Equitable Mootness – – Are Bankruptcy Courts Still to be “Courts of Equity?”

Detroit manhole cover

The concept of “equitable mootness” is a doctrine of relatively long-standing in bankruptcy jurisprudence. It has been used by courts to avoid determination of issues raised on appeal that would require the unscrambling of a plan previously confirmed and implemented. However, that doctrine has recently been questioned in a variety of decisions. It appears that the scope of equitable mootness is clearly ebbing. In that context, a recent decision by this Sixth Circuit Court of Appeals provides an opportunity to further examine the doctrine.

In Ochadleus, et. al. v City of Detroit Michigan, the Sixth Circuit considered an appeal from confirmation of the City of Detroit’s confirmed chapter 9 plan of adjustment. The plan was the product of the so-called “Grand Bargain” that reflected a complex series of settlements and agreements among various creditor constituencies. One aspect of the plan involved a reduction in certain pension benefits under the City’s general retirement system. Although the plan was approved by the class comprised of pension claimants, several pension creditors appealed confirmation of the plan challenging the reduction in their pension benefits. Continue Reading

Christmas on Credit

Frustrated Santa Claus. Christmas and many problems.With the UK festive season now merrily in swing, credit cards maxed out on Black Friday and Cyber Monday bargains and Christmas shopping well under way, will the lure of the Christmas spirit be enough to tip some people over the edge into unmanageable debt?

For many the holiday season is a time to adopt a laissez-faire attitude to spending (and waistlines for that matter). However, come the New Year the financial hangover will still be lingering, well after the frivolities have worn off.

With UK personal insolvencies increasing noticeably throughout 2016, it could be that following Christmas 2016 we will be faced with ever increasing numbers of personal insolvencies into 2017. The insolvency rule changes introduced in April 2016 cutting the cost of bankruptcy has seen more people declaring themselves bankrupt. The rule changes mean that people can now apply for their own bankruptcy online rather than through Court proceedings, which has perhaps been the barrier in the past. Now the perceived stigma has been removed it seems more individuals are declaring themselves bankrupt and are seeing this as an easy way out of debt.

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Early Restructuring and a Second Chance for Entrepreneurs – EU Commission proposes new Restructuring Directive

Businessman falling

According to the European Commission, every year in the EU, 200,000 firms go bankrupt, resulting in over 1.7 million people losing their jobs. Currently, too many viable companies in financial difficulties are steered towards liquidation rather than early restructuring. Also, too few entrepreneurs get a second chance.

In order to improve this situation, yesterday  the European Commission has presented the draft EU directive on preventive restructuring frameworks, second chance and measures to increase the efficiency of restructuring, insolvency and discharge procedures (the “Draft Directive”).

The purpose of the Draft Directive is to provide a legal framework where more viable companies can survive, legal certainty resulting from similar rules on insolvency and restructuring across the EU attracts cross-border investors and where early restructuring measures will result in increased recovery rates for creditors.

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The balance of power – the right deal or the best deal? New administration procedure for housing sector

MortgageThe Housing and Planning Act 2016 (the “Act”) introduces special administration procedures for social housing associations which aim to protect the level of social housing in the UK.  The new housing administration orders (“HAOs”) create an additional objective for insolvency practitioners to try to keep social housing in the regulated housing sector to maintain levels of social housing.

However, it remains to be seen whether the Act gives the Homes and Communities Agency (“HCA”) sufficient teeth to maintain social housing numbers without discouraging lenders from providing funding to social housing associations – and whether this objective will conflict with the overriding objective to obtain the best outcome for creditors. Continue Reading

Stormy Seas for Indenture Trustees and Bondholders Settling Claims in Bankruptcy

Dangerous storm over oceanRecently, in Caesars Entertainment Operating Co. (“Caesars”), U.S. Bankruptcy Judge A. Benjamin Goldgar denied payment of indenture trustee Wilmington Trust’s attorneys’ fees and costs in connection with the Debtors’ motion to approve a settlement.  The U.S. Trustee objected to payment arguing that the Debtor could not rely on 11 U.S.C. § 363 (seeking settlement approval) as authority to pay Wilmington Trust’s fees and costs.  Sustaining the U.S. Trustee’s objection, the Court found that as a matter of statutory interpretation, indenture trustee legal fees for unsecured notes could not be paid under section 363 of the Bankruptcy Code.  Judge Goldgar made it clear that while payment under section 363 was not available, his ruling did not address whether the indenture trustee fees could be paid under section 503(b) of the Bankruptcy Code or under a plan of reorganization.[1]

While the Bankruptcy Code is clear on when and how an unsecured creditor can be paid legal fees and costs, as a practical matter, the strict interpretation of the Code will hamper the timing and implementation of settlements with bondholders in large complex cases such as Caesars.  The result is that the parties will be forced to embed the settlements in a plan of reorganization or the indenture trustee must seek reimbursement under section 503(b).   Judge Goldgar’s ruling is also a harbinger of the objections that will no doubt arise when indenture trustees seek payment of fees and costs under section 503(b) as the standard is elusive at best.  Lastly, unlike many other creditors seeking payment of professional fees and costs from the estate, indenture trustees have the benefit of an express contractual priority of payment for the trustee’s fees and costs over payment to their bondholders and a charging lien on recoveries to the extent that the fees and costs are not otherwise paid.

