Monday, November 25, 2013

Venue Takes Center Stage At ABI Commission Hearing (Austin Hearing Pt. 2)

Venue occupied the second half of the commission hearing held on November 22, 2013 and produced some of the liveliest discussion.  While there were five panelists slated to discuss venue, Judge Greendyke and Buzz Rochelle added their comments as well.   (I mention them here out of order for clarity of presentation).   

The Case for Reform

Former Judge Greendyke related his experiences with two Texas debtors that filed out of state.   He said that when Enron filed in New York, "I had to go to church and answer questions about why the company was filing there."   When American Airlines filed for bankruptcy in the same location, he expressed frustration that "you're going to have to rely on ABC News to find out what is going on."   

Mr. Rochelle emphasized that "chapter 11 needs to be seen and not just occur" and that "when it happens halfway across the country" this doesn't happen.  He emphasized the need for "the judge in the local community to make decisions."

First up on the venue panel was Judge Steven Rhodes from the Eastern District of Michigan. Judge Rhodes started with the "blunt observation" that:
The venue law we have is a venue non-law.   Any lawyer can figure out a way to file any case in any location.
Judge Rhodes urged the Commission to take a fresh look at the current "non-law" and to consider the purpose of venue laws.  He identified two key purposes as the interests of the parties and the institution as a whole.   He said that venue laws should "protect the parties who the moving party brings into court from inconvenience arising from choices made by" the debtor.    He said that the institutional purpose for venue laws was to provide legitimacy to the court and its proceedings.

He acknowledged that there were no perfect solutions in a world with multi-state and multi-national parties but said that "that doesn't excuse us from doing the best we can."    Judge Rhodes recommended principal place of business as the best solution for venue.

Judge Rhodes responded to the argument that concentrating cases in two forums creates predictability in how the law will be applied by saying that "if we had perfect predictability we wouldn't need judges."   He added that, "The biggest problem with predictability is that (people who use the term) mean predictability that I'm going to win."   He said that too much concentration reduces innovation and experimentation and thereby the opportunity to improve.  

He concluded with a plea for integrity.   He said:
Courts work because people have confidence they can send disputes to them, be heard and have a just result.   Everything that we do that enhances confidence needs to be encouraged.   Our non-law detracts from legitimacy.
Douglas Rosner of Goulston & Storrs in Boston testified on behalf of an ad hoc group of over 100 attorneys in 35 states seeking venue reform.   (Disclosure:   The Commercial Law League of America of which I am a member supports this effort and I helped Doug prepare for his testimony.).

Mr. Rosner laid out the statistical case for reform stating:
Substantial evidence demonstrates that a disproportionate number of chapter 11 cases are being filed in Delaware and New York which have little connection to those forums. A recent study by Associate Prof. Samir Parikh of Lewis & Clark School of Law found that 70% of large public companies that have filed bankruptcy in the last 5 years have forum shopped; 80% of which filed in Delaware or the Southern District of New York. Unlike the studies done in the mid-1990s, we know now that forum shopping affects companies of all sizes. In fact, almost half of the 559 out-of-state cases that filed in Delaware since 2003 had assets of less than fifteen million dollars and middle market companies comprise the vast majority of the filings in Delaware. The statistics demonstrate that chapter 11 debtors forum shop at such a staggering rate, it can no longer be ignored.
Rosner also gave examples from his home state of Massachusetts in which 33 companies with assets of over $6.2 billion and 65,000 employees filed in other states over a ten year period. Examples included Evergreen Solar, a company that received $58 million of assistance from Massachusetts, Polaroid, which drastically affected local employees and retirees, and Friendly Ice Cream, a cultural institution in Massachusetts for more than 75 years. (Ed.: Imagine the furor that would result if Bluebell filed for bankruptcy in Delaware).

Mr. Rosner also raised the specter of manipulation, pointing out that "The chapter 11 landscape is littered with examples of debtors trying to manufacture venue or using immaterial affiliates as a hook to establish venue."   

He also addressed creditor expectations, stating:
Prior to a bankruptcy filing, a debtor’s creditors and employees are used to dealing with the company’s headquarters. When they read in the papers that the company filed in another jurisdiction, their reaction is likely to be one of suspicion. They can reasonably question whether the company filed in a distant forum to obtain an advantage over other parties or discourage participation by local interests.
Mr. Rosner argued that the transfer of venue for Patriot Coal out of New York was not proof that the system is working.   He pointed out that the process took four months and millions of dollars in professional fees.   He quoted Bloomberg News for the prospect that Patriot Coal proved "the near impossibility of having venue transferred in large cases."
Next up was Prof. Jay Westbrook of the University of Texas School of Law who said he was delighted to see the attention being given to the venue issue.   Sounding a familiar theme, he said that:
Justice must not only be done; it must be seen to be done.   If not, the system fails in an important part of its social, political and economic role.
Prof. Westbrook argued that reform often comes from "spectacular trials or puzzling verdicts."   He said that "proceedings in a distant court will not receive the same coverage" as a local case would, being relegated to the financial press rather than the local media on which most people rely.   He also stated that when cases are filed closer to home, that local officials will be more likely to intervene.

He summed up his thoughts with the memorable phrase that when debtors are required to file in their principal place of business "the windows of justice will not be frosted by distance."

"There Is No Problem"

James Patton of Young, Conaway, Stargatt & Taylor in Delaware was the first of two witnesses favoring the status quo.   He argued that place of incorporation was the "only uncontestable standard" for venue and that a principal place of business requirement would lead to litigation such as encountered in Chapter 15 cases over the Center of Main Interest.   (The requirement in Chapter 15 cases that the proceeding be filed where the business has its main economic activity).  

Mr. Patton praised the experience of the Delaware bench, stating that they provide "the opportunity to go to a court with a great deal of depth and a great deal of experience."    He said that if state of incorporation venue was abolished
We will never again be able to grow another forum with the depth of experience and body of case law.   There will be no other place where cases can be concentrated.  
(Ed.:    Do you hear the refrain of "My judge is better than your judge, my judge is better than yours, my judge is better 'cause he's from Delaware, my judge is better than yours"?).

