Daily Archives: March 31, 2021

President Biden signed the COVID-19 Bankruptcy Relief Extension Act on Saturday, March 27, 2021 to extend critical bankruptcy relief provisions under the CARES Act that were set to expire on the same day. The bipartisan bill was introduced in late February 2021 and was passed by Congress just one day before the President signed it into law.

The bill extends a key provision that increased the small business debt limit and eligibility from $2.7M to $7.5M under the CARES Actallowing more small businesses to file Chapter 11 bankruptcies under Subchapter V of the Code. Subchapter V cases offer businesses a more efficient and less costly route to reorganization.

The extension of the expanded debt limit is widely applauded by practitioners and vital to many small businesses in need of the protections offered under the Bankruptcy Code. The $7.5M small business debt limit is now set to expire on March 27, 2022 at which time it will revert back to approximately $2.7M. There is no guarantee or indication that another extension will take place at that time.

Interestingly, the Senate amended the bill by striking a provision that would have extended a few additional bankruptcy provisions under the Consolidated Appropriations Act of 2021 which are set to expire on December 27, 2021. Some of those key provisions from the Consolidated Appropriations Act of 2021 prevent utility service providers from discontinuing services to debtors in bankruptcy, limit preference attacks against commercial landlords, extend assumption/rejection periods for debtors, and exclude COVID-19 relief payments from the bankruptcy estate; all of these additional benefits will not be extended through 2022, but will expire on December 27, 2021 unless extended later this year.

Notably, these recent developments do not appear to clear up the confusion regarding a debtors ability to receive PPP loans while in bankruptcy. The lack of clarity on this issue has been a source of frustration for bankruptcy courts and has led to conflicting decisions around the country. Unless the SBA Administrator issues an authorization letter, debtors remain restricted in their ability to obtain PPP funds after a bankruptcy case has been filed.

Our Creditors' Rights, Bankruptcy, Reorganization & Workouts team will continue to keep you apprised on ongoing developments with respect to the COVID-19 Bankruptcy Relief Extension Act.

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Updates to Bankruptcy Relief Provisions of the CARES Act - Lexology

Rival groups of investors are vying for the right to back the expected recovery of Hertz Global Holdings Inc.s car-rental business and ease a path out of bankruptcy.

One offer was already on the table when a group led by Centerbridge Partners LP, Warburg Pincus LLC and Dundon Capital Partners stepped up with a competing funding package meant to lift the rental car provider out of bankruptcy.

In court papers filed Monday, Hertz said the new offer is competitive with a proposal the company had previously floated to emerge from bankruptcy under the control of Knighthead Capital Management LLC, Certares Management LLC and other co-investors.

This competitive process remains ongoing, Hertz said, noting that neither group has fully committed to a final deal.

An early casualty of the travel-deadening effects of the coronavirus pandemic, Hertz filed for chapter 11 protection in May 2020, its fleets idled and its future prospects uncertain. The competing offers to shepherd the company out of chapter 11 cap months of financing and deal maneuvers that kept Hertz going.

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Investors Mount Competing Bids to Buy Hertz Out of Bankruptcy - The Wall Street Journal

The number of people seeking bankruptcy fell sharply during the pandemic as government aid propped up income and staved off housing and student-loan obligations.

Bankruptcy filings by consumers under chapter 7 were down 22% last year compared with 2019, while individual filings under chapter 13 fell 46%, according to Epiq data. After holding above 50,000 filings a month in 2019 and in the first quarter of 2020, bankruptcy filings have remained below 40,000 a month since last March when the pandemic hit.

By contrast, commercial bankruptcy filings rose 29%, with more than 7,100 businesses seeking chapter 11 protection last year, according to Epiq.

The downward trend in personal bankruptcies bucks predictions by analysts and economists that disruptions from Covid-19 lockdowns and restrictions early in the pandemic would lead to a sharp increase in filings.

Economists and bankruptcy lawyers say federal suspensions of evictions, home foreclosures and student-loan obligations have helped limit bankruptciesthough they worry bankruptcy rates could go up after aid ends. Household spending also dropped as people stayed home, canceled travel and socially distanced to avoid the coronavirus. Several rounds of government aid padded incomes with direct payments to households and enhanced unemployment benefits. The personal saving rate rose.

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Coronavirus Was Supposed to Drive Bankruptcies Higher. The Opposite Happened. - The Wall Street Journal

One year ago, we wrote that the large business bankruptcylandscape in 2019 was generally shaped by economic, market, andleverage factors, with notable exceptions for disastrous wildfires,liabilities arising from the opioid crisis, price-fixing fallout,and corporate restructuring shenanigans.

The year 2020 was a different story altogether. The headline wasCOVID-19.

The pandemic may not have been responsible for every reversal ofcorporate fortune in 2020, but it weighed heavily on the scale,particularly for companies in the energy, retail, restaurant,entertainment, health care, travel, and hospitality industries.Mandatory shutdowns beginning in the spring of 2020 wreaked havocon the bottom lines of thousands of companies confronting aprecipitous drop in demand for their products and services. Somewere able to weather the worst of the storm with packages ofgovernment assistance or by adapting their business models to meetthe unique challenges of the pandemic. Others could not and eitherclosed their doors or sought bankruptcy protection to attempt torestructure their balance sheets or sell their assets.

