I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY

i Economic overview

The past year – from 1 May 2019 to 1 May 2020 – has been a tale of two economies. 'It was the best of times, it was the worst of times . . .'2 The US unemployment rate for February 2020 was 3.5 per cent – the lowest since 1970.3 In late February 2020, the stock market (i.e., the S&P 500) hit an all-time high of nearly 3,400.4 Annualised real GDP growth was around 2 per cent to 3 per cent throughout 2019.5

And then the novel coronavirus, which causes the disease covid-19, which had already begun impacting Asia in January 2020, hit the United States – and the rest of the world – hard.6 For example, on 20 March 2020, the governor of New York State announced that all residents must stay home to the maximum extent possible.7 By 26 March 2020, the United States had the most confirmed covid-19 cases in the world.8 The US unemployment rate for March 2020 was recorded as 4.4 per cent, based on about 700,000 lost jobs,9 and was headed higher as millions of workers filed for unemployment insurance in late March and April.10 From 15 March to 25 April 2020, 30.3 million people probably lost their jobs, erasing all jobs created since the 2008 financial crisis.11 In late March 2020, the S&P 500 dipped as low as around 2,200 – a fall of around 35 per cent within one month – before recovering somewhat.12 If these events were not enough, a Russian and Saudi Arabian oil dispute threatened to dramatically increase the supply of oil at a time when demand was dramatically reduced as a consequence of the coronavirus pandemic. This caused oil prices to fall to the point where the prices of expiring futures contracts became negative (i.e., traders struggled to store oil so they were willing to pay others to take delivery instead).13 Thus, at the same time that various sectors of our economy were devastated by the effects of the covid-19 pandemic (e.g., hotels, airlines, cruise lines), oil and gas exploration companies and related service providers were particularly hard hit.14

Prior to the covid-19 crisis, financing conditions remained loose, with covenant protections in particular continuing to erode as 80 per cent of leveraged loans were estimated to be 'covenant-lite', and loan documents contained 'add-backs' to earnings before interest, taxes, depreciation and amortisation weakening its relevance in monitoring financial health.15 Since the crisis began, borrowers have begun drawing down the amounts available to borrow under their lines of credit, and where there were covenant breaches or lenders were otherwise in a position to modify loan terms, they began considering adding provisions such as 'anti-cash hoarding' that would strengthen their positions.16

ii Bankruptcy filing trends

Following the Great Recession, since 2010, the number of bankruptcy filings had been consistently downward or steady, and as of 2018 was hardly changed from its 1990 level.17 (From 2018 to 2019, both business and non-business bankruptcy filings rose slightly, from 22,232 and 751,186, to 22,780 and 752,160, respectively – an overall increase from 773,418 to 774,940 of less than 1 per cent. Combining (to the extent applicable) both business and non-business cases, Chapter 7 (liquidation) and Chapter 12 (family farm) cases rose slightly, while Chapter 11 (reorganisation) and Chapter 13 (individual debt adjustment) cases declined slightly.18) In spite of massive stimulus measures by both Congress and the Federal Reserve,19 given the massive disruption caused by covid-19 to everything from hotels, to clothiers, malls, international trade, drillers, government coffers and more,20 to say nothing of the human toll in death and sickness, bankruptcy filings are likely to rise.21

During the economic expansion, Chapter 11 filings tended to be in industries such as retail and energy that faced overarching business challenges such as trends towards online shopping and low oil prices, or in businesses with idiosyncratic problems (e.g., alleged fraud). Now that the economic cycle appears to have turned, debtors and creditors are facing difficult negotiations in a wider range of industries, although some have been impacted worse than others (e.g., tourism versus medical manufacturing), and many situations may result in out-of-court loan amendments, debt equitisations or liquidations, rather than bankruptcy filings.

Given the ongoing problems in the energy sector in 2019, it should not be surprising that Texas continued to be a leading venue for bankruptcy filings, challenging the traditional strength of New York and Delaware. In 2019, the Southern District of New York (i.e., Manhattan) had 610 Chapter 11 cases, while Delaware had 595. The Southern District of Texas, which includes Houston, was the third most common venue, with 334 cases, including major cases such as Weatherford International PLC, EP Energy Corporation and Sanchez Energy Corporation.22

As for bankruptcy practice, 2019 saw more of the 'super-fast' pre-packaged23 bankruptcy cases (of only a handful of days in duration at most) – particularly FullBeauty Brands and Sungard – that had previously been rare events (e.g., Bluebird Bus Company in 2006 and Roust Corporation in 2016). While these cases do not work in all circumstances, and require significant coordination and planning, they present an intriguing option for streamlining consensual cases. It remains to be seen whether 'super-fast' bankruptcy cases will increase or decrease in popularity in a post-coronavirus world.24

II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK

i Statutory overview

Title 11 of the United States Code (i.e., the Bankruptcy Code) governs bankruptcy cases filed in the United States.25 The Bankruptcy Code is premised on the theory that an honest debtor deserves a fresh financial start and thus relief from its unsecured debts. The Bankruptcy Code endeavours to allow for this fresh start, while at the same time balancing the rights of the debtor's various constituents as fairly and equitably as possible. The Bankruptcy Code was enacted by Congress in 1978 and has been amended several times – including notably in 2005 and also (as discussed below) in 2019.

The filing of a petition by a debtor (for business entities, this is usually a petition for relief under either Chapter 7 or Chapter 11 of the Bankruptcy Code) commences a bankruptcy case. There is no requirement that a debtor be 'insolvent' to commence a voluntary bankruptcy case. Rather, case law has developed to require only that a petition be filed in 'good faith'. Immediately upon filing a petition, a debtor obtains the benefit of an automatic stay. The stay prohibits most creditors from taking actions against the debtor and its property on account of pre-petition liabilities or agreements, without express authorisation from the bankruptcy court.26 Thus, the stay gives the debtor the necessary breathing space to complete its reorganisation or orderly liquidation consistent with the terms of the Bankruptcy Code.

A company hoping to reorganise or liquidate with its management in place will file a petition under Chapter 11; a company with no option but to liquidate under court supervision will commence a Chapter 7 case. Banks, savings and loan associations, insurance companies, stockbrokers and commodity brokers are not eligible to file for Chapter 11 protection. In general, these types of entities are liquidated under other federal or state winding-up laws or, in the case of stockbrokers and commodity brokers, under their own subchapter of the Bankruptcy Code.27

Unlike many insolvency regimes in other countries, in a Chapter 11 case, the debtor's management and directors generally remain in place and continue to manage the business and guide the restructuring (the filing entity is referred to as a debtor-in-possession).28 A trustee is rarely appointed to oversee a Chapter 11 debtor's operations unless the situation suggests that one is necessary (e.g., due to fraud or mismanagement).29 By contrast, in a Chapter 7 case, a trustee is appointed to manage the liquidation.

The bankruptcy court judge is typically heavily involved in the bankruptcy case. Indeed, many of the debtor's activities (e.g., financing, major asset sales, plan of reorganisation) must be brought to the bankruptcy court judge for approval. Also, the US Trustee (UST), a representative of the Department of Justice, acts as a watchdog over the debtor's case – particularly at the outset before creditors have had time to organise. In a Chapter 11 case, the debtor-in-possession's actions will often be subject to scrutiny by one or more official committees appointed by the UST.30 The most common official committee is one composed of unsecured creditors. In larger cases, the committee typically retains its own professionals (including counsel) to represent the unsecured creditors' interests, and the debtor's estate pays for the cost of these professionals. In some cases, equity holders or retirees will convince the UST to appoint a separate committee for their constituency, especially in cases in which it appears that the debtor might be solvent. Other official committees can be formed to represent other creditor groups, although such committees are rare, except in cases driven by mass torts such as asbestos liability.

