The Restructuring Review: USA

Overview of restructuring and insolvency activity

i Economic overview

Over the past year, from 1 May 2020 to 1 May 2021, covid-19 continued to dominate the United States' economic landscape. Unprecedented government stimulus relief coupled with aggressive monetary policy from the US Federal Reserve (e.g., maintenance of near-zero interest rates, buybacks of US treasury bonds and creation of facilities for corporate financing) helped avoid a sustained recession and spurred a dramatic and accelerated economic turnaround. In the first and second quarters of 2020, with covid-19 restrictions in full effect, real gross domestic product (seasonally adjusted at annual rates) shrunk by 5 per cent and 31.4 per cent, respectively; but in the third and fourth quarters of 2020 and the first quarter of 2021 rebounded sharply by 33.4 per cent, 4.3 per cent, and 6.4 per cent, respectively.2 Congress passed numerous significant covid-19 relief bills, including direct stimulus payments sent to individuals, unemployment benefits and trillions of dollars of spending.3 The Federal Reserve also cut interest rates effectively to zero (specifically, cutting the target range for the federal funds rate to zero to 0.25 per cent), and launched extraordinary measures 'to support the flow of credit to households and businesses' including buying bonds and launching various financing facilities.4 As of April 2021, the overall civilian unemployment rate, seasonally adjusted, was 6.1 per cent, down dramatically from a high of 14.8 per cent in April 2020 when the economy went into lockdown, but 2.6 per cent worse than the extremely low level of 3.5 per cent in February 2020 immediately before the effects of the pandemic began to be felt.5 And while deficit spending and low interest rates have led to concerns over government debt and price inflation, long-term interest rates remain low.6 Inflation also remains relatively low, although there have been significant, perhaps temporary, upward pressures in goods including used cars (see discussion of Hertz below) and construction materials, and the Consumer Price Index (CPI) has also reflected an upward trend, rising 4.2 per cent over the 12 months through April 2021.7

At the onset of the pandemic, the United States saw a significant uptick in distressed debt (loans and bonds), the level of which has since precipitously dropped. For example, at the 23 March 2020 peak, 57 per cent of performing loans in the S&P/LSTA Loan Index were trading below 80 per cent of face value, and 15 per cent were trading below 70 per cent. By the end of February 2021, 1.53 per cent of loans were trading below 80 per cent and 0.43 per cent were trading below 70 per cent.8

Meanwhile, in the equity markets, one of the great surprises of the recent covid-19 recession was the brevity of a steep decline in stock prices, followed by an impressive bull market reacting to the aforementioned monetary and fiscal stimulus. The S&P 500 reached an all-time high of nearly 3,400 in February 2020. By late March 2020, it had dipped as low as around 2,200, a downswing of around 35 per cent. It then rallied to new record highs. By the end of April 2021, it stood around 4,200, an all-time high 24 per cent above its February 2020 level and a remarkable 92 per cent above its March 2020 low.9 This equity market activity saw the advent of retail investors taking strategically challenged stocks such as GameStop and AMC to unforeseen levels with access to online trading platforms. This retail investing phenomenon has had the effect of squeezing short sellers with large positions in such stocks.10

As a result of a plethora of capital, low interest rates, government stimulus, and Federal Reserve liquidity initiatives, in the second half of 2020 and the first half of 2021 both debt and equity have been easy to finance. M&A deal activity has also hit record levels.11 Prominent in capital markets and M&A activity have been special purpose acquisition companies (SPACs), also known as 'blank cheque companies'. A SPAC is a publicly traded corporate entity with no assets other than money raised from investors used to acquire a to-be-determined business to take the acquired entity public; they were rarely used acquisition vehicles until 2020 and 2021.12 With frenetic M&A activity stoked by frothy debt and equity markets, and low interest rates and discount rates, company valuations have been pushed to increasingly high levels. And while some of the aforementioned rumblings regarding future inflation may temper some valuation expectations, a bull market appears to be continuing to gain momentum as the United States looks to leave covid-19 in the rear-view mirror with a significant portion of the population having been vaccinated. With an anticipated return to 'normalcy' during the second half of 2021, the country's domestic economic focus will likely shift from weathering the covid-19 storm to the efforts of the narrow Democratic majority in Congress to implement the new Biden administration's agenda, which includes a US$2 trillion infrastructure and jobs plan, and a US$1.8 trillion plan for helping families via spending on education, childcare and paid family leave, as well as proposed tax increases including a corporate tax hike and increased taxes on capital gains.13

ii Restructuring trends

Overall filing and industry trends

Given the economic volatility accompanying the covid-19 pandemic, corporate restructuring practitioners have figuratively seen both flood and drought in the past year. Business cases filed under Chapter 11 of the Bankruptcy Code (the most common form of in-court reorganisation for a large, complex business, as discussed further below) totalled 7,786 in 2020, up 28.7 per cent from 6,052 in 2019. However, the overall number of bankruptcy filings, including for individuals and small businesses, fell 29.7 per cent from 774,940 to 544,463. The federal judiciary's statisticians noted in announcing these figures that (1) 'Filings fell sharply in the early months of the pandemic . . . when many courts offered limited access to the public', and furthermore that (2) 'bankruptcy filings can lag behind other economic indicators'.14 It is worth noting that the new subchapter V of Chapter 11 (discussed below) appears to be gaining traction; although government statistics do not break them out from other Chapter 11 cases, it appears that over 1,000 cases filed or converted in 2020.15

At the onset of the covid-19 pandemic, the United States saw companies already in distress pre-pandemic lead the way in bankruptcy filings, pushed over the edge by economic stress, government shut-down orders, and reluctance of consumers to leave their homes. Also, some of the major industries in distress in 2020 were the predictable victims of covid-related business shutdowns, such as restaurants and movie theatres. Department stores and other retailers are an example of an industry that took hits from both sides: first an excess of retail space and a pre-pandemic shift towards online shopping, and second the impact of the pandemic, which shut them down temporarily and also accelerated the shift to shopping online. On the other hand, many investors were willing to provide bridge financing to recapitalise businesses viewed as facing surmountable, temporary problems. For example, while movie theatre chain Alamo Drafthouse declared bankruptcy, larger movie theatre chains AMC and Regal avoided bankruptcy due to capital raises.16

