Brian P. Guiney, Counsel

On Monday, November 30, Bankruptcy Judge Marvin Isgur approved a request by Ultra Petroleum and its affiliated debtors that he certify his October 26, 2020 memorandum opinion for direct review by the United States Court of Appeals for the Fifth Circuit.  That decision, which we recently summarized here, held that certain creditors are entitled to allowance and payment of make-whole claims, and that post-petition interest is calculated at the contractual default rate.  No creditor or other party in interest opposed the request for direct appeal.

In December of last year, we wrote about the Fifth Circuit’s two decisions – Ultra I, from January 2019, and Ultra II, from December, which replaced Ultra I – regarding make-whole claims in the Ultra Petroleum bankruptcy cases.  That blog post provides important background for this one. 

On September 29, 2020, the House Judiciary Committee advanced H.R. 7370, Protecting Employees and Retirees in Business Bankruptcies Act of 2020, a Democrat-sponsored bill, to the full chamber. If enacted into law, the bill would usher in considerable changes in commercial bankruptcy cases, including in the areas of executive compensation, employee and retiree benefits, and confirmation of a Chapter 11 plan.  Some of the more salient provisions of the bill are listed below; for the complete text of H.R. 7370, click here.

On Friday August 7th, the NAACP filed a motion to intervene in the chapter 11 bankruptcy cases of Purdue Pharma L.P. and its affiliated debtors (collectively, “Debtors”). The Motion argues that “[i]ntervention is warranted because the NAACP has an interest to ensure that the settlement allocates appropriate relief to communities of color adversely affected by the Opioid Crisis. Attention has been disproportionately focused on white suburban and rural communities with little consideration for the communities of color that have similarly experienced harm by the [c]risis, including dramatic increases in opioid misuse, addiction, and death.” These concerns are only exacerbated by the COVID-19 pandemic, the NAACP contends, which has led to economic contraction that has decreased states’ tax revenue, leading to concerns that the settlement fund may have a “disproportionate allocation and distribution” and “may be diverted for other use.” By intervening in the bankruptcy case, the NAACP hopes to protect communities of color from the repetition of “the long-storied history of [the] government’s disproportionate treatment of communities of color.”

Hertz Global Holdings Inc. and most of its affiliates filed for bankruptcy on May 22, 2020.  This was just one corporate failure among many in the midst of the COVID-19 pandemic; but, a novel strategy by Hertz to raise capital to fund its bankruptcy has raised eyebrows instead.

Changes in culture and technology have been reshaping the way Americans acquire and consume goods and services for a generation.  Indeed, long before the coronavirus, insolvency professionals and industry experts understood that the retail landscape was experiencing a dramatic transformation.  Reduced foot traffic, online competition from Amazon and others, and changing shopping patterns all combined to place enormous strain on traditional retailers.  To keep up, and to match the tastes of consumers in the age of social media, retailers and shopping centers have placed a renewed focus on strategies that will create a more valuable and enriching in-store experience for consumers.  It has to be modern, it has to be fun, and – above all – it has to look cool on Instagram: no one takes a selfie at Sears. 

The importance of clarity in drafting agreements can never be understated. And while there are strategies available to spouses of business owners to help protect a family in bankruptcy, it is imperative to properly plan and draft to receive such protection from the Courts. In re Somerset Regional Water Resources, LLC, _____________ F.3d ________________ (3^rd Cir. 2020) (“Somerset”), recently decided by the Third Circuit Court of Appeals, offers a prime example of both cautionary concepts.

On December 19, the Court of Appeals for the Third Circuit became the first federal circuit court of appeals to hold that a bankruptcy court may confirm a plan containing nonconsensual third-party releases without exceeding the constitutional limits on its jurisdiction articulated in Stern vs. Marshall.  The decision in In re Millennium Lab Holdings II, LLC is notable because it rejects a new line of attack on nonconsensual releases in a jurisdiction where they are regularly permitted.