The goal of a debtor in commencing a Chapter 11 case is to confirm and consummate a Chapter 11 reorganisation plan. Unless a trustee has been appointed, the debtor initially has the exclusive right to file a reorganisation plan.31 The exclusivity period, however, is not indefinite. Indeed, with the bankruptcy court's permission, plan exclusivity can be extended, but only to a maximum of 18 months after the petition date.32

Before a debtor can solicit votes on its reorganisation plan, it must provide creditors with a disclosure statement (generally, that has been approved by the bankruptcy court). The bankruptcy court does not approve the contents of the disclosure statement; rather, its role is to ensure that the disclosure statement contains adequate information to permit a creditor to make an informed decision to accept or reject the related plan. Following approval of the adequacy of the disclosure statement, the debtor may solicit votes from creditors and equity holders entitled to vote on the plan.33 Parties who are entitled to vote on the plan are those whose debt claims or equity interests are being affected by the plan, unless they receive no distribution, in which case they are deemed to have rejected the plan. Groups of creditors and equity holders will be categorised into different classes. If the requisite votes are received, the debtor will seek confirmation, or approval, of the plan by the bankruptcy court.

Aside from the required votes, the most critical requirement of the Bankruptcy Code for the plan is the 'best interests of creditors test'. This test requires that each impaired (i.e., affected) creditor and equity holder either accept the plan or receive under the plan a distribution at least as much as it would receive if the debtor were to liquidate rather than reorganise.34 In some cases, the test requires valuation of property given to dissenting creditors. Because valuation is a complex and fact-intensive undertaking, a 'best interests fight' can lead to time-consuming and expensive litigation.

The second critical requirement is that at least one class of claims votes for a plan if there is a class of impaired – or affected – claims. For this vote, the votes of insiders do not count.35 A class will be deemed to accept the plan if two-thirds in amount and more than 50 per cent in number of voting creditor class members vote in favour of it. In the event that equity security holders are proposed to receive a distribution, classes of equity security holders must vote for the plan by at least two-thirds in amount.36

Usually, at least one class will either affirmatively reject or be deemed to have rejected the plan because that class is not slated to receive a distribution under the plan. In those cases, the debtor can confirm its plan by cramming down these creditors or equity security holders. Cramdown requires the debtor to prove that the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired under the plan and has not accepted it.37 The 'fair and equitable' test is fairly straightforward and follows an absolute priority waterfall, under which secured creditors are entitled to full payment (at least over time) before unsecured creditors and equity holders receive a distribution.38 Despite this rather simplistic concept, valuation and issues regarding the present value of future payments to secured creditors are often hotly contested. The unfair discrimination requirement is more difficult to grasp but, at a minimum, it prevents creditors and interest holders with similar legal rights from receiving materially different treatment under a proposed plan without compelling justification for doing so.

Confirmation of a reorganisation plan provides a reorganising Chapter 11 debtor with the fresh start that most debtors hope to obtain by reorganising under the Bankruptcy Code. The discharge that the debtor receives under the Bankruptcy Code is key to the fresh start. This discharge bars creditors and equity security holders from looking to the debtor for satisfaction of claims owed to them prior to the commencement of the Chapter 11 case. Rather, their sole source of recovery is the distribution proposed to be made to them under the plan. Corporate debtors liquidating under either Chapter 7 or Chapter 11 of the Bankruptcy Code, however, do not obtain a discharge.

ii Absolute priority rule

A basic premise under the Bankruptcy Code is that, in the absence of consent (obtained through the votes of classes of claims and interests), distributions to creditors must follow the 'absolute priority rule'. In applying this rule, lower-priority creditors may receive a distribution only if more-senior classes are being paid in full. Secured creditors are first in the priority scheme. Secured claims typically include pre-petition collateralised loans and trade obligations with security interests (such as mechanics' liens and materialmen's liens). Administrative expense claims are second in priority. Included in this bucket are claims relating to the post-petition operations of the debtor, and 'cure' claims that arise when debtors 'assume', or agree to be bound by, pre-existing contracts. The Bankruptcy Code also elevates to administrative expense priority status certain pre-petition claims of vendors of goods that would otherwise be treated as general unsecured claims. Next in order of priority come priority claims, which include certain pre-petition wages and commissions, employee benefit plan contributions, unsecured claims in connection with certain prepayments for goods or services from the debtor (e.g., the pre-petition purchase of goods laid away with the debtor, up to a cap) and certain taxes. A Chapter 11 reorganisation plan must provide for payment of administrative expense claims and priority claims in full on the plan's effective date, although individual creditors may instead agree to a payout over time.

General unsecured claims, in terms of priority, come after secured claims, administrative expense claims and priority claims, but before subordinated debt claims.39 Equity interests (including equity-related damage claims that are treated as equity) are lowest on the distribution waterfall and, as a result, equity holders rarely receive a bankruptcy distribution.

iii Duties of directors

In the United States, the duties of directors are defined by state law. In particular, Delaware is the most common state of organisation. Businesses can take a number of forms, including the corporation (which is under the control of a board of directors), the partnership or the limited liability company (or LLC) (which shares the characteristics of both a corporation and a partnership, and can be managed either by the owner – member-managed – or by a manager or board of managers – manager-managed).

The seminal ruling in North American Catholic Educational Programming Foundation, Inc. v. Gheewalla, issued by the Supreme Court of Delaware in 2007,40 explained that, for Delaware corporations, 'It is well established that the directors owe their fiduciary obligations to the corporation and its shareholders.' Shareholders rely on directors acting as fiduciaries, whereas creditors are protected by legal mechanisms including contract law (and the terms of their contracts), security interests, clawback actions and bankruptcy law. For a solvent corporation (even one operating close to insolvency – the 'zone of insolvency' that Gheewalla explained was legally irrelevant), the focus of directors is to 'discharge their fiduciary duties to the corporation and its shareholders by exercising their business judgment in the best interests of the corporation for the benefit of its shareholder owners'.

Per Gheewalla, the fiduciary duties of the directors to the corporation do not change because of the corporation's insolvency. However, the creditors 'take the place of the shareholders as the residual beneficiaries of any increase in value'. Therefore, creditors become able to sue the directors 'derivatively' (i.e., on behalf of the corporation) – but not 'directly' (i.e., on their own behalves) – for alleged breaches of fiduciary duties.

For an LLC, governance matters are flexible and depend on the contents of the limited liability company agreement (also called an LLC agreement or operating agreement), which represents an agreement among the members of the LLC.41 This agreement can expand, restrict or eliminate the fiduciary or other duties of members, managers and other persons to the LLC, except that the agreement 'may not eliminate the implied contractual covenant of good faith and fair dealing'.42

Accordingly, depending on the terms of the LLC agreement, fiduciary duties may largely be eliminated. Moreover, Delaware LLCs differ from Delaware corporations in that LLC creditors do not have standing to sue members or managers, either derivatively or directly. Under the statute, only a member (or an assignee of an LLC interest, who is entitled to share in profits and losses but has not necessarily become a member43) is a proper plaintiff to bring a derivative action.44

What are these duties that the aforesaid parties may be able to litigate to enforce? There are multiple duties, and their complexities are beyond the scope of this review. The two key duties are the duty of care and the duty of loyalty (the latter of which includes the duty of good faith). Although under certain circumstances a higher standard of review can apply (e.g., if a director had a conflict of interest), generally when a court reviews corporate decision-making, it focuses on process rather than outcome and applies the business judgment rule – the presumption that in making a business decision the decision-maker acted on an informed basis, in good faith and in the honest belief that the action taken was in the best interests of the company. If the business judgment rule applies, the business decisions of disinterested directors will not be second-guessed by a judge applying his or her judgment ex post if they can be attributed to any rational business purpose.45

