I am attending the National Conference of Bankruptcy Judges meeting in New Orleans this week. Here are some highlights.
Lawrence P. King Award
The Commercial Law League of America presented the Lawrence P. King Award to Judge Burton Lifland from the Southern District of New York. In his acceptance speech, he stated that he has some concerns about the most recent phenomenon that has overtaken bankruptcy practice. According to judge Lifland, bankruptcy is becoming nothing more than a marketplace and that rehabilitation is on the back burner. He regretted that the pendulum has swung too far.
Philadelphia Newspapers and Credit Bidding
The topic du jour was credit bidding and inter-creditor agreements. Three out of six panels that I attended discussed some combination of these issues. There is another panel on Philadelphia Newspapers scheduled for Friday. (Note to planning committee: try to avoid duplication).
There was a lot of discussion of the Third Circuit opinion in In re Philadelphia Newspapers, 2010 U.S. App. LEXIS 5805 (3rd Cir. 2010), including a presentation from debtor’s counsel. In that case, the Third Circuit held that a sale pursuant to a plan of reorganization could eliminate the lender’s right to credit bid. Under 11 U.S.C. Sec. 1129(b)(2)(A), there are three alternatives for dealing with a secured claim separated by the word “or.” Option (iii) allows the realization of the “indubitable equivalent” of the lender’s collateral. The majority opinion held that a sale without the right to credit bid could provide the “indubitable equivalent.” The dissent argued that the more specific provision, which allowed credit bidding, should control.
I think the dissent had the better argument, but the more intriguing question is why it would be advantageous to avoid credit bidding. Lawrence McMichael, who represented the debtor, said that the rationale (apart from “torturing the lenders”) was to encourage bidders who would want to operate the newspaper, rather than simply sell it. The specter of a bidder with an unlimited right to credit bid was thought to be a deterrent to third party bidders. After the sale was allowed without credit bidding, the number of bidders who signed confidentiality agreements increased from three to thirty and the sale price went from the stalking horse bid of $30 million to $105 million. However, the winning bidder was still members of the bank group who had put together a cash bid.
The counter argument to eliminating credit bidding was that bank group relationships have grown so complex that a cash bid may be difficult to prepare. While the indenture trustee can make a credit bid on behalf of the group, it cannot require the members to advance new capital. Individual members of the group may be deterred from making a cash offer out of concerns about liability to the non-participating members.
An interesting side note is that section 363(k) allows the court to eliminate a right to credit bidding “for cause.” If there are compelling reasons for eliminating credit bidding, it seems more intellectually honest to do it directly.
The panel on international insolvency included E. Bruce Leonard from Canada, Bankruptcy Judge Charles Case from Phoenix, Michael Crystal from England, Thomas Felsberg from Brazil and Prof. Jay Westbrook from the University of Texas Law School. They provided a good primer on chapter 15.
The purpose of chapter 15 is to allow an ancillary proceeding to be opened in the United States in support of a main proceeding in another country. Chapter 15 consists of two stages: recognition and relief. Recognition of a foreign proceeding is intended to be easy to obtain, although Prof. Westbrook pointed out the problem of haven countries, which incorporate companies but have no economic activity there.
The relief portion is highly discretionary and can include “any other relief than can be granted to a trustee” other than avoidance actions under the Bankruptcy Code. Judge Case stressed the importance of making a record to support the court in exercising its discretion. Any interesting example offered was a case where the chapter 15 proceeding sought to pursue fraudulent transfers under Nevis law. The Fifth Circuit ruled that only avoidance actions under the United States Bankruptcy Code were prohibited.
Individual Chapter 11s
The panel on individual chapter 11 cases included Judge Mary Diehl, Peter Lively, Sally Neely and Riley Walter. They approached the problem from the perspective of chapter 13 lawyers having to learn chapter 11 concepts and chapter 11 lawyers having to learn chapter 13 concepts which apply in individual chapter 11 cases.
They raised several interesting issues.
1. Can the same lawyer represent the debtor and the debtor in possession? What happens when a creditor files an objection to exemptions? Can the debtor’s lawyer defend the objection and get paid for it? In chapter 7 and chapter 11, the trustee may employ professionals, but the debtor may not. Can the attorney for the debtor in possession perform services for the benefit of the individual debtor? In re Dixon, 2010 Bankr. LEXIS 3305 (Bankr. N.D. Cal. 2010) was discussed as an extreme case, which held that not only could the attorneys not be compensated for defending the objection, but that they placed all of their fees at risk by taking a course of action adverse to the estate. Intellectually it is possible to connect the dots, but it is a terrible result practically. It would mean that an individual chapter 11 debtor would be required to hire one lawyer to represent the estate and a second attorney, who could not be paid from estate property, to represent him individually.
A better approach would be to recognize that the debtor in possession is a flesh and blood person with a right to claim exempt property. Once a creditor objects to the claim of exempt property, both the individual debtor and the debtor in possession have an interest in determining whether the property is exempt or not. My personal view is that if there is a conflict, it is one built into the structure of the Bankruptcy Code. An attorney has a duty to zealously represent his client which extends to both roles of the human being. Any other result means that a creditor could hold the debtor hostage by filing frivolous objections to exemptions or complaints to determine dischargeability, knowing that the debtor will be hamstrung in responding.
2. Is there an absolute priority rule for individual chapter 11 debtors? Three cases say no, holding that section 1129(a)(15)’s requirement to pay projected disposable income for five years overrides the absolute priority rule. In re Shat, 2010 WL 702443 (Bankr. D. Nev. 2010); In re Rodemeier, 374 B.R. 264 (Bankr. D. Kan. 2007); In re Tegeder, 369 B.R. 477 (Bankr. D. Neb. 2007). However, four cases have found that the absolute priority rule does apply. In re Gelin, 2010 Bankr. LEXIS 3217 (Bankr. M.D. Fl. 2010); In re Gbadeo, 431 B.R. 222 (Bankr. N.D. Cal. 2010); In re Mullins, 2010 Bankr. LEXIS 2826 (Bankr. W.D. Va. 2010); In re Steedley, 2010 Bankr. LEXIS 3113 (Bankr. S.D. Ga. 2010). Three of the cases finding that the absolute priority rule applies are so new that they came out after the materials were prepared.
3. How do you calculate “projected disposable income” under section 1129(a)(15)? The section says to look to section 1325(b)(2). However, section 1325(b)(2) defines defines “disposable income” as “current monthly income” less expenses reasonably necessary. “Current monthly income” is based on the means test form. However, the expense portion of the means test is contained in section 1325(b)(3), which is not incorporated. Both Collier on Bankruptcy and the Bankruptcy Forms take the position that the expense calculation under the means test is not incorporated so that the court retains discretion to determine which expenses are “reasonably necessary.”
4. Can you close the case prior to discharge to avoid paying U.S. Trustee fees? The panel stated that an increasing number of courts are allowing this practice. However, they cautioned that the automatic stay goes away when the case is closed and the discharge injunction does not apply until discharge is granted at the end of the plan. They recommended including an injunction in the closing order.