Capital LLC called the change pro-debtor and more democratic.

    Seery explained that under current bankruptcy law, a creditor can go out and acquire a blocking position or amass enough claims to hinder the debtor from reaching the requirements needed for a creditor class to accept the plan: at least two-thirds in claim amount and one-half in number of claims must vote in favor of the plan.

    Tags: American Bankruptcy Institute | Arthur J. Gonzalez | Bankruptcy Code | Body Central Corp. | Chapter 11 | Deb Stores Holding LLC | DELiA*s Inc. | Harold S. Novikoff | Jack Butler | Kevin Gross | Michelle M. Harner | Stephen Lubben