Finally, what is the ultimate point of corporate governance from a Delaware perspective? The goal of the fiduciary is to maximise long-term corporate value, rather than, for example, balancing that interest with the interests of employees or other constituents, or furthering social or environmental considerations.46 Even for a company in financial difficulty, a value-maximising board of directors is not obliged to shut down operations or otherwise minimise risk, but neither should it buy lottery tickets or otherwise take unwise, risky bets at the expense of creditors for the benefit of out-of-the-money stockholders.47

iv Treatment of contracts in bankruptcy

A debtor generally has the power to determine those executory contracts and unexpired leases by which it will continue to be bound following its reorganisation. A contract is usually found to be executory when both the debtor and the non-debtor party to the contract have material performance obligations outstanding. If the debtor chooses to assume (or keep) a contract, it will be bound under all the terms of the agreement. Alternatively, if the debtor no longer seeks to be bound by the agreement, it will reject it. Upon rejection of a contract, the debtor is no longer required to perform and the contract is deemed breached as of the date that the bankruptcy commenced. Damages resulting from such a breach are referred to as rejection damages and are generally given low status in the sequence of priority of payments (i.e., prepetition general unsecured claims). Under certain circumstances, a debtor may be able to assign its interest in a contract or lease to a third party.48

In the event that a debtor does not assume an agreement, the default option under the Bankruptcy Code is rejection.49 The deadline to make the assumption or rejection decision with respect to executory contracts and unexpired leases (other than unexpired leases for non-residential real property) is the date that a Chapter 11 plan is confirmed by the bankruptcy court. The deadline for a debtor to assume or reject an unexpired lease for non-residential real property can be much sooner (i.e., generally 210 days after commencement of the bankruptcy case, absent landlord consent). In a case where leased real property locations number in the hundreds, as in large retail cases, the debtor should make preliminary decisions on which leases it wants to assume or reject prior to commencing its bankruptcy case, and thereby attempt to avoid assuming leases it may not ultimately need.

v Security interests

In the United States, Article 9 of the Uniform Commercial Code (Article 9 and the UCC, respectively), as adopted by each of the 50 states, generally applies to any security interest created by contract in personal property and fixtures to secure payment or other performance of an obligation.50 There are three components to the creation and enforcement of a security interest under Article 9: attachment, perfection and priority. Under Article 9, a security interest attaches to collateral at the moment that it becomes enforceable against the debtor. Only an attached security interest may be perfected under Article 9. Perfection is the process by which a secured party gives public notice of its security interest in collateral. A perfected security interest will prevail over claims of an interest in collateral by other parties (including liens of creditors using the judicial process to obtain liens on the collateral). State law, generally uniform throughout the United States, will dictate the method for perfecting a consensual security interest.

In many cases, two or more creditors may have security interests in the same collateral. In such cases, Article 9 provides general rules as to the ranking of security interests – that is, which security interest takes priority over the others. As a general rule, an earlier-secured party will prevail over later-secured creditors. There are, however, exceptions to this general rule and, therefore, practitioners must refer to Article 9 in the applicable jurisdiction relevant to a particular transaction or consult local counsel.

Article 9 has a critical interplay with the Bankruptcy Code. Upon the bankruptcy filing, the debtor steps into the role of a hypothetical lien creditor.51 This means, in general, that it may void any unperfected security interest. Accordingly, it is critically important for secured creditors to ensure that their liens are properly perfected, especially when transacting business with a distressed company on the verge of bankruptcy. Again, while there are some variations in the details, security interests are usually perfected by filing in a governmental registry or by taking possession of the collateral.

Whereas the UCC, which deals with the creation of security interests in personal property, is fairly uniform as adopted in all 50 states, security interests or mortgages in real property are controlled by different laws in each of the 50 states. However, most state laws provide for the recording of mortgages in local governmental offices. As with security interests in personal property, a bankruptcy trustee or debtor-in-possession can avoid improperly recorded mortgages by stepping into the shoes of state-law creditors.

vi Clawback actions

The Bankruptcy Code gives a debtor certain avoidance powers to recover property transferred by the debtor to third parties before the petition date. Generally, these avoidance actions fall into two categories: the transfers had the effect of preferring one creditor over others; or the transfers were made for the purpose of hindering, delaying or defrauding creditors from collecting on their claims.

'Transfer' is defined broadly and encompasses payments as well as the granting and perfection of liens. Transfers that the debtor can prove to be fraudulent or preferential can be treated as voidable transfers. In many instances it is unnecessary to prove that the debtor or the recipient, or both, had a wrongful motive – the Bankruptcy Code is concerned only with ensuring equal treatment of creditors, even if that means unwinding well-intentioned arm's-length transfers of property. That said, the recipient of a voidable transfer has certain affirmative defences to shield all or a portion of the transfer from the debtor.

The most common voidable transfer is referred to as a preference. Preferences are those payments that a debtor makes to a pre-petition creditor on the eve of the bankruptcy filing52 that allow such creditor to receive more on account of its claim than it would have received had it waited in line with other creditors and received its distribution in a hypothetical liquidation of the debtor pursuant to Chapter 7 of the Bankruptcy Code. The amount that the creditor received in connection with the transfer will be voidable, subject to certain defences, such as receipt of the transfer in the ordinary course of business. To the extent that the transfer is avoided, the preference recipient would have a claim against the debtor.

Fraudulent transfers that can be recovered include transfers made with the actual intent to hinder, delay or defraud creditors. Recoverable fraudulent transfers also include transfers for inadequate consideration when the debtor (transferor) was insolvent, undercapitalised or unable to pay its debts as they became due. The Bankruptcy Code has its own fraudulent transfer provisions, but the debtor-in-possession may also prosecute such claims under similar state law provisions.

vii Pre-planned bankruptcies: a quick escape from an all-out bankruptcy

Pre-planned bankruptcies continue to be a useful tool for debtors as they try to manage the time and expense of a US bankruptcy filing. There are two types of pre-planned bankruptcies: pre-packaged and pre-negotiated bankruptcies. Pre-packaged bankruptcies (pre-packs) are typically utilised by companies seeking to right-size their capital structures (e.g., to address maturities or deleverage from existing secured lender or bondholder indebtedness). The pre-packaged bankruptcy mechanism is not useful for companies seeking to achieve an operational turnaround or that need to modify other significant liabilities such as pension, retiree medical or mass tort liabilities.

In a pre-pack, the Chapter 11 case is commenced after the plan proponent has obtained the requisite votes to approve a reorganisation plan.53 In pre-negotiated plans, the creditors entitled to vote on the plan indicate their support for the plan before the commencement of the case,54 often in the form of a lock-up agreement, but the vote occurs following the commencement of the case. It is common for pre-packs to last less than 60 days. Absent complications, pre-negotiated bankruptcies will take 45 to 60 days longer than a pre-pack. These periods are far shorter than the duration of Chapter 11 cases that are not pre-planned or that require operational fixes.

The pre-pack concept is an important negotiation tool as companies attempt to obtain concessions from their constituents. The requirement to achieve an accepting class of creditors (and, therefore, to bind non-accepting class members) under the Bankruptcy Code is two-thirds in amount and greater than one-half in number of those creditors who cast a vote. If acceptance is received from almost all of the creditors from whom votes are solicited, companies will often consummate the restructuring without filing for bankruptcy. Moreover, the threat of a pre-pack makes it less likely that a filing will be required, because there is little reason for creditors to withhold their acceptance once the company has received acceptances sufficient to satisfy the minimum threshold for an accepting class in the Chapter 11 context.

III Recent Legal Developments

i Bankruptcy Code revisions improve restructuring for small businesses

In August 2019, the United States adopted several changes to the Bankruptcy Code. Most notable was the Small Business Restructuring Act of 2019 (SBRA), which became effective in February 2020. For various reasons including cost, complexity, deadlines and disclosure requirements, Chapter 11 of the Bankruptcy Code, which many consider the gold standard for large corporate reorganisations, is problematic for small businesses. Also, notably, for many small businesses, ownership and management are the same, whereas for a large business, stockholders generally take a more passive role, electing the board of directors, which hires and supervises professional management. Accordingly, while a liquidation may not be attractive to an owner–manager, neither is a reorganisation that results in a loss of both upside and control.