According to data provided by Epiq AACER, there were 32,506commercial bankruptcy filings in 2020, compared to 39,050 in 2019-a26% decrease. By contrast, commercial chapter 11 filings increasedby 29% in 2020 to 7,128, compared to 5,519 in 2019. The 2020commercial chapter 11 filing total was the highest since the 7,789filings registered in 2012. Recognition of a foreign bankruptcyproceeding under chapter 15 was sought on behalf of 221 commercialdebtors in 2020, compared to 113 in 2019.

S&P Global Market Intelligence reported that U.S. corporatebankruptcies reached their highest levels in a decade in 2020 asthe pandemic upended global industries and struggling companiesfaced their breaking points. A total of 630 public companies witheither assets or liabilities valued at $2 million, or privatecompanies with public debt and at least $10 million in assets orliabilities, declared bankruptcy in 2020, compared to 578 in 2019.This surpassed the number of such filings in every year since 2010,when there were 800. The top five sectors represented by thefilings were consumer discretionary, industrials, energy, healthcare, and consumer staples.

According to New Generation Research, Inc.'sBankruptcyData.com, bankruptcy filings for "publiccompanies" (defined as companies with publicly traded stock ordebt) reached the highest level in more than a decade in 2020. Thenumber of public company bankruptcy filings in 202 was 110,compared to 64 in 2019. At the height of the Great Recession, 138public companies filed for bankruptcy in 2008 and 211 in 2009.

The combined asset value of the 110 public companies that filedfor bankruptcy in 2020 was $292.7 billion, compared to $150 billionin 2019. By contrast, the 138 public companies that filed forbankruptcy in 2008 had prepetition assets valued at $1.2 trillionin aggregate.

Companies in the oil and gas sector led the charge in publiccompany bankruptcy filings in 2020, with 26% (29 cases) of theyear's 110 public company bankruptcies. Thirteen of the 30largest public company bankruptcy filings in 2020 came from the oiland gas sector. Other sectors with a significant number of publiccompany filings in 2020 included retail (14 cases), health care(seven cases), pharmaceuticals (six cases), and entertainment,software, and airlines (four cases each).

The year 2020 added 51 public company names to thebillion-dollar bankruptcy club (measured by value of assets),compared to 21 in 2019.

The largest public company bankruptcy filing of 2020-car rentalcompany The Hertz Corporation, with $25.8 billion in assets-was the24th largest public company bankruptcy case of all time. By assetvalue, the largest public company bankruptcy filings in 2020 alsoincluded air carrier LATAM Airlines Group S.A. ($21 billion inassets); specialty finance company Emergent Capital, Inc. ($17.5billion in assets); telecommunications provider FrontierCommunications Corporation ($17.4 billion in assets); natural gasproduction company Chesapeake Energy Corporation ($16.2 billion inassets); offshore drilling services company Valaris plc ($13billion in assets); satellite services provider Intelsat S.A.($11.6 billion in assets); pharmaceutical company Mallinckrodt plc($9.6 billion in assets); and oilfield service company McDermottInternational, Inc. ($8.8 billion in assets).

Twenty-five public companies with assets valued at more than $1billion obtained confirmation of chapter 11 plans or exited frombankruptcy in 2020. Continuing a trend begun in 2012, many more ofthose companies reorganized than were liquidated or sold.

More than half of the chapter 11 plans confirmed in 2020 bybillion-dollar public companies were in prepackaged orprenegotiated bankruptcy cases. As in 2019, the "rapid-fireprepack" was in vogue in 2020. In 2019, women's plus-sizeretailer Fullbeauty Brands Inc. and information technology companySungard Availability Services Capital Inc. established new recordswhen they obtained bankruptcy court approval of prepackaged chapter11 plans in 24 and 19 hours, respectively. In 2020, in-store musicand interactive mobile marketing services provider Mood Media Corp.set a new record when it not only obtained confirmation of a planin less than a day but emerged from bankruptcy in just 31hours.

Notable court rulings in 2020 examined: (i) the bankruptcy"safe harbor" protecting payments made as part of certainsecurities transactions from avoidance as fraudulent transfers;(ii) the payment of claims for "make-whole" premiumsunder a chapter 11 plan; (iii) the enforcement of contractualsubordination agreements under a plan; (iv) debtor-in-possessionfinancing; (v) rent relief during bankruptcy for commercial tenantsdue to the pandemic; and (vi) the rejection in bankruptcy ofexecutory contracts regulated by the Federal Energy RegulatoryCommission ("FERC").

Securities Transactions Safe Harbor. In 2019,the U.S. Court of Appeals for the Second Circuit made headlineswhen it ruled in In re Tribune Co. Fraudulent ConveyanceLitig., 946 F.3d 66 (2d Cir. 2019), petition for cert.filed, 2020 WL 3891501 (U.S. July 6, 2020), thatcreditors' state law fraudulent transfer claims arising fromthe 2007 leveraged buyout of Tribune Co. were preempted by the safeharbor for certain securities, commodity, or forward contractpayments set forth in section 546(e) of the Bankruptcy Code. TheSecond Circuit concluded that a debtor may itself qualify as a"financial institution" covered by the safe harbor, andthus avoid the implications of the U.S. Supreme Court'sdecision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc.,138 S. Ct. 883 (2018), by retaining a bank or trust company as anagent to handle LBO payments, redemptions, and cancellations.

