Making the Test for Unfair Discrimination More "Fair": A Proposal
Committee on Bankruptcy and Corporate Reorganization of the Association of the Bar of the City of New York, 58(1): 83–108 (Nov. 2002)
Section 1129(b)(1) of the Bankruptcy Code requires that a Chapter 11 plan must not "discriminate unfairly" if it is to be confirmed without acceptance by all classes of impaired claims and interests. Court decisions interpreting and applying the unfair discrimination standard employ several different approaches, are difficult to reconcile, and have produced some questionable results. Recently, some courts have applied a test proposed by Professor Bruce A. Markell in A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L.J. 227 (1998), that looks to prebankruptcy expectations of the parties and whether the treatment favoring one class is justified by contributions from the favored creditors. The Committee, although acknowledging that the Markell test is a step in the right direction, believes that his test needs refinement. The Committee reviews the current status of the law and, based upon pre-Code caselaw and the structure and legislative history of the Code, proposes a new judicial test to balance conflicting policies of flexibility, fairness, and predictability.
Slouching Toward Fairness: A Reply to the ABCNY's Proposal on Unfair Discrimination
Professor Bruce A. Markell, 58(1): 109–122 (Nov. 2002)
In this response to the Association of the Bar of the City of New York's critique of A New Perspective on Unfair Discrimination in Chapter 11, 72 AM. BANKR. L.J. 227 (1998), the author first examines the many points of similarity between the ABCNY's proposal and A New Perspective. Although this examination illustrates an agreement on many points of reorganization doctrine, it also underscores the sharp differences that divide the two approaches. After responding to the ABCNY's critique of A New Perspective, the Article argues that the ABCNY's counter-proposal improperly exalts certainty over other reorganization goals and is based upon a conception of valuation that is at odds with reorganization practice.
At the Intersection of Regulation and Bankruptcy: FCC v.Nextwave
William J. Perlstein and Kenneth A. Bamberger,59(1): 1-22 (Nov. 2003)
Last Term, in FCC v. NextWave Personal Communications, Inc. ("NextWave") , the Supreme Court held that the Federal Communications Commission could not revoke wireless communications licenses held by a debtor-in-possession under the Bankruptcy Code, following that debtor's failure to make timely payments owed for their purchase. The Code, the Court held, prevented the agency from canceling licenses issued pursuant to its administrative authority, notwithstanding the licensee's violation of a "full and timely payment" requirement established by agency regulation. The decision is significant in its particulars: the holding concerned the allocation of valuable licenses to use wireless spectrum. Yet the case also has much broader ramifications for the treatment of government agencies in bankruptcy proceedings. Specifically, the Court's opinion signals three related principles that may impose significant limitations on the power of administrative agencies participating in bankruptcy proceedings. First, agencies are subject to the strictures of the Bankruptcy Code, even when they act in a regulatory capacity; second, bankruptcy law may prohibit the enforcement of a wide array of license conditions; and third, the Bankruptcy Code trumps agency licensing rules. At the same time, however, the opinion leaves in place lower court decisions limiting bankruptcy jurisdiction over administrative action. This Article describes the factual and procedural history of NextWave's dispute with the FCC, and engages in a preliminary assessment of the case's broader implications for administrative agencies. Thus, it seeks to explore some of the consequences of the Court's decision for the treatment of government creditors in bankruptcy proceedings and for the jurisdiction of the bankruptcy courts over administrative matters. Finally, it explores the options remaining for government entities structuring licensing procedures in an attempt to comport with the NextWave decision's holdings.
Section 363 Sales Free and Clear of Interests: Why the Seventh Circuit Erred in Precision Industries v. Qualitech Steel
Michael St. Patrick Baxter, 59(2): 475–501 (Feb. 2004)
Rarely does a bankruptcy case have the potential to profoundly impact the non-bankruptcy world. In Precision Industries v. Qualitech Steel, the Seventh Circuit allowed a debtor to sell land free and clear of an unexpired ground lease in apparent disregard of the lessee's rights to retain possession of the leased premises. This case will have profound implications on bankruptcy sales, real estate leasing, and real estate lease financing. This Article examines the decision in Precision Industries and its effect on the rights afforded to lessees by § 365(h) of the Bankruptcy Code. The author contends that the case is wrongly decided. The author discusses some of the practical problems created by Precision Industries and suggests some strategies that can be employed to avoid its perils.
