Bankruptcy Trends in Times of Distress: What the Next Administration Should Avoid Friday, April 27, :00 a.m. - 12:30 p.m.

Size: px

Start display at page:

Download "Bankruptcy Trends in Times of Distress: What the Next Administration Should Avoid Friday, April 27, :00 a.m. - 12:30 p.m."

Andrea Green
5 years ago
Views:

1 2012 ANNUAL SPRING INVESTMENT FORUM American College of Investment Counsel Chicago, IL Bankruptcy Trends in Times of Distress: What the Next Administration Should Avoid Friday, April 27, :00 a.m. - 12:30 p.m. James E. Spiotto Chapman and Cutler LLP (Moderator) Renee M. Dailey Bracewell & Giuliani LLP Todd J. Dressel Chapman and Cutler LLP

The American College of Investment Counsel Annual Spring Investment Forum 3188789 Moderator: James Spiotto Panelists: Renée Dailey and Todd

2 The American College of Investment Counsel Annual Spring Investment Forum Moderator: James Spiotto Panelists: Renée Dailey and Todd Dressel April 27, 2012 The American College of Investment Counsel Annual Spring Investment Forum Bankruptcy Trends in Times of Distress 2 1

3 Updates on International Insolvency Laws COMI Shift to UK Germany: Amendment became effective in March 2012 Ability to Self-Administrate Stronger Creditors Committee Cramdown Plans Compromise Shareholder Claims Schutzschirmverfahren Prepack Proceeding 3 Updates on International Insolvency Laws (cont d) France: March 2011 Amendments to Safeguard Proceedings Intended to mimic U.S. Chapter 11 pre-pack proceedings Ability to limit plan to just financial creditors and exclude trade Pre-pack plan must be adopted by two thirds of each affected class of creditors within one month Argentina: Employee cooperatives and suspension of payment to creditors Expropriation 4 2

4 Anglo Irish Bank*: Sovereign Immunity Issues with Foreign Issuers Facts: Anglo Irish issued private placement notes (the Notes ) in 2005 Anglo Irish was nationalized in 2009 Post- nationalization, some or all of the Notes were sold by the original institutional investors to Cayman funds Irish Government reorganization plan for Bank involved a sale of assets and merger with another bank Plaintiffs-Cayman funds commenced a proceeding in the SDNY to enjoin Anglo Irish s sale of assets in the US Anglo Irish objected on grounds of Sovereign Immunity * Fir Tree Capital Opportunity Master Fund v. Anglo Irish Bank, 2011 WL (S.D.N.Y. Nov. 28, 2011) 5 Anglo Irish Bank: Sovereign Immunity Issues with Foreign Issuers (cont d) Plaintiffs argued that Anglo Irish had waived its sovereign immunity: Standard jurisdiction consent under the NPA Waiver under Irish-American Friendship Treaty which subjected public entities to the same lawsuits that private entities would be subject to Waiver under Foreign Sovereign Immunity Act, given commercial activity in the US 6 3

5 Anglo Irish Bank: Sovereign Immunity Issues with Foreign Issuers (cont d) Court held no waiver of Sovereign Immunity: Waiver under NPA was not binding on post-nationalized Anglo Irish; only a sovereign could waive its own immunity Irish-American Friendship Treaty only benefits US and Irish citizens, not for the benefit of Cayman funds Nationalized Anglo Irish Bank didn t engage in commercial activity in the US: Notes were issued pre-nationalization Any direct effect of Bank s activities felt in Caymans, not US Sale of US assets didn t violate NPA 7 Overview of PBGC/ERISA Claims in Restructuring and Bankruptcy (See the Written Presentation as a Reference Tool for Specific Issues) 8 4

6 Understanding Types of Pension Plans Involving Defined Contribution vs. Deferred Benefits Whether and to what extent the PBGC can place a lien on the assets of the company is key to strategic planning Aggregate Balance of Past Due Contributions must exceed $1,000,000 before lien arises PBGC liens do not prime Perfected Secured Lenders except for credit extended 45 days after lien is filed Care should be taken in analysis of Control Group Panel and subsidiaries and related PBGC liability 9 Successor Liability Can be Avoided with Attention and Planning Be Alert to Reportable Events Change in Contributing Sponsor or Control Group Loan Defaults as Reportable Events Upon Reportable Event, PBGC will be watching [insert chart on pp in DMS ] Guard against healthy corporation purchasing assets of a troubled company without protection by cleansing sale process There is a difference between Evade and Avoid as far as successor liability. Sham transfers will only lead to real liability PBGC claims are subject to 363 sale in bankruptcy or UCC sale with court approval and the release of any successor liability attaching to the assets sold 10 5

