Posts Tagged ‘Bankruptcy’

Cross-Border Recognition of Resolution Actions

Editor’s Note: The following post comes to us from Sullivan & Cromwell LLP, and is based on a Sullivan & Cromwell publication authored by Mitchell S. Eitel, Andrew R. Gladin, Rebecca J. Simmons, and Jennifer L. Sutton. The complete publication, including footnotes, is available here.

On September 29, 2014, the Financial Stability Board (the “FSB”) published a consultative document concerning cross-border recognition of resolution actions and the removal of impediments to the resolution of globally active, systemically important financial institutions (the “Consultative Document”). The Consultative Document encourages jurisdictions to include in their statutory frameworks seven elements that would enable prompt effect to be given to foreign resolution actions. In addition, due to a recognized gap between the various national legal resolution regimes that are currently in place and those recommended by the FSB, the Consultative Document sets forth two “contractual solutions”—that is, resolution-related arrangements to be implemented as a matter of contract among the private parties involved—to address two underlying substantive issues that the FSB considers critical for orderly cross-border resolution, namely:

…continue reading: Cross-Border Recognition of Resolution Actions

The Duty to Maximize Value of an Insolvent Enterprise

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Thursday October 9, 2014 at 9:07 am
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Editor’s Note: The following post comes to us from Brad Eric Scheler, senior partner and chairman of the Bankruptcy and Restructuring Practice at Fried, Frank, Harris, Shriver & Jacobson LLP, and is based on a Fried Frank M&A Briefing authored by Mr. Scheler, Steven Epstein, Robert C. Schwenkel, and Gail Weinstein. This post is part of the Delaware law series, which is cosponsored by the Forum and Corporation Service Company; links to other posts in the series are available here.

In Quadrant Structured Products Company, Ltd. v. Vertin (October 1, 2014), Vice Chancellor Laster clarified the Delaware Chancery Court’s approach to breach of fiduciary duty derivative actions brought by creditors against the directors of an insolvent corporation. Importantly, the Vice Chancellor applied business judgment rule deference to the non-independent directors’ decision to try to increase the value of the insolvent corporation by adopting a highly risky investment strategy—even though the creditors bore the full risk of the strategy’s failing, while the corporation’s sole stockholder would benefit if the strategy succeeded. By contrast, the court viewed the directors’ decisions not to exercise their right to defer interest on the notes held by the controller and to pay above-market fees to an affiliate of the controller as having been “transfers of value” from the insolvent corporation to the controller, which were subject to entire fairness review.

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Update on Directors’ and Officers’ Insurance in Bankruptcy

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Wednesday September 24, 2014 at 9:02 am
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Editor’s Note: The following post comes to us from Douglas K. Mayer, Of Counsel in the Restructuring and Finance Department at Wachtell, Lipton, Rosen & Katz, and is based on a Wachtell Lipton memorandum by Mr. Mayer, Martin J.E. Arms, and Emil A. Kleinhaus.

Directors’ and officers’ (“D&O”) insurance coverage continues to represent a key element of corporate risk management. See memo of July 28 2009. A decision in the bankruptcy of commodities brokerage MF Global, In re MF Global Holdings Ltd., No. 11-15059 (S.D.N.Y. Sept. 4, 2014), provides a recent illustration of how D&O insurance may be treated upon the bankruptcy of the insured company, depending on the specific structure and terms of the insurance at issue.

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Rolling Back the Repo Safe Harbors

Posted by Mark Roe, Harvard Law School, on Wednesday September 10, 2014 at 9:02 am
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Editor’s Note: Mark Roe is the David Berg Professor of Law at Harvard Law School, where he teaches bankruptcy and corporate law. This post is based on an article co-authored by Professor Roe, Ed Morrison, Professor of Law at Columbia Law School, and Bankruptcy Judge Christopher Sontchi for the District of Delaware. All three are members of the Advisory Committee on Derivatives, Financial Contracts and Safe Harbors, which is working with the ABI Commission to Study the Reform of Chapter 11. The article was presented at the Federal Reserve’s recent conference on Wholesale Funding Markets.

Ed Morrison, Judge Christopher Sontchi and I recently posted to SSRN our article recommending a major narrowing of the repo safe harbors, after presenting it at the Federal Reserve’s recent conference on Wholesale Funding Markets in which the Boston Fed president warned of the dangers in the repo market. Overall, we conclude that the Bankruptcy Code has aggressively and unwisely sought to regulate market liquidity and systemic risk, with the Code’s “safe harbors” from the normal bankruptcy machinery largely backfiring during the financial crisis. The sounder policy would be to limit the repo safe harbors to U.S. Treasury repos and repos of similarly liquid government securities.

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Bankruptcy Court Holds Secured Creditors Can Be “Crammed Down” With Below-Market Replacement Notes

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Saturday September 6, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Mark I. Bane, Partner focusing on corporate restructurings at Ropes & Gray LLP, and is based on a Ropes & Gray Alert.

On August 26, 2014, in the case In re MPM Silicones, LLC, Case No. 14-22503 (Bankr. S.D.N.Y.) (“Momentive”), the United States Bankruptcy Court for the Southern District of New York held that secured creditors could be “crammed down” in a chapter 11 plan with replacement notes bearing interest at substantially below market rates. Unless overturned on appeal, this decision will introduce a new level of risk to leveraged lending—secured lenders will face the specter of losing in a bankruptcy restructuring not only their negotiated rates, but any semblance of market treatment. This risk could result in a tightening of availability and increased costs to borrowers in levered transactions.

…continue reading: Bankruptcy Court Holds Secured Creditors Can Be “Crammed Down” With Below-Market Replacement Notes

Nationalize the Clearinghouses!