Extension of Section 524(g) of the Bankruptcy Code to Nondebtor Parents, Affiliates, and Transaction Parties
Susan Power Johnston and Katherine Porter, 59(2): 503–27 (Feb. 2004)
After reviewing the historical difficulties of resolving asbestos liability and the foundations of section 524(g) of the Bankruptcy Code, this Article explores current attempts by nondebtors to use the bankruptcies of their subsidiaries, affiliates, or transaction parties to receive protection from asbestos liability. A particular focus is given to the efforts in very recent or pending cases to protect nondebtors and to the problems that have hindered confirmation of plans of reorganization in current cases.
Fiduciary Duties of Directors of a Corporation in the Vicinity of Insolvency and After Initiation of a Bankruptcy Case
Myron M. Sheinfeld & Judy L. Harris, 60(1): 79—107 (Nov. 2004)
This article discusses the general fiduciary duties of directors of corporations and how those duties are altered when a corporation is in the zone or vicinity of insolvency and when the corporation is insolvent. The different tests for determining a corporation's insolvency are outlined. The article also analyzes the fiduciary duties of directors in a Chapter 11 bankruptcy case. In particular, the article discusses directors' duties in managing the bankruptcy estate, directors' responsibilities under Sarbanes-Oxley, and the exculpations of directors that are permitted in Chapter 11 plans of reorganization. The article provides directors with practical guidelines for properly exercising their fiduciary duties in Chapter 11.
Derivatives in Bankruptcy
Shmuel Vasser, 60(4): 1507—1546 (August 2005)
The Bankruptcy Code provides for special and favored treatment to securities, forward and commodities contracts, swaps, and repurchase agreements. This special treatment includes the ability of the non—debtor counter—party to exercise rights free of the automatic stay, the enforceability of ipso facto clauses and protection from avoidance actions, including fraudulent transfers and preferences, except for actual fraud. In light of the explosive growth in the volume of the various derivative contracts, it is imperative for bankruptcy lawyers, whether they represent the debtor or its creditors, as well as for financial engineers, who develop cutting edge financial instruments, to be fully familiar with the benefits that the Bankruptcy Code provides as well as with the pitfalls associated with the application and interpretation of the relevant Code provisions. This is even more so in light of the significant expansion of the protections enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, which will become effective for bankruptcy cases filed on or after April 17, 2005. This article analyzes the building blocks required for each derivative contract to qualify for the special treatment provided for in the Bankruptcy Code, and presents a comprehensive analysis as to the various issues that arise as to their interpretation and application.
Framework for Control over Electronic Chattel Paper--Compliance with UCC § 9–105
Working Group on Transferability of Electronic Financial Assets, a Joint Working Group of the Committee on Cyberspace Law and the Committee on the Uniform Commercial Code of the ABA Section of Business Law and The Open Group Security Forum, 61(2):721—744 (February 2006)
Proving Solvency: Defending Preference and Fraudulent Transfer Litigation
Robert J. Stearn, Jr., 62(2): 359-396 (February 2007)
Litigating solvency can be a complicated endeavor. This article provides a general road map for proving solvency in the defense of preference and fraudulent transfer litigation. The three common measures of solvency are discussed: The "balance sheet" test; the "unreasonably small capital" test; and the "ability to pay debts" test. The article also provides practical suggestions for defense counsel.
J.B. Heaton, 62(3): 983–1006 (May 2007)
This Article explains the basic economic function of solvency tests and the relations among the three solvency tests applied in bankruptcy and corporate law. It also explains why solvency diagnoses can differ, depending on the test that is applied. Although one of these tests—the ability-to-pay test—is probably best, it may suffer from significant measurement error in practice. Multiple solvency tests ultimately make sense because the costs of failing to detect insolvency when it exists exceed the costs of detecting insolvency when it does not exist.