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Third Circuit Enforces Make-Whole Payment in Energy Future Bankruptcy

Appellate CourtThe Third Circuit Court of Appeals, in an opinion authored by Judge Thomas Ambro, has reversed two district court opinions and refused to allow a company to use a Chapter 11 bankruptcy filing as a means to reduce interest on its debt obligations.  Specifically, the court held that filing for bankruptcy would not excuse a debtor from its obligation for a “make-whole” payment otherwise due to its lenders.

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Chancellor of English High Court looks to a post-Brexit future

In an address last week to the Insolvency Lawyers Association, Sir Geoffrey Vos, Supreme Court Londonthe new Chancellor of the High Court, looked at the future for Insolvency and Business Litigation in London, especially after Brexit.

Whilst acknowledging that Brexit presents a challenge, he said it is one which should not defeat the English Courts. The main issue will be enforcing English judgments within the EU when we are no longer bound by Brussels 1 Regulation. English insolvency proceedings will no longer be automatically recognised in other EU member states under the EU Insolvency Regulation or the revised version which will come into effect in June 2017. The Chancellor reassured insolvency lawyers that these issues could be resolved and that the judiciary and the government are giving them detailed and careful consideration and looking for simple and practical solutions.

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Marshalling Allows Individuals to Benefit from Agricultural Charges

Business successThe High Court has recently held that an individual may claim the proceeds of the sale of assets subject to an agricultural charge by the application of the equitable remedy of marshalling.

Agricultural Sector

The agricultural or farming sector includes a combination of unique assets and ownership structures that have given rise to a bespoke form of security. The Agricultural Credits Act 1928 (“ACA 1928”) allows a farmer to grant an agricultural charge to a bank. The purpose behind this legislation was to give farmers more freedom to use their chattels as security. Essentially, an agricultural charge extends the scope of the security from just the land and buildings of a farm to include the other assets of the farm, such as crops (whether in the ground or already picked), livestock, vehicles and machinery. It is similar to taking a debenture over a limited company such that a lender or financier would be able to take control of the business of the farm, not just its real property.

Marshalling

Marshalling is an equitable remedy to do justice between two or more creditors who are each owed money by the same debtor. It is based on the principle that a creditor who has recourse to a number of sources to satisfy its debt should not disadvantage another creditor who only has access to one of those sources. In these circumstances, marshalling allows the second creditor a right in equity to require the first creditor to be treated as having satisfied himself from security to which the second creditor has no recourse.

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Ninth Circuit Makes Plan Confirmation More Expensive And Doubtful

Symbol of rising interest rates on white background. Financial concept

What does it mean to “cure” a default in the context of a plan of reorganization? This question arises by virtue of section 1123(a)(5)(G) of the Bankruptcy Code, which requires that a plan provide adequate means for the plan’s implementation, including the “curing or waiving of any default.”  On November 4, 2016, the Ninth Circuit Court of Appeals defined what it means to “cure” by holding that a debtor can only cure a contractual default under a plan of reorganization by complying with contractual post-default interest rate provisions.

In Pacifica L 51 LLC v. New Investments, Inc. (In re New Investments, Inc.), Case No. 13-36194, United States Court of Appeals for the Ninth Circuit, the debtor borrowed approximately $3 million from its lender in order to purchase a hotel property in Washington State.  The promissory note, which was secured by a deed of trust, provided for an 8% non-default interest rate.  The note also provided that in the event of default the interest rate would increase to 13%.

The debtor subsequently defaulted on the note and filed for Chapter 11 bankruptcy after the lender commenced non-judicial foreclosure proceedings. The debtor’s plan of reorganization proposed to cure the default under the note by selling the hotel to a third party and using the proceeds of the sale to pay the outstanding amount of the loan at the non-default interest rate.  The lender objected to the plan, arguing that under the terms of the note it was entitled to be paid at the higher, post-default interest rate.  Following the sale of the property, the bankruptcy court ordered that $100,000 of the proceeds be reserved for the lender’s attorney’s fees on appeal and that $670,000 be set aside as a disputed claim reserve for the lender.