Picking up where the Second Circuit left off, the U.S.Bankruptcy Court for the Southern District of New York held inHolliday v. K Road Power Management, LLC (In re BostonGenerating LLC), 617 B.R. 442 (Bankr. S.D.N.Y. 2020), that:(i) section 546(e) preempts intentional fraudulent transfer claimsunder state law because the intentional fraud exception expresslyincluded in section 546(e) applies only to intentional fraudulenttransfer claims under federal law; and (ii) payments made to themembers of limited liability company debtors as part of apre-bankruptcy recapitalization transaction were protected fromavoidance under section 546(e) because, for that section'spurposes, the debtors were "financial institutions," ascustomers of banks that acted as their depositories and agents inconnection with the transaction.

The U.S. District Court for the Southern District of New Yorkjoined the Tribune bandwagon in In re Nine W. LBO Sec.Litig., 2020 WL 5049621 (S.D.N.Y. Aug. 27, 2020), appealfiled, No. 20-3290 (2d Cir. Sept. 25, 2020). The courtdismissed $1.1 billion in fraudulent transfer and unjust enrichmentclaims brought by a chapter 11 plan litigation trustee and anindenture trustee against the debtor's shareholders, officers,and directors. Citing Tribune, the district court ruledthat the payments were protected by the section 546(e) safe harborbecause they were made by a bank acting as Nine West's agent.According to the court, "[w]hen, as here, a bank is acting asan agent in connection with a securities contract, the customerqualifies as a financial institution with respect to that contract,and all payments in connection with that contract are thereforesafe harbored under Section 546(e)."

In SunEdison Litigation Trust v. Seller Note, LLC (In reSunEdison, Inc.), 2020 WL 6395497 (Bankr. S.D.N.Y. Nov. 2,2020), the U.S. Bankruptcy Court for the Southern District of NewYork invoked section 546(e) to dismiss a chapter 11 plan litigationtrustee's complaint seeking to avoid and recover allegedconstructive fraudulent transfers made by a subsidiary ofrenewable-energy development company SunEdison, Inc., in connectionwith the acquisition of a wind and solar power generation project.According to the court, even though the trustee sought to avoidpart of a two-step transaction that did not involve an agentfinancial institution, the "overarching transfer" wasmade as part of an "integrated transaction" insulatedfrom avoidance under the safe harbor.

In Fairfield Sentry Limited (In Liquidation) v. Theodoor GGCAmsterdam (In re Fairfield Sentry Ltd.), 2020 WL 7345988(Bankr. S.D.N.Y. Dec. 14, 2020), the U.S. Bankruptcy Court for theSouthern District of New York applied the Tribunerationale in a chapter 15 case to dismiss claims under BritishVirgin Islands ("BVI") law to recover "unfairpreferences" and "undervalue transactions" assertedby the liquidators of foreign feeder funds that invested in BernardL. Madoff Investment Securities LLC. According to the court,redemption payments made to investors in the funds were safeharbored under section 546(e) in accordance with Merit andTribune because, among other things, the BVI law claimswere constructive, rather than intentional, fraudulent transferclaims, and the funds were "financial institutions," asthe customers of the banks that made the redemption payments as thefunds' agent.

In In re Greektown Holdings, LLC, 2020 WL 6218655(Bankr. E.D. Mich. Oct. 21, 2020), reh'g denied, 2020WL 6701347 (Bankr. E.D. Mich. Nov. 13, 2020), the U.S. BankruptcyCourt for the Eastern District of Michigan ruled that apre-bankruptcy recapitalization transaction involving the issuanceof notes underwritten by a financial institution and payment of aportion of the proceeds to parties later sued in avoidancelitigation fell outside the section 546(e) safe harbor because: (i)neither the transferor nor the transferees were financialinstitutions in their own right; (ii) the defendants failed toestablish that the transaction was "for the benefit" ofthe underwriter financial institution by showing that it"received a direct, ascertainable, and quantifiable benefitcorresponding in value to the payments"; and (iii) theevidence did not show that the underwriter was acting as either thetransferor's agent or custodian in connection with thetransaction, such that the transferor itself could be deemed afinancial institution.

In In re Lehman Bros. Holdings Inc., 2020 WL 4590247(2d Cir. Aug. 11, 2020), the U.S. Court of Appeals for the SecondCircuit held that section 560 of the Bankruptcy Code, which createsa safe harbor for the liquidation of swap agreements, prevented adebtor from recovering payments made to certain noteholders inaccordance with a priority-altering "flip clause" inagreements governing a collateralized debt obligation transaction.According to the court, even if the provisions were "ipsofacto" clauses that are generally invalid in bankruptcyin other contexts, section 560 creates an exception to this rule inconnection with the liquidation of swap agreements.

Make-Whole Premiums and Postpetition Interest.In In re Ultra Petroleum Corp., 2020 WL 6276712 (Bankr.S.D. Tex. Oct. 26, 2020), direct appeal certified, No.16-32202 (Bankr. S.D. Tex. Dec. 1, 2020) [Docket No. 1897], theU.S. Bankruptcy Court for the Southern District of Texas issued along-awaited ruling on whether Ultra Petroleum Corp. must pay amake-whole premium to noteholders under its confirmed chapter 11plan and whether the noteholders were entitled to postpetitioninterest on their claims. The bankruptcy court held that: (i) themake-whole premium was not disallowed under section 502(b)(2) ofthe Bankruptcy Code as "unmatured interest" or its"economic equivalent" but represented liquidated damagesenforceable under New York law; and (ii) the noteholders wereentitled to postpetition interest on their claims at thecontractual default rate, rather than the federal judgment rate, inaccordance with the "solvent-debtor exception."