Debt Recharacterization Under State Law
James M. Wilton and Stephen C. Moeller-Sally, 62(4): 1257–1280 (August 2007)
The doctrine of debt recharacterization, as developed in the federal courts, imposes inconsistent, and sometimes irrational, standards on insiders who wish to support their business enterprises through periods of financial distress. Three conflicting lines of cases have evolved in the federal jurisprudence of debt recharacterization, two holding that debt recharacterization is a viable separate cause of action under the Bankruptcy Code and one holding that any such action has no statutory basis at all. This Article examines the flaws in these approaches and analyzes state law as a rational basis for developing a principled doctrine of debt recharacterization. Under long-standing legal principles, state law provides the proper framework for determining whether debt should be recharacterized as equity in bankruptcy cases. Drawing examples from Massachusetts and Wisconsin law, this Article shows that state law offers a higher degree of predictability concerning the enforcement of insider debt and may serve as a means for reconciling the conflicting and inconsistent tests applied in federal courts.
At the Crossroads: The Intersection of Federal Securities Laws and the Bankruptcy Code
Wendy Walker, Mike Wiles, Alan Maza, and David Eskew, 63(1): 125–146 (November 2007)
This Article examines the ways in which the federal securities laws and the U.S. Bankruptcy Code do—and, at times, do not—work together, with an emphasis on the potential conflict between the Fair Funds Provision of the Sarbanes–Oxley Act of 2002, which permits the U.S. Securities and Exchange Commission to distribute penalties and disgorged funds collected from debtor–corporations to shareholders, and the "absolute priority rule," which prevents distributions to equity holders in Chapter 11 reorganization cases absent payment in full of creditors. Although touched upon in some of the largest bankruptcy cases in recent years, including Enron, WorldCom, and Adelphia, this potential conflict has not been squarely addressed by the courts and presents issues which should be examined by Congress.
Corporate Governance of Troubled Companies and the Role of Restructuring Counsel
D.J. (Jan) Baker, John Wm. (Jack) Butler, Jr., and Mark A. McDermott, 63(3): 855–880 (May 2008)
Officers and directors of a troubled corporate enterprise can expect to face a host of complex decisions as they attempt to restructure the corporation's affairs. These decisions may be made more difficult because officers' and directors' fiduciary duties extend to all stakeholders, including creditors, when the corporation is in the zone of insolvency. The role of corporate restructuring counsel is critical in this uncertain environment. This Article provides a comprehensive overview of recent court decisions and statutory changes relating to the fiduciary duties of officers and directors of troubled companies. It also provides practical applications of these principles to common situations that directors and officers face as they attempt to guide a troubled business toward a successful restructuring.
Working Paper: Best Practices for Debtors' Attorneys
Task Force on Attorney Discipline Best Practices Working Group, Ad Hoc Committee on Bankruptcy Court Structure and the Insolvency Processes, ABA Section of Business Law, 64(1): 79-152 (November 2008)
Special Report on the Preparation of Substantive Consolidation Opinions
The Committee on Structured Finance and the Committee on Bankruptcy and Corporate Reorganization of The Association of the Bar of the City of New York, 64(2): 411-432 (February 2009)
Report of the Model First Lien/Second Lien Intercreditor Agreement Task Force
Committee on Commercial Finance, ABA Section of Business Law, 65(3): 809–884 (May 2010)
Campbell, Iridium, and the Future of Valuation Litigation
Michael W. Schwartz and David C. Bryan, 67(4): 939 - 956 (August 2012)
Five years ago, two landmark federal court valuation decisions, Campbell and Iridium, held that market evidence—rather than the testimony of paid litigation experts—should be relied on to value corporations for purposes of litigation. While a number of decisions have followed Campbell and Iridium, their full potential to make business valuation litigation less costly and less susceptible to hindsight bias has yet to be realized.
How Safe Are Institutional Assets in a Custodial Bank’s Insolvency?
Edward H. Klees, 68(1): 103 - 136 (November 2012)
It is a widely held belief among institutional investors that custody accounts are protected against a bank's insolvency in the United States. This assumption undergirds trillions of dollars of assets held in custody in U.S. banks. However, despite the 2008 financial crisis, little if any attention has been paid to analyzing whether this belief is, indeed, valid. This article argues that while the FDIC, as receiver of almost all failed banks in the United States, will likely protect custodied assets to the extent permitted by law, clients bear several significant legal and operational risks that could limit recovery of their custodied assets. While investors can protect against some risks, others may be outside their control. The article outlines these risks and proposes ameliorative steps for institutional investors.