7 Be Aware There are Different Types of Plan Terminations Distress Termination Employer in Financial Distress Involuntary Termination The problem of Follow On Plan Limitation on PBGC Guaranty Evolving Pension Laws 11 Pension Claim Priority Secured Creditor Claims will prevail Unperfected ERISA liens do not have a priority If the PBGC has not placed a lien on the assets prior to filing of a bankruptcy proceeding, the automatic stay will prevent assertion of the lien No administrative expense or tax priority claim for PBGC pre-petition claim There is an administrative claim status for ERISA/PBGC payments that come due post-petition and are attributable to the post-petition period The PBGC unsecured claim will always be an issue of the discount rate and calculation dispute and the lesson of U.S. Airways is that reason and reasonableness should prevail 12 6

8 State and Local Government Public Pension Problems The need for determination of the sustainable and affordable and current efforts to address the undisclosed trillion dollars underfunding issue Efforts to address and correct the funding contributions and failed promises problem 13 Recent Mega-Case Treatment of Retiree Obligations In the GM Bankruptcy, assets were transferred free and clear of encumbrances (unless specifically assumed) including all retiree obligations. The GM Court approved the sale to the acquisition entity sponsored by the United States Treasury, Export Development Canada and a VEBA, determining the assets were indeed in a near-death condition as a going concern 14 7

9 Recent Mega-Case Treatment of Retiree Obligations (cont d) Similarly, the Chrysler free and clear asset sale was approved by the Second Circuit. Certain unions objected to the Section 363 sale in the GM case, arguing that the purchaser entity should take on the obligation to continue paying previously-promised retiree insurance benefits. In re GM, the court noted that nothing in the statutory text of Section 1114 of the Bankruptcy Code, nor applicable caselaw, requires the purchaser entity to take on responsibility for the debtor s pre-petition retiree obligations. Only the debtor has responsibility to continue making such payments. The GM court sympathized with the U.S. government s incentive to give current UAW workers a richer deal in order to properly motivate[] the current workforce, whereas there was no such incentive for retirees. 15 Recent Mega-Case Treatment of Retiree Obligations (cont d) The Chrysler court dismissed a similar objection brought by UAW retirees. Thus, the union retirees were left to pursue their insurance claims against the debtor, without any recourse to the purchaser entities In the pending AMR Corp. ( American Airlines ) bankruptcy case of , American Airlines first threatened in early February, 2012 to effect a distress termination of its definedbenefit pension plans, which have approximately $8.3 billion of assets and $18.5 billion of liabilities. The director of PBGC replied in a public statement by observing that American had not yet shown that terminating the pension plans was necessary to its reorganization, as required by 29 U.S.C. 1341(c) 16 8

10 Recent Mega-Case Treatment of Retiree Obligations (cont d) In March, 2012, American Airlines offered to certain of its unions, excluding its pilots union, that it could freeze the pension plans as of its bankruptcy petition date, i.e. workers would retain the full value of the benefits that they had accrued prior to that date, but they would make no further contributions and accrue no further benefits. Instead, workers would switch to a 401(k) plan going forward. Since the TWA Bankruptcy in , freezing the plan and a follow on plan that caps liability has been an effective means of insulating the new or reorganized company from past legacy costs 17 Upholding the Make-Whole: A Constant Battle Despite long line of cases upholding no-call and make-whole provisions outside of bankruptcy, competing creditors or the debtor may question the enforceability of the no-call or make-whole in the bankruptcy Analysis involves: Is the provision enforceable under state law? Is there any provision of the Bankruptcy Code that would prevent the allowance of the claim? 18 9

11 Upholding the Make-Whole: A Constant Battle (cont d) Recent Delaware bankruptcy case upholding a make-whole challenged as a claim for unmatured interest: In In re Trico Marine Servs., Inc., the Delaware bankruptcy judge held: The substantial majority of courts considering this issue have concluded that make-whole obligations are in the nature of liquidated damages rather than unmatured interest, whereas courts taking a contrary approach are distinctly in the minority. This Court is persuaded by the soundness of the majority s interpretation of make-whole obligations, and therefore finds that the claim on account of the Make-Whole Premium is akin to a claim for liquidated damages, not a claim for unmatured interest 19 The Acceleration Issue and Its Impact on the Make-Whole: Various Approaches Calpine I: In Calpine I, Judge Bernard Lifland of the Bankruptcy Court of the Southern District of New York ruled, over the objection of the debtors and the creditors committee, that the no-call provisions, although not specifically enforceable, would support as unsecured claims for expectation damages resulting from the debtor s breach. The court calculated the damages based upon the make-whole provisions even though they were not yet triggered 20 10