He also argued for predictability, stating:
We can argue about whether "law shopping" is a good thing or a bad thing, but loss of flexibility means less chances to maximize value for stakeholders.
(Ed.:  law shopping refers to the practice of filing in a venue where judges take the legal position that you favor.  It is a variant on forum shopping).   

Mr. Patton argued that requests for transfer of venue are "granted far more often than denied" and that cases with "a clear center of gravity" are being adequately addressed through transfer of venue.

Finally, he said that principal place of business would not eliminate forum shopping, pointing to a survey of 50,000 companies which had an average of 15 headquarters each.   

In response to a question from Commissioner Deborah Williamson, Mr. Patton admitted that Delaware's local counsel rule was outdated.

Michael Luskin, appearing on behalf of the New York City Bar Association's Committee on Bankruptcy and Corporate Reorganization bucked the prevailing mood when he boldly stated, "This is a solution in search of a problem.   There is no problem."    He argued that the current system "as applied by judges and practitioners serves efficiency and justice" and that "cases get transferred when they need to be."

Like his colleague from Delaware, Mr. Luskin raised the specter that a nerve center test would lead to endless litigation.

His suggestion was to ensure that all constituencies be represented through committees.    He said that committees are able to find superb representation for cases in Delaware and New York which protects parties.   He also said that "what's important" is that parties are able to "participate in a meaningful way" in negotiating the DIP order, plan and exit financing.   

Mr. Luskin pointed out that while airline cases have been filed across the country, the same firm represents the employees regardless of where the case is filed.

He said that "it is a fact that you can't run from" that people don't have a problem traveling to New York.

Luskin also sang the praises of the New York court, stating that it is a great advantage to have a case administered by a court that has a deep bench and where "the whole courthouse is set up for it."    

He said that another solution would be televising hearings much as the ABI Commission hearing was being livestreamed. Judge Rhodes pointed out that the current policy of the administrative office of the courts prevents audio or video broadcasting of court proceedings. He said that he requested permission to broadcast hearings in the City of Detroit case and was turned down.

Thinking Outside the Box

Each of the five venue panelists was asked to step outside of the box and propose a solution other than their proposed resolution.

Judge Rhodes said that having a national bankruptcy court process might be a solution but that "the devil is in the details."     He also suggested re-examining the appellate structure for bankruptcy courts to avoid avoid law shopping.    

Douglas Rosner said that a possibility would be making principal place of business the presumptive choice and placing the burden on the debtor to justify a filing elsewhere.    

Prof. Westbrook said that a national bankruptcy court was not the solution, even if judges were appointed from across the country, because it would not solve the problem of engaging the local community.   

James Patton said that the community problem would not be solved by venue reform because "there's always going to be a choice."   He suggested having a hearing at the beginning of a case to determine whether there is a better place to administer the case and what could be done to make the present venue a better place.   He gave the example of a Delaware case involving a Florida debtor where local Florida officials wanted the case transferred but other parties, including Florida creditors, did not want the case transferred.   In that instance, the court did not transfer venue but did order that the debtor pay for first class plane tickets and hotel accommodations for the local officials so that they could attend the proceedings.   

Mr. Luskin suggested that they should make it easier to get to court.   He proposed a system of national admission.   He said he was "horrified" to hear that the judicial conference prohibited broadcasting  and said "I can't think of a single reason not to do that."  He also went back to his suggestion to have more committees.    (Ed.:  Was it Marie Antoinette who said, "Let them have committees?").   

Commissioner James Markus asked Judge Rhodes about how his experience with the City of Detroit Chapter 9 bankruptcy compared to Chapter 11.

Judge Rhodes said that the City of Detroit case illustrated two points about the importance of having cases in the local community.

First, he said, citizens came to every hearing.   He used the largest courtroom available to him as well as two overflow rooms where citizens could watch on closed-circuit television.   (Apparently this does not constitute broadcasting).    He said that the citizens who came were very attentive and very interested in everything that occurred.

Second, he said that he devoted a full day to hearing remarks from 90 citizens who filed pro se objections to the City's eligibility for chapter 9.    Judge Rhodes said that the citizen comments were thoughtful, objective and angry and that he found them to be "of extraordinary value."    The Judge added that it was "an extraordinary day of process" and that he was "as grateful as I could be to have participated in that day."   

Closing Thoughts

The venue discussion was lively and thoughtful.   The advocates for change focused on the political and social values that are lost when cases are heard in distant forums while the advocates for the status quo argued that they had superior courts which knew how to transfer venue when it was needed.    As I have disclosed above, I am biased in favor of Texas companies filing bankruptcy in Texas, and yes, part of the reason is that I would like to see Texas firms get the work.   I thought that the Delaware and New York representatives were a bit patronizing toward judges in the rest of the country.   I have no doubt that there are some really good judges in Delaware and New York.   However, what does that make the judges in the other 88 districts?    Are they so sub-par that big cases have to be kept out of their reach?   I don't think so.   Also, I don't buy the argument that it is so easy to transfer venue.  According to James Patton, the Delaware Courts granted motions to transfer venue in nine out of thirteen cases between 2006 and 2012.   The fact that only two venue transfer motions per year are filed in Delaware says something.   It could say that most people feel that Delaware is a superior forum and are happy to have their case litigated there.   However, I think it is more likely that most creditors are too intimidated to hire a Delaware lawyer to tell a Delaware Judge that the case should be somewhere else.   

While Mr. Luskin believes that no one has a problem traveling to New York,  that doesn't mean that it is affordable for small creditors to travel to Delaware or New York.   Delaware is a poster child for parochialism.   Its local counsel requirement (which Mr. Patton agreed was outmoded) requires creditors wanting to appear in that court to hire an attorney with an office in Delaware.  To get to Delaware, it is necessary to fly into Philadelphia and take a 30 mile ride by car or limo.   New York has much better access.   However, once you get there, a hotel will run you $250-$400/night.  

