Category Archives: Bankruptcy

Galla Parkopened in October 2018 as a restaurant and bar at Third Street and Joe Nuxhall Way, a few stepsfrom the entrance to Great American Ball Park.(Photo: Enquirer file)

The operator of Galla Park at The Banks, PMG Cincinnati, Inc., announced Tuesday it had filed for Chapter 11 bankruptcy protection.

A press release notes Galla Park will stay open and continue to employ its roughly 60employees, but the restaurant and bar is urging supporters to defend it against the city of Cincinnati's allegations that the business is a nuisance.

The city filed a nuisance complaint against Galla Park last week in Hamilton County Common PleasCourt and is asking a judge to shut the business down for a year.

The complaint outlined underage drinking, bar fights and repeated police intervention among the reasons for seeking the designation.

Galla Park management has said it takes 'full responsibility for any and all reported circumstances within our control."

A court hearing on the matter has not yet been scheduled.

"Galla Park remains committed to the Downtown and Banks communities, and we are encouraged by the incredible support and words of encouragement we have received from our loyal employees, guests, and patrons," the press release posted on Galla Park's Facebook page said.

"We want to use that strength to preserve our investment in the Downtown and Banks communities, and if you want to help Galla Park to continue to thrive, then we encourage you to dine with us, and support us on your evenings on the town," the press release goes on to say. "After all, without you, none of what we have been able to achieve would have been possible."

It then asks supporters to "share your feelings of support with the City Manager and the Mayor's Office with the same enthusiasm you have shown us in the last week."

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Amid nuisance allegations, Galla Park at The Banks files for bankruptcy; pledges to remain open - The Cincinnati Enquirer

A drilling rig operates in the Permian Basin oil and natural gas production area in Lea County, New Mexico, U.S., February 10, 2019. REUTERS/Nick Oxford/File Photo

Bankruptcies by North American oil producers rose to the highest first-quarter level since 2016, according to a report released on Thursday by law firm Haynes and Boone, as some energy firms struggled to recover from the 2020 crash in oil prices.

There were eight bankruptcies by North American oil and gas producers in the first quarter of 2021, versus 17 in the first quarter of 2016 - the last time U.S. crude futures dipped under $30 a barrel. Prices have bounced back from year-ago lows, trading around $63 a barrel on Thursday.

The first quarter was marked by filings from relatively smaller firms, with just $1.8 billion in aggregate debt for the quarter. Last year, companies that filed for bankruptcy held $53 billion in aggregate debt, the highest total since 2016, when debt among filers totaled $56.8 billion, according to the report.

HighPoint Resources Corp was the largest debt-holder to file for the quarter, with $905 million in secured and unsecured debt.

Five oilfield service companies also filed for bankruptcy in the first quarter. Offshore driller Seadrill Ltd (SDRL.OL) accounted for most of the sector's $7.2 billion debt, according to the report.

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North American oil bankruptcies hit highest Q1 level since 2016 -Haynes and Boone - Reuters

Courtyard by Marriott Dallas Market Center, one of Hospitality Investors Trust's properties at the time of its bankruptcy.

The economy's recent improvements didn't take effect quickly enough to save a hotel REIT focused on urban properties.

Hospitality Investors Trust, a public, nontraded REIT formerly known as American Realty Capital Hospitality Trust, is preparing to hand over all of its assets to Brookfield Asset Management in a prepackaged bankruptcy deal, Bloomberg reports. The REIT announced in itsyear-end Securities and Exchange Commission filingthat it expected to run out of cash needed to pay debt obligations in the first half of this year.

In the same filing, HIT noted that Brookfield would be the only potential source of additional liquidity and that it already owns all of the company's preferred equity, worth $441M. HIT ended 2020 with over $1B in debt obligations and is under forbearance with its mezzanine lenders through the first half of this year, Bloomberg reports. Law firm Proskauer Rose and investment bank Jefferies Financial Group have been advising HIT on its portfolio decisions.