Accordingly, the SBRA added a new subchapter V to Chapter 11. If a debtor with less than US$2,725,625 elects,55 it may elect to proceed under subchapter V. Certain procedures are streamlined, including that generally no creditors' committee is appointed and no separate disclosure statement is necessary.56 Furthermore, the rules regarding creditor voting on a plan are modified, such that no impaired accepting class is needed, if the plan 'does not discriminate unfairly, and is fair and equitable, with respect to each class of claims or interests that is impaired under, and has not accepted, the plan'. Being fair and equitable includes that the plan provides that all projected disposable income of the debtor will be applied to make payments under the plan for at least three and up to five years.57

In 2020, the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) amended subchapter V by raising the eligible debt limit to US$7,500,000. However, this provision was designed to sunset after one year.58 It remains to be seen how widely used subchapter V becomes, whether it will accomplish the aims of its drafters, and whether the success of the new law and of the raised eligibility limit encourages Congress to expand eligibility permanently. In 2014, the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11 issued a report flagging problems with Chapter 11 for small and medium-sized enterprises. It recommended special procedures for debtors with balance sheets of up to US$10 million (and up to US$50 million with court approval), including no creditors' committee and the possibility for the pre-existing owners to keep ownership interests.59 Ideally, the ideas behind the SBRA and the commission report will continue to be implemented on an expanded basis.

Contemporaneous with the SBRA were other new bankruptcy law revisions benefiting family farmers, veterans and national guard and reservist members.60

ii Case law developments

Violation of the discharge injunction

As mentioned above, confirmation of a plan of reorganisation under Chapter 11 discharges the debtor from any debt that was resolved by the bankruptcy process.61 Accordingly, creditors are enjoined from attempting to collect on discharged debts.62 If a creditor persists in collection efforts, the bankruptcy court can sanction the creditor with a civil contempt citation.63 In Taggart v. Lorenzen,64 the US Supreme Court answered the question of when a court may hold a creditor in contempt. The Supreme Court decided that a court could find contempt if there was no fair ground of doubt as to whether the discharge injunction barred the creditor's conduct – in other words, that there was no objectively reasonable basis for concluding that the creditor's conduct might be lawful. This was a more permissive standard for creditors than a strict liability standard (proposed by the bankruptcy court in the case) where the creditor's beliefs were irrelevant, so long as the creditor was aware of the discharge order and intended the actions which violated it. It was, however, a more restrictive standard for creditors than the standard proposed by the intermediate appellate court, which was a subjective rather than objective standard, where a court could not find contempt if the creditor had a good faith belief that the discharge order did not apply to the creditor's claim, even if such belief was unreasonable.

Violation of the automatic stay: action versus inaction

Another issue facing courts is whether inaction violates the automatic stay (which covers numerous acts in addition to collection, such as 'any act to obtain possession of property of the estate or of property from the estate or to exercise control over property of the estate').65 Is inaction a form of action? In 2019, the US Supreme Court agreed to hear the appeal of City of Chicago v. Fulton, which was scheduled for hearing for April 2020. Due to covid-19, the hearing was rescheduled until 2020–21. The question presented is whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation to return that property. Currently, the intermediate appellate courts are divided on the issue. Fulton specifically involves the Seventh Circuit (which includes the state of Illinois) practice of requiring the City of Chicago to turn over cars automatically that had been impounded for unpaid parking fines.66

At odds with Fulton, the Third Circuit (which includes Delaware) in late 2019 concluded that a creditor need not turn over repossessed property or face a contempt citation. In the case of Denby-Peterson,67 the debtor's car was repossessed by creditors after she defaulted on her car payments. She then filed for bankruptcy and demanded return of the car. That court decided that failure to return collateral is not an act to exercise control over property of the estate – and therefore not a stay violation. Further, the Denby-Peterson court decided that the turnover provision of Bankruptcy Code section 542(a) saying that a party 'shall deliver' property of the bankrupt estate to an estate representative is not self-executing. Rather, the court indicated that the debtor should follow Bankruptcy Rule 7001(1) and file an adversary proceeding (i.e., a self-contained trial within the bankruptcy case) to recover property.

Whether the Supreme Court upholds the Fulton court or sides with the Denby-Peterson court will ultimately affect the procedural burdens for debtors seeking use of their assets and whether a creditor in possession of collateral will be able to keep it during the important early days of a bankruptcy case.

When to appeal

The automatic stay was also involved in one of the Supreme Court's other recent cases. In Ritzen Group, Inc. v. Jackson Masonry, LLC,68 the defendant in a lawsuit filed for bankruptcy. The automatic stay put the lawsuit on hold. The plaintiff moved for relief from the automatic stay, but its motion was denied. The plaintiff did not appeal the denial; rather, it filed a proof of claim (a written statement setting forth a creditor's claim). The claim was later disallowed, and a plan of reorganisation was confirmed. The plaintiff then appealed the earlier denial of stay relief. The Supreme Court concluded that the appeal was untimely, having been filed after the 14-day window had closed.

The Supreme Court reasoned that orders are considered final and therefore appealable if they dispose of discrete disputes within a larger bankruptcy case. Unless a court enters an order without prejudice, indicating that it may revisit the issue (a fact pattern that was not applicable and that therefore the Supreme Court did not decide), an order denying stay relief represents the disposition of a proceeding that is distinct from resolution of claims. As distinct from non-bankruptcy civil litigation, where appeal is generally only made at the end of a case, bankruptcy constitutes an aggregation of individual controversies.

The lesson to creditors from Ritzen is not to sleep on their rights and to watch carefully for the proper time to raise appeals. However, the issue is complicated. If a party is too late to appeal, it will have lost its rights. But if a party is too early it will waste time and money pursuing inconclusive appeals. Litigation experience in both bankruptcy and appellate practice will pay dividends for clients, and counsel, facing this complexity.

Third-party releases: the Third Circuit's Millennium opinion

The previous edition of this review discussed in detail the Delaware district court opinion in Millennium Lab Holdings II.69 In late 2019, the Third Circuit affirmed the district court.70

Millennium was a medical testing company that borrowed money to pay a dividend, and then faced bankruptcy following a hefty fine from the government to settle allegations of improper billing practices. As part of a bankruptcy plan, the company and a majority of the lenders agreed that if old equity contributed back part of the dividend to pay the fine, and ownership of the company was transferred to the lenders, old equity would be released from further liability. However, one lender sued old equity for fraud.

The question presented was whether a bankruptcy court had the authority under the US Constitution to block this litigation by a non-debtor against another non-debtor. The appellate court concluded yes: the bankruptcy court could, in extraordinary cases, when necessary for a successful reorganisation, approve a reorganisation plan releasing claims against third parties.

The Millennium opinion has brought helpful clarity to two complicated topics – bankruptcy releases and bankruptcy constitutional jurisprudence – and is important in particular for stating clearly that courts in the Third Circuit are able to approve releases in extraordinary cases.

The Fifth Circuit clarifies administrative expense claims

As discussed above, the Bankruptcy Code elevates payment of certain administrative expense claims above other unsecured claims. In particular, administrative expenses include 'the actual, necessary costs and expenses of preserving the estate including wages, salaries, and commissions for services rendered after the commencement of the case'.71

The Whistler Energy case decided by the Fifth Circuit72 provides useful guidance on what satisfies that statutory definition. Whistler, a bankrupt energy company, rejected a contract with Nabors, a company that provided drilling equipment on Whistler's offshore oil platform. Whistler and Nabors then fought over whether Nabors was entitled to payment for the period between contract rejection and when Nabors removed the equipment. Nabors explained that it was not simply waiting around, but that delay pending regulatory approval had benefited Whistler.

The appellate court did not act as a fact-finder, but remanded to the bankruptcy court, saying that if the debtor had induced Nabors to wait, and had benefited from that wait, then Nabors could seek administrative expense treatment. Notably, the appellate court explained that even if Nabors did not, ex post, actually provide specific goods and services during the waiting period, its availability on the platform still could constitute, ex ante, a benefit to the debtor's estate.