Enforcement of Subordination Agreements in a Chapter 11Plan. In In re Tribune Co., 972 F.3d 228 (3d Cir.2020), the U.S. Court of Appeals for the Third Circuit ruled that adebtor's confirmed chapter 11 plan did not unfairlydiscriminate against senior noteholders who contended that theirdistributions were reduced because the plan improperly failed tostrictly enforce pre-bankruptcy subordination agreements. The courtheld that a nonconsensual chapter 11 plan that does not enforce asubordination agreement does not necessarily discriminate unfairlyagainst a class of creditors that would otherwise benefit fromsubordination. The Third Circuit agreed with the lower courts thatthe "immaterial" reduction in the senior noteholders'recovery did not rise to the level of unfair discrimination.

Bankruptcy Financing. In In re LATAMAirlines Grp. S.A., 2020 WL 5506407 (Bankr. S.D.N.Y. Sept. 10,2020), the U.S. Bankruptcy Court for the Southern District of NewYork initially refused to approve a proposed debtor-in-possessionfinancing agreement involving insider shareholders, finding thatthe agreement was a prohibited "sub rosa"chapter 11 plan because it provided that the debtor could elect torepay the shareholder loan with discounted stock in lieu of cashand effectively prevented confirmation of any plan other than thedebtor's. However, after the parties modified the financingagreement to remove the equity election feature, the bankruptcycourt approved it.

In GPIF Aspen Club LLC v. Aspen Club Spa LLC (In re AspenClub Spa LLC), 2020 WL 4251761 (B.A.P. 10th Cir. July 24,2020), a Tenth Circuit bankruptcy appellate panel ruled thatsection 364(d)(1) of the Bankruptcy Code could not be used toapprove chapter 11 plan exit financing that primed the liens of anexisting secured lender, and it remanded the case to the bankruptcycourt to determine whether the cram-down plan provided the primedlender with the "indubitable equivalent" of its securedclaim.

Commercial Rent Relief During the Pandemic. Inresponse to the devastating impact of the pandemic on restaurants,retailers, and other "nonessential" businesses forced toshutter or severely curtail their operations, many bankruptcycourts deployed their statutory and equitable powers during 2020 todefer or suspend timely payment of rent and other expenses thatwould otherwise be obligatory under the Bankruptcy Code. See,e.g., In re Hitz Restaurant Group, 616 B.R. 374, 379 (Bankr.N.D. Ill. June 3, 2020) (due to a force majeure clause ina lease, abating the debtor's rent payments "in proportionto its reduced ability to generate revenue due to the executiveorder"); In re Bread & Butter Concepts, LLC, No.19-22400 (DLS) [Docket 219] (Bankr. D. Kan. May 15, 2020) (holdingthat "these unprecedented circumstances require flexibleapplication of the Bankruptcy Code and exercise of the Court'sequitable powers . to grant further relief" such as deferringrent payments); In re True Religion Apparel, Inc., No.20-10941 (CSS) (Bankr. D. Del. May 12, June 22, and Aug. 7, 2020)[Docket Nos. 221; 367; 465] (extending time to perform rentobligations for four months by order extending for 60 days and twoadditional orders, each extending for additional 30-dayincrements); In re Pier 1 Imports, Inc., 2020 WL 2374539(Bankr. E.D. Va. May 10, 2020) (delaying debtors' payment ofcertain accrued but unpaid rent during a "limited operationsperiod" when their stores were closed due to stay-at-homeorders entered in connection with the pandemic); In reCraftWorks Parent, LLC, No. 20-10475 (BLS) (Bankr. D. Del.Mar. 30, 2020) [Docket No. 217] (temporarily suspending certainaspects of a chapter 11 case under section 105(a)); In reModell's Sporting Goods, Inc., No. 20-14179 (VFP) [DocketNos. 166, 294, and 371] (Bankr. D.N.J. Mar. 27, Apr. 30 and June 5,2020) (suspending a bankruptcy case under sections 105 and 305 anddeferring payment of nonessential expenses, including rentobligations).

However, some courts concluded that their equitable powers couldnot be used to circumvent the express language of the BankruptcyCode mandating the payment of rent. See, e.g., In reCEC Entertainment Inc., 2020 WL 7356380 (Bankr. S.D. Tex. Dec.14, 2020) (denying a chapter 11 debtor's motion for a furtherabatement of rent and holding that: (i) a court cannot use itsequitable powers to override section 365(d)(3)'s unequivocalrent payment requirement; and (ii) force majeure clausesin the leases did not excuse timely payment of rent due to thepandemic or government shutdown orders).

Rejection of Natural Gas Agreements inBankruptcy. In a leading precedent-Sabine Oil &Gas Corp. v. Nordheim Eagle Ford Gathering, LLC (In re Sabine Oil& Gas Corp.), 734 Fed. Appx. 64 (2d Cir. May 25, 2018)-theU.S. Court of Appeals for the Second Circuit upheld rulingsauthorizing a chapter 11 debtor to reject certain natural gasgathering and handling agreements under section 365 of theBankruptcy Code. According to the Second Circuit, the agreementscould be rejected because, under Texas law, they contained neitherreal covenants "running with the land" nor equitableservitudes that would continue to burden the affected property evenif the agreements were rejected.