HIT owns around 100 hotels across the U.S., focused in the Southeast but with a scattering of properties in the Northeast and as far west as California. The hotels it manages are all operated under the banners of brands owned by Marriott International, Hilton Worldwide Holdings or Hyatt Hotels Corp.

Though BAM's preferred equity makes up only 43% of the common stock shares of the company, its ability to assume HIT's debt in a takeover would likely wipe out all other ownership shares, Bloomberg reports. Brookfield's ownership deal called for regular cash payments, which HIT hadalready converted to payment in kind before the latest development.

Though improving weather and widening availability of coronavirusvaccinations havebegun to unleash the pent-up demand for travel in the U.S. economy, hotels that depend more on business travel or other nontourism business have not been included in that early turnaround. Eagle Hospitality Trust was a similar casualty, filing for bankruptcy in February.

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Hotel REIT To Turn Control Over To Brookfield In Bankruptcy Deal - Bisnow

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(Bloomberg) -- China Evergrande New Energy Vehicle Group Ltd.s expansive pop-up showroom sits at the heart of Shanghais National Exhibition and Convention Center. With nine models on display, its hard to miss. The electric car upstart has one of the biggest booths at Chinas 2021 Auto Show, which starts Monday, opposite storied German automaker BMW AG. Yet its bold presence belies an uncomfortable truth -- Evergrande hasnt sold a single car under its own brand.Chinas largest property developer has an array of investments outside of real estate, from soccer clubs to retirement villages. But its the recent entry into electric cars thats captured investors imaginations. Shareholders have pushed Evergrande NEVs Hong Kong-listed stock up more than 1,000% over the past 12 months, allowing it to raise billions of dollars in fresh capital. It now has a market value of $87 billion, greater than Ford Motor Co. and General Motors Co.Such exuberance over an automaker that has repeatedly pushed back forecasts for when it will mass produce a car is emblematic of the froth that has been building in EVs over the past year, with investors plowing money into a rally that briefly made Elon Musk the worlds richest person and has some concerned about a bubble. Perhaps nowhere is that more evident than in China, home to the worlds biggest market for new energy cars, where a mind-boggling 400 EV manufacturers now jostle for consumers attention, led by a cabal of startups valued more than established auto players but which have yet to turn a profit.Evergrande NEV was a relatively late entrant to that scene.In March 2019, Hui Ka Yan, Evergrandes chairman and one of Chinas richest men, vowed to take on Musk and become the worlds biggest maker of EVs in three to five years. Tesla Inc.s Model Y crossover had just had its global debut. In the two years since, Tesla has gained an enviable foothold in China, establishing its first factory outside the U.S. and delivering around 35,500 cars in March. Chinese rival Nio Inc. earlier this month reached a significant milestone when its 100,000th EV rolled off the production line, prompting Musk to tweet his congratulations.Read more: Nio, Xpeng Exude Optimism as EVs Boom: Shanghai Auto ShowDespite his lofty ambitions and Evergrande NEVs rich valuation, Hui has repeatedly pushed back car-production targets. The tycoons coterie of rich friends, among others, have stumped up billions, but making cars -- electric or otherwise -- is hard, and hugely capital intensive. Nios gross margins only flipped into positive territory in mid-2020, after years of heavy losses and a lifeline from a municipal government.Speaking on an earnings call in late March after Evergrande NEVs full-year loss for 2020 widened by a yawning 67%, Hui said the company planned to begin trial production at the end of this year, delayed from an original timeline of last September. Deliveries arent expected to start until some time in 2022. Expectations for annual production capacity of 500,000 to 1 million EVs by March 2022 were also pushed back until 2025. Still, the company issued a buoyant new forecast: 5 million cars a year by 2035. For comparison, global giant Volkswagen AG delivered 3.85 million units in China in 2020.Its not just Evergrandes delayed production schedule thats raising eyebrows. A closer look under the companys hood reveals practices that have industry veterans scratching their heads: from making selling apartments part of car executives KPIs, to attempting a model lineup that would be ambitious for even the most established automaker.Weird CompanyIts a weird company, said Bill Russo, the founder and chief executive officer of advisory firm Automobility Ltd. in Shanghai. Theyve poured a lot of money in that hasnt really returned anything, plus theyre entering an industry in which they have very limited understanding. And Im not sure theyve got the technological edge of Nio or Xpeng, he said, referring to the New York-listed Chinese EV makers already deploying intelligent features in their cars, like laser-based navigation.A closer look at Evergrande NEVs operations reveals the extent of its unorthodox approach. While its established three production bases -- in Guangzhou, Tianjin in Chinas north, and Shanghai -- the company doesnt have a general car assembly line up and running. Equipment and machinery is still being adjusted, according to people who have seen inside the factories but dont want to be identified discussing confidential matters.In a response to questions from Bloomberg, Evergrande NEV said it was preparing machinery for trial production, and would be able to make one car a minute once full production is reached.The company is targeting mass production and delivery next year of four models -- the Hengchi 5 and 6; the luxe Hengchi 1 (which will go up against Teslas Model S); and the Hengchi 3, according to people familiar with the matter. The company has told investors it aims to deliver 100,000 cars in 2022, one of the people said, roughly the number of units Nio, Xpeng Inc. and Li Auto Inc., the other U.S.