When a contractual relationship ends due to contract rejection, the counterparty is stuck with unwanted costs.73 However, as the Whistler court explained, the Bankruptcy Code elevates claims arising from sale of post-petition goods and services, so that parties are willing to do business with the bankrupt. Whistler will help counterparties to rejected contracts navigate bankruptcy cases so that they can evaluate whether to support the debtor going forward, and be paid appropriately for their services, or whether to adopt a less accommodative approach.

New developments in Ultra Petroleum regarding make-wholes and impairment

The previous edition of this review discussed in detail the Fifth Circuit opinion in Ultra Petroleum.74 In late 2019, the Fifth Circuit withdrew the original opinion and substituted a new one, following a petition for rehearing.75

Due to a rise in oil prices, during the course of the bankruptcy the debtors went from insolvent to solvent. The debtors proposed to pay unsecured noteholders in full, but without the premium that would normally come from paying off notes ahead of maturity (variously called a make-whole, yield maintenance, redemption or prepayment premium). The noteholders objected, arguing that exclusion of the make-whole payment rendered them impaired (and thus, for example, eligible to vote).

Under Bankruptcy Code section 502(b)(2), unmatured interest is disallowed. The circuit court remanded for a determination in the trial court (i.e., the bankruptcy court) of whether a make-whole premium is unmatured interest. If so, failure to pay it would not constitute impairment for purposes of voting on the plan of reorganisation. Rather, it would be the Bankruptcy Code, and not the plan, that would be causing the impairment.

The circuit court also remanded to the trial court to consider whether a solvent debtor exception applied that would countermand section 502(b)(2). This exception is a pre-Bankruptcy Code principle, and whether it survived enactment of the Bankruptcy Code is disputable. If it survived, it might entitle creditors of a solvent debtor to all amounts owed under their contracts.76

In addition to the make-whole, creditors argued that they should be paid post-petition interest based on the default rates specified in their contracts – and not at the lower legal rate specified by statute. The circuit court remanded on this issue as well, for the bankruptcy court to consider what interest rate might apply.

The court's original opinion had included extensive dicta – which is not precedential – about make-wholes and the solvent debtor exception. This material was largely excised and left to the bankruptcy court to consider in the first instance.

While the solvent-debtor facts in Ultra Petroleum were rare, guidance about make-wholes is valuable to the lending markets in evaluating possible outcomes in downside scenarios and in litigation. The future of this case may continue to generate important case law. One thing that is clear from make-whole disputes is that judges consider the specific language of the debt documents. Choice of law provisions can also be relevant. So careful drafting in the first instance is important.

IV SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES

Section I above provides a broad perspective on bankruptcy trends from the past year. While avoiding repetition, some major bankruptcies of 2019 and 2020 year to date are listed below:77

  1. Utility companies: PG&E Corporation (aka Pacific Gas & Electric). This was, by far, the largest filing in 2019, and was discussed in the previous edition of this review.
  2. Oil and gas companies (or related service providers): numerous companies including Weatherford International, EP Energy Corp., Sanchez Energy Corp., Bristow Group, Halcon Resources Corp., Vanguard Natural Resources, Legacy Reserves, Alta Mesa Resources, Inc., Approach Resources Inc., PHI, Inc. and Southcross Energy Partners. Most filed in the Southern District of Texas. Coal also remained an area of distress (e.g., Murray Energy Holdings Co.).
  3. Retail: since the covid-19 crisis began, major retailers have filed for bankruptcy including J. Crew, Neiman Marcus and J.C. Penney. 2019 and 2020 had already seen numerous retail bankruptcies, including Pier 1, Modell's Sporting Goods, Shopko, Gymboree, Things Remembered, Payless Shoesource, Charlotte Russe, Diesel, Z Gallerie, Roberto Cavalli, Charming Charlie, A'Gaci, Avenue, Barneys New York, Fred's, Forever 21, Sugarfina and Destination Maternity.
  4. Mortgage lending: Ditech Holding Corp. and Stearns Holdings, LLC, both filed in the Southern District of New York.
  5. Telecommunications: Windstream Holdings and GCX Limited. Satellite companies have also filed for bankruptcy recently, including Intelsat SA, Speedcast International Limited and OneWebGlobal Limited.
  6. Milk: Southern Foods Group (aka Dean Foods) and Borden Dairy Company.

As can be seen from this list, energy and retail have been some of the most prominent, but by no means the only, distressed sectors. With government-mandated retail shutdowns, continued low oil prices and other economic distress, these same sectors are likely to see continued bankruptcies. As for venue, although the Southern District of New York and Delaware remain the most common venues for corporate bankruptcies, the Southern District of Texas is now a peer; it has seen a large share of energy company filings, as well as some major cases in other industries.

V INTERNATIONAL

In 2005, Congress added Chapter 15 to the Bankruptcy Code. Chapter 15 'incorporates the Model Law on Cross-Border Insolvency to encourage cooperation between the United States and foreign countries with respect to transnational insolvency cases'.78 Chapter 15 is based on a rigid recognition standard that one court labelled 'consistent with the general goals of the Model Law'.79 Thus, if a US bankruptcy court denies recognition of a foreign proceeding, section 1509(d) of the Bankruptcy Code provides that 'the court may issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from courts in the United States'.80 This has been interpreted to mean that Chapter 15 recognition is now the sole form of relief in the United States with respect to foreign insolvency proceedings.81

A foreign representative can obtain recognition under Chapter 15 of the Bankruptcy Code 'by the filing of a petition for recognition of a foreign proceeding under section 1515'.82 Two types of recognition of a foreign proceeding are possible under Chapter 15: recognition as a foreign main proceeding or recognition as a foreign non-main proceeding. Greater relief is available to a foreign representative of a foreign main proceeding than for a foreign representative of a foreign non-main proceeding.

In order for a US court to recognise a foreign proceeding as a main proceeding, the foreign proceeding must be 'pending in the country where the debtor has the center of its main interests' (COMI).83 COMI is not defined in Chapter 15. Section 1516(c), however, sets out a presumption that the debtor's registered office is the COMI '[i]n the absence of evidence to the contrary'.84 Moreover, one of the first bankruptcy decisions to analyse the matter defined a company's COMI as a debtor's '“principal place of business” under concepts of United States law'.85 Indeed, the concept of COMI is lifted from the European Union Convention on Insolvency Proceedings, where COMI is defined as 'the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties'.86

On the other hand, the Second Circuit has rejected the notion that COMI is coterminous with principal place of business, but has explained that the latter 'may be useful in adducing factors that point to a COMI'. The court has explained further: 'any relevant activities, including liquidation activities and administrative functions, may be considered in the COMI analysis'. The Second Circuit also provided more guidance in determining the relevant period to examine in establishing a debtor's COMI, concluding that the relevant analysis should be based on the debtor's 'activities at or around the time the Chapter 15 petition is filed . . . . But . . . a court may consider the period between the commencement of the foreign insolvency proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith'.87

If the required COMI is lacking, a foreign proceeding may be recognised as a non-main proceeding under Chapter 15 if the foreign proceeding is 'pending in a country where the debtor has an establishment'. 'Establishment' is defined in Chapter 15 as 'any place of operations where the debtor carries out a nontransitory economic activity'.88 Determining whether a debtor has an establishment 'is essentially a factual question, with no presumption in its favor'. At least one court has indicated that non-main recognition is generally only appropriate if a debtor has assets in a country.89 A 2019 opinion in In re Servicos de Petroleo Constellation S.A. is a particularly thorough example of the entity-by-entity COMI analysis that courts will perform to determine whether main or non-main recognition is appropriate.90

In 2019, a total of 130 Chapter 15 cases were commenced, an increase from 100 in 2018.91

VI Future Developments

As discussed in Section I, the covid-19 crisis has disrupted the US economy.

i Debtors and other contract parties seeking relief from obligations

One effect of covid-19 has been tenants (with closed stores and no cash flow) seeking not to pay rent (or reducing or deferring it). In particular, retailers have been scouring their leases for force majeure (or act of God) clauses that would free them from their obligations. If present, the clause ideally (for tenants) would be broad enough, either explicitly or implicitly, to cover pandemics or government-issued store closure orders, and not carve out rent as an unavoidable obligation.