I can somewhat understand the argument for filing large cases in the Southern District of New York.  New York is a major center of commerce, but so are Houston, Chicago and Los Angeles.  And Delaware:  Delaware is a state where companies go to incorporate   While half of the companies in the counrty are incorporated in Delaware, only two Fortune 500 companies have their headquarters there, compared to 53 in California, 52 in Texas, 50 in New York and 32 in Illinois.  Having two Fortune 500 companies located there places Delaware on a par with such states as Oregon and Rhode Island.   What Delaware does have is friendly corporation and tax laws.   According to the New York Times, the Cayman Islands complain that "Delaware is today playing faster and looser than the offshore jurisdictions that raise hackles in Washington."   Thus, while the Delaware courts possess a certain expertise, this is as a result of an historical accident favoring incorporation there. However, Nevada is also gaining a reputation as a tax haven.   I wonder whether the proponents of state of incorporation venue would be quite so bullish on this theory if Nevada started to usurp their business.  

ABI Commission Considers Future of Chapter 11 (Austin Hearing Pt. 1)

The ABI Commission studying reform of Chapter 11 met for its seventeenth and final time at the UT Bankruptcy Conference in Austin, Texas on Friday November 22, 2013.   The Commission heard from a total of eight witnesses on a variety of topics.   Seven of the eight witnesses touched on the venue issue with a substantial majority favoring reform.   Part 1 will discuss the future of Chapter 11 and proposed reforms to address the Stern problem, while Part 2 will discuss venue.

The Future of Chapter 11

Commission Co-Chair Al Togut introduced the topic with a discussion of how the world had changed since the Bankruptcy Code was adopted. He stated that in 1979, companies were likely to be based in the United States, employ American workers and have very little secured debt. Today, companies are likely to be multinational and have manufacturing facilities overseas with assets that are frequently leveraged to the point that unsecured creditors are out of the money. He stated that Commissioner Ken Klee who worked on drafting the Bankruptcy Code estimated that the Code would have a shelf life of no more than 30 years and then would have to be reworked. This set the stage for a discussion on the future of chapter 11.

Former Bankruptcy Judge William Greendyke and practitioner Buzz Rochelle discussed the future of chapter 11 with particular emphasis on the results of a survey of Texas bankruptcy lawyers. Among the conclusions of the survey were that Chapter 11 is being used for more section 363 sales, the process is faster today, the use of Chief Restructuring Officers is largely positive and Chapter 11 fills a role in providing clean assets to buy but that Chapter 11 has gotten more expensive.

In response to a question, Greendyke stated that section 363 and increased costs make cases move faster. He said that "faster is less expensive and less expensive is better."

By a two to one margin, respondents felt that the U.S. Trustee has been a net negative in chapter 11 cases. One commenter described the U.S. Trustee as "bring(ing) only the ants to the picnic." Judge Greendyke was more sanguine stating that his experiences with the U.S. Trustee's program as a judge had been positive. He said that the reason for the negative responses was "difficult to discern from the survey results" but that "there are different personalities in different offices" and there can be disparities in prosecutorial discretion.

Buzz Rochelle (brother of Bloomberg News correspondent Bill Rochelle) described how problems with the jurisdictional system of the Bankruptcy Courts have persisted. He stated:
I went to college on what my father earned litigating jurisdiction. My sons went to college on what I earned on jurisdiction.
He said that the problems in the current system were "way past the irritation point" and used the illustration of a lawyer who told a Dallas bankruptcy judge that she was not bound by the Court's confirmation order "because Stern said she wasn't."

Rochelle also sounded an apocalyptic note about the future of bankruptcy, stating that "unsecured creditors do not regard the bankruptcy court as their friend" and that "the message sent is that this is a place for debtor's management and more than that for secured creditors."

He urged the commission to reconsider the absolute priority rule saying that "it is not holy writ." Rochelle argued that the absolute priority rule was originally intended to lead to a reasonable accord and to protect the little people, but has been turned on its head as a tool to protect secured lenders.

Rochelle described claims trading as a casino that "does not serve a legitimate economic function." In response to a question, he said that claims traders are in a "very dicy ethical situation." He said that they have studied real hard and can accurately gauge the value of a claim but will pay only a small fraction of that amount to the original creditor. He also said that claims trading gives creditors an easy out of a case and causes them to lower underwriting standards. He recommended that claims buyers only be allowed to vote what they had paid to purchase claims so that they would not have a disproportionate impact on the outcome of cases.

Mr. Rochelle added that the secured lender's group has become "a wild place with competing agendas" because of claims trading He said that all they are interested in is the dividend and not reorganization, which he said "brings the reorganization system into disrepute," a result that he described as "not cool."
Commissioner James Markus asked Greendyke and Rochelle if there were conflicts in their testimony with regard to the need to choose between classes of creditors or preserve value. Judge Greendyke stated that "there is nothing wrong with section 363 sales" and that just because "there are less opportunities for unsecured creditors does not mean that there should be a tax imposed on secured creditors." Mr. Rochelle said that he would "put down his torch and pitchfork for a moment" and acknowledged that the Bankruptcy Code is the tail of the dog while the dog itself is the financial system. He said that the huge growth in neo-lenders and non-bank lenders "makes the banks we grew up with look like sweet, good-natured Sunday School teachers." He admitted that "you can't change that in the Code" but that "we don't have to lay back and enjoy it." He said that there should be some disincentive to the lender who grabs onto everything. He added that
The common law grows in response to problems. This is a problem.
The shy and retiring Mr. Rochelle added:
The real question in my mind is why the federal government should be subsidizing the liquidation efforts of one group of people.
He further stated that the justification for section 363 sales is preserving jobs and that we are seeing far fewer jobs preserved.

Stern and the Allocation of Jurisdiction

Veteran Supreme Court litigator Eric Brunstad stated that "our current jurisdictional system is broken." He recommended amending the definition of core proceeding to move counterclaims to claims and fraudulent transfers to the non-core category. He said that "there is a very small category of things that need to be moved from the core bucket to the non-core bucket."