-listed Chinese EV contender, delivered last year, combined.Its workers are also being asked to help sell real estate, the backbone of the Evergrande empire.New hires are required to undergo internal training and attend seminars that drill them on the companys property history and have nothing to do with car making. In addition, employees from all departments, from production-line workers to back-office staff, are encouraged to promote the sale of apartments, whether through posting ads on social media or bringing relatives and friends along to sale centers to make them appear busy. Managerial-level staff even have their performance bonuses tied to such endeavors, people familiar with the measure said.Meanwhile, the ambitious targets have Evergrande NEV turning to outsourcing and skipping procedures seen as normal practice in the industry, people with knowledge of the situation say.While its hiring aggressively and recently scored Daniel Kirchert, a former BMW executive who co-founded EV startup Byton Ltd., the firm has contracted most of the design and R&D of its cars to overseas suppliers, some of the people said. Contracting out the majority of design and engineering work is an unusual approach for a company wanting to achieve such scale.14 Models At OnceOne of those companies is Canadas Magna International Inc., which is leading the development of the Hengchi 1 and 3, one of the people said. Evergrande NEV has also teamed with Chinese tech giants Tencent Holdings Ltd. and Baidu Inc. to co-develop a software system for the Hengchi range. It will allow drivers to use a mobile app to instruct the car to drive via autopilot to a certain location and use artificial intelligence to switch on appliances at home while on the road, according to a statement last month.A spokesperson for Evergrande said it was working with international partners including Magna, EDAG Engineering Group AG and Austrian parts maker AVL List GmbH in developing 14 models simultaneously. Representatives from Magna declined to comment. A Baidu spokesperson said the company had no further details to share, while a representative for Tencent said the software venture is with a related firm called Beijing Tinnove Technology Co. that operates independently. Tinnove didnt respond to requests for comment.Rather than staggering model releases, Evergrande NEV appears to be rolling out every type of car all at once under its Hengchi brand, which sports a roaring gold lion on the badge and translates loosely to unstoppable gallop. The nine models being launched span almost all major passenger vehicle segments from sedans to SUVS and multi-purpose vehicles. Prices will range from about 80,000 yuan ($12,000) to 600,000 yuan, although the final costs could change, a person familiar said.Thats a completely different product development strategy to EV pioneers like Tesla, which only has four models on offer. Nio and Xpeng have also chosen to focus on just a handful of marques, and even then are struggling to break into the black.The market has proved the effectiveness of the one product in vogue at one time strategy, said Zhang Xiang, an automobile industry researcher at the North China University of Technology. Evergrande is offering many products and expects a win. Theres a question mark over whether this will work.Without any long-term carmaking nous, Evergrande has issued uncompromising directives to meet its latest production targets, according to the people. Two models, including the Hengchi 5, a compact SUV that rivals Xpengs G3, are targeting mass production in a little over 20 months. To hit that timing, certain industry procedures, like making mule cars, or testbed vehicles equipped with prototype components that require evaluation, may be skipped, people familiar with the situation said. Evergrande told Bloomberg it has entered a sprint stage toward mass production.As it is, Bloomberg could only find one instance where the Hengchi 5 has been showcased in public, in photos and grainy footage released by Evergrande in February as the cars drove around a snow-covered field in Inner Mongolia. The companys shares surged to a record.Glossing over those steps is unusual, said Zhong Shi, a former automotive project manager turned independent analyst.Theres a standard engineering process of product development, validation and verification, which includes several laboratory and road tests in China and everywhere else, Zhong said. Its hard to compress that to shorter than three years.While theres no suggestion Evergrandes approach violates any regulations, its stock-market run could be in for a reality check. After similarly hefty market gains, some EV startups in the U.S. that have yet to prove their viability as revenue-generating, profitable entities have lost their shine over the past few months amid concern about valuations and as established carmakers like VW move faster into EV fray.Read more: The End of Teslas Dominance May Be Closer Than It AppearsThe industrys multi-billion dollar surge also hasnt escaped Beijings attention. Evergrande NEV shares dipped lower last month after an editorial from the state-run Xinhua news agency highlighted concerns about how the EV sector is evolving. Of particular worry are companies that are shirking their responsibility to build quality cars, a blind race by local governments to attract EV projects, and high valuations by companies that have yet to deliver a single mass-produced car, according to the missive, which named Evergrande specifically in that regard. The huge gap between production capacity and market value shows there is hype in the NEV market, it said.Still, Evergrande NEVs stock has gained 18% since then, buoyed by the outlook for Chinas electric-car market. EVs currently account for about 5% of Chinas annual car sales, BloombergNEF data show, with demand forecast to soar as the market matures and electric-car prices fall. EV sales in China may climb more than 50% this year alone, research firm Canalys said in a February report.With competition also on the rise, some outside Evergrande NEVs loyal shareholder base remain skeptical.The market is getting crowded but unless you have a preferred lane, theres not much chance to win, Automobilitys Russo said. Maybe theres some synergy with the property businesses but right now its an EV story, and a pretty expensive one.For more articles like this, please visit us at bloomberg.comSubscribe now to stay ahead with the most trusted business news source.2021 Bloomberg L.P.