M&A parties who agreed to buy or sell a business at a higher price than is now warranted are also looking for force majeure or material adverse change (MAC) or material adverse effect (MAE) clauses that would arguably allow one party to call off the deal. Expect litigation on these contractual disputes in the coming year.

Even if a contract party cannot rely on force majeure, it may attempt to argue using the general contract law concepts of 'impossibility of performance' and 'frustration of purpose', as well as other creative arguments. These are starting to appear in bankruptcy court. For example, retailer Pier 1 successfully sought an order authorising it to temporarily cease making payments to landlords because performance was excused if performance was made impracticable by an event (i.e., a store closure order) the non-occurrence of which was a basic assumption on which the contract was made.92

Debtors in a bankruptcy court are also pointing to Bankruptcy Code sections to advocate for relief from rent or other expenses, or for other relief. For example, bankrupt retailer Forever 21 is attempting to conduct going-out-of-business sales and close unwanted stores. However, such going-out-of-business sales are hardly practical when stores are closed. In seeking judicial relief related to such sales, and to lease rejections, Forever 21 pointed to the general equitable power of the court under Bankruptcy Code section 105(a) to 'issue any order . . . that is necessary or appropriate to carry out the provisions of' the Bankruptcy Code.93

In the bankruptcy case of retailer Modell's Sporting Goods, the debtor relied on another Bankruptcy Code provision in support of a court order to 'mothball' their operations and delay liquidation sales. The debtor pointed to section 305, which provides that the court 'may suspend all proceedings . . . if . . . the interests of creditors and the debtor would be better served by such . . . suspension'.94

Given the exigent circumstances, judges have been understandably sympathetic to these extraordinary motions. After all, the purposes of bankruptcy include rehabilitating businesses, saving jobs and maximising value for creditors, none of which can be accomplished if a debtor is unable to operate but forced to burn its remaining cash on ongoing expenses like rent. However, as might be expected, landlords have pushed back on what they characterise as debtor overreach exceeding the bounds of both contract law and Bankruptcy Code statutory interpretation. It has been said that 'bad facts make bad law', and the strains caused by covid-19 on both our legal system and our society generally will take years to work out. These cases will certainly lead to interesting disputes and precedents.

ii Regulatory changes spurred by covid-19

The government relief programmes that have resulted from the covid-19 crisis are also creating new law. In addition to statutes and regulations, case law is beginning to develop related to them. For example, the government's Paycheck Protection Program (PPP) provides funds to companies through the Small Business Administration (SBA). While the legislation contains no exclusion for bankrupt companies, the SBA, in related regulations, indicated that bankrupt companies were ineligible. Jilted debtors have been suing the SBA with some success, for example focusing on Bankruptcy Code section 525(a), which provides that the government may not deny or condition grants based on bankruptcy status, or on solvency prior to or during a bankruptcy case.95 This is just one example – new sources of law will continue to arise and be interpreted by the courts.

Existing laws may rise to the occasion as well. For example, commentators are optimistic that recent legislation, discussed in Section III, aimed at helping smaller businesses reorganise, will prove helpful to businesses struggling due to the pandemic.96

Finally, in a period of social distancing, technological innovation continues apace: individuals, companies and even judges are adopting remote communications technologies.97

Of these changes and innovations, only time will tell how they continue to evolve, and which will have staying power versus proving to be temporary.


Footnotes

1 J Eric Ivester is a partner and Edward Mahaney-Walter is an associate at Skadden, Arps, Slate, Meagher & Flom LLP.

2 Charles Dickens, A Tale of Two Cities 1 (Cosmopolitan Book Corp. 1921) (1859); available at https://www.loc.gov/item/22004431/.

3 US Bureau of Labor Statistics, 'Databases, Tables & Calculators by Subject'; available at https://data.bls.gov/timeseries/LNS14000000.

4 Yahoo Finance, 'S&P 500'; available at https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC.

5 Bureau of Economic Analysis, 'Gross Domestic Product'; available at https://www.bea.gov/data/gdp/gross-domestic-product.

6 Grace Hauck et al., USA Today, 'Three Months In: A Timeline of How COVID-19 Has Unfolded in the US', 22 April 2020; available at https://www.usatoday.com/in-depth/news/nation/2020/04/21/coronavirus-updates-how-covid-19-unfolded-u-s-timeline/2990956001/; Johns Hopkins University, 'Hubei Timeline'; available at https://coronavirus.jhu.edu/data/hubei-timeline; World Health Organization, 'WHO Timeline - COVID-19', 12 April 2020; available at https://www.who.int/news-room/detail/08-04-2020-who-timeline---covid-19.

7 Jorge L. Ortiz and Grace Hauck, USA Today, 'Coronavirus in the US', 9 April 2020; available at https://www.usatoday.com/story/news/nation/2020/03/30/coronavirus-stay-home-shelter-in-place-orders-by-state/5092413002/.

8 Bloomberg News, The Washington Post, 'U.S. Surpasses China for Most Infections Worldwide: Virus Update', 26 March 2020; available at https://www.washingtonpost.com/business/on-small-business/us-surpasses-china-for-most-infections-worldwide-virus-update/2020/03/26/48dc2f14-6fb4-11ea-a156-0048b62cdb51_story.html.

9 US Bureau of Labor Statistics, 'The Employment Situation—March 2020', 3 April 2020; available at https://www.bls.gov/bls/news-release/empsit.htm.

10 US Department of Labor, 'Unemployment Insurance Weekly Claims', 23 April 2020; available at https://oui.doleta.gov/press/2020/042320.pdf; US Department of Labor, 'Unemployment Insurance Weekly Claims', 30 April 2020; available at https://oui.doleta.gov/press/2020/043020.pdf.

11 Rachel Siegel and Andrew Van Dam, The Washington Post, '4.4 Million Americans Sought Jobless Benefits Last Week, as Economic Pain Continued Across the United States', 23 April 2020; available at https://www.washingtonpost.com/business/2020/04/23/economy-coronavirus-unemployment/; Rachel Siegel and Andrew Van Dam, The Washington Post, '3.8 Million Americans Sought Jobless Benefits Last Week, Extending Pandemic's Grip on the National Workforce', 30 April 2020; available at https://www.washingtonpost.com/business/2020/04/30/weekly-jobless-claims-unemployment/.

12 Yahoo Finance, 'S&P 500'; available at https://finance.yahoo.com/quote/%5EGSPC?p=%5EGSPC.

13 Sarah Hansen, Forbes, 'Here's What Negative Oil Prices Really Mean', 21 April 2020; available at https://www.forbes.com/sites/sarahhansen/2020/04/21/heres-what-negative-oil-prices-really-mean; US Energy Information Administration, 'Petroleum & Other Liquids: Spot Prices', 22 April 2020; available at https://www.eia.gov/dnav/pet/pet_pri_spt_s1_d.htm.

14 Mark Muro et al., Brookings, 'The Places a COVID-19 Recession Will Likely Hit Hardest', 17 March 2020; available at https://www.brookings.edu/blog/the-avenue/2020/03/17/the-places-a-covid-19-recession-will-likely-hit-hardest/; Grant Suneson, USA Today, 'Industries Hit Hardest by Coronavirus in the US Include Retail, Transportation, and Travel', 21 March 2020; available at https://www.usatoday.com/story/money/2020/03/20/us-industries-being-devastated-by-the-coronavirus-travel-hotels-food/111431804/.

15 Mayra Rodriguez Valladares, Forbes, 'Leveraged Loans and Collateralized Loan Obligations Are Riskier than Many Want to Admit', 22 September 2019; available at https://www.forbes.com/sites/mayrarodriguezvalladares/2019/09/22/leveraged-loans-and-collateralized-loan-obligations-are-riskier-than-many-want-to-admit/.