Ultra Petroleum entered bankruptcy in significant financial distress, but then – thanks to a spike in oil prices – the debtor’s fortunes changed almost literally overnight.  It is generally accepted that a solvent debtor must pay its creditors their complete contractual entitlement before any amount is paid to equity or retained by the debtor.  So, in light of the debtor’s newfound solvency, bondholders and other lenders demanded payment of post-petition interest at the contract rate and payment of a “make-whole premium.”  Anything less, they said, would render them “impaired” and entitled to vote on the proposed plan.

In 1930, Clarence Bennett’s wealthy uncle died. He left behind shares in Berry Holding Company ("BHC") that were subdivided into three groups. Bennett was the beneficiary of dividends paid out of one of these groups and, for many years, received his share of dividends from BHC. In 1986, BHC became Berry Petroleum Company ("BPC"), a publicly traded company, and Bennett’s interest changed.  In order to preserve the intent of the wealthy uncle’s bequest, that his heirs receive income on the shares of his company, and because of an unrelated dispute with a third-party that resulted in certain of the shares being retired, BPC agreed to pay Bennett “deemed dividends” each time BPC paid an actual dividend to its shareholders. 

A “little bit of a crisis” was averted last week in the Chapter 11 bankruptcy case of St. Christopher’s Hospital for Children, a Philadelphia-area hospital with ties to Hahnemann University Hospital, which is also a Chapter 11 debtor.  On Tuesday, Delaware bankruptcy judge Kevin Gross said he could not approve a $65 million DIP loan requested by St. Christopher’s over the objection of several creditor groups because the terms of the loan were too onerous.  The failure to obtain the much-needed liquidity might have forced the hospital into a chaotic, freefall liquidation, potentially jeopardizing patients and most certainly spelling disaster for creditor recoveries.  But by Wednesday, after last-minute negotiations between the Debtor and the DIP Lender, MidCap Financial Trust, the parties reached a deal that increased the cash infusion to the estate.  Later that same day, Judge Gross said he would approve the revised loan package.  The funding is expected to keep St. Christopher’s open long enough to conclude a sale of the hospital as a going concern. 

The Financial Oversight and Management Board for Puerto Rico (Oversight Board) announced Sunday that it had reached an agreement with bondholders regarding the terms of a plan of adjustment that would resolve $35 billion worth claims against the Commonwealth of Puerto Rico.  If approved by the Bankruptcy Court, the deal would reportedly reduce the struggling island’s outstanding bond debt to less than $12 billion, a reduction of more than 60%.

Ruling from the bench on April 4, Bankruptcy Judge Alan Koschik of the United States Bankruptcy Court for the Northern District of Ohio denied approval of a disclosure statement proposed by FirstEnergy Solutions Corp. because the plan it described was “patently unconfirmable.”

There have been two significant developments in the ongoing restructuring case for the Commonwealth of Puerto Rico.  First, as was widely expected, District Judge Laura Taylor Swain entered orders on February 4 and 5, respectively, approving the Commonwealth’s entry into the Commonwealth-COFINA settlement (which we reported on here) and confirming the Title III Plan of Adjustment for COFINA.  The dispute over ownership of the sales taxes pledged to pay the COFINA bonds has complicated the Commonwealth’s bankruptcy case since it was commenced in 2017.  Had Judge Swain been forced to resolve the dispute it could have wiped out the COFINA bondholders entirely, or assured them a 100% recovery.  But, with a settlement of this dispute in hand, and a confirmed plan of adjustment confirmed for COFINA, the Debtors were poised to pivot towards pursuing a consensual plan for the Commonwealth itself. 

In a recent cross-border insolvency case, Judge Glenn of the United States Bankruptcy Court for the Southern District of New York recognized an insurance company rehabilitation proceeding in Curaçao as a “foreign main proceeding” under Chapter 15 of the Bankruptcy Code.