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18 Restaurant Chains That Have Filed for Bankruptcy - Yahoo Finance

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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Texas Bankruptcy Court Allows Make-Whole Premium As Liquidated Damages And Requires Solvent Chapter 11 Debtor To Pay Postpetition Interest -...

Members of the plutocratic Sackler clan have upped the ante yet again in a bankruptcy court bid to settle thousands of lawsuits targeting Purdue Pharmaceutical, the company long in the familys grip and blamed for untold misery in the now-resurgent opioid abuse and drug overdose crisis.

The latest, and perhaps final plan submitted to the courts for approval would oust the family from Purdue, converting it into a public trust company.

The Sacklers say they will add a billion dollars more from the familys formidable fortunes to sums that would be extracted from the company itself.

This would provide $10 billion to be divided among disputing parties to battle the worsening opioid crisis, including more than $4 billion from the family.

The New York Times reported the sums would be divided into three main buckets:

One to compensate individual plaintiffs, like families whose relatives overdosed or guardians of infants born with neonatal abstinence syndrome, as well as hospitals and insurers; another for [Indian] tribes; and the third and largest for state and local governments, which have been devastated by the costs ofa drug epidemic that has only worsened during the Covid-19 pandemic.

In exchange for $10 billion, the Washington Post reported, Purdue and the Sacklers would be released from opioid-related litigation a contentious point as many suing the company blame the Sackler family, in part, for the opioid epidemic that has killed more than 450,000 people in the United States in the past two decades, following Purdues development of OxyContin in 1996.

Purdue advertised and marketed their powerful painkiller in relentless and deceptive fashion, providing a template for others, with Big Pharma, doctors, hospitals, insurers, and others playing various roles in inundating the country with addictive, debilitating, and lethal opioids, notably their synthetic versions. These prescription medications, in turn, opened the door to abuse and overdoses of illicit drugs. Rural and ex-urban areas were slammed by opioid-related problems, with big cities suffering with surging illegal drug overdoses.

