November 18, 2020 - On November 17th the LSTA hosted the latest in its quarterly series of webinars covering Recent Developments in Bankruptcy. This installment was moderated by the LSTA’s Elliot Ganz and, as usual, featured Richard Levin of Jenner & Block. This session, the first after the recent elections, began with a discussion of the prospects for Congressional action on bankruptcy reform. Mr. Ganz noted that while significant financial regulatory legislation is unlikely in a closely-divided Senate (at the time of writing, the Republicans held a 50-48 edge with two seats yet to de decided), consumer bankruptcy reform legislation, which tends to be more bipartisan than most issues, was certainly possible. Furthermore, bankruptcy bills often turn into “Christmas Trees” that attract other legislative “ornaments” so corporate bankruptcy reform was possible. Mr. Levin agreed, noting that a tweak to the bankruptcy code included in the CARES Act that significantly increased the threshold for small business bankruptcy filings proved to be extremely helpful in many bankruptcy cases. He predicted that more tweaks could be forthcoming in the next wave of pandemic stimulus but fell short of predicting that significant Chapter 11 reform, such as H.R. 7370 (a bill promoted by labor interests which was introduced in June and “marked up” in the House Judiciary Committee in September) could make its way into law.
Mr. Levin then discussed a number of important recent cases, two of which are particularly noteworthy. The first, CNH Diversified v. Cleveland United, is a non-bankruptcy case involving strict foreclosure under a bond indenture. In a 4-3 opinion, the majority of the New York Court of Appeals (the state’s highest court) ruled that strict foreclosure does not extinguish bondholders’ payment rights. The Court distinguished Marblegate a Second Circuit case, where a minority bondholder lost only the “practical ability to collect payment”. Here, the Court ruled that the minority holders’ legal rights were extinguished. In response to a question about the ramifications of this case, Mr. Levin suggested that issuers will likely try to have their cases adjudicated in federal court or structure transactions that overcome holdouts in a way that does not run afoul of this ruling. In the second case of interest, In re Ultra Petroleum, Judge Marvin Isgur of the SDTX bankruptcy court ruled that a “make-whole” is not interest because it does not compensate the lender for the borrower’s use of forbearance of the lender’s money, “it compensates the [lender] for [the borrower’s] breach of a promise to use money.” The case arose in a situation where the borrower filed for bankruptcy when oil prices collapsed but quickly became solvent when prices recovered. The filing triggered the make whole provision in the credit agreement and the judge signaled that the “absolute priority rule” in bankruptcy does not permit the equity holders to receive windfalls at the expense of senior creditors who are entitled to be paid in full. The case has been appealed to the District Court and we will continue to monitor it. The remainder of the webinar focused on other important bankruptcy cases concerning topics such as cram downs, fraudulent transfers, critical vendor payments, and valuation. A replay of the webinar and the presentation materials are available here.