The Sears bankruptcy case made headlines this month in the complex world of credit default swaps (CDS).  A credit default swap is a contract pursuant to which the seller receives payment from a buyer in exchange for which the seller must compensate the buyer in the event of a default or other specified credit event.  On November 9, in what it openly admitted was an attempt to take advantage of the abundance of default protection issued in the days leading up to its bankruptcy filing, Sears sought permission to auction certain “medium-term notes” (MTNs) that were issued by Sears Roebuck Acceptance Corp. (“SRAC”) prior to the petition date and held entirely by affiliates of Sears.

Started as a mail-order retailer, evolved to brick-and-mortar stores in urban areas and expanded to a big-box retailer through merger, Sears is now facing the most turbulent time in its history.  On October 15, 2018, Sears Holdings Corp.—the holding company of Sears and Kmart—along with its affiliated entities, filed a voluntary Chapter 11 petition in the United States Bankruptcy Court for the Southern District of New York. With assets of approximately $6.94 billion and liabilities of approximately $11.34 billion in total, the fate of “Where America Shops” remains unclear.

We generally advise clients to think carefully before commencing an involuntary bankruptcy petition against an alleged debtor.  One of the primary reasons for our caution is section 303(i) of the Bankruptcy Code, which provides that “(i) If the court dismisses [an involuntary] petition under this section other than on consent of all petitioners and the debtor, and if the debtor does not waive the right to judgment under this subsection, the court may grant judgment—(1) against the petitioners and in favor of the debtor for—(A) costs; or (B) a reasonable attorney’s fee; or (2) against any petitioner that filed the petition in bad faith, for—(A) any damages proximately caused by such filing; or (B) punitive damages.”  A recent unreported decision of the Third Circuit Court of Appeals underscores the serious consequences that can flow from an adverse judgment under this section of the Code.  

In 2010, Lehman Brothers Special Financing Inc. (“Lehman”) commenced an adversary proceeding against Shinhan Bank (“Shinhan”) to avoid and recover pre-bankruptcy transfers made to the South Korean bank.  In 2015, while a motion to dismiss the case was pending, a mediator proposed a resolution to both sides at a settlement conference.  Two weeks later, counsel for Shinhan emailed the mediator that “Shinhan has agreed to accept” the settlement, whereupon the mediator notified both parties that a settlement was reached.[1] 

On May 14, a large coalition of stakeholders in the COFINA-Commonwealth litigation, which we previously reported on here, announced a proposed settlement outline to resolve the long-running dispute over who owns the sales and use taxes pledged by COFINA to secure COFINA bonds.  The proposed settlement is supported by the Ad Hoc Group of Puerto Rico General Obligation Bondholders, the COFINA Senior Bondholders Coalition, and certain monoline insurers.  But while this is an important step forwards, the settlement does not yet have the support of the two agents appointed by the Oversight Board, the only parties with authority to settle the dispute. 

In September, we reported on the possible bankruptcy of Connecticut’s capital city and questioned whether anything short of a State-led bailout could save the City from its crippling deficit and mounting debt service payments.

Section 303(b)(1) of the Bankruptcy Code generally requires three petitioning creditors to join an involuntary petition, each of which must hold claims against the debtor that are not contingent as to liability and are not the subject of a bona fide dispute as to liability or amount.

A recent decision of the United States Bankruptcy Court for the Southern District of New York provides important guidance on the limits of nonconsensual third-party releases in the Second Circuit. SunEdison, Inc. sought confirmation of a plan for itself and its affiliated debtors.  The plan included releases of claims against non-debtor third parties by any creditor that was entitled to but did not cast a vote on the plan. No party objected to the release at the confirmation hearing, but Judge Bernstein asked sua sponte whether he had authority to bind non-voting creditors to broad releases of claims against third parties.

On Tuesday, two leading credit-rating agencies again downgraded the city of Hartford:  Moody’s Investors Service now rates the struggling city at Caa3, while S&P Global Ratings has lowered its rating to CC.  They attribute the junk classification to the increasing likelihood of a default by Hartford on its debt service obligations to bondholders.