In 2020, bankruptcy courts in Delaware and Texas joined the frayin the ongoing debate on this issue.

In Extraction Oil & Gas, Inc. v. Platte River Midstream,LLC and DJ South Gathering, LLC (In re Extraction Oil & Gas,Inc.), 2020 WL 6694354 (Bankr. D. Del. Oct. 14, 2020), ChiefJudge Christopher S. Sontchi of the U.S. Bankruptcy Court for theDistrict of Delaware entered a declaratory judgment that certaingas transportation service agreements did not create covenantsrunning with the land under Colorado law and could therefore berejected in bankruptcy, because the agreements did not "touchand concern" the land but merely dealt with hydrocarbons afterthey were produced from the debtor's real property.

In In re Extraction Oil & Gas, Inc., 2020 WL6389252 (Bankr. D. Del. Nov. 2, 2020), stay pending appealdenied, No. 20-01532 (D. Del. Dec. 7, 2020), Judge Sontchiauthorized the debtor to reject the gas transportation serviceagreements, ruling that: (i) even if the agreements createdcovenants that run with the land, the agreements could still berejected, after which any covenants would be unenforceable againstthe debtor and its assigns; (ii) the "business judgment"test rather than "heightened scrutiny" should be appliedto the debtor's request to reject the agreements; and (iii)there is "no prohibition on or limitation against rejecting a[FERC] approved contract" under section 365(a) of theBankruptcy Code.

In In re Chesapeake Energy Corp., 2020 WL 6325535(Bankr. S.D. Tex. Oct. 28, 2020), the U.S. Bankruptcy Court for theSouthern District of Texas authorized the debtor to reject anatural gas production agreement after concluding that theagreement did not create a covenant running with the land or anequitable servitude under Texas law because it expressly indicatedthat the debtor did not intend to create any such encumbrances orto convey a real property interest but merely conveyed an interestin produced gas.

In Southland Royalty Company LLC, v. Wamsutter LLC (In reSouthland Royalty Company LLC), 2020 WL 6685502 (Bankr. D.Del. Nov. 13, 2020), Judge Karen B. Owens of the U.S. BankruptcyCourt for the District of Delaware ruled that gas gatheringagreements did not contain covenants running with the land orequitable servitudes under Wyoming law but were merely servicecontracts relating to the debtor's personal property (producedgas), and that, even if they did, the debtor could either rejectthe agreements or sell its assets free and clear of any associatedcovenants. Following rejection, the court noted, the contractcounterparty would have a prepetition claim against the estate fordamages resulting from the debtor's nonperformance.

In In re Ultra Petroleum Corp., 2020 WL 4940240 (Bankr.S.D. Tex. Aug. 21, 2020), the U.S. Bankruptcy Court for theSouthern District of Texas granted the debtors' motion toreject a FERC-regulated gas transportation agreement. Addressingthe standard for rejection, the court held that a bankruptcy courtshould engage in a fact-intensive analysis of whether the rejectionof the agreement would lead to direct harm to the public interestthrough an "interruption of supply to consumers" or a"readily identifiable threat to health and welfare," noneof which was shown to exist in this case. The court wrote that it"is not authorized to graft a wholesale exception to 365(a) of the Bankruptcy Code . preventing rejection of FERCapproved contracts." It further noted that, whether therejection of such a contract is "good or bad publicpolicy" must be decided by Congress and not by the court orFERC.

Much of the bankruptcy legislative activity during 2020 wasunderstandably focused on alleviating the impact of the pandemic.Enacted legislation and executive orders included:

The Coronavirus Aid, Relief, and Economic Security("CARES") Act. Signed into law on March 27,2020, as an initial response to the economic fallout of thepandemic, the CARES Act created a $600 unemployment bonus thatlasted until July 31, 2020, for those who lost their jobs as aresult of the shutdowns due to COVID-19. The law also set up thePaycheck Protection Program ("PPP") to provide up to $659billion to small businesses to pay up to eight weeks of payrollcosts, mortgage interest, rent, and utilities. Originally set toexpire on June 30, 2020, the PPP was extended to August 8, 2020,after which it lapsed. The CARES Act also provided temporary relieffor federal student loan borrowers by deferring student loanpayments for six months without penalty.

The Consolidated Appropriations Act, 2021("CAA"). Signed into law on December 27, 2020,the CAA was a $2.3 trillion spending bill that combined $900billion in stimulus relief for the pandemic with a $1.4 trillionomnibus spending bill for the 2021 federal fiscal year. The CAA wasone of the largest spending measures ever passed by Congress. Itprovided for $600 in direct payments to millions of Americans, aswell as $300 per week in supplemental federal unemployment benefitsfor 11 weeks. It also included: (i) $284 billion to revive thelapsed PPP, along with additional small-business aid; (ii) $15billion in payroll support to airlines; (iii) $25 billion in rentalassistance and eviction moratoriums; and (iv) a ban on mostsurprise medical bills.

The CAA also included various bankruptcy-related provisions forboth consumer and business debtors. The business bankruptcyprovisions included:

Amendments to the Small Business Reorganization Act of2019 ("SBRA"). Even though the SBRA, whichcreated a new subchapter V of chapter 11 of the Bankruptcy Code forsmall businesses, became effective on February 19, 2020, Congressamended the law shortly afterward to increase the eligibilitythreshold for businesses filing under the new subchapter so that itcould be available to a greater number of small businessdebtors.