The question presented by the lender’s appeal was the interplay between section 1123(a)(5)(G) and section 1123(d). As noted above, section 1123(a)(5)(G) requires a plan to provide adequate means to cure or waive any default.  This section was interpreted by the Ninth Circuit in Great W. Bank & Tr. v. Entz-White Lumber & Supply, Inc. (In re Entz-White Lumber & Supply, Inc.), 850 F.2d 1338 (9th Cir. 1988), to permit a debtor to cure contractual defaults by paying the non-default interest rate.  Under the court’s holding in Entz-White, a debtor whose plan proposed to cure a default could therefore avoid having to pay a higher, post-default interest rate called for in the underlying agreement.

Subsequent to the court’s ruling in Entz-White, Congress added subsection (d) to section 1123.  This new subsection provided that notwithstanding subsection (a) of section 1123, “if it is proposed in a plan to cure a default, the amount necessary to cure the default shall be determined in accordance with the underlying agreement and applicable nonbankruptcy law.”

In its appeal, the lender argued that this new subsection (d) rendered the court’s decision in Entz-White void and that a debtor who proposes to cure a default must comply with the underlying contract and applicable nonbankruptcy law.  In this case, this meant that the debtor was required to cure its default at the 13% default interest rate, and not at the non-default 8% interest rate.  A divided panel from the Ninth Circuit agreed, holding that under section 1123(d) “a debtor cannot nullify a pre-existing obligation in a loan agreement to pay post-default interest solely by proposing a cure.”  Instead, the debtor must look to the underlying contract and applicable nonbankruptcy law to determine what amount it needs to pay in order to cure its default.  The court held that this interpretation was consistent with the intent of section 1123(d) because it holds the parties to the benefit of their bargain.  Furthermore, it is consistent with the balance struck by the Bankruptcy Code between a debtor’s interest in reorganizing and the creditor’s interest in maximizing the value of the bankruptcy estate.

In her dissent, Circuit Judge Marsha S. Berzon criticized the majority’s holding as inconsistent with the legislative history of section 1123(d). Judge Berzon further argued that the holding was contrary to the binding precedent of the Entz-White opinion.

If the divided panel’s ruling stands, it will be harder for debtors, at least in the Ninth Circuit, to confirm a plan since any cure will now have to include payment of items such as a default rate of interest and associated penalties. In contrast, the leverage available to the lender has substantially increased given its right to demand payment in full, at a default rate of interest, before a default can be cured under a plan.  It remains to be seen whether the debtor will seek en banc review.  Review by the full Ninth Circuit may be appropriate since this issue has not been addressed by any of the other circuit courts of appeal.

We will keep our readers informed of any developments in this case.

Brexit by numbers

What are the implications for the European restructuring profession of the continued uncertainty over the UK’s withdrawal from the EU? The High Court gave its judgment in the Article 50 judicial review proceedings on Houses of Parliament3 November 2016. The Court decided the UK Government does not have the power under the Crown’s prerogative to give notice pursuant to Article 50 for the UK to withdraw from the European Union.  The Government has confirmed its intention to appeal the decision to the Supreme Court.  The Supreme Court has said it will accept a leapfrog appeal (avoiding the intermediate step of a Court of Appeal hearing) and has reserved between December 5th and December 8th for the hearing.  This will be the first time since the Supreme Court was formed in 2009 that a hearing will take place before all 11 justices, demonstrating the importance of the case.

For a longer article explaining the background of the case and discussing the result in more detail, see the post Brexit Means… on our Brexit Legal Blog.

It is possible that because of this legal ruling, the British Prime Minister, Theresa May, may not be able to serve the Article 50 notice for the UK to withdraw from the European Union by March 2017 in accordance with her original timetable. Until the Article 50 notice has been served, the EU leaders are refusing to entertain even preliminary discussions about what will happen after the UK exits the EU. What is the impact of this upon European restructuring professionals?

At the moment, European cross-border restructuring is governed by Council Regulation (EC) 1346/2000 on insolvency proceedings. On 5 June 2015, the amended or “recast” Insolvency Regulation was published in the Official Journal of the EU, as Regulation (EU) 2015/848. The majority of the provisions of the Recast Regulation will apply from 26 June 2017. It will govern European cross-border restructurings by UK insolvency practitioners until the UK finally leaves the EU, which looks like mid-2019 at the earliest. Until the Article 50 notice is served, the UK cannot begin negotiations about a new treaty to ensure recognition in Europe for UK insolvency practitioners.

In the meantime, we can be sure of only one thing: the uncertainty as to what Brexit really means for the European restructuring profession will continue for a while yet.

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