Trademark Licensing in the Shadow of Bankruptcy
James M. Wilton and Andrew G. Devore, 68(3): 739-780 (July 2013)
When a business licenses a trademark, transactional lawyers regularly advise that if the trademark licensor files for bankruptcy, the licensee could be left without a right to use the mark and with only a bankruptcy claim for money damages against the licensor. Indeed, the ability of a trademark licensor to reject a trademark license and to limit a licensee’s remedies to a dischargeable claim for money damages has been a significant risk for licensees for twenty-five years based on the Fourth Circuit case, Lubrizol Enterprises, Inc. v. Richmond Metal Finishers, Inc. This result is grounded in the Bankruptcy Code prohibition on remedies of specific performance for non-debtor parties to rejected contracts and is in accord with Bankruptcy Code policy of affording debtors an opportunity to reorganize free of burdensome contracts. In the summer of 2012, however, the Seventh Circuit, in its decision Sunbeam Products, Inc. v. Chicago American Manufacturing, LLC, held that a non-debtor trademark licensee retains rights to use licensed trademarks following rejection of the contract by the debtor-licensor. The decision, derived from a pre-Bankruptcy Code paradigm for understanding the rights of non-debtors under rejected executory contracts that convey interests in property, creates a circuit split over the implications of trademark license rejection. This article asserts that the Sunbeam Products case misconstrues the rights of a trademark licensee as a vested property right and is therefore incorrect under both the holding of the Lubrizol case and the pre-Bankruptcy Code paradigm on which the Sunbeam Products case relies.
Market Evidence, Expert Opinion, and the Adjudicated Value of Distressed Businesses
Robert J. Stark, Jack F. Williams, and Anders J. Maxwell, 68(4): 1039-1070 (August 2013)
One year ago, The Business Lawyer published an article arguing that courts, when adjudicating the value of distressed businesses, should predominantly defer to “market” evidence, rather than expert opinion. In Campbell, Iridium, and the Future of Valuation Litigation, authors Michael W. Schwartz and David C. Bryan contended that near-universal judicial deference to market data: (1) is supported by recent developments in the case law; (2) would obviate judicial “hindsight bias”; and (3) would enable a more efficient valuation process. Messrs. Schwartz and Bryan further argued that, to solidify the paradigm change, courts should start imposing a pretrial obligation on any litigant intending to present expert valuation opinion to move specially, under Federal Rule of Evidence 702(a), for allowance to do so. This article offers an opposing viewpoint and argues that Messrs. Schwartz and Bryan interpret applicable case law selectively, outside of a broader jurisprudential context, and in a manner that disregards deeply ingrained legal principles. The authors here further contend that: (a) Messrs. Schwartz and Bryan have not presented a compelling case of widespread judicial “hindsight bias”; (b) they have also failed to make a persuasive showing that their proposal will lead to meaningful process efficiencies; and (c) their thesis fails to appreciate the complexity of market dynamics. This article concludes that market evidence tends to require expert interpretation, especially when used to value troubled businesses.
A Further Comment on the Complexities of Market Evidence in Valuation Litigation
Gregory A. Horowitz, 68(4): 1071-1082 (August 2013)
This comment offers another view in the dialogue concerning the use of market evidence in valuation litigation initiated in these pages one year ago. In Campbell, Iridium, and the Future of Valuation Litigation, Michael Schwartz and David Bryan argued that an understanding of the importance of market evidence, and of costs and vagaries of a battle of valuation experts, should lead courts to adopt a rebuttable presumption against the admissibility of expert valuation testimony. Like Messrs. Stark, Williams, and Maxwell, whose views are forcefully advanced in a separate article here, I find this proposal ill-advised, but for somewhat different reasons. I agree with Messrs. Schwartz and Bryan that market evidence is central to any question of value, but argue that the market never speaks for itself, indeed never speaks with a voice capable of lay interpretation. By way of example, I present a “debt discount test” for determining whether the market deems an enterprise to be insolvent (the question at issue in both Campbell and Iridium) and show that, even while this test substantially simplifies the interpretation of market data, expert opinion is inevitably required in its application. The increasing recognition of the importance of contemporaneous market information will improve valuation litigation and narrow areas of good-faith dispute without the need for radical procedural limitations on the adversarial process.