He also recommended a statutory process for consent which would be similar to what is used in the U.S. Magistrate Judge system. In response to a question, he said that he proposed express written consent because he wanted to take the most conservative position.

Finally, he recommended that the Code's jurisdictional scheme be construed to avoid conflicts with the U.S. Constitution and that Bankruptcy Judges be specifically authorized to submit proposed findings and conclusions in any case in which they could not enter a final judgment.

Brunstad also emphasized the need to get as much of the case as possible in front of the bankruptcy judge and encouraged the practice of District Judges re-referring matters to the Bankruptcy Court.

He also said that one problem with the Supreme Court's approach to Article III jurisprudence is that it relies on the traditional model of the judge as a neutral adjudicator while the bankruptcy court is "the quintessential problem solving court." Commission Reporter Prof. Michelle Harner asked whether the judge in a problem-solving court is placed in a mediator/negotiator role. In response, Brunstad stated that you don't have to use that particular label, but that it is the "reality of large chapter 11 cases." He urged the Commission to "be up front and recognize it."

Monday, November 04, 2013

Ethics, Empiricists and International Insolvency at NCBJ

Saturday was the final day of the National Conference of Bankruptcy Judges.   The panels focused on ethics issues of the future, the role of empirical research and international insolvency.


The first topic up on the ethics panel was reasonable investigation.    The hypothetical involved a lawyer who was unwittingly asked to facilitate money laundering and purchase of estate assets with hidden assets.   Recent cases to be aware of include In re Soare, 493 B.R. 158 (Bankr. D. Nev. 2013)(attorney who failed to investigate whether judgment was nondischargeable and then refused to represent debtor in nondischargeability action required to disgorge fees) and  In re Goodman, No. 12-1643 (9th Cir. BAP 9/5/13)(sanctions against attorney for negligent representation affirmed)(unpublished opinion can be found here).   

We  learned that ABA opinion 465 says that there is not a per se prohibition on attorneys offering groupons.    (That doesn’t mean it’s a good idea, though).   

The Ethics 20/20 Commission is working on guidelines that would allow foreign lawyers to appear in U.S. proceedings on a pro hac vice basis.   However, a U.S. lawyer must reserve the absolute right to advice on American law.

Hunter v. Virginia State Bar, 744 S.E.2d 611 (Va. 2013) is an interesting case on the intersection between blogging and State Bar advertising requirements.   Hunter published a blog titled “This Week in Richmond Criminal Defense,” which was accessible from his firm’s website.    The overwhelming majority of posts were about cases in which he obtained favorable results for his clients.   The blog did not contain any disclaimers.   The Virginia Supreme Court found that Hunter’s blog constituted commercial speech subject to regulation by the Bar.    The Court found that the Bar could require Hunter to place disclaimers on his posts about his own cases to the effect that the results in the given case did not guarantee the same results for other people.    However, it found that the First Amendment allowed Hunter to discuss public details of his cases without the client’s permission.   A dissent would have found that the First Amendment prevented the Bar from regulating the blog.    

Muniz v. United Parcel Service, 2011 U.S. Dist. LEXIS 11219 (N.D. Cal. 2011) dealt with whether the defendant could subpoena the plaintiff’s lawyer’s postings to a listserv.    The Court quashed the subpoena.   The case illustrates the danger of revealing work product by posting on a listserv.

Empirical Research

The panel on empirical research features three academics:   Dean J. Richard Leonard of Campbell University School of Law, Prof. Theodore Eisenberg of Cornell Law School and Prof. Melissa Jacoby of UNC School of Law.   

Until recently, Dean Leonard was a bankruptcy judge.   He said that when he took the bench, he asked what he should read and was referred to Warren and Westbook’s empirical book, As We Forgive Our Debtors.   He pointed out that empirical studies published by just one law review, the American Bankruptcy Law Review, were cited in 32 opinions ranging from trial courts to the Supreme Court.   

Prof. Eisenberg said that empirical research can be used to disprove the conventional wisdom about bankruptcy.   He referred to the view that the American bankruptcy system is too pro-debtor and noted that the concept of a Debtor-in-Possession is shocking to other countries.   He pointed to empirical studies showing that U.S. reorganization cases paid 20% more to unsecured creditors than those in other countries.   Of twelve studies looking at payouts to unsecured creditors in different countries, the top five payouts were in American bankruptcies.   His conclusion was that the combination of the absolute priority and the Debtor-in-Possession led management to propose a higher dividend to unsecured creditors than plans in other countries.  

He also talked about the importance of studying fees.   He said, “From the day you graduate, (fees) will control your life.”    He said that big fees made news while small ones did not.   In this regard, he said that newspapers were just doing their jobs.   However, he said that the headlines did not reflect reality.  In smaller cases, the fees awarded average 17.6-21.6% of the assets of the debtor.  However, when the assets involved exceeded $100 million, the fees averaged 1-2% of assets.   He contended that fees charged by other professionals, such as investment bankers, charged more in fees.   

In an interesting study, courts denied requested fees at the following rates:
Delaware             0.74%
New York            4.50%
Everyone else      2.29%

While I did not catch his conclusion, mine would be that you can’t assume that judges in Delaware and New York always march in lockstep. 

Prof. Jacoby expressed the concern that empirical studies were too reactive.   She said that there were numerous studies framed in response to concerns that debtors were getting too much relief in bankruptcy.   She said that this approach was a limiting factor on the questions that academics ask and that academics should be more proactive in asking questions that others were not raising. 

Two random points that she made were that academics need more theory in empirical research and that empirical research meant observation and that academics should take the time to observe bankruptcy courts at work.