Other Bankruptcy Code Amendments Benefitting IndividualDebtors. These included amendments to the Bankruptcy Code:(i) excluding coronavirus-related payments from the federalgovernment from the definition of "income" for thepurposes of determining eligibility to file for chapters 7 and 13;(ii) clarifying that the calculation of disposable income for thepurpose of confirming a chapter 13 plan does not includecoronavirus-related payments; and (iii) permitting chapter 13debtors to seek payment plan modifications if they are experiencinga material financial hardship due to the pandemic.

Executive Orders. President Trump issuedexecutive orders on August 8, 2020, to address some of the concernsrelated to the pandemic financial crisis. They included measuresproviding an additional $400 ($300 in federal funds, $100contingent on state participation) in weekly unemployment benefitsto replace the expired $600-per-week unemployment bonus, suspendingcertain student loan payments, protecting some renters fromeviction, and deferring payroll taxes.

Several other pieces of bankruptcy legislation were introducedin the 116th Congress but were never enacted, althoughmany of them are likely to be reintroduced in 2021. These includedbills that would implement the most significant consumer bankruptcyreforms since 2005, make student loans dischargeable in bankruptcy,significantly increase the federal-scheme homestead exemption, andprotect employees and retirees in business bankruptcy cases.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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The Year In Bankruptcy: 2020 - Insolvency/Bankruptcy/Re-structuring - United States - Mondaq News Alerts

On October 26, 2020, the U.S. Bankruptcy Court for the SouthernDistrict of Texas issued a long-awaited ruling on whether naturalgas exploration and production company Ultra Petroleum Corp.("UPC") must pay a make-whole premium to noteholdersunder its confirmed chapter 11 plan and whether the noteholders areentitled to postpetition interest on their claims pursuant to the"solvent-debtor exception." On remand from the U.S. Courtof Appeals for the Fifth Circuit, the bankruptcy court answered"yes" on both counts, adding yet another chapter to adebate that has long occupied bankruptcy and appellate courts inthis and other chapter 11 cases. See In re Ultra PetroleumCorp., 2020 WL 6276712 (Bankr. S.D. Tex. Oct. 26, 2020).

In particular, the bankruptcy court held that: (i) thecontractual make-whole premium was not disallowed under section502(b)(2) of the Bankruptcy Code as "unmatured interest"or its "economic equivalent" but, rather, representedliquidated damages enforceable under New York law; and (ii) thenoteholders were entitled to interest on their claims at thecontractual default rate, rather than the federal judgment rate, inaccordance with the "solvent-debtor exception," which"has been widely recognized, both before and after adoption ofthe Bankruptcy Code" and is "rooted in the principle thatthe solvent debtor must pay its creditors in full before the debtormay recover a surplus."

UPC issued approximately $1.5 billion in unsecured notes from2008 to 2010. The note agreement, which was governed by New Yorklaw, provided that UPC had the right to prepay the notes at 100% ofprincipal plus a make-whole amount. The make-whole amount wascalculated by subtracting the accelerated principal from thediscounted value of the future principal and interest payments.Events of default under the agreement included a bankruptcy filingby UPC. In that event, failure to pay the outstanding principal,any accrued interest, and the make-whole amount immediatelytriggered the obligation to pay interest at a higher default ratespecified in the note agreement.

UPC filed for chapter 11 protection in April 2016. Improvingbusiness conditions during the course of the case allowed UPC toseek confirmation of a chapter 11 plan that provided for thepayment in cash of all unsecured claims in full. The plandesignated the noteholders' claims as "unimpaired"but did not provide for the payment of the make-whole amount andwould pay postpetition interest on the notes at the federal-fundsrate rather than the default rate. UPC contested thenoteholders' right to receive the make-whole amount. Theparties agreed that postpetition interest should be paid on thenoteholders' claims, but they disagreed on the appropriaterate. The plan distributed new common stock in the reorganizedentity to UPC's existing shareholders.

In its plan confirmation ruling, the bankruptcy court decidedthat under New York law, the make-whole amount was an enforceableliquidated damages provision, rather than an unenforceable penalty.The court rejected UPC's arguments that the make-whole amountwas "conspicuously disproportionate to foreseeable losses atthe time the parties entered" into the note agreement becauseit would result in a double recovery.

The court also held that UPC's chapter 11 plan impaired thenoteholders' claims because the plan failed to provide for thepayment of the make-whole amount and postpetition default-rateinterest. The court rejected UPC's position that, because themake-whole amount represented "unmatured interest" andwas not allowable under section 502(b)(2), the plan left thenoteholders' rights under the Bankruptcy Code unaltered, andthe noteholders' claims were therefore unimpaired under section1124(1).

The bankruptcy court certified a direct appeal of its order tothe Fifth Circuit, which agreed to hear the appeal.

In In re Ultra Petroleum Corp., 913 F.3d 533 (5th Cir.2019) ("Ultra I"), the Fifth Circuit ruled thatthe make-whole premium constituted "unmatured interest"disallowed by section 502(b)(2) and that, because the BankruptcyCode, rather than UPC's chapter 11 plan itself, disallowed thenoteholders' claim for a make-whole premium and postpetitioninterest at the contractual default rate, the noteholders'claims were not "impaired" for purposes of confirming theplan.