In addition to retailers, the travel industry faced many challenges brought on by covid-19 restrictions; US companies, however, largely avoided bankruptcy filings, based on access to capital markets, creditors largely refraining from taking aggressive actions, and, in numerous cases, government support. Specific businesses exposed to tourism and business travel that were severely impacted by covid-19 included cruise lines, airlines, hotels and rental car companies. Among cruise lines, in many cases companies raised sufficient funds to withstand a period of significantly diminished bookings and operations.17 Meanwhile, government funds supported most US airlines sufficiently for them to avoid bankruptcy,18 whereas foreign airlines lacking similar government support were forced to restructure. Some filed for Chapter 11 (particularly Latin American carriers Avianca Holdings SA, Grupo Aeromexico and LATAM Airlines Group SA), and others for Chapter 15 (discussed below, a procedure for dealing with cases of cross-border insolvency19) (e.g., Virgin Atlantic20). In addition to these various types of consumer-facing businesses, numerous energy companies, particularly oil and gas companies, also filed for bankruptcy in the past year due to volatility and declines in oil and other commodity prices, in a continuation of trends that predated the pandemic and that the pandemic exacerbated.

Professional practice trends

Although 2020 business Chapter 11 filings were substantially higher than in 2019, they undoubtedly would have been even higher but for the fiscal and monetary stimulus mentioned above. For some small businesses, a significant source of money was received from the federal government through the Coronavirus Aid, Relief, and Economic Security Act (CARES Act) and its Paycheck Protection Program (PPP), which provided forgivable loans to small businesses.21 For larger companies, as mentioned, the capital markets largely remained a viable source of financing. Indeed, for many of their clients, restructuring lawyers were busy with negotiating financings and out-of-court restructurings, evaluating government programmes and avoiding bankruptcy, as opposed to preparing for and executing bankruptcy filings. Financial professionals prepared budgetary models and calculated companies' 'runway', that is, how long they could survive with cash on hand (including from revolving credit facilities) without profitability returning to pre-pandemic levels. Debtor and creditor professionals then negotiated loan amendments, forbearances (where worsening financial performance had tripped covenants) and maturity extensions.

One financing technique that became popular was 'up-tiering', where creditors with unsecured debt (possibly maturing in the short term) exchanged it for secured debt (possibly with a longer maturity and higher interest rate). If a company's offer to exchange debt favoured some creditors and not others, or harmed existing secured creditors, litigation often ensued, with different creditor groups seeking to unwind the exchange or fighting over collateral and fees. For example, in each of Serta Simmons, Boardriders and TriMark, minority lenders sued the borrower, participating lender and sponsor or sponsors over up-tiering transactions.22 A raft of loosely drafted credit documents in the pre-pandemic loan market allowed for these sorts of transactions to occur. Newer financing documents are tending to close these previous loopholes. Where PPP loans, other government stimulus money or funds from Federal Reserve financing facility programmes were available, these also became part of professionals' potential financing tools.

Venue statistics

Among business Chapter 11 cases, there has long been a tendency for cases to file in specific forums such as Delaware or New York, based on the filer's 'domicile, residence, principal place of business . . . or principal assets . . . or . . . in which there is pending a case . . . concerning such person's affiliate'.23 For example, many corporations (or their affiliates) are organised in Delaware or have their principal place of business or assets in New York. Under the affiliate filing rule, a group of affiliated companies can file for bankruptcy in a given jurisdiction based on one of their affiliates establishing venue in that jurisdiction. For example, under the affiliate filing rule, a group of corporate entities incorporated in Florida can file for bankruptcy in Delaware if one of their affiliates is incorporated in Delaware.

In 2020, of the 7,786 business Chapter 11 cases, a plurality of 1,665 were filed in Delaware (21.4 per cent). The Southern District of Texas was second with 1,361 cases (17.5 per cent); in 2019 it had seen 345 cases (5.7 per cent), making it the third-most-common venue that year. The other districts in Texas also saw significant activity in 2020. While the Southern District of Texas (which includes Houston) has seen numerous major oil and gas company filings in recent years, in 2020 it also saw retail and other cases (e.g., department stores JC Penney and Neiman Marcus). The Southern District of New York (which includes Manhattan) was the third-most-common venue in 2020, with 686 cases (8.8 per cent), more than its 617 cases (10.2 per cent) in 2019 (when it led the nation in filings), but fewer than in Delaware and Texas. This table summarises these filing trends, which also include an increased concentration of filings in these common venues.24

Chapter 11 business case filings by district20202019
Total7,786100.0% 6,052100.0%
S.D. Tex.1,36117.5%2nd3455.7%3rd
Subtotal3,71247.7% 1,57126.0% 

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 and 2020.

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'.39 In applying this rule, lower-priority creditors may not receive a distribution unless the Chapter 11 plan provides that each holder of a claim in a dissenting senior class is 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. An unimpaired class is deemed to have accepted the plan, and thus does not vote.40 Administrative expense claims and certain priority claims also do not vote.41

General unsecured claims, in terms of priority, come after secured claims, administrative expense claims and priority claims, but before subordinated debt claims.42 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. As mentioned above, if a class of claims is impaired under the plan, at least one class of claims that is impaired under the plan must accept the plan for it to be confirmed by the bankruptcy court (determined without including any acceptance of the plan by any insider).43

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 2007,44 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.45 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'.46

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 member47) is a proper plaintiff to bring a derivative action.48

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 judgement 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 judgement 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.49 In a Chapter 11 case, many transactions by the debtor-in-possession are subject to bankruptcy court approval and are reviewed by the bankruptcy court using this business judgement standard.

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.50 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.51

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.52

In the event that a debtor does not assume an agreement, the default option under the Bankruptcy Code is rejection.53 In Chapter 11, the deadline to make the assumption or rejection decision with respect to executory contracts and unexpired leases (other than unexpired leases of non-residential real property) is the date that a plan is confirmed by the bankruptcy court.54 The deadline for a debtor to assume or reject an unexpired lease of non-residential real property can be much sooner (i.e., generally 210 days after commencement of the bankruptcy case, absent landlord consent, which deadline as discussed below has been temporarily extended to 300 days in light of the covid-19 pandemic, until 27 December 2022, and which extension is permanent as to subchapter V cases commenced before 27 December 2022).55 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.56 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 the security interest 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 other 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.57 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 filing58 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 an unsecured claim against the debtor.