Prof. Eisenberg got on a soapbox about parties making unsubstantiated claims about the legal system.  He said:
You shouldn’t be able to stand in front of an audience and make nonsensical claims (with statistics).   The Chamber of Commerce does it every day.  
 He went on to say that we study areas that we care about, such as economic statistics.   He said:
You couldn’t say that the inflation rate is 20% (and get away with it).  However, you could say that plaintiffs are recovering multimillion dollar verdicts because of crazy juries. 
The learned professors also made two seemingly contradictory statements.   On the one hand, they stated that there is a lot of shoddy empirical research out there and that empirical studies should not be blindly accepted.   On the other hand, they said that the appeal of empirical research was the “ability of completely untrained people to get into it.”   I think that the point here was that anyone can pick a facet of the legal system to observe, but that it is helpful to partner with statistics geeks to help tell you the significance of what you observed.   (TBLB:  My words, not theirs).

International Insolvency:  The Good, the Bad and the Ugly

The international insolvency panel largely focused on three cases:  In re Lehman Brothers Holdings, Inc., No. 08-13555 (Bankr. S.D. N.Y.) (the good), In re Nortel Networks, Inc., No. 09-10138 (Bankr. D. Del.) (the bad) and Ad Hoc Group of Vitro Noteholders v. Vitro, SAB de CV (In re Vitro, SAB de CV), 701 F.3d 1031 (5th Cir. 2012) (the ugly).   (The Clint Eastwood reference came from panelist Bruce Leonard).    The panelists were Judge James Peck from the Southern District of New York, Marc Adams of Wilkie Farr, Andrew Leblanc from Milbank Tweed and Bruce Leonard from the Ontario office of Cassels Brock.    In some cases, my notes do not indicate who said what so I will have to attribute comments generically to the panel. 

Before getting into the cases, Judge Peck provided an introduction to chapter 15.   Judge Peck noted that according to section 1501, the purpose of chapter 15 is to “incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of” increasing cooperation between courts of the United States and other countries.    However, as illustrated by the cases that followed, there are factors that get in the way of those purposes.

According to Mr. Abrams, chapter 15 is “the exclusive portal through which foreign representatives can seek assistance of the U.S. bankruptcy courts.”   Chapter 15 allows an American court to recognize and enforce orders and decrees from foreign courts.   It is not a reorganization chapter like chapter 11, but merely allows American courts to assist foreign courts with regard to assets of foreign entities in the United States.

Under Chapter 15, a foreign representative may seek recognition of a proceeding in another country as either a foreign main proceeding (Main Proceeding) or a foreign non-main proceeding (Non-Main Proceeding).    A Main Proceeding is one that is filed in the company’s center of main interest (COMI).    A Non-Main Proceeding is one filed anywhere else that the company has non-transitory economic activity.  A proceeding filed somewhere that is neither a COMI or has non-transitory economic activity is not entitled to recognition.    

Unlike the U.S. venue laws, the COMI determination pays little attention to the company’s domicile or state of incorporation.   Instead, it is more of a nerve center test.   While this may seem clear, Judge Peck commented that “what is written down is not necessarily clear until the circuit court tells you it is clear.”    In the recent case of Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013), the Second Circuit held that COMI is determined as of the date of filing of the chapter 15 petition, so that activities of the foreign representative prior to the filing of the chapter 15 can change what would have otherwise been the COMI.  
The importance of being a Main Proceeding vs. a Non-Main Proceeding turns on sections 1520 and 1521.   Under section 1520, a Main Proceeding (which is a proceeding filed in the COMI) is entitled to automatic relief, including enforcement of the automatic stay and sales free and clear of liens for assets in the USA.    Under section 1521, there are various forms of discretionary relief that can be granted to either a Main Proceeding or a Non-Main Proceeding.

The panelists stated that Lehman Brothers and Nortel Networks shared many similarities.   Both were large entities with multi-national operations that took a major hit after the freeze of the credit markets in September 2008.   Nortel filed in September 2008, while Lehman Brothers held on until January 2009.   (TBLB:  The role of the U.S. government in orchestrating the filing of Lehman Brothers is well documented in the movie Too Big to Fail in which a committee of top economic advisors decides that Lehman Brothers should go ahead and file chapter 11 at which point someone asks whether the company should be informed).

In the Nortel case, the business operated in 140 countries through a series of five business lines as opposed to operating through subsidiaries.   It filed proceedings in the United States, Canada and the U.K.    The U.S. claimed priority based on the location of the assets, Canada claimed priority based on the company’s headquarters and the U.K. claimed dibs based on the location of the intellectual property.   The United States and Canadian proceedings recognized each other as contemplated by UNCITRAL.   The U.S. also recognized the U.K. proceeding as a Non-Main Proceeding.   However, the Canadian and U.K. administrators did not seek recognition of each other’s proceedings.  
Based on the view that the company’s assets were melting ice cubes, the three administrators quickly agreed upon a sale of the company’s assets for $7 billion.   However, four years later, the funds continue to sit in escrow because the parties could not agree upon a formula for allocating the sales proceeds.   After three failed mediations, a trial has been scheduled for 2014 with at least four competing formulas for distribution.   

Mr. Abrams commented that the Model Law was not well equipped to deal with the situation where there were three competing COMIs.

Judge Peck stated:
It is hard to design a law that gets to good results.   People have to get to good results.
The panel’s consensus was that because the Nortel assets were sold prior to obtaining an agreement for distribution of the proceeds that the parties lacked sufficient incentives to cooperate once the money was in the lockbox.   

According to Judge Peck, in Lehman Brothers, on the other hand, the assets were “not easily monetized” and “had to be cultivated.”   The only way to unlock the value was through a consensual plan, as opposed to Nortel where the creditors were in gridlock.    In Lehman Brothers, the parties negotiated a protocol for international cooperation and “based on the excuse given by the protocol, people talked to each other and developed a plan.” 

Vitro was a large Mexican glassmaker with U.S. debt.    It obtained approval of a concurso in Mexico and sought recognition in the United States.   In Mexico, all creditors vote together in a single class, including insiders and intercompany claims.   Furthermore, approval of a concurso constitutes a novation which releases all guarantors.   Finally, because a focus of the Mexican law is preserving jobs, a concurso must have the approval of equity.    