12 The Acceleration Issue and Its Impact on the Make-Whole: Various Approaches (cont d) In re Solutia: In the Solutia case, the Bankruptcy Court for the Southern District of New York, Judge Prudence Carter Beatty, held that none of the clauses in the indenture had the explicitedness that would be expected in a typical post-acceleration yield maintenance clause (make-whole). The court refused to include any expectation damages for the loss of future incremental interest into the proof of claim of the lenders 21 The Acceleration Issue and Its Impact on the Make-Whole: Various Approaches (cont d) In re Premier Entertainment Biloxi LLC: The Bankruptcy Court in Mississippi held that the automatic acceleration of maturity upon the debtor s Chapter 11 filing precluded the payment the lenders for secured claim for damages for breach of the no-call provisions. Nevertheless, the Bankruptcy Court awarded an unsecured claim for breach of contract for financial harm that the lenders sustained because of the debtors early payment of the notes. The court distinguished the case from the decision In re: Solutia, referencing the language of the indenture in the Premier Entertainment case providing that all remedies are cumulative to the extent permitted by law and determining that the remedies provided for in the indenture were not limiting 22 11

13 The Acceleration Issue and Its Impact on the Make-Whole: Various Approaches (cont d) Calpine II: On appeal, the District Court, In re Calpine, held that the bankruptcy filing rendered the no-call provision in the notes unenforceable so that the debtor did not incur any liability for repaying the notes. The District Court concluded that no payment should be awarded under the make-whole provisions because they were not triggered according to their terms. Importantly, the Court held that the Notes could have provided for the payment of premiums in the event of a payment pursuant to acceleration. Without such a provision, however, no damages were recoverable after acceleration 23 The Acceleration Issue and Its Impact on the Make-Whole: Various Approaches (cont d) In re Chemtura Corporation: In this case, which involved the approval of a settlement of the make-whole claim, the court noted that neither indenture contained make-whole provisions that specifically addressed the payment of a premium upon the filing of a Chapter 11 case and the resulting automatic acceleration to maturity. The court noted that it was at least arguable in bankruptcy cases the make-whole premiums and damages for breach of no-call are proxies for unmatured interest, but recognized that majority view disfavored disallowance on this basis. The Chemtura case involved the approval of a settlement agreement in as much as the holders were to receive a portion of their asserted make-whole claims. The court determined that settlement overall was reasonable 24 12

14 The Acceleration Issue and Its Impact on the Make-Whole: Various Approaches In re Chemtura Corporation (cont'd): Generally, if supported by proper language and the intended economic bargain, the lender should be able to receive as an unsecured claim damages arising from the breach of the nocall provision, as noted in Calpine I, or the economic benefit of the bargain provided by the make-whole as recognized in In re Premier Entertainment Biloxi LLC, In re Chemtura Corporation and Trico Services. However, care should be taken to make sure all bases are covered, that one conforms with the provisions of the documents as noted by the court in Calpine II and that the documents clearly provide for the make-whole as the Solutia case so articulated. With those principles in mind, the enforceability of make-wholes in bankruptcy should be assured, as recognized in Trico Services 25 Settlement Payment Exception to 546(e) of the Bankruptcy Code Two cases in 2011 confirmed that the early redemption of notes, whether public or private, constitutes a "settlement payment," which is exempt from preference actions under 546(e) of the Bankruptcy Code Enron Creditors Recovery Corp. v. Alfa, S.A.B. de C.V. (In re Enron Creditors Recovery Corp.), 651 F.3d 329 (2d Cir. 2011): Enron had drawn down its $3 billion bank revolver to redeem more than $1.1 billion of its commercial paper prior to their maturity at prices well above market during the preference period (90 days prior to its bankruptcy filing) The Second Circuit held that the 546(e) "safe harbor" extends to an issuer s redemption of public notes prior to maturity through means of the DTC, regardless of the nature of, the motivations behind, or the circumstances surrounding such redemption 26 13

15 Settlement Payment Exception to 546(e) of the Bankruptcy Code (cont d) Official Comm. of Unsecured Creditors of Quebecor World (USA) Inc. v. Am. United Life Ins. Co., 453 B.R. 201 (Bankr. S.D.N.Y. 2011): Quebecor redeemed $376 million of private notes at face value plus make-whole during the 90-day preference period. Unlike Enron's early redemption effected through the DTC, the Quebecor noteholders mailed their private notes directly to the company for cancellation over a period of months following their agreement with the company to accept early redemption The Court held that, under Enron, a repurchase of notes qualifies for the 546(e) exemption "without having to show anything more than the transfer in question was made to a financial institution to complete a securities transaction." The Court concluded that even where the redemption of private placement notes was effected directly by the debtor, without the assistance of a clearing agency, the 546(e) safe harbor provision still applies 27 Credit Bidding in Bankruptcy Overview of Section 363(k) Secured Creditor s Right to Credit Bid Motion for Sale of Assets Pursuant to 11 U.S.C. 363(b) Plan of Reorganization Pursuant to 11 U.S.C. 1123(a) (5)(D) Section 363K At a sale under subsection (b) of [section 363] of property that is subject to a lien that secures an allowed claim, unless the court for cause orders otherwise the holder of such claim may bid at such sale, and, if the holder of such claim purchases such property, such holder may offset such claim against the purchase price of such property

