CLIENT ALERT: Olshan’s 2020 Hot Topics in Bankruptcy Law
As we head into 2020, Olshan’s Bankruptcy & Financial Restructuring practice group shares its list of current hot topics in bankruptcy law. In no particular order, here is our top 10 list:
1. Make-Whole Provisions. Bonds and term loans often contain “make-whole” provisions that provide for the payment of a fee in lieu of interest upon early prepayment. It remains unresolved as to whether a make-whole must be satisfied to leave a creditor unimpaired under the Bankruptcy Code or whether make-wholes constitute claims for unmatured interest that are disallowed under Bankruptcy Code section 502(b). Another open question is whether the lender’s acceleration upon default can trigger the make-whole clause. The law is further developing with the closely watched case of In re Ultra Petroleum Corp. In the “Ultra Petroleum II” case, the Fifth Circuit Court of Appeals essentially held that make-whole provisions are almost always unmatured interest subject to disallowance. But recently, in the “Ultra Petroleum III” case, the Fifth Circuit Court of Appeals withdrew its “Ultra Petroleum II” decision, held that make-whole provisions are fact-intensive case specific decisions, and remanded to the Bankruptcy Court for further consideration. Meanwhile, in In re 1141 Realty Owner LLC, the Bankruptcy Court for the Southern District of New York held that a make-whole clause was enforceable under New York law, even where a lender accelerated the loan, based on the language of the make-whole clause in that case.
2. Supreme Court Rules on Trademark Licenses. Bankruptcy Code section 365(n) gives special protections to intellectual property licensees upon rejection, but also expressly defines intellectual property as patents and copyrights, but not trademarks. Resolving a long-open question, in Mission Product Holdings, Inc. v. Tempnology, LLC, the Supreme Court held that section 365(n) does not extend to trademark licensees; however, the Supreme Court protected trademark licensees by ruling that rejection of a trademark still affords licensees the protections of section 365(g): a rejection is treated as a breach and the breach does not revoke the license or stop the licensee from exercising its rights under the license agreement. The ruling allows trademark licensees to retain their rights following rejection by the licensor.
3. Securities Safe Harbor. Bankruptcy Code section 546(e) prevents the avoidance (or claw back) of certain settlement payments made by or to certain entities, including financial institutions. In the “Tribune II” decision, the Second Circuit Court of Appeals held in December 2019 that cash payments to shareholders arising from an LBO paid by Compushare Trust Company were protected from avoidance because they were made by a “financial institution” as agent in making payments to tendering shareholders.
4. Bankruptcy Sale Safe Harbor. Bankruptcy Code section 363(m) generally protects good faith purchasers of estate assets from risk of reversal of the underlying transaction on appeal. Writing for the Seventh Circuit Court of Appeals and reversing precedent, however, in Trinity 83 Development v. ColFin Midwest Funding, LLC, Judge Easterbrook held that section 363(m)’s protection protects purchasers but does not prevent appellate courts from revisiting the allocation of proceeds from the sale.
5. Substantive Consolidation. In United Sportco Holdings, Inc., the Bankruptcy Court for the District of Delaware authorized substantive consolidation of multiple debtor entities as part of a liquidating chapter 11 plan over the objection of creditors where the estates’ assets were scrambled postpetition disentanglement would be cost prohibitive, the objecting creditor could not articulate a harm, and substantive consolidation was not intended to harm creditors. This development is particularly meaningful as Olshan served as co-counsel to the second lien creditors who sought the substantive consolidation.
6. Intercreditor Agreement Goes to Third Circuit. In December 2018, the Bankruptcy Court for the District of Delaware held that the filing of a proof of claim constituted an exercise of remedies that was prohibited by an intercreditor agreement and that a provision in such agreement concerning distribution of collateral proceeds constituted de facto claim subordination. The junior creditors appealed and in September 2019, the District Court for the District of Delaware affirmed. The junior creditors took the appeal to the Third Circuit Court of Appeals, where it is currently pending and styled as Ad Hoc Group of Second Lien Creditors v. LNV Corp. (In re: La Paloma Generating Company LLC).
7. Limitations on Involuntary Filing. Bankruptcy Code section 303 provides a mechanism for holders of bona fide non-contingent claims to file an involuntary bankruptcy against a person or entity. However, in In re Taberna Preferred Funding IV, Ltd., the Bankruptcy Court for the Southern District of New York held that holders of nonrecourse secured claims against a collaterized debt obligation did not have the right to file an involuntary bankruptcy against the underlying special purpose entity issuer.
8. Break-Up Fee. In In re Energy Future Holdings Corp., the Third Circuit Court of Appeals held that the Delaware Bankruptcy Court did not abuse its discretion in reconsidering an earlier award of a $275 million stalking horse break-up fee for a sale of the debtor’s crown-jewel operating subsidiary. The sale to the stalking horse was not consummated for want of regulatory approval that another bidder was able to obtain. It became apparent on reconsideration that with the regulatory approval contingency, the break-up fee did not meet the Third Circuit’s heightened O’Brien test that the award of the fee actually necessary to benefit the estate.
9. Congress Acts! Small Business Bankruptcy. The Small Business Reorganization Act (the “SBRA”) adds a new subchapter to chapter 11 of the Bankruptcy Code meant to streamline the chapter 11 process for small business debtors with aggregate liabilities that do not excess $2,725,625. The new subchapter will go into effect in February 2020. For small businesses in distressed situations, the SBRA should ease the cost and burdens considerably and help make bankruptcy a more viable option.
10. New York Acts! Adoption of the Uniform Voidable Transactions Act. New York exits the stone age in respect of its fraudulent conveyance laws while aligning itself with other jurisdictions by adopting the Uniform Voidable Transactions Act, effective April 2020. For more details, please review our write-up of the Act.
Please contact the Olshan attorney with whom you regularly work or one of the attorneys listed below if you would like to discuss further or have questions.