When Vitro sought recognition in the U.S., Judge Hale said no based primarily on section 1506, which states that relief need not be granted if it would be “manifestly contrary to the public policy of the United States.”     I have previously written about Judge Hale’s decision here.   The Fifth Circuit affirmed Judge Hale, but on different grounds.   You can find the Fifth Circuit opinion here.   The Fifth Circuit ruled that the granting of non-debtor releases is an issue that has divided the circuit courts.   Because federal courts do not agree upon this issue, allowing non-debtor releases could not be “manifestly contrary.”   Instead, the Fifth Circuit held that:
On the basis of the foregoing analysis, we hold that Vitro has not met its burden of showing that the relief requested under the Plan—a non-consensual discharge of non-debtor guarantors—is substantially in accordance with the circumstances that would warrant such relief in the United States. In so holding, we stress the deferential standard under which we review the bankruptcy court’s determination. It is not our role to determine whether the above-summarized evidence would lead us to the same conclusion. Our only task is to determine whether the bankruptcy court’s decision was reasonable.
Opinion, p. 58.  

The panel was critical of this opinion, asking whether it meant that the United States would be exporting its laws to other countries.    Judge Peck stated:
Recognition was intended to be a presumption to facilitate the reorganization goals of other jurisdictions.   Vitro seems to have changed that model.  
Mr. Abrams argued that:
The panel put blinders on when applying a plain meaning approach.
Abrams also said that he thought Judge Hale had the right approach in examining whether the result was manifestly contrary to the public policy of the United States, even though he did not agree with the Judge’s conclusion.  
The panel noted that the Fourth Circuit has opined that Courts should avoid reaching the section 1506 issue to avoid retaliation.   Judge Peck stated that:
I defer to a court that is at least civilized.
He gave the example of a case decided by a local court in India that he had deferred to.   

In the Fairfield Sentry case, the Second Circuit was asked to address the “manifestly contrary” issue in the context of a foreign proceeding in which the records had been sealed.   It held that open records were not a matter of such importance to US policy as to negate recognition.

Mr. Abrams concluded with the remark that
It is not time to trigger an Amber Alert for Chapter 15 and international cooperation yet.
Parting Thoughts:

This is a very good conference.   However, when I attend, I am usually pulling down long days and am mainlining coffee to stay awake.   I can’t help but notice that some very smart people are not very dynamic speakers.    If you are speaking at a conference as prestigious as the National Conference of Bankruptcy Judges, is it not too much to ask that you look up from your notes and speak loudly enough to be heard.    If you sound bored with your own presentation, you are probably putting your audience to sleep.   I would also like to put in a word for more diversity in program formats.     Four people on a one hour panel who don’t interact with each other is nothing more than a series of short monologues.   While brevity is much to be desired, fifteen minutes or less is not enough time to tell me something I don’t already know.   When it comes to putting together a panel, quality of content is to be desired over quantity of talking heads.    If you are going to put multiple people up there, make them interact with each other and preferably disagree on some things.   In the words of Robin Williams, “If you are going to go into the jungle, clash.”  The student loan debate was a good example of how to keep things lively.

Friday, November 01, 2013

Blogging, Economics and Bankruptcy Reform Commission at NCBJ

This is continuing coverage of the 2013 National Conference of Bankruptcy Judges.   Today I was able to attend a program on blogging, listen to an economist prognosticating and observe a hearing of the ABI Commission to Study the Reform of Chapter 11.


Judge Robert Kessel (Bankr. D. Minn.), Judge Bruce Harwood (Bankr. D. N.H.), Bob Lawless (of Credit Slips) and Debra Dandenau (of Weil Bankruptcy Blog) presented an informative panel on blogging.   Including this panel at NCBJ (with two judges participating) is evidence that blogs have come a long way in terms of respectability.     It also underscores the point that judges read bankruptcy blogs.

Blogs are part of the larger group of content classified as “electronic social media,” which puts them in the same category as Facebook and Twitter.    The term blog is a contraction of web log and refers to the origin of blogs as personal journals published on the internet.    The blogs on the internet are distinguished from the same term used to describe a strong drink of indiscriminate content used by science fiction writers.   (I would not have known this if it wasn’t for Judge Harwood).

Debra Dandenau is an editor of the Weil Bankruptcy Blog (WBB), which can be found here.    In order to distinguish themselves from other blogs, they made the decision to publish daily.   This is possible when you have an army of minions (associates) jumping at the chance to be published.   The Weil authors publish an average of once a month which must mean that they have at least twenty authors contributing.    The firm uses the blog as a marketing tool which means that the Weil name is on every page.   

Prof. Bob Lawless is a contributor to Credit Slips, which can be found here.   Credit Slips is also a group effort.   It began as a way for a diverse group of academics working on a major research project to maintain contact with each other.  

The two blogs have contrasting approaches to their corporate identity.   At WBB, editors who are partners review the content to ensure quality and make sure that the blog represents the firm.    Associates are required to send an email around to all of the partners in the department to make sure that the blog does not take a position contrary to client interests.   In contrast, each of the Credit Slips bloggers are solely responsible for their own content and they do not attempt to do message control.   This blog, on the other hand, is purely a solo effort.   While I have been approached by strangers offering to do guest posts, I would not be comfortable accepting content from someone I did not know well.  

WBB tries to engage its readers through devices such as surveys and humor.   Their October 31 posting was on the Ghost of Anna Nicole.   

Writing a blog raises legal and practical issues.   As explained by Dandenau, authors strive to provide more insight than can be gained from simply reading the cases, but are careful not to betray client confidences or work product.   As a result, the firm rarely writes about ongoing cases in which it is involved.   (A practice that I follow as well).   Prof. Lawless noted that it was important to make disclosure when writing about a case that the author has an interest in.  