However, the Fifth Circuit acknowledged in Ultra I thatthe noteholders' claim for a make-whole premium might still beallowed because UPC was solvent. According to the court, "thecreditors can recover the Make-Whole Amount if (but only if) thesolvent-debtor exception survives Congress's enactment of 502(b)(2)."

Prior to the enactment of the Bankruptcy Code, the Fifth Circuitexplained, there existed a "solvent-debtor exception" tothe disallowance of interest accruing after the filing of abankruptcy petition derived from English law. The exceptionprovided that interest would continue to accrue on a debt after abankruptcy filing if the creditor's contract expressly providedfor it and that interest would be payable if the bankruptcy estatecontained sufficient assets to pay it after satisfying other debts.According to the Fifth Circuit, in such cases the post-bankruptcyinterest was treated as part of the underlying debt obligation, asdistinguished from interest "on" a creditor's claimthat might be allowed by the provisions of a bankruptcystatute.

The Fifth Circuit further explained that the Bankruptcy Codecontains several exceptions to the general principal that upon abankruptcy filing, unmatured interest is disallowed under section502(b)(2). For example, section 506(b) provides that an oversecuredcreditor is entitled to interest during the bankruptcy case at thecontract rate. Further, in a chapter 7 case, the distributionscheme set forth in section 726 designates as fifth in priority ofpayment interest on allowed unsecured claims "at the legalrate" (which has been interpreted to mean the federalstatutory rate for interest on judgments set by 28 U.S.C.?1961). Thus, if the estate in a chapter 7 case is sufficientto pay claims of higher priority, creditors are entitled topostpetition interest before the debtor can recover anysurplus.

In a chapter 11 case, the chapter 7 priority scheme can applyunder section 1129(a)(7). Referred to as the "bestinterests" test, section 1129(a)(7) mandates that, unless eachcreditor in an impaired class accepts a chapter 11 plan, thecreditor must receive at least as much under the plan as it wouldin a chapter 7 liquidation of the debtor.

The Fifth Circuit emphasized, however, that each of theseprovisions is a statutory grant of postpetition interest "on aclaim," rather than an allowance of postpetition interestaccruing as part of the claim itself. According to the court,disallowance of the latter type of interest is absolute pursuant tosection 502(b)(2), unless the pre-Bankruptcy Code solvent-debtorexception allowing postpetition interest as part of a claimsurvived the enactment of section 502(b)(2).

The Fifth Circuit doubted that it survived. Even so, the courtnoted, the bankruptcy court's resolution of the Bankruptcy Codeversus chapter 11 plan impairment question prevented it fromconsidering whether "Congress chose not to codify thesolvent-debtor rule as an absolute exception to 502(b)(2)" or whether lawmakers' silence on that score in1978 should be presumed as an indication that certainlong-established bankruptcy principles should remain undisturbed.The Fifth Circuit accordingly remanded the case below to make thatdetermination. It also remanded the case to the bankruptcy courtfor additional findings regarding the appropriate rate ofpostpetition interest.

After agreeing to rehear the case, the Fifth Circuit partiallyvacated its decision in Ultra I. See In re UltraPetroleum Corp., 943 F.3d 758 (5th Cir. 2019) ("UltraII"). In Ultra II, the court reaffirmed itsprevious ruling regarding impairment but again remanded the casebelow to determine whether the make-whole premium was disallowedunder section 502(b)(2) as unmatured interest, whether thenoteholders were entitled to postpetition interest under the"solvent-debtor exception," and, if so, at what rate.

At the outset of its opinion on remand, the bankruptcy courtframed the issues before it as: (i) "does the Bankruptcy Codedisallow a contractual claim for [a make-whole premium] when aninterest-bearing obligation is prepaid?"; and (ii) "doesthe Bankruptcy Code permit a solvent debtor to forego contractualobligations to an unimpaired class of unsecured creditors, butstill pay a distribution to its shareholders?" The courtsanswered "no" on both counts.

The Make-Whole Premium Was Liquidated Damages Ratherthan Unmatured Interest. Addressing the first issue, thebankruptcy court explained that, because the Bankruptcy Codedefines neither "interest" nor "unmaturedinterest" (as used in section 502(b)(2) or elsewhere), thoseterms must be defined according to their ordinary meanings underapplicable nonbankruptcy law. According to the court, the ordinarymeaning of "interest" is "consideration for theuse or forbearance of another's money accruing overtime," and "unmatured interest" means"consideration for the use or forbearance of another'smoney, which has not accrued or been earned as of a referencedate." In bankruptcy, the reference date is the date ofentry of the order for relief (which is the petition date involuntary cases).

The court rejected the noteholders' argument that themake-whole premium matured due to acceleration. In this case, thecourt explained, "whether interest is matured at the moment offiling is determined without reference to acceleration clausestriggered by a bankruptcy petition."

However, the bankruptcy court concluded that the make-wholepremium was not interest because it did not compensate thenoteholders for UPC's use or forbearance of thenoteholders' money but, instead, "compensate[d] the[noteholders] for the cost of reinvesting in a less favorablemarket." It further explained that, in an unfavorable market,UPC's decision not to use the noteholders' money wouldcause them to suffer damages, which the make-whole premiumliquidated. The court also wrote that "[t]he Make-Whole Amountis not unmatured interest simply because it could equal zero whenreinvestment rates are high." Moreover, the make-whole premiumdid not accrue over time but, rather, "is a one-time chargewhich fixes the [noteholders'] damages when it istriggered."