Opioid makers, distributors, and others implicated in this public health menace have insisted they followed the law and share no fault for what had been, pre-pandemic, a leading public health crisis for the country.

States, cities, and other local governments, along with Indian tribes, filed thousands of suits against parties they blamed for the mess, with the federal courts consolidating the cases before a judge in Cleveland. Purdue, however, took a different step from other drug companies and cast its fate with the bankruptcy courts.

The plaintiffs in the voluminous cases have split over the settlement offers by Purdue and the Sacklers, with key parties, particularly from bigger and bluer states, denouncing the plans as insufficient. Other jurisdictions, however, say the case has dragged on and the needs are great and growing to attack the opioid crisis with any increased resources to do so highly welcome.

Crisis victims continue to be infuriated that full justice has not been done for the huge harms caused by Purdue and others implicated in the opioid crisis. The Justice Department, under the Trump Administration, raced to conclude a deal in November in which the Purdue company pleaded guilty to criminal charges for defrauding health agencies and violating anti-kickback laws, the New York Times reported.

In that deal, the family whose fortunes have been estimated to run as high as $13 billion faced no criminal charges but agreed to pay $225 million in civil penalties while admitting no wrongdoing. Federal prosecutors said as recently as in November that they still can charge family members.

The absence of charges combined with other family actions to rile critics, who say the Sacklers have plundered Purdue to enrich themselves and keep money away from plaintiffs. As the Washington Post reported:

Members of the family withdrew about $10 billion in profits from 2008 to 2017, according to a forensic audit of their finances filed in the case. The familys attorneys have argued that the distributions complied with a corporate integrity agreement and about half were paid as taxes.

It is up in the air as to whether the bankruptcy court will approve the latest settlement plan. Critics say it is notably stingy to individuals harmed in the opioid crisis, the Washington Post reported:

According to [court documents], about 130,000 personal injury claimants, including family members who lost relatives to overdoses from OxyContin, would receive compensation up to an estimated maximum of $48,000. That dollar amount, to families torn apart by addictive opioids, is insufficient, said Charlotte Bismuth, a former New York assistant district attorney following the bankruptcy case. I am absolutely appalled, disgusted and angered by the paltry payments reserved for personal injury victims, Bismuth wrote in an email. Families were devastated emotionally and financially: $48,000 doesnt even begin to cover funeral costs and lost wages. It is an insult to those families who lost their reason to live overnight.

In my practice, I see not onlythe harms that patients suffer while seeking medical services, but alsothe damages that can be inflicted on them by dangerous drugs, notably opioids.Complex lawsuits involving big numbers of plaintiffs can be difficult to resolve to the satisfaction of all concerned. The individual plaintiffs often deserve great credit for the fortitude it can require to withstand prolonged, withering legal onslaughts from deep-pocketed defendants, whether monied corporations or wealthy individuals who also may be held in high esteem by some for their philanthropy.

It was unacceptable that, among other factors, political and regulatory failures ever allowed the opioid abuse and drug overdose crisis to explode as it did and that it has returned with a vengeance. Stat, the medical and scientific news site, reported that federal authorities recorded 81,003 deaths due to drug overdoses in the 12-month period ending last June. That was a 20% increase and the highest number of fatal overdoses ever recorded in the U.S. in a single year. The drug deaths started spiking last spring, as the coronavirus forced shutdowns, and more recent statistics show the crisis has only deepened.

The Biden Administration may be challenged on many fronts, notably in battling the coronavirus pandemic. It would help in dealing with prescription painkillers and other powerful medications if the administration would nominate a new, permanent chief of the federal Food and Drug Administration. Thats a urgent task for the president and Xavier Becerra, his newly confirmed Health and Human Services chief, We all have much work to do to re-energize the fight against the opioid menace.

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Plutocratic clan offers $1 billion more in bankruptcy bid to end opioid suits - JD Supra