16 For an example of a discussion of borrower/lender negotiating positions, see Seth Belzley and Keith Sambur, JD Supra, 'When Cash Is King: Can a Reserve-Based Lender Block Borrower Cash Hoarding?', 19 March 2020; available at https://www.jdsupra.com/legalnews/when-cash-is-king-can-a-reserve-based-62211/.

17 Ed Flynn, American Bankruptcy Institute Journal, 'How Long Will the Era of Bankruptcy Stability Last?', August 2019; available at https://s3.amazonaws.com/abi-org-corp/journals/numbers_08-19.pdf.

18 United States Courts, 'Bankruptcy Filings Increase Slightly', 28 January 2020; available at https://www.uscourts.gov/news/2020/01/28/bankruptcy-filings-increase-slightly.

19 For example, Erica Werner et al., The Washington Post, 'Trump Signs $2 Trillion Coronavirus Bill into Law as Companies and Households Brace for More Economic Pain', 27 March 2020; available at https://www.washingtonpost.com/us-policy/2020/03/27/congress-coronavirus-house-vote/; Heather Long, The Washington Post, 'Fed Announces Unlimited Bond Purchases in Unprecedented Move Aimed at Preventing an Economic Depression', 23 March 2020; available at https://www.washingtonpost.com/business/2020/03/23/fed-unlimited-credit-coronavirus/.

20 Tony Romm, The Washington Post, 'Cities and States Brace for Economic “Reckoning,” Eyeing Major Cuts and Fearing Federal Coronavirus Aid Isn't Enough', 10 April 2020; available at https://www.washingtonpost.com/business/2020/04/10/cities-states-coronavirus-budgets/; Grant Suneson, USA Today, 'Industries Hit Hardest by Coronavirus in the US Include Retail, Transportation, and Travel', 21 March 2020; available at https://www.usatoday.com/story/money/2020/03/20/us-industries-being-devastated-by-the-coronavirus-travel-hotels-food/111431804/.

21 Anita Sharpe, Bloomberg Law, 'Record Bankruptcies Predicted in Next Year as Unemployment Soars', 10 April 2020; available at https://news.bloomberglaw.com/bankruptcy-law/record-bankruptcies-predicted-in-next-year-as-unemployment-soars.

22 New Generation Research, Inc., 'Short 2019 Review', pp. 9-11, 26-29; available at http://info.bankruptcydata.com/year-end-2019-report-0.

23 A 'pre-packaged bankruptcy' or 'pre-pack' is a bankruptcy where the proponent of a plan of reorganisation has already obtained the votes necessary to confirm a plan of reorganisation, or at least begun soliciting those votes (a 'straddle' pre-pack) prior to filing for bankruptcy. These cases are generally 30 to 60 days in duration. A 'pre-negotiated' bankruptcy has committed creditor support at the time of filing, but the formal creditor voting process has not yet begun – these are slightly slower than pre-packs but also considered to be faster, more efficient and possibly less expensive procedures than non-negotiated, traditional 'free-fall' bankruptcies, although both procedures are generally too short to address operational restructuring issues rather than just adjustment of a company's financial obligations.

24 Eric S. Chafetz and Myles R. MacDonald, New York Law Journal, 'Ultra-Expedited Prepacks Are No Longer an Academic Curiosity'; available at https://www.law.com/newyorklawjournal/2019/12/30/ultra-expedited-prepacks-are-no-longer-an-academic-curiosity/; Kara Hammond Coyle and Sean M. Beach, Journal of Corporate Renewal, 'As “Expedited” Prepacks Gain Speed, How Can Companies Jump on Board?', October 2019, pp. 6–11; Jesse DelConte et al., Journal of Corporate Renewal, 'Riding the Express Lane Through Bankruptcy', October 2019, pp. 12–16.

25 11 USC, Sections 101–1532.

26 The few exceptions include certain offsets under various financial contracts, taxes and the actions by certain governmental authorities who are asserting their police and regulatory powers. See 11 USC, Section 362(b).

27 Note, however, that holding companies of banks, insurance companies and brokers are eligible to file for Chapter 11 relief (e.g., the filings of Lehman Brothers Holdings Inc. and the holding company of Washington Mutual Bank). Insurance companies are liquidated under state law procedures, which differ among the 50 states. Banks are liquidated under the Federal Deposit Insurance Act.

28 11 USC, Section 1107.

29 11 USC, Section 1104.

30 11 USC, Section 1103.

31 Note that if a Chapter 11 trustee is appointed, neither the debtor nor the Chapter 11 trustee has the exclusive right to file a plan. 11 USC, Section 1121(c)(1).

32 11 USC, Section 1121(d)(2)(A).

33 11 USC, Section 1125(b). In some cases, the disclosure statement can be approved at the time the plan is approved.

34 11 USC, Section 1129(a)(7).

35 11 USC, Section 1129(a)(10).

36 11 USC, Section 1126(c)-(d).

37 11 USC, Section 1129(b)(1).

38 11 USC, Section 1129(b)(2).

39 See, generally, 11 USC, Section 507(a).

40 930 A.2d 92 (Del. 2007).

41 6 Delaware Code, Section 18-101(9).

42 6 Delaware Code, Section 18-1101(c). The implied covenant is best understood as a way of implying terms in the agreement, whether employed to analyse unanticipated developments or to fill in gaps in the contract's provisions. It is not an equitable remedy for rebalancing economic interests after events that could have been anticipated, but were not, that later adversely affected one party. Rather, it is a limited and extraordinary legal remedy. Oxbow Carbon & Minerals Holdings, Inc. v. Crestview-Oxbow Acquisition, LLC, 202 A.3d 482, 506-08 (Del. 2019).

43 6 Delaware Code, Sections 18-101(10), 18-301 and 18-701 to 18-705.

44 6 Delaware Code, Sections 18-1001 and 18-1002; accord CML V, LLC v. Bax, 6 A.3d 238, 241-44 (Del. Ch. 2010); see also Gavin/Solmonese LLC v. Citadel Energy Partners, LLC (In re Citadel Watford City Disposal Partners, L.P.), 603 B.R. 897, 903-05 (Bankr. D. Del. 2019) (Carey, J.).

45 R. Franklin Balotti and Jesse A. Finkelstein, Delaware Law of Corporations and Business Organizations, Chapter 4, Part 2, and Sections 4.14 to 4.21 (last updated March 2020).

46 Gheewalla, 930 A.2d at 100, 103 ('directors' duty to maximize the value of the insolvent corporation for the benefit of all those having an interest in it'); accord Quadrant Structured Products Co. v. Vertin, 115 A.3d 535, 547 (Del. Ch. 2015); Quadrant Structured Products Co. v. Vertin, 102 A.3d 155 (Del. Ch. 2014); Leo E. Strine, Jr., The Dangers of Denial, 50 Wake Forest Law Review 761, 767 (2015).

47 Quadrant, 115 A.3d at 547 ('They do not have a duty to shut down the insolvent firm and marshal its assets for distribution of creditors, although they may make a business judgment that this is indeed the best route to maximize the firm's value.').

48 11 USC, Section 365(f). See also 11 USC, Section 365(c) for additional assignment restrictions.

49 11 USC, Section 365(d)(1).

50 Each of the 50 states and the District of Columbia has adopted its own version of the UCC. All references to Article 9 contained herein are to Article 9 as set out in the model UCC. Practitioners are encouraged to refer to Article 9 as adopted in the jurisdiction relevant to each particular transaction, to consult local counsel, or to do both.

51 See 11 USC, Section 544.

52 The reach-back period is generally 90 days, unless the transferee is an insider of the debtor, in which case the reach-back period is one year.

53 11 USC, Section 1125(g) of the Bankruptcy Code provides that an acceptance or rejection of the plan may be solicited from a holder of a claim or interest before the commencement of the case, provided that such solicitation complies with applicable non-bankruptcy law.

54 The Bankruptcy Code requires that two-thirds in amount and more than one-half in number of a class of creditors vote to accept a plan for that class of creditors to be deemed to have accepted the plan. 11 USC, Section 1126(c).