Fraudulent transfers (also known as fraudulent conveyances) that can be recovered include transfers made with the actual intent to hinder, delay or defraud creditors (known as actual fraud or intentional fraud). 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 (known as constructive fraud). 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 (or at least begun to solicit those votes (a 'straddle' pre-pack)).59 In a pre-negotiated (also known as pre-arranged) bankruptcy, the creditors entitled to vote on the plan indicate their support for the plan before the commencement of the case, often in the form of a lock-up agreement (also known as a restructuring support agreement (RSA) or plan support agreement (PSA)), but the vote occurs following the commencement of the case. Pre-packs are generally 30 to 60 days in duration. 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 traditional Chapter 11 cases that are not pre-planned (i.e., 'free-fall' bankruptcies) 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 for a Chapter 11 plan (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.60 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. Ultimately, in order for a pre-pack to move swiftly through the Chapter 11 process, class consensus is critical. An impaired class or classes will have accepted the plan prior to the bankruptcy filing. Often, general unsecured claims (e.g., trade payables) are paid in full and do not vote, whereas the impaired accepting class required by Bankruptcy Code Section 1129(a)(10) will be composed of a bond or loan issuance that is less broadly held, and more practical to negotiate with and solicit in advance. In contrast, a pre-negotiated bankruptcy may involve key classes that are not voting in favour, and thus must be crammed down.

Over a decade ago, bankruptcy attorneys developed techniques for implementing 'super-fast' pre-packs involving only a handful of days in bankruptcy (e.g., Bluebird Bus Company in 2006). While these cases remain rare, a number have occurred since 2019, such as Belk, Inc in 2021. In some cases, a plan has been confirmed and become effective within 24 hours.61 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 in popularity in a post-covid world.

Recent legal developments

i Bankruptcy law revisions in relation to small businesses and covid-19 relief

In recent years, Congress has passed a number of laws aiming to streamline the bankruptcy process for small businesses that have suffered as a result of the costs and complexities of reorganising under Chapter 11.62 Most notably, in 2019, the Small Business Reorganization Act of 2019 (SBRA) added new subchapter V to Chapter 11,63 which was described in detail in last year's edition of this publication. However, subchapter V eligibility was restricted to debtors with debts not more than the puny amount of US$2,725,625.64 This trend towards debtor-friendly legislation (particularly small business debtors) picked up steam in 2020 on account of the covid-19 pandemic. For the sake of affordable and successful small business reorganisations, we hope that it continues, even after the pandemic passes.

The first notable further change was that in 2020 the 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.65 The covid-19 Bankruptcy Relief Extension Act of 2021 provided an additional one-year extension.66 It remains to be seen whether Congress will allow subchapter V eligibility to revert to a lower level after the pandemic passes.

The Consolidated Appropriations Act 2021 (CAA) included a variety of 'bankruptcy relief' provisions generally providing relief to debtors in connection with covid-19, generally subject to sunset provisions.67 Two notable sets of provisions regarded commercial leases, and discrimination against debtors.

Treatment of commercial leases

As discussed above, Bankruptcy Code Section 365 provides for the debtor's assumption, assignment, or rejection of executory contracts and unexpired leases.68 In a case under Chapter 11, the debtor generally may assume or reject an executory contract or unexpired lease at any time before confirmation of a Chapter 11 plan. However, as to commercial real estate leases, a tenant debtor must decide whether or not to keep the lease within 210 days of filing for bankruptcy (120 days plus one 90-day extension). Also, tenant debtors must timely pay to commercial landlords rent that becomes payable during a bankruptcy case, subject to a potential 60-day grace period. The 210-day deadline was added as part of the 2005 amendments to the Bankruptcy Code69 and has been criticised as an overly stringent protection for commercial landlords that causes retailers to avoid Chapter 11 or to liquidate rather than reorganise.70

CAA Section 1001(f) provides various temporary modifications to this statutory scheme.

First, applicable to subchapter V debtors only, an additional 60-day grace period is available if the debtor is experiencing a material financial hardship due, directly or indirectly, to covid-19. This provision helps to address situations that were common in the summer of 2020 (and which were discussed in detail in the previous edition of this publication) where retailers (although in many cases larger retailers not eligible for subchapter V) were either ordered by the government to close their locations temporarily, or voluntarily did so in response to the spread of covid-19, filed for bankruptcy, and then argued that they should receive extraordinary rent relief while facing a lack of revenues.

Second, the 210-day lease assumption or rejection deadline was temporarily extended to 300 days (210 days plus one 90-day extension).

These two modifications expire after two years, on 27 December 2022.

Discrimination against debtors

As a general matter, Bankruptcy Code Section 525 prohibits the government and private employers from discriminating against people on account of bankruptcy.71 However, covid-19 has raised two novel situations.

First, the CARES Act contained provisions regarding mortgage foreclosure and tenant eviction moratoria and mortgage forbearance. Benefiting individual debtors, CAA Section 1001(c) adds a temporary section providing that a person may not be denied relief under those provisions because of bankruptcy.

Second, regarding corporate debtors, as mentioned above, the CARES Act created PPP loans to provide financial relief to distressed small businesses. As discussed in the prior edition of this Restructuring Review, PPP loans are administered by the Small Business Administration (SBA). While the original legislation authorising PPP loans contained no exclusion for bankrupt companies – which predictably could benefit from PPP loans during the pandemic, and potentially use them to reorganise, preserving jobs – the SBA indicated that bankrupt companies were ineligible. Jilted debtors litigated the issue with the SBA with some success, for example focusing on Bankruptcy Code Section 525.72