Best Practices Report on Electronic Discovery (ESI) Issues in Bankruptcy Cases
ABA Electronic Discovery (ESI) in Bankruptcy Working Group, Bankruptcy Court Structure and Insolvency Process Committee, ABA Business Law Section, 68(4): 1113-1148 (August 2013)
Equity Receivers and the In Pari Delicto Defense
Hon. Steven Rhodes and Kathy Bazoian Phelps; 69(3): 699-716 (May 2014)
Federal equity receivers are creations of equity. The in pari delicto doctrine is similarly a defense based in equity. When equity receivers are called upon to administer the assets of a receivership entity for the benefit of defrauded victims, courts sitting in equity must balance the needs of the victims with the rights of the defendants to assert the in pari delicto defense to litigation claims brought by the receiver against them. The competing equities reveal the great discretion that courts can exercise in permitting litigation claims to proceed in the face of the assertion of the in pari delicto defense. Courts, however, must also be mindful of a variety of issues and obstacles in deciding whether to allow the in pari delicto defense.
Rolling Back the Repo Safe Harbors
Edward R. Morrison, Mark J. Roe, and Christopher S. Sontchi, 69(4): 1015-1048 (August 2014)
Recent decades have seen substantial expansion in exemptions from the Bankruptcy Code’s normal operation for repurchase agreements. These repos, which are equivalent to very short-term (often one-day) secured loans, are exempt from core bankruptcy rules such as the automatic stay that enjoins debt collection, rules against prebankruptcy fraudulent transfers, and rules against eve-of-bankruptcy preferential payment to favored creditors over other creditors. While these exemptions can be justified for United States Treasury securities and similarly liquid obligations backed by the full faith and credit of the United States government, they are not justified for mortgage-backed securities and other securities that could prove illiquid or unable to fetch their expected long-run value in a panic. The exemptions from baseline bankruptcy rules facilitate this kind of panic selling and, according to many expert observers, characterized and exacerbated the financial crisis of 2007–2009. The exemptions from normal bankruptcy rules should be limited to United States Treasury and similar liquid securities, as they once were. The more recent expansion of these exemptions to mortgage-backed securities should be reversed.
Massey Prize for Research in Law, Innovation, and Capital Markets Symposium—Foreword
70(2): 319-320 (Spring 2015)
Financial Innovation and Governance Mechanisms: The Evolution of Decoupling and Transparency
Henry T. C. Hu; 70(2): 347-406 (Spring 2015)
Financial innovation has fundamental implications for the key substantive and information-based mechanisms of corporate governance. “Decoupling” undermines classic understandings of the allocation of voting rights among shareholders (via, e.g., “empty voting”), the control rights of debtholders (via, e.g., “empty crediting” and “hidden interests”/ “hidden non-interests”), and of takeover practices (via, e.g., “morphable ownership” to avoid section 13(d) disclosure and to avoid triggering certain poison pills). Stock-based compensation, the monitoring of managerial performance, the market for corporate control, and other governance mechanisms dependent on a robust informational predicate and market efficiency are undermined by the transparency challenges posed by financial innovation. The basic approach to information that the SEC has always used—the “descriptive mode,” which relies on “intermediary depictions” of objective reality—is manifestly insufficient to capture highly complex objective realities, such as the realities of major banks heavily involved with derivatives. Ironically, the primary governmental response to such transparency challenges—a new system for public disclosure that became effective in 2013, the first since the establishment of the SEC—also creates difficulties. This new parallel public disclosure system, developed by bank regulators and applicable to major financial institutions, is not directed primarily at the familiar transparency ends of investor protection and market efficiency.
As starting points, this Article offers brief overviews of: (1) the analytical framework developed in 2006−2008 for “decoupling” and its calls for reform; and (2) the analytical framework developed in 2012−2014 reconceptualizing “information” in terms of three “modes” and addressing the two parallel disclosure universes.
As to decoupling, the Article proceeds to analyze some key post- 2008 developments (including the status of efforts at reform) and the road ahead. A detailed analysis is offered as to the landmark December 2012 TELUS opinion in the Supreme Court of British Columbia, involving perhaps the most complicated public example of decoupling to date. The Article discusses recent actions on the part of the Delaware judiciary and legislature, the European Union, and bankruptcy courts—and the pressing need for more action by the SEC. At the time the debt decoupling research was introduced, available evidence as to the phenomenon’s significance was limited. This Article helps address that gap.