55 11 USC, Section 101(51D) provides for a US$2 million cap, but this is periodically raised for inflation. 84 Fed. Reg. 3488 (12 February 2019); available at https://www.govinfo.gov/content/pkg/FR-2019-02-12/pdf/2019-01903.pdf.

56 However, the plan must include a brief history of the business, a liquidation analysis, and payment projections – contents that would otherwise be part of a disclosure statement.

57 Small Business Reorganization Act of 2019, Pub. L. No. 116-54, 133 Stat. 1079 (2019); available at https://www.govinfo.gov/content/pkg/PLAW-116publ54/pdf/PLAW-116publ54.pdf; see also Charissa Potts, American Bankruptcy Institute Journal, 'Key Facts About the SBRA', December 2019; available at https://s3.amazonaws.com/abi-org-corp/journals/legisupdate_12-19.pdf.

58 Coronavirus Aid, Relief, and Economic Security Act, H.R. 748, 116th Cong. Section 1113 (2020); available at https://www.congress.gov/116/bills/hr748/BILLS-116hr748enr.pdf.

59 American Bankruptcy Institute Commission to Study the Reform of Chapter 11, 'Final Report and Recommendations', pp. 275–302; available at http://commission.abi.org/full-report.

60 Family Farmer Relief Act of 2019, Pub. L. No. 116-51, 133 Stat. 1075 (2019); available at https://www.govinfo.gov/content/pkg/PLAW-116publ51/pdf/PLAW-116publ51.pdf; Honoring American Veterans in Extreme Need Act of 2019, Pub. L. No. 116-52, 133 Stat. 1076 (2019); available at https://www.govinfo.gov/content/pkg/PLAW-116publ52/pdf/PLAW-116publ52.pdf; National Guard and Reservists Debt Relief Extension Act of 2019, Pub. L. No. 116-53, 133 Stat. 1078 (2019); available at https://www.govinfo.gov/content/pkg/PLAW-116publ53/pdf/PLAW-116publ53.pdf.

61 11 USC, Section 1141(d)(1).

62 11 USC, Section 524(a).

63 See generally Crocker v. Navient Solutions, L.L.C. (In re Crocker), 941 F.3d 206 (5th Cir. 2019).

64 139 S. Ct. 1795 (2019) (Breyer, J.).

65 11 USC, Section 362(a).

66 In re Fulton, 926 F.3d 916 (7th Cir 2019).

67 In re Denby-Peterson, 941 F.3d 115 (3d Cir 2019).

68 140 S. Ct. 582 (2020).

69 Opt-Out Lenders v. Millennium Lab Holdings II, LLC (In re Millennium Lab Holdings II, LLC), 591 B.R. 559 (D. Del. 2018).

70 945 F.3d 126 (3d Cir. 2019).

71 11 USC, Section 503(b)(1)(A)(i).

72 Nabors Offshore Corp. v. Whistler Energy II, L.L.C. (In re Whistler Energy II, L.L.C.), 931 F.3d 432 (5th Cir. 2019).

73 See, e.g., In re Ames Department Stores, Inc., 306 B.R. 43, 58 (Bankr. S.D.N.Y. 2004) ('Landlords' cleanup costs after rejection . . . do not warrant administrative expense treatment . . . ').

74 Ultra Petroleum Corp. v. Ad Hoc Committee of Unsecured Creditors of Ultra Resources, Inc. (In re Ultra Petroleum Corp.), 913 F.3d 533 (5th Cir. 2019).

75 943 F.3d 758 (5th Cir. 2019).

76 Under the solvent debtor exception, 'creditors may recover post-petition interest when the debtor turns out to be solvent', in contrast to the 'age-old rule in bankruptcy, adopted from the English system . . . that interest on claims stops accruing when the bankruptcy petition is filed'. In re Fesco Plastics Corp., 996 F.2d 152, 155 (7th Cir. 1993) (citing United States v. Ron Pair Enters., Inc., 489 US 235, 246 (1989)). In Ron Pair, the Supreme Court acknowledged this pre-Code rule, but left ambiguous whether the replacement of the Bankruptcy Act by the Bankruptcy Code in 1978 had done away with it. 489 US at 246. In Ultra Petroleum, the debtors argued that the exception no longer existed, and the circuit court remanded to the bankruptcy court to consider the argument. 943 F.3d at 765-66.

77 See, for example, New Generation Research, Inc., 'Short 2019 Review', pp. 26–27; available at http://info.bankruptcydata.com/year-end-2019-report-0; Lauren Thomas, CNBC, 'The bankruptcies that rocked the retail industry in 2019', 29 December 2019; available at https://www.cnbc.com/2019/12/27/forever-21-among-bankruptcies-that-rocked-the-retail-industry-in-2019.html.

78 H.R. Rep. No. 109-31(1), at 105 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 169.

79 In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd, 389 B.R. 325, 332 (S.D.N.Y. 2008).

80 11 USC, Section 1509(d).

81 See Iida v. Kitahara (In re Iida), 377 B.R. 243, 257 n.21 (B.A.P. 9th Cir. 2007) ('Subsections (b)(2), (b)(3), and (c) [of section 1509] make it clear that chapter 15 is intended to be the exclusive door to ancillary assistance to foreign proceedings.') (quoting H.R. Rep. No. 109-31, at 110-11 (2005), reprinted in 2005 U.S.C.C.A.N. 88, 173).

82 11 USC, Section 1504.

83 11 USC, Section 1502(4).

84 11 USC, Section 1516(c).

85 In re Tri-Continental Exchange Ltd., 349 B.R. 627, 629 (Bankr. E.D. Cal. 2006).

86 Bear Stearns, 389 B.R. at 336 (quoting Council Regulation (EC) No. 1346/2000, Paragraph 13).

87 Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 135-37 (2nd Cir. 2013).

88 11 USC, Section 1502(2), (5).

89 Bear Stearns, 389 B.R. at 338-39 ('In general, section 1521(c) of the Bankruptcy Code limits the scope of relief available in a nonmain proceeding to relief related to assets located in the nonmain jurisdiction or closely connected thereto, while a plenary bankruptcy proceeding where the [debtors] are located would control the [debtors'] principal assets.').

90 600 B.R. 237 (Bankr. S.D.N.Y. 2019).

91 United States Courts, 'Table F-2 – Bankruptcy Filings (December 31, 2019)'; available at https://www.uscourts.gov/statistics/table/f-2/bankruptcy-filings/2019/12/31; New Generation Research, Inc., 'Short 2019 Review', p. 17; available at http://info.bankruptcydata.com/year-end-2019-report-0.

92 In re Pier 1 Imports, Inc., No. 20-30805 (Bankr. E.D. Va. 31 March 2020 and 6 April 2020) (docket numbers 438 and 493) (motion and order).

93 In re Forever 21, Inc., No. 19-12122 (Bankr. D. Del. 1 April 2020) (docket number 1115) (motion).

94 In re Modell's Sporting Goods, Inc., No. 20-14179 (Bankr. D.N.J. 23 March 2020) (docket number 115) (application).

95 See, for example, Bill Rochelle, American Bankruptcy Institute, 'Two More Judges Rule that Chapter 11 Debtors Are Eligible for PPP Loans', 5 May 2020; available at https://www.abi.org/newsroom/daily-wire/two-more-judges-rule-that-chapter-11-debtors-are-eligible-for-ppp-loans.

96 See, for example, Vince Sullivan, Law360, 'Small Biz Bankruptcy Rules Come Just In Time For Many', 24 April 2020; available at https://www.law360.com/articles/1267190/small-biz-bankruptcy-rules-come-just-in-time-for-many.

97 See, for example, General Order M-543 (Bankr. S.D.N.Y. Mar. 20, 2020) ('All hearings . . . will be conducted telephonically pending further Order . . . .'); available at http://www.nysb.uscourts.gov/sites/default/files/m543.pdf.