CAA Sections 320(a) and (f) helped to clarify this important and contentious topic,73 although by creating new uncertainty. The CAA temporarily amended Bankruptcy Code Section 364 (concerning the debtor's ability to obtain loans while in bankruptcy) by allowing a debtor (or trustee) proceeding under subchapter V (but not under regular Chapter 11), Chapter 12 (for family farmers and fishermen), or Chapter 13 (for individuals) to obtain PPP loans with court permission. However, this amendment contained an unusual effectiveness provision. This provision provided that the amendment of Section 364 would only come into effect if the SBA determined that it would. Thus, Congress punted the issue of PPP loan eligibility back to the SBA. The SBA has not yet changed (and may never change) its position on this issue. Indeed, its latest frequently asked questions section about PPP loans reiterated that to be eligible for a PPP loan, an applicant must certify that it is not presently in bankruptcy. However, it noted that a Chapter 11, 12 or 13 debtor is considered to be out of bankruptcy for SBA and PPP purposes once a plan has been confirmed (or the case has been dismissed); it did not distinguish between regular Chapter 11 and subchapter V.74 The date that a plan is confirmed is often earlier than the date that the plan becomes effective (also known as 'substantial consummation'),75 and earlier still than the date of case closure (also known as obtaining a 'final decree').76 So some commentators expected a rush among eligible debtors to confirm a plan and access PPP funds.77 However, in early May 2020 the PPP ran out of money, and in any event new loan eligibility was scheduled to expire after 31 May 2020, so eligibility in bankruptcy seems to have become an academic matter.78

ii Case law developments

Violation of the automatic stay: action versus inaction

In the second half of 2020, and in 2021 so far, the most notable court case in the bankruptcy context has probably been the Supreme Court's decision in City of Chicago v. Fulton.79 The question presented was whether an entity that is passively retaining possession of property in which a bankruptcy estate has an interest has an affirmative obligation under the Bankruptcy Code's automatic stay, 11 United States Code Section 362, to return that property to the debtor or trustee immediately upon the filing of the bankruptcy petition. The bankruptcy petitioners had filed bankruptcy petitions and requested that the City of Chicago return their vehicles, which had been impounded for failure to pay fines. The court below had concluded that the City's refusal violated the automatic stay, because by retaining possession the City had acted 'to exercise control over' the bankrupts' property, in violation of Bankruptcy Code Section 362(a)(3).

The Supreme Court disagreed. It held that the mere retention of estate property did not violate Section 362(a)(3). Under that provision, the filing of a bankruptcy petition operates as a 'stay' of 'any act' to 'exercise control' over the property of the bankruptcy estate. It concluded that 'the most natural reading of these terms . . . is that [they] prohibit[] affirmative acts that would disturb the status quo'.80 It appears instead that the clear avenue for seeking return of property is via a turnover proceeding under Section 542.

The Supreme Court expressly did not reach the question of whether the City of Chicago had violated any other sections of 362, specifically (a)(4) or (a)(6), which stay creation, perfection, and enforcement of liens, and 'any act to collect, assess, or recover a claim'.81 Thus, where arguments that the City's conduct had violated other sections had been presented, the intermediate appellate court subsequently remanded to the relevant bankruptcy courts for consideration of these alternative arguments.82 Further interesting developments on this topic are likely.

Fiduciary duties in LBO situations

As discussed above, clawback actions are a prominent method for creditors to enhance recoveries in Chapter 11. Likewise, whether in or out of bankruptcy, aggrieved shareholders, or creditors if they have standing, may sue for breach of fiduciary duty. In December 2020, the District Court for the Southern District of New York laid down an important discussion of these topics in the context of a leveraged buy-out (LBO), in In re Nine West LBO Securities Litigation.83 It provides guidance and warning to directors and officers about the risks of approving (even indirectly) transactions to increase corporate leverage that could ultimately leave a company insolvent.

The key question was whether creditor representatives could sue successfully former directors for breach of fiduciary duty for approving an LBO that arguably led to a company's bankruptcy.84 The short answer is yes – the litigation survived a motion to dismiss.85

Factual and litigation background

The Jones Group, Inc (or the Company), later renamed Nine West, was a publicly traded shoe and clothing company that sold brands including Nine West. In 2012, the Company began to market itself, and its board was advised that the Company could support a 5x debt to EBITDA (earnings before interest, taxes, depreciation and amortisation) ratio. In 2013, the Company agreed to a merger with an affiliate of a private equity firm. The Company would be taken private, would borrow a significant amount of additional corporate debt, and the existing shareholders would be cashed out. A portion of the company (brands referred to by the Court as the 'crown jewels') would be carved out and sold to other affiliates of the sponsor for allegedly 'substantially less than their fair market value'. Ultimately, the transaction structure included approximately 7x to 8x debt to 'adjusted' EBITDA. The directors disclaimed responsibility for the Company taking on more debt and selling the 'crown jewels', planned before but implemented shortly after they left the board.

The transaction closed in 2014, and Nine West filed for bankruptcy in 2018. When Nine West emerged from bankruptcy in 2019, a litigation trustee was put in place to pursue claims relating to the 2014 transaction against former directors and officers in order to collect money to distribute to creditors. In 2020, the litigation trustee (the plaintiff in this litigation) sued former directors on multiple grounds including (1) breach of fiduciary duty, (2) aiding and abetting breach of fiduciary duty, and (3) fraudulent conveyance, accusing the directors of complicity in the bankruptcy because they approved the 2014 sale, which arguably precipitated the Company's insolvency.

Directors ignore post-acquisition capital structure at their peril

The Court's 4 December 2020 opinion and order focused on fiduciary duties.86 The Court ruled that the directors ignored 'red flags' regarding the post-merger components of the transaction, and could not 'take cover behind the business judgment rule' (i.e., their approval of the sale was not entitled to judicial deference, as discussed in the 'duties of directors' section above).87 The key takeaway is that directors should not ignore significant changes to the company planned before a sale but implemented after a sale,88 when they will no longer be on the board. Put another way, directors' fiduciary duties include considering the health of the company following a sale.

Directors would do well to carefully consider all information provided to them regarding the future plans for their company, and may wish to obtain representations and warranties regarding the purchaser's future intentions with regard to incurrence of additional debt, and other corporate transactions. A director who approves an LBO should use due care and be wary, because he or she may later be sued on account of the LBO failing. If it is alleged that the director was passive and inadequately informed, he or she may not be able to obtain a dismissal prior to the court authorising discovery, which significantly increases defence costs and affects settlement negotiations. While Nine West was decided primarily under Pennsylvania law, where the Company was incorporated,89 careful advisers will refer to it for best practices regardless of location.