Because the make-whole premium was not interest, the courtwrote, "it is also not unmatured interest" or its"economic equivalent," which the court defined as"in economic reality, . the economic substance of unmaturedinterest," such as unamortized original issue discount onbonds. Instead, the bankruptcy court ruled that the make-wholepremium was an enforceable liquidated damages clause under New Yorklaw, and accordingly, "it forms part of the [noteholders']allowed claims."

The Solvent-Debtor Exception Survives. Next,the bankruptcy court held that, because UPC was solvent, it wasobligated to pay postpetition interest to the noteholders. It wrotethat, according to the legislative history, "Congress gave noindication that it intended to erode the solvent debtorexception" when it enacted the Bankruptcy Code. Moreover,"[e]quitable considerations" continue to support it,including the policy against allowing a windfall at the expense ofcreditors to any debtor that can afford to pay all of itsdebts.

According to the court, this conclusion is also supported bypost-Bankruptcy Code court rulings involving solvent debtors aswell as the removal from the Bankruptcy Code in 1994 of section1124(3), which did not require the payment of postpetition intereston claims to render a class of creditors unimpaired under a chapter11 plan, and therefore deemed to accept it, even though more juniorclasses would receive value under the plan. In short, the courtwrote, there is a "'monolithic mountain of authority,'developed over nearly three hundred years in both English andAmerican courts, holding that a solvent debtor must make itscreditors whole" (quoting Ultra II, 943 F.3d at760).

The court explained that, standing alone, neither section 105(a)of the Bankruptcy Code (giving the bankruptcy court broad equitablepower), section 1129(a)(7) ("best interests" test), norsection 1129(b)(1) (requiring a cram-down chapter 11 plan to be"fair and equitable" with respect to dissenting impairedclasses of creditors) is a statutory source for the solvent-debtorexception. Instead, the court wrote, "piecing these BankruptcyCode provisions together," the solvent-debtor exception flowsthrough section 1124(1), which provides that, to render a class ofclaims unimpaired, a plan must leave unaltered the claimants'"legal, equitable, and contractual rights." According tothe court, "[b]ecause an unimpaired creditor has equitablerights to be treated no less favorably than an impaired creditorand to be paid in full before the debtor realizes a recovery, aplan denying post-petition interest in a solvent debtor case altersthe equitable rights of an unimpaired creditor under 1124(1)."

Finally, the bankruptcy court held that the default contractrate was the appropriate rate of interest, rather than the federaljudgment rate. The court explained that the noteholders' rightto postpetition interest was based on "two key equitablerights"-the right to receive no less favorable treatment thanimpaired creditors and the right to have their contractual rightsfully enforced. According to the court, if the noteholder classwere paid interest at the federal judgment rate, it would be worseoff than if it were impaired under UPC's plan because"even though the [noteholders] would receive identicalinterest as a hypothetical impaired class, as an unimpaired classthe Claimants were deprived of the right to vote for or against theplan." In addition, the court noted, limiting the noteholderclass to interest at the federal judgment rate would contravene thepurpose of the solvent-debtor exception, which dictates that when adebtor is solvent, "a bankruptcy court's role is merely toenforce the contractual rights of the parties."

The circuit courts of appeals have come to conflictingconclusions over the allowance of make-whole premiums inbankruptcy. The Third Circuit allowed a make-whole premium inDelaware Trust Co. v. Energy Future Intermediate Holding Co.LLC (In re Energy Future Holdings Corp.), 842 F.3d 247 (3dCir. 2016). The Second Circuit disallowed one in BOKF NA v.Momentive Performance Materials Inc. (In re MPM SiliconesLLC), 874 F.3d 787 (2d Cir. 2017), cert. denied,, 138S. Ct. 2653 (2018), but because the make-whole never became payableunder the relevant terms of the notes. In Ultra Petroleum,the bankruptcy court noted that MPM is distinguishablebecause the Second Circuit "was not presented with thequestion of whether a make-whole is unmatured interest."Therefore, it wrote, to the extent the Second Circuit appeared tosay that make-whole premiums are disallowed, it isdicta.

The bankruptcy court's ruling regarding the solvent-debtorexception is notable. However, whether it will be embraced bycourts adhering to a "plain language" approach to therelevant provisions of the Bankruptcy Code is an open question.Moreover, given the relative rarity of solvent-debtor chapter 11cases, the issue may not be subject to extensive scrutiny.

Finally, the court's determination that the unsecuredcreditors of a solvent debtor are entitled to interest at thecontract rate, rather than the federal funds rate, iscontroversial. Several other courts have ruled to the contrary.See In re Cardelucci, 285 F.3d 1231 (9th Cir. 2002);In re Beguelin, 220 B.R. 94 (B.A.P. 9th Cir. 1998); Inre Cuker Interactive LLC, 2020 WL 7086066 (Bankr. S.D. Cal.Dec. 3, 2020); In re Pacific Gas & Electric Co., 610B.R. 308 (Bankr. N.D. Cal. 2019).

The bankruptcy court certified a direct appeal of his ruling onremand to the Fifth Circuit on November 30, 2020. As such, theFifth Circuit will have yet another opportunity to consider whetherthe make-whole premium in Ultra Petroleum should beallowed.

The content of this article is intended to provide a generalguide to the subject matter. Specialist advice should be soughtabout your specific circumstances.

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