Another important decision to make is how much of an editorial voice to use.   Ms. Dandenau stated that they never criticize bankruptcy judges, although they may occasionally point out an issue that presumably was not brought up by the parties.    The blog is somewhat more willing to take a position on appellate decisions.  

There are also judicial bloggers, including Hercules and the Umpire (found here) and the Becker Posner blog (found here).   According to ABA FormalOpinion 462, judges can participate in electronic social media, but must “avoid any conduct that would undermine the judge’s independence, integrity, or impartiality, or create an appearance of impropriety.”    Thus, a judge could get in trouble for making comments on a blog or other social media that reflected favorably or poorly on an attorney appearing before her.  

According to Prof. Lawless, the benefits of writing a blog include:
  • Getting your name out
  • Showcasing your expertise
  • Networking with the media
  • Staying current on the issues
  • Engaging with the community that reads your blog
  • One way to engage with the community is through the comments section of the blog.   
WBB make a conscious decision not to allow comments, while Credit Slips allows unmoderated comments (although they have software to screen out spam).   Prof. Lawless said that one recent commenter who took him to task succeeded in changing his mind.   On the other hand, nasty comments may come back to bite the commenter.   Recently, an irate reader of Scotusblog posted a comment that read  “go f***yourself and die.”   Scotusblog tracked down the anonymous commenter though his IP address and outed him to their list of 174,000 twitter followers.    I moderate comments because I haven’t figured out a better way to block spam, but also because I get the occasional hateful comment about a judge, lawyer or party.

Judge Harwood said that he reads bankruptcy blogs because they are updated frequently, have focused content and have hyperlinks to useful material.   He compared blogs to law reviews with the analogy that blogs are business casual while law review articles are black tie.   Law reviews get dressed up but don’t go out very often.  

Judge Hannah Blumenstiel (Bankr. N.D. Cal.) stated that she uses blogs as a shortcut to do legal research.   She said that they did not violate the prohibition against a judge consulting outside sources because they were used to find the law rather than the facts.

The most popular blogs read by panelists were:
  • Credit Slips
  • Hercules and the Umpire
  • Weil Bankruptcy Blog
  • The Ponzi Blog
  • Wall Street Journal Bankruptcy Beat

Even though they did not mention this blog, I am glad to give a hat tip to these well-written selections.   (Their written materials did refer to both A Texas Bankruptcy Lawyer’s Blog and Spiritually Bankrupt by Ron Satija).

Judge William L. Norton, Jr. Award

Judge Barry Russell (Bankr. C.D. Cal.) was honored by the American Bankruptcy Institute with the William L. Norton, Jr. Award.   Judge Russell was appointed as a Bankruptcy Referee in 1974 and became a Bankruptcy Judge in 1979.   He is currently the longest serving Bankruptcy Judge in the United States.  He is the author of West’s Bankruptcy Evidence Manual and established a mediation program in his district.   In his acceptance speech, he called his long friendship with Judge Norton and noted that Judge Norton encouraged him to write his first evidence book.

The Economist’s Viewpoint

Prof. Jeffrey Rosensweig of Emory University, who was formerly a senior economist for the Atlanta Fed, gave the luncheon address for the ABI.    His presentation was full of slides packed full of charts and economic data, some of which I could read.    Any errors are due to my poor eyesight.

Prof. Rosensweig presented a lot of data pointing to different trends.   One recurring theme was that the incoming Fed Chairman Janet Yellen will keep interest rates low for the foreseeable future but that they will go up.     He said that Yellen would continue the quantitative easing program of the Fed where it buys U.S. government debt from banks in order to put more money back into the economy.    He pointed out that treasury debt held by the Federal Reserve System had increased from $1.5 trillion to $2.0 trillion in the last three years.  

So long as the Fed keeps pumping money into the economy interest rates will remain low.   Recently the expectation that the Fed would begin tapering its purchases caused interest rates to go up by a point.   However, when the Fed did not taper, they resumed their downward path.   The 10 year U.S. Treasury interest rates upon which most mortgages are priced has declined from 7% to less than 2%, went up to 3% but is expected to drop to 2.5%.  

Beyond the interest rate news, he was fairly gloomy.   He noted that the developing countries were showing tremendous growth while Europe was stagnant or declining.   The U.S. economy will grow at a rate of 1.5% this year and is expected to grow by 2.5% next year.    This will not be sufficient to put a dent in unemployment.  

One reason for poor growth is that housing is no longer the locomotive driving growth.   During the housing bubble, home starts were up at two million, which exceeded the long term average of 1.5 million per year.   After the crash, they dropped as low as half a million before rebounding to one million.  Thus, even though housing starts are up from the bottom, they are not back to historic levels.

Among other industries, health care employment is up by 35% over ten years, while manufacturing employment is down 30%.   Construction had crashed but is coming back.   Government employment has been steadily declining for years.

He said that the unemployment rates published gave a misleading impression of the labor market.   While unemployment is down, labor force participation is at its lowest point since women entered the workforce in the 60s and 70s.   (He was quick to point out that women had always been working but were not counted as being in the workforce until they began working outside the home).    He described labor force participation and unemployment as the donut and the hole.   Participation is the donut, while unemployment is the hole in the donut.   He said that when you buy a donut, you care about how big the donut is, not the size of the hole.   The donut is shrinking.

Prof. Rosensweig noted that inflation has been running below target.   To keep the economy humming, an inflation rate of 2% is healthy.   We have been running below 2% and declining.

However, he was not overly pessimistic about the national debt and entitlement spending.   The national debt has grown from $1 trillion in 1981 to a projected $18 trillion next year   Meanwhile the ratio of debt to GDP grew from 30% of GDP in 1981 to over 100% in 2011.   Now the percentage has dropped below 100% which means that the economy will not implode (my words not his).   On an annual level, the deficit has dropped from $1.4 trillion in in 2009 to $680 billion in 2013.   As a percentage of GDP, this is a drop from 10% to 3%.    He said that as long as the economy grows faster than the new debt being accumulated, we will be able to stay ahead of the deficit.   He likened it to a family that is going deeper in debt, but whose income is rising faster than their debt payments.