Significant transactions, key developments and most active industries

i Major Chapter 11 filings

Section I above provides a broad perspective on bankruptcy trends from the past year. As discussed above, industries that saw particular distress included retail, tourism, and other consumer-facing businesses (restaurants, hotels, airlines, etc.), as well as oil and gas. The largest Chapter 11 filings in 2020 by asset size included the following, with between US$7 billion and US$26 billion in assets:90

  1. Consumer-facing companies: The Hertz Corporation (rental cars) (the largest case of the year, with US$26 billion in assets), LATAM Airlines Group SA (airline), Ascena Retail Group, Inc (clothing) (i.e., Ann Taylor, Loft, Lane Bryant, etc.), JC Penney Company, Inc (department store), Neiman Marcus Group LTD LLC (department store), and Avianca Holdings SA (airline).
  2. Oil and gas (including equipment and services): Chesapeake Energy Corporation, Valaris plc, McDermott International, Inc, Whiting Petroleum Corporation, and Oasis Petroleum Inc.
  3. Pharmaceuticals: Mallinckrodt plc (in relation to opioid litigation).
  4. Telecom: Frontier Communications Corporation and Intelsat SA.

Although the out-of-court financing markets are robust, as discussed above, some significant Chapter 11 cases have filed in 2021 to date, including continued retail and oil and gas activity, including Paper Source (retail), Belk (retail) and L'Occitane (retail), and Seadrill Limited (oil drilling).91 An unusual weather event also triggered some filings: a particularly harsh winter storm in Texas in February 2021 triggered a surge in demand for energy while freezing equipment that was not winterised.92 Notable bankruptcies of electrical companies affected by the dislocation in the provision and sale of electricity included Brazos Electric Power Cooperative, Inc, and Griddy Energy LLC.93

ii Hertz: a case study in the value of equity in a distressed company

As discussed above, the travel industry has been significantly impacted by covid-19. One example of a business in the travel industry that has seen the highs and lows of the recent volatile markets is rental car company Hertz, which filed the single largest case in 2020, with US$26 billion in assets.94

After its bankruptcy filing, Hertz common stock continued to trade actively at a meaningful market capitalisation. Financial experts call this phenomenon 'option value' – even though the stock appears to be 'out of the money' and the equity value zero or negative (i.e., debts exceed assets), there is a chance that the company will recover. Indeed, when significant swings are likely (i.e., volatility is high), option value can be substantial. Hertz was a case in point. In an attempt to raise funds and capitalise on the unexpectedly high value of its stock, Hertz took the highly unusual and unprecedented step of attempting to sell equity into the public markets during a bankruptcy case. The bankruptcy judge, whose mandate is to support corporate rehabilitation and recoveries to creditors, and generally to approve corporate actions taken using reasonable business judgement, approved the proposed stock sale. However, the US Securities and Exchange Commission (SEC), whose mandate is protection of retail investors, strongly discouraged the sale, notwithstanding that Hertz had warned in its disclosures that the stock was likely worthless. The sale did not go forward except for a small portion sold before the SEC objected.95

Indeed, equity rarely recovers any value in Chapter 11 cases, but Hertz's case demonstrates that in the right economic circumstances, the US bankruptcy system can preserve equity value.96 For a point of comparison, the stock price of competitor Avis Budget Group, which avoided bankruptcy, finished April 2021 at an all-time high. In May 2021, Hertz ran an auction to provide equity capital to fund the company going forward, and after an active bidding war is proposing a plan of reorganisation funded by the winning bidding group that would 'deliver significant value to the Company's existing shareholders' including cash, common stock and warrants.97


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'.98 Chapter 15 is based on a rigid recognition standard that one court labelled 'consistent with the general goals of the Model Law'.99 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'.100 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.101

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'.102 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 to 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).103 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'.104 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'.105 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'.106

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'.107

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'.108 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.109 A 2019 opinion in In re Servicos de Petroleo Constellation SA 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.110

In 2020, a total of 236 Chapter 15 cases were commenced, a substantial increase (up 81.5 per cent) from 130 in 2019. This table summarises the trends, which include (1) more concentration in common venues than for Chapter 11 cases as shown in the earlier table, (2) an increased concentration of filings in these common venues, and (3) the Southern District of Texas as not yet a dominant venue, but with rapid growth from zero cases in 2019:111

Chapter 15 case filings by district20202019
S.D. Tex.2711.4%3rd00.0%Not applicable
* Behind the Southern District of Florida with 20 cases.

Future developments

'It's tough to make predictions, especially about the future.'112 Covid-19 has dramatically affected business and life in the United States and around the world. It is unclear what changes will be transient and which permanent.

So long as interest rates remain low and markets ebullient, debtors will continue to focus on financing solutions to stay out of court. Out-of-court solutions and (for small companies) subchapter V will continue to be economical and speedy alternatives to a traditional Chapter 11 process. Especially given weak creditor protections in loan documents ('covenant-lite'), creative lending terms will continue to be used by subsets of creditors at the expense of others (e.g., changing priority levels and security interests, or removing unrestricted assets from collateral packages). Where a borrower's financial performance remains weak and loans are maturing or covenants have been breached, borrowers and existing lenders will 'kick the can down the road' if possible pending either a refinancing or improved performance.

In terms of industries to watch, it is likely that tourism industries will surge forward with pent-up demand, at least in countries that are highly vaccinated. However, it is likely that shopping habits have changed permanently, and malls and other 'brick and mortar' retail will continue to struggle versus online and 'omnichannel' retailers. Less clear is whether 'work from home' will put a significant and permanent dent in demand for office space, especially expensive offices in central business districts. It does seem likely that cost-conscious businesses will cut back significantly on their spending on business travel in favour of videoconferencing. However, remote networking events may not replace conventions and other group events.

As for other industries, healthcare (e.g., hospitals, skilled nursing facilities and other service providers) and pharmaceutical companies continue to be exposed to complex pricing dynamics and government regulations and other risks, and will likely continue to need restructurings (including sales of substantially all assets). And highly leveraged oil and gas companies (and coal companies) may continue to need restructurings. The questions for fossil fuel companies are (1) whether a rapid global economic recovery will push prices up, benefiting them, and (2) whether prices will be pushed down or operating costs will be pushed up, harming them, due to shale drillers, environmental regulations, or cheap green energy.