Posted by June Rhee, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Friday August 8, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Stephen J. Lubben, Harvey Washington Wiley Chair in Corporate Governance & Business Ethic at Seton Hall University School of Law.

A clearinghouse reduces counterparty risks by acting as the hub for trades amongst the largest financial institutions. For this reason, Dodd-Frank’s seventh title, the heart of the law’s regulation of OTC derivatives, requires that most derivatives trade through clearinghouses.

The concentration of trades into a very small number of clearinghouses or CCPs has obvious risks. To maintain the vitality of clearinghouses, Congress thus enacted the eighth title of Dodd-Frank, which allows for the regulation of key “financial system utilities.” In plain English, a financial system utility is either a payment system—like FedWire or CHIPS—or a clearinghouse.

But given the vital place of clearinghouses in Dodd-Frank, it is perhaps surprising that Dodd-Frank makes no provision for the failure of a clearinghouse. Indeed, it is arguable that the United States is not in compliance with its commitment to the G-20 on this point.

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Make-Whole Provisions Continue to Cause Controversy

Posted by Yaron Nili, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday August 3, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Michael Friedman, Partner in the Banking Group and in the Litigation, Bankruptcy and Restructuring Group at Chapman and Cutler LLP, and is based on a Chapman publication by Mr. Friedman and Craig M. Price.

Given today’s low interest rate environment, the enforceability of make-whole provisions has been the subject of intense litigation as debtors seek to redeem and refinance debt entered into during periods of higher interest rates, and investors seek to maintain their contractual rates of return. This trend has come to the forefront most recently in two separate cases, one filed in Delaware and the other in New York. In Energy Future Holdings, the first-lien and second-lien indenture trustees have each initiated separate adversary proceedings in Delaware bankruptcy court claiming the power company’s plan to redeem and refinance its outstanding debt entitles the respective holders to hundreds of millions of dollars in make-whole payments. [1] Conversely, In MPM Silicones, LLC, it is the debtors that have sought a declaratory judgment from the New York bankruptcy court that, on account of an automatic acceleration upon the bankruptcy filing, no make-whole payment is required to be paid. [2] Given the frequency which make-whole disputes have arisen and the enormous sums at stake, it is important for all investors to understand the various arguments for and against payment of a make-whole premium, and the specific issues to look for when analyzing debt containing make-whole provisions. Despite the various legal arguments that exist, the single most important factor will always be the specific language of the applicable credit agreement or indenture.

…continue reading: Make-Whole Provisions Continue to Cause Controversy

Court Holds That US Bankruptcy Code Does Not Permit Recovery of Extraterritorial Transfers

Editor’s Note: George T. Conway III is partner in the Litigation Department at Wachtell, Lipton, Rosen & Katz. The following post is based on a Wachtell Lipton firm memorandum authored by Mr. Conway, Douglas K. Mayer, and Emil A. Kleinhaus.

In a decision that could significantly limit the power of U.S. bankruptcy trustees to challenge cross-border transactions, the United States District Court for the Southern District of New York has held that the trustee overseeing the Madoff liquidation may not recover transfers made by Madoff’s foreign customers to other foreign entities. SIPC v. Bernard L. Madoff Investment Securities LLC, No. 12-mc-115 (S.D.N.Y. July 7, 2014). The court held that recovery of such “purely foreign” transfers would run afoul of the presumption against extraterritoriality reaffirmed by the Supreme Court in Morrison v. National Australia Bank.

…continue reading: Court Holds That US Bankruptcy Code Does Not Permit Recovery of Extraterritorial Transfers

Two New Cases Cast a Shadow Over Credit Bidding

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 13, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Marshall S. Huebner, partner and co-head of the Insolvency and Restructuring Group at Davis Polk & Wardwell LLP, and is based on an article by Damian S. Schaible and Darren S. Klein that first appeared the New York Law Journal; the full article, including footnotes, is available here.

Two recent bankruptcy court decisions have increased uncertainty over the right of secured creditors to credit bid in sales of debtors’ assets. Relying on and expanding a rarely used “for cause” limitation on a secured creditor’s right to credit bid under §363(k) of the Bankruptcy Code, these decisions may ultimately affect credit bidding rights in a broad swath of cases.

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The Prevalence and Utility of “Roadmap” Decisions in Bankruptcy Mega-Cases

Posted by Kobi Kastiel, Co-editor, HLS Forum on Corporate Governance and Financial Regulation, on Sunday July 6, 2014 at 9:00 am
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Editor’s Note: The following post comes to us from Marshall S. Huebner, partner and co-head of the Insolvency and Restructuring Group at Davis Polk & Wardwell LLP, and is based on an article by Mr. Huebner and Elliot Moskowitz that first appeared in Financier Worldwide.

As the pace of Chapter 11 filings jumped in the aftermath of the 2008 financial crisis, bankruptcy courts found their resources increasingly stretched. The number of Chapter 11 “mega-cases”—that is, cases that involve $100m or more in assets, over 1000 entities and/or a high degree of public interest—placed significant strain on the nation’s bankruptcy courts. Many of these cases involve numerous creditors and, given the stakes, litigation that has the potential to drag on for years. Against this backdrop, bankruptcy judges have developed a variety of strategies to foster the efficient resolution of such cases. Mediation is becoming a regular feature of contentious mega-cases, and judges are frequently urging parties to resolve their disputes. Where a compromise is not possible and litigation is unavoidable, judges have increasingly issued “roadmap” decisions that deny relief but provide a specific list of steps that need to be taken or changes to be made that will yield judicial approval. These decisions encourage parties to recalibrate their positions based on the court’s views on the matter, engage in productive negotiations, and quickly come to an agreement on a proposal that the court has already indicated it will approve.

…continue reading: The Prevalence and Utility of “Roadmap” Decisions in Bankruptcy Mega-Cases

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