As to information, the Article begins by outlining the calls for reform associated with the 2012−2014 analytical framework. With revolutionary advances in computer- and web-related technologies, regulators need no longer rely almost exclusively on the descriptive mode rooted in intermediary depictions. Regulators must also begin to systematically deploy the “transfer mode” rooted in “pure information” and the “hybrid mode” rooted in “moderately pure information.” The Article then shows some of the key ways that the new analytical framework can contribute to the SEC’s comprehensive and long-needed new initiative to address “disclosure effectiveness,” including in “depiction-difficult” contexts completely unrelated to financial innovation (e.g., pension disclosures and high technology companies). The Article concludes with a concise version of the analytical framework’s thesis that the new morphology of public information—consisting of two parallel regulatory universes with divergent ends and means—is unsustainable in the long run and involve certain matters that need statutory resolution. However, certain steps involving coordination among the SEC, the Federal Reserve, and others can be taken in the interim.
Corporate Bankruptcy Tourists
Oscar Couwenberg and Stephen J. Lubben; 70(3): 719-750 (Summer 2015)
Foreign corporations facing financial distress have a choice: restructure in their home jurisdiction or file for bankruptcy in the United States. And some number of foreign corporations do file bankruptcy petitions in the United States. But besides the occasional anecdotal account, how frequently this actually happens or what types of foreign firms are apt to file in the United States is almost completely unstudied. American firms that file under chapter 11 and foreign firms that file under chapter 15 are the frequent objects of study, but what of the foreign firms that file under chapters 7 or 11? This Article addresses this obvious gap in the literature by constructing a database of foreign corporate debtors. By analyzing this new dataset, this Article concludes that the United States Bankruptcy Code is used by foreign debtors in a way that is diametrically opposed to most of the extant thinking on transnational insolvency. In particular, foreign debtors use the American bankruptcy system to impose a global discharge on assets, without the cooperation of any jurisdiction beyond the United States, where the case is pending. This is in complete contrast with the efforts of UNCITRAL to facilitate cross-border cooperation among jurisdictions.
The Uniform Voidable Transactions Act; or, the 2014 Amendments to the Uniform Fraudulent Transfer Act
Kenneth C. Kettering; 70(3): 777-834 (Summer 2015)
In 2014, the National Conference of Commissioners on Uniform State Laws approved a set of amendments to the Uniform Fraudulent Transfer Act. Among other changes, the amendments renamed the act the Uniform Voidable Transactions Act. In this paper, the reporter for the committee that drafted the amendments describes the amendment project and discusses the changes that were made to the act.
The Medicare Provider Agreement: Is It a Contract or Not? And Why Does Anyone Care?
Samuel R. Maizel and Jody A. Bedenbaugh, 71(4): 1207-1240 (Fall 2016)
The article first considers the conflicting positions taken by the United States Government regarding whether the Medicare Provider Agreement is an executory contract in and outside of bankruptcy court. It examines whether the Government’s positions can be reconciled, and if the Government should be barred by preclusion and estoppel principles from asserting in bankruptcy court that a Provider Agreement is an executory contract. The article then discusses whether the Provider Agreement should be treated as an executory contract in bankruptcy, and the implications of such treatment on a bankrupt provider’s ability to transfer its Provider Agreement to a purchaser under the Bankruptcy Code and related issues, such as the Government’s setoff and recoupment rights and successor liability.
The Past and Future of Debt Recharacterization
James M. Wilton and William A. McGee, 74(1) 91-126 (Winter 2018/2019)
The bankruptcy doctrine of debt recharacterization, as developed in four federal circuits, uses multi-factor tests derived from tax cases involving solvent companies. Aspects of these tests make no sense when applied to debt of insolvent companies and the U.S. Treasury has determined that, even for the purpose originally intended, the tests produce “inconsistent and unpredictable results.” The Ninth Circuit has now joined the Fifth Circuit in looking to state law as the basis for determining whether debt claims should be recharacterized as equity and disallowed in bankruptcy cases. This Article examines these two approaches, analyzing arguments for and against application of a federal or a state law rule of decision for debt recharacterization. Drawing on U.S. Supreme Court precedent, statutory analysis, and policy, the Article shows that, under long-standing legal principles, state law provides the proper framework for determining whether debt should be recharacterized as equity in bankruptcy and offers both consistency between state and federal courts and a higher degree of predictability concerning the enforcement of insider debt. The article predicts that the U.S. Supreme Court will ultimately resolve the circuit split in favor of a state law rule of decision. In anticipation of such a ruling, the article concludes by providing an overview of choice of law issues and state law approaches to debt recharacterization.