More generally, covid-19 has demonstrated the vulnerabilities of some supply chains, especially ones that have been optimised for globalisation and 'just in time' logistics. Some national governments seem inclined towards onshoring, both for national security and for economic protectionism. Significant changes in supply chain management, onshoring or decreased globalisation could disrupt current companies and lead to unpredictable winners and losers.

For bankruptcy professionals, one year of quarantines and remote court appearances could lead to various permanent changes. For example, routine hearings should probably be moved permanently online. While trials and live testimony may always be better in person (and present more opportunities for sidebar conversations and settlement negotiations), it is clear that money and time (including the judge's time) can be saved by holding status conferences and hearings for most types of motions remotely, without significant detriment. Indeed, access to justice may be advanced by allowing creditors to attend hearings easily in distant parts of the country. Journalists benefit for the same reason. Mediations and creditor meetings also gain convenience from occurring remotely, though with a similar loss in the ability for spontaneous conversations and negotiations and potential efficacy of the dispute resolution mechanism. We may also see changes to the venues that are used for filings.

The standing orders (also known as general orders) and local rules that courts have adopted in the past year to deal with covid-19 will undoubtedly continue to be revised, and will be well worth observing for how they address some of these topics.


1 Lisa Laukitis and James J Mazza, Jr are partners and Edward Mahaney-Walter is an associate at Skadden, Arps, Slate, Meagher & Flom LLP.

2 Bureau of Economic Analysis, 'Gross Domestic Product'; available at; Bureau of Economic Analysis, 'GDP & Personal Income'; available at (see 'Table 1.1.1. Percent Change From Preceding Period in Real Gross Domestic Product').

3 See, e.g., BBC, 'Biden's $1.9tn Covid Relief Bill Passes US Congress', 10 March 2021; available at (describing the 'sixth Covid-19 relief bill').

4 Board of Governors of the Federal Reserve System, 'Press Releases'; available at (see, e.g., 'Federal Reserve Issues FOMC Statement', 15 March 2020; available at; 'Federal Reserve Actions to Support the Flow of Credit to Households and Businesses', 15 March 2020; available at; 'Federal Reserve Board Announces Establishment of a Commercial Paper Funding Facility (CPFF) to Support the Flow of Credit to Households and Businesses', 17 March 2020; available at; Peter G. Peterson Foundation, 'The Federal Reserve Holds More Treasury Notes and Bonds than Ever Before', 29 April 2021; available at

5 US Bureau of Labor Statistics, 'Civilian Unemployment Rate'; available at; US Bureau of Labor Statistics, 'Databases, Tables & Calculators by Subject'; available at

6 See Board of Governors of the Federal Reserve System, 'Selected Interest Rates (Daily) – H.15', 30 April 2021; available at (showing that as of 29 April 2021 the interest rate for 30-year Treasury bonds was 2.31 per cent).

7 See Editorial Board, The Washington Post, 'Should We Worry About Inflation – Even If the Fed Doesn't?', 20 March 2021; available at Compare the modest inflation reported for March 2021, US Bureau of Labor Statistics, 'Consumer Price Index – March 2021', 13 April 2021; available at ('Over the last 12 months, the [Consumer Price Index] all items index increased 2.6 percent before seasonal adjustment.'), with the spike one month later, US Bureau of Labor Statistics, 'Consumer Price Index – April 2021', 12 May 2021; available at ('Over the last 12 months, the all items index increased 4.2 percent before seasonal adjustment. This is the largest 12-month increase since . . . 2008. The index for used cars and trucks rose 10.0 percent in April.'). That 10 per cent increase for used cars and trucks was merely for the one-month period, and 'the largest 1-month increase since the series began'. The corresponding annual increase was 21 per cent.

8 Rachelle Kakouris, S&P Global, 'From Trough to Froth: US leveraged loan market, a year after the covid-19 crash', 18 March 2021; available at

9 Yahoo Finance, 'S&P 500'; available at

10 See, e.g., Yun Li, CNBC, 'GameStop breaks below $50 a share as short squeeze comes to an end', 9 February 2021; available at
as-short-squeeze-comes-to-an-end.html; Matt Egan, CNN Business, 'It's not just GameStop. Market bubble fears are rising', 29 January 2021; available at

11 See, e.g., Kevin Dowd, Forbes, 'Despite Pandemic Fears, A Record-Breaking “Frenzy” Of M&A Activity Is Underway', 2 May 2021; available at ('Globally, an all-time record of $1.77 trillion in M&A transactions were announced through the first four months of 2021 . . . . That's up a whopping 124% compared to last year, and it's 10% higher than the first four months of any other year on record.').

12 See generally US Securities and Exchange Commission, 'Blank Check Company'; available at; Phil Mackintosh, 'A Record Pace for SPACs', 21 January 2021; available at; Yun Li, CNBC, 'SPACs break 2020 record in just 3 months, but the red-hot industry faces challenges ahead', 19 March 2021; available at (reporting that SPACs raised US$13.6 billion in 2019, US$83.4 billion in 2020, and US$87.9 billion in just the first three months of 2021). Since April 2021, SPAC activity seems to have slowed, and SPAC share prices fallen. The SEC has also indicated that it is paying close attention to SPAC activity for compliance with the securities laws, and has provided staff guidance on accounting rules and other select issues. Sissi Cao, Observer, 'SPAC Bubble Pops: Deals Drop 90% in April After SEC Warns of Crackdown', 22 April 2021; available at; US Securities and Exchange Commission, 'Staff Statement on Select Issues Pertaining to Special Purpose Acquisition Companies', 31 March 2021; available at; US Securities and Exchange Commission, 'SPACs, IPOs and Liability Risk under the Securities Laws', 8 April 2021; available at
under-securities-laws; US Securities and Exchange Commission, 'Staff Statement on Accounting and Reporting Considerations for Warrants Issued by Special Purpose Acquisition Companies (“SPACS”)', 12 April 2021; available at