Finally, he said that we will be able to maintain entitlement spending but that it will be necessary to raise the retirement age.   He said that in order to have the same number of workers paying into social security and medicare in 2030 as in 2010, it will be necessary to raise the retirement age to 70, although we may be able to get away from 68 or 69.   On the other hand, if the retirement age remains at 65, there will be a serious imbalance between working and retired people.  

ABI Commission to Reform the Bankruptcy Laws

The ABI is conducting a series of hearings on reforming chapter 11.   Today’s hearing was on corporate governance.   The six witnesses combined a chorus of pleas for the status quo with a few startling proposals for change.

Dennis Dunne of Milbank Tweed testified that the current system of official committees worked just fine and should be kept.   He argued that ad hoc committees were a poor substitute because they did not owe fiduciary duties and tended to come and go.   However, he did note a potential problem where a committee represented unsecured creditors who were out of the money.   In that situation, the committee would have an incentive to pursue chancy litigation and prolong the case in order to fulfill its fiduciary duty to get something for the unsecureds.   However, he did feel that the committee still had a role in order to investigate the secured creditor’s liens and make sure there were not any unencumbered assets.

Questions directed to Mr. Dunne concerned whether there should be multiple committees for jointly administered debtors or one committee for all creditors, secured and unsecured creditors alike.   Mr. Dunne testified that too many committees could prevent reorganization while a single committee, including secured creditors, would have impossible and conflicting duties.    He was also asked about the problem of ad hoc committees holding out for substantial contribution claims.   He acknowledged that having to pay two sets of committees was a problem, but said there was not a statutory fix.            

William Snyder of Deloitte Financial Advisory Services, LLP testified about the virtues of Chief Restructuring Officers.    In his view, a Chief Restructuring Officer allows a business to address is problems while retaining the institutional knowledge of the board of directors.   He said that anyone who thinks they can step into a business and know everything within 2-4 weeks is delusional.  

He gave the analogy of a plane in trouble.   In that case, there is one pilot to fly the plane and one pilot to fix the problem.   Presumably, the CRO would be the pilot fixing the plane.  

He said that to work, a CRO must have the power to hire, fire, sign checks and refuse to sign checks.  

He recommended that section 101(14) be amended to allow a pre-petition CRO to be employed as a professional.   Currently, “officers” are defined as not disinterested.   Since the O in CRO stands for officer, this is a problem.

One of the commissioners questioned whether the CRO was a threat to the traditional DIP model.   He described the CRO as “just a trustee picked by the secured creditor before the case is filed.”   Mr. Snyder pushed back against this notion, asserting that while someone in the capital structure usually forces the issue but the debtor selects the CRO.    He said that if the creditor requesting the CRO provides a list of acceptable candidates, those parties are usually blacklisted.  

One of the commissioners suggested that the debtor’s lawyer usually has the most control over selection of the CRO.

Brady Williamson, who chaired the National Bankruptcy Review Commission, advised the Committee to forget about persuading Congress with their recommendations and instead focus on educating the courts, US Trustees and public of the need for change.   He pointed out that BAPCPA was vetoed by the President and blocked by one house of Congress or the other on at least four occasions before it eventually passed.   He said that today’s Congress is much more divided.    He said that the Commission could improve the public perception of the bankruptcy system by showing that it is fundamentally sound.

Clarkson McDow is the former U.S. Trustee for Region Four.   His message was that the U.S. Trustee system is a valuable part of the system.   In particular, he was emphatic that the U.S. Trustee continue to appoint trustees and examiners so that judges can avoid fulfilling an administrative role.    He insisted that appointing a chapter 11 trustee was not an extreme remedy and encourage more use of chapter 11 trustees in liquidating chapter 11 cases.   He said it was important to get a trustee in place before the most valuable assets were gone.    Mr. McDow encouraged the panel to resist appointing persons with trustee-like powers in favor of appointing actual trustees.

Prof. Anne Lawton of Michigan State University College of Law reported on her empirical research.   She said that the 300 day deadline for a small business debtor to file a plan and the45 day deadline to confirm a plan were solutions in search of a problem.   She said cases were being disposed of quickly prior to BAPCPA.    Of small business cases, only 47% were still pending at 345 days into the case.   However, she said that of cases still pending at the 345 day mark, 71% proposed a plan and 46% confirmed a plan.   This compares to a confirmation rate of 26% overall.   She said that it just takes longer to get to confirmation.   

She also testified that cases more likely to succeed typically had committees appointed.   However, she did not advocate for more committee appointments.   Instead, she said that appointment of a committee was a signal that the creditors believe that the case is one worth paying attention to.  

Prof. Lawton said that there were adequate means for quickly getting rid of cases with low prospects for success.    On the other hand, she said that there were too many levers to pull to dispose of a case that might succeed.   She said that we need a more efficient system for determining keepers.  
Mark Gittelman, Chief Practice Counsel-Asset Recovery for PNC Bank, had the most provocative recommendations.    Unlike the other witnesses, who proposed no changes or at most one tweak, he had a six point plan:

  • He recommended bifurcating bankruptcy courts into commercial courts and consumer courts.
  • He also recommended creating mega courts for large and complex cases.   He said that the system could start with the courts in Delaware and New York and add a few others elsewhere in the country.   In return for creating the mega court, mid-market cases would be filed in their local venues.
  • Mr. Gittelman also recommended that bankruptcy judges be rotated among different courts to encourage uniform practices between locales.
  • He recommended that the selection process for professionals be more transparent and that courts be open to billing arrangements other than on an hourly basis.
  • He favored enforcing the rules on timely filing of schedules and monthly operating reports so that creditors can receive needed information early in the process.   (Apparently he was referring to the practice of routinely granting schedule extensions in large cases).
  • Finally, he recommended uniformity in first day motion practices.   He said that many cases were needlessly delayed because lawyers failed to file all of the first day motions they should.   He recommended developing a series of uniform first day motions to be filed in every case.