Oil and Gas Rights in Bankruptcy: Beware the Many Pitfalls for Interest Holders and Creditors
Richard L. Epling, 74(1) 127-150 (Winter 2018/2019)
Lenders, vendors, pipelines, storage facilities and other businesses that lend money to or do business with the working interest owner/lessors of oil and gas properties often assume that their contractual bargains will prevail over the rights and claims of other participants in the hydrocarbon production process. Such persons often fail to take into account the varied local and state laws affecting the definitions of what is real and personal property, the requirements for perfection and certain overriding priorities granted to field operators, suppliers and vendors in certain cases. Bankruptcy is the crucible for testing these conflicting rights and claims, and there have been some instructive recent developments in several key court decisions.
How Efficient Is Sufficient: Applying the Concept of Market Efficiency in Litigation Bradford Cornell and John Haut, 74(2) 417-434 (Spring 2019)
The concept of market efficiency has been adopted by courts in a variety of contexts. In reality, markets can never be perfectly efficient or inefficient, but exist somewhere in between depending on the facts and circumstances. Courts, therefore, face a problem in deciding how efficient is sufficient in any particular legal context. Because market prices incorporate the views of numerous market participants, courts have often been willing to presume that a market is efficient so long as the appropriate criteria are satisfied. However, those criteria are different for different types of cases, such as securities class actions, appraisal actions, and cram downs in bankruptcy.
Simple Insolvency Detection for Publicly Traded Firms
J.B. Heaton, 74(3) 723-734 (Summer 2019)
This article addresses current limitations of financial-market-based solvency tests by proposing a simple balance-sheet solvency test for publicly traded firms. This test is derived from an elementary algebraic relation among the inputs to the balance-sheet solvency calculation. The solvency test requires only the assumption that the market value of assets equals the sum of the market value of the firm’s debt plus the market value of the firm’s equity. The solvency test is a generated upper bound on the total amount of debt the firm can have and still be solvent or, alternatively, the minimum amount of stock-market capitalization the firm must have if it is solvent at current debt prices. The virtue of the method—apart from its ease of implementation—is that it makes possible the detection of balance-sheet insolvent firms notwithstanding the possibility that not all of the firm’s liabilities—including hard-to-quantify contingent liabilities—can be identified. As a result, the method allows for the detection of balance-sheet insolvent firms that otherwise might escape detection. The method proposed here can identify insolvent firms that should be retaining assets and not paying them out to shareholders as dividends or repurchases, identify stocks that brokers and investment advisers should treat as out-of-the-money call options that may be unsuitable investments, and can help auditors identify publicly traded firms that are candidates for going-concern qualifications and other disclosures.
Why Law Firms Collapse
John Morley; 75(1): 1399-1440 (Winter 2019-2020)
Law firms don’t just go bankrupt—they collapse. Like Dewey & LeBoeuf, Heller Ehrman, and Bingham McCutchen, law firms often go from apparent health to liquidation in a matter of months or even days. Almost no large law firm has ever managed to reorganize its debts in bankruptcy and survive. This pattern is puzzling, because it has no parallel among ordinary businesses. Many businesses go through long periods of financial distress and many even file for bankruptcy. But almost none collapse with the extraordinary force and finality of law firms. Why?
Third-Party Releases in Bankruptcy Cases: Should There Be Statutory Reform?
Richard L. Epling; 75(2): 1747-1768 (Spring 2020)
Third-party releases, which can function as de facto discharges of nondebtors, have become an increasingly common feature of reorganization plans. There is no definitive Supreme Court case dealing with the legality and scope of such plan provisions, and the seven circuit courts of appeals that have addressed release issues have either disagreed or posited various legal tests and standards to satisfy the “extraordinary circumstances” bar they set for approving such releases.