13 Tami Luhby, Katie Lobosco and Kate Sullivan, CNN, 'Here's what's in Biden's infrastructure proposal', 21 April 2021; available at
biden-explainer/index.html; Tami Luhby, Maegan Vazquez and Katie Lobosco, CNN, 'Here's what's in Biden's $1.8 trillion American Families Plan', 28 April 2021; available at

14 United States Courts, 'Annual Bankruptcy Filings Fall 29.7 Percent', 28 January 2021; available at

15 Clifford J. White III, American Bankruptcy Institute Journal, 'Small Business Reorganization Act: Implementation and Trends', January 2021; available at; Ed Flynn, American Bankruptcy Institute Journal, 'Subchapter V's First 1,000 Cases', November 2020; available at

16 Khristopher J. Brooks, CBS News, 'AMC Theatres escapes bankruptcy thanks to $917M cash infusion from investors', 25 January 2021; available at; Alexander Gladstone, The Wall Street Journal, 'Regal Cinemas Owner Lands Financial Lifeline, Averting Bankruptcy', 23 November 2020; available at

17 See, e.g., Sergei Klebnikov, Forbes, 'Norwegian Cruise Line Raises Over $2 Billion After Warning of Possible Bankruptcy', 6 May 2020; available at

18 Andrew Ross Sorkin, The New York Times, 'Were the Airline Bailouts Really Needed?', 16 March 2021; available at; Alan Rappeport and Niraj Chokshi, The New York Times, 'Crippled Airline Industry to Get $25 Billion Bailout, Part of It as Loans', 14 April 2020; available at

19 11 USC, Section 1501.

20 Dominic Rushe, The Guardian, 'Virgin Atlantic files for bankruptcy protection as Covid continues to hurt airlines', 4 August 2020; available at

21 American Bankruptcy Institute Journal, 'Tools for Navigating Uncertain Times', May 2020; available at

22 Shana A. Elberg, Evan A. Hill, and Catrina A. Shea, 'Uptier Exchange Transactions Remain in Vogue, Notwithstanding Litigation Risk', 2 February 2021; available at

23 See the bankruptcy venue statute, 28 USC, Section 1408 ('Venue of cases under title 11').

24 United States Courts, 'Table F-2', 31 December 2020; available at; United States Courts, 'Table F-2', 31 December 2019; available at See generally United States Courts, 'Caseload Statistics Data Tables'; available at

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 Please 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 Please note, however, 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 11 USC, Section 1129(a)(8), (b), and the discussion above of 'cramdown'. The absolute priority rule only applies in cramdown situations (i.e., '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').

40 11 USC, Section 1126(f).

41 11 USC, Sections 507, 1123(a)(1).

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

43 11 USC, Section 1129(a)(10).

44 930 A.2d 92 (Del. 2007).

45 6 Delaware Code, Section 18-101(9).

46 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).

47 6 Delaware Code, Sections 18-101(10), 18-301 and 18-701 to 18-705.

48 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.).

49 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).

50 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).

51 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.').

52 11 USC, Section 365(f). See also 11 USC, Section 365(c) for additional assignment restrictions.

53 See, e.g., 11 USC, Section 365(d)(1), (d)(2), (d)(4), (p)(3).

54 11 USC, Sections 365(d)(2), 1123(b)(2).

55 11 USC, Section 365(d)(4); Pub. L. No. 116-260, H.R. 133, 116th Cong., Division FF ('Other Matter'), Title X ('Bankruptcy Relief'), Section 1001(f)(1)(B), (2), p. 2038 (27 December 2020); available at;, 'H.R.133 - Consolidated Appropriations Act, 2021'; available at

56 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.

57 See 11 USC, Section 544.

58 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.

59 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 (i.e., securities law, as a plan to recapitalise a company by converting debt to equity, for example, is equivalent to an offer for existing bondholders to tender their securities and exchange them for a new issuance of stock).

60 11 USC, Section 1126(c).

61 Daniel Gill, Bloomberg Law, 'Federal Watchdog Wants to Put Brakes on High-Speed Bankruptcies', 5 April 2021; available at

62 For a report identifying problems and recommending solutions for small and medium-sized businesses, see American Bankruptcy Institute Commission to Study the Reform of Chapter 11, 'Final Report and Recommendations', pp. 275-302 (2014); available at

63 Pub. L. No. 116-54, 133 Stat. 1079 (2019); available at

64 The ceiling for eligibility provided in 11 USC, Section 101(51D), is US$2 million, but this is periodically raised for inflation. 84 Fed. Reg. 3488 (12 February 2019); available at

65 Pub. L. No. 116-136, Section 1113(a), 134 Stat. 281, 310-11 (2020); available at

66 Pub. L. No. 117-5, Section 2(a)(1), 135 Stat. 249 (2021); available at

67 Pub. L. No. 116-260, H.R. 133, 116th Cong., Division FF ('Other Matter'), Title X ('Bankruptcy Relief'), Section 1001, pp. 2035-40 (27 December 2020); available at

68 11 USC, Section 365(d)(2)-(4).

69 Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), Pub. L. No. 109-8, Section 404, 119 Stat. 23, 104-05 (2005); available at

70 See, e.g., American Bankruptcy Institute Commission to Study the Reform of Chapter 11, 'Final Report and Recommendations', pp. 129-32 & nn. 478-80.

71 11 USC, Section 525.

72 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

73 Pub. L. No. 116-260, H.R. 133, 116th Cong., Division N ('Additional Coronavirus Response and Relief'), Title III ('Continuing the Paycheck Protection Program and Other Small Business Support'), Sections 320(a), (f), pp. 834-36 (27 December 2020); available at

74 US Small Business Administration, 'Paycheck Protection Program Loans: Frequently Asked Questions (FAQs)', 6 April 2021, p. 30, Question #67; available at

75 11 USC, Section 1101(2).

76 Federal Rule of Bankruptcy Procedure 3022.

77 See, e.g., Howard M. Berkower and Franklin Barbosa Jr., ABF Journal, 'Chapter 11 Debtors with Confirmed Plans Now Eligible for PPP Loans', 7 May 2021; available at

78 Joyce M. Rosenberg, The Washington Post, 'Small business covid-19 relief program runs out of money', 5 May 2021; available at
program-runs-out-of-money/2021/05/05/9a46d8aa-adc4-11eb-82c1-896aca955bb9_story.html; Carmen Reinicke, CNBC, 'Paycheck Protection Program has run out of money for most borrowers. What you need to know', 5 May 2021; available at; Lydia DePillis, ProPublica, 'The Federal Government Will Now Give PPP Loans to Borrowers in Bankruptcy', 19 April 2021; available at

79 141 S. Ct. 585 (2021).