16 Credit Bidding in Bankruptcy (cont d) Overview of Section 363(k) (cont'd) Protection against undervaluation of collateral Not an absolute right (side-agreement, chill bidding, etc.) Free and Clear Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (B.A.P. 9 th Cir. 2008) Free and Clear subject to later challenge? Impact on 363 Sales in 9 th Circuit State Law Issues In re 155 East Tropicana LLC (Hooter s Hotel and Casino) NRS (1)(c) [Nevada Assembly Bill (AB) 273] Deficiency claims limited to consideration paid for debt. Expanding application to commercial loans and retroactive Federal Implications Contracts Clause and FIRREA 29 Credit Bidding in Bankruptcy (cont d) Sale of Assets Pursuant to Plan of Reorganization In order to force secured creditor to accept treatment under a proposed plan, debtor must satisfy one of three alternatives provided under 11 U.S.C. 1129(b)(2)(A) Maintain secured creditor s liens in its collateral with plan payments equal to present value of such creditor s allowed claim Allow secured creditor to credit bid at sale, or Provide secured creditor with indubitable equivalent of such allowed claim 30 15

17 Credit Bidding in Bankruptcy (cont d) Credit Bidding Denied Indubitable Equivalent Value Scotia Pacific Co. v. Official Unsecured Creditors Comm. (In re Pacific Lumber Co.), 584 F.3d 229 (5th Cir. 2009) (current value of growing timberlands). In re Philadelphia Newspapers, LLC, 599 F.3d 298 (3rd Cir. 2010) (proceeds from auction of collateral). What does it mean? Credit Bidding Must Be Allowed in Sale of Collateral under Plan River Road Hotel Partners, LLC v. Amalgamated Bank (In re River Road Hotel Partners, LLC), 651 F.3d 642 (7th Cir. 2011) (indubitable equivalent violates purpose of section 363(k)). U.S. Supreme Court to decide in RADLAX Gateway Hotel, LLC v. Amalgamated Bank, case no Bankruptcy Remote Vehicles: How Remote Are They? Recent cases to consider: The General Growth undercutting of the independent director: In upholding the bankruptcy petitions filed by the SPEs approved by newly appointed directors who replaced the original independent directors, the court made some significant findings The court found that, under Delaware law, the independent directors owe their duties to the corporation and ordinarily the shareholders and not the lenders even if financial distress may be imminent The court found the firing of the original independent directors was not inconsistent with the operative documents but was an appropriate execution of the rights of shareholders to change independent directors 32 16

18 Bankruptcy Remote Vehicles: How Remote Are They? (cont d) Recent cases to consider (cont'd): Open issues left by General Growth: Would an original independent director with expertise be immune from the precipitous actions of a corporate parent and how would such a director be compensated? What, if any, limitations can be placed on the termination of a director or manager in the operative documents? What, if any, limitations may be placed on actions of a manager or director in the operative documents? And Are there better structures for SPEs to provide the expectations of the lenders? 33 Bankruptcy Remote Vehicles: How Remote Are They? (cont d) Recent cases to consider (cont'd): The Zais case upholding the involuntary bankruptcy petition filed by a senior secured noteholder against a CDO entity based in the Cayman Islands: The court ignored the Cayman Island address for registration purposes, noting the issuer-debtor conducted most business in the United States and held all of its property (securities and cash) there The court declined to dismiss the case as a bad faith attempt to get around the indenture s requirements of twothirds noteholders consent for the disposal of collateral and restrictions against filing by junior noteholders 34 17

19 Bankruptcy Remote Vehicles: How Remote Are They? (cont d) Significance of Zais: Unless decision overturned, every foreign-based CDO issuer entity that keeps its collateral or conducts business in the United States is potentially subject to the jurisdiction of the U.S. bankruptcy courts Junior noteholders in CDOs may be at risk of losing rights found in the indenture where unanimous consent of all holders not required for filing Senior noteholders can rewrite the original deal by placing the entity into bankruptcy and submitting a plan to liquidate their collateral 35 Bankruptcy Remote Vehicles: How Remote Are They? (cont d) Significance of Zais (cont d): Raises issue of whether non-debtors may contest an involuntary petition Assumes indentures are executory contracts contrary to established law Suggest importance of requiring independent director approval for bankruptcy filing 36 18

DISTRESSED DEBT REPORT

DISTRESSED DEBT REPORT Fall 2011 A Publication of the Distressed Debt Group COURT STRICTLY INTERPRETS WHAT CONSTITUTES THE IMPAIRMENT OF ASSIGNED CLAIM UNDER A CLAIM ASSIGNMENT AGREEMENT The District Court