80 Id. at 590.

81 Id. at 592 n.2; id. at 592 (Sotomayor, J., concurring).

82 In re Fulton, 843 Fed. App'x 799, 800-01 (7th Cir. 2021).

83 No. 20 MD. 2941 (JSR), 2020 WL 7090277 (S.D.N.Y. Dec. 4, 2020) (Rakoff, J.). See also In re Nine West LBO Sec. Litig., 482 F. Supp. 3d 187 (S.D.N.Y. 2020) (Rakoff, J.) (providing factual background).

84 Notably, the Court found that there were not sufficient allegations that the directors and officers were self-dealing or otherwise particularly self-interested in the LBO – while they may have owned some stock and received some 'change in control' payments (in connection with the termination of their employment), they were not 'on both sides of the transaction' (both seller and buyer of the company).

85 The Court also refused to dismiss claims against the directors that they aided and abetted the breach of fiduciary duty by their successor directors at Nine West, on the basis that the old directors knew that the new directors planned to carry out transactions that would leave the Company insolvent.

86 The Court's 27 August 2020 opinion and order dismissed certain fraudulent conveyance and unjust enrichment claims.

87 Cf. Smith v. Van Gorkom, 488 A.2d 858, 893 (Del. 1985) (holding that 'directors . . . breached their fiduciary duty [of care under Delaware law] to their stockholders . . . by their failure to inform themselves of all information reasonably available to them and relevant to their decision to recommend the . . . merger . . . .'). On the other hand, the Court found that the litigation trustee failed to allege that the board was self-interested; self-interest also would have precluded application of the business judgment rule.

88 This is because '[m]ultistep transactions can be treated as one integrated transaction' where they 'reasonably collapse into a single integrated plan'.

89 However, Delaware law governed the claim that the predecessor directors aided and abetted the bad acts of the successor directors, because successor company Nine West was reincorporated in Delaware. Also, the Court referred extensively to Delaware law to interpret analogous Pennsylvania law, while occasionally distinguishing the two.

90 New Generation Research, Inc, '2020 Review', p. 11; available at Excludes Emergent Capital, Inc., which appears to be listed in error, as it filed with US$175 million in assets, not US$17.5 billion in assets.

91 Retail Dive Team, Retail Dive, 'The running list of 2021 retail bankruptcies', 29 April 2021; available at; Houston Business Journal, 'The week in bankruptcies: Brazos Electric, Belk, Seadrill bring big bankruptcies to Houston', 12 March 2021; available at

92 Will Englund, The Washington Post, 'The Texas grid got crushed because its operators didn't see the need to prepare for cold weather', 16 February 2021; available at

93 Michael B. Lubic and Sumner C. Fontaine, The National Law Review, 'Case Notes: Brazos Electric's Bankruptcy Filing', 4 March 2021; available at
brazos-electric-s-bankruptcy-filing; Brazos Electric Cooperative, 'Brazos Electric Power Cooperative, Inc. Files for Chapter 11 Financial Restructuring', 1 March 2021; available at; Eric Levenson, CNN, 'Texas energy company that charged huge electric bills during storm files for bankruptcy', 15 March 2021; available at

94 New Generation Research, Inc, '2020 Review', p. 11; available at

95 Reuters Staff, Reuters, 'Hertz suspends share sale after U.S. SEC raises objections', 17 June 2020; available at
raises-objections-idUSKBN23O2MR; Michael Wayland, CNBC, 'Hertz halts plan to sell $500 million in shares pending SEC review', 17 June 2020; available at
plan-to-sell-500-million-in-shares-after-sec-review.html; Chris Isidore, CNN Business, 'Hertz sold $29 million in stock despite SEC questions', 11 August 2020; available at

96 See also Anthony J. Casey and Joshua C. Macey, The University of Chicago Law Review Online, 'The Hertz Maneuver (and the Limits of Bankruptcy Law)', 7 October 2020; available at (arguing that retail investors should have been allowed to buy Hertz stock in bankruptcy, that retail investors do not require bankruptcy-specific protections, and that that the 'absolute priority rule' (discussed below) should be modified to better protect equity-holders so that they are not cut off from post-bankruptcy recoveries in value). The last point echoes a recommendation of the report of the American Bankruptcy Institute's Commission to Study the Reform of Chapter 11. See American Bankruptcy Institute Commission to Study the Reform of Chapter 11, 'Final Report and Recommendations', pp. 207-11 (2014); available at (recommending that a junior class be able to receive option value in the reorganised business).

97 Hertz Global Holdings, Inc, Cision PR Newswire, 'Hertz Selects $6 Billion Bid From Knighthead, Certares And Apollo To Fund Chapter 11 Exit', 12 May 2021; available at

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

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

100 11 USC, Section 1509(d).

101 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).

102 11 USC, Section 1504.

103 11 USC, Section 1502(4).

104 11 USC, Section 1516(c).

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

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

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

108 11 USC, Section 1502(2), (5).

109 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.').

110 600 B.R. 237 (Bankr. S.D.N.Y. 2019).

111 United States Courts, 'Table F-2', 31 December 2020; available at; United States Courts, 'Table F-2', 31 December 2019; available at It is worth noting that the Chapter 15 venue statute, 28 USC, Section 1410, provides that a case under Chapter 15 may be commenced in the district (1) in which the debtor has its principal place of business or principal assets in the United States, (2) if the debtor does not have a place of business or assets in the United States, in which there is pending against the debtor an action or proceeding in a federal or state court, or (3) in a case other than those specified in clause (1) or (2), in which venue will be consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative.

112 This and similar quotes have been attributed to multiple individuals, including Yogi Berra, Samuel Goldwyn and Niels Bohr. The Economist, 'The perils of prediction, June 2nd', 15 July 2007; available at (letters to the editor).

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