Monday, October 31, 2022

NCBJ 2022: Bankruptcy Boom or Bust - How Far Is Too Far and Is the Day of Reckoning Here?


The first plenary session of NCBJ was a panel consisting of Professor Melissa Jacoby, Jennifer Hagle from Sidley and Austin and Judge Lisa Beckerman (Bankr. S.D.N.Y.). My overall impression of the panel was that it consisted of Prof. Jacoby asking why parties in big bankruptcy cases should be allowed to bend the rules, Ms. Hagle saying that its necessary to meet the demands of her creditor clients and Judge Beckerman trying to make sense of what parties are telling her. The Moderator, Judge Elaine Hammond, brought in the views of some of her judicial colleagues in the audience.
Do Traffic Laws Apply in Large Chapter 11s?

In a typical exchange, Professor Jacoby asked "Can you get an exemption from traffic laws?" Somewhat later in the program, she said  "Imagine going into a chapter 7 case and saying we don’t need a trustee, we don’t need a financial management course. We’ve got a better idea."  

Ms. Hagle replied that "certainty is very strong currency."  She added that venue and jurisdiction and what judge and what precedent will apply gives creditors the ability to understand when you extend credit what’s going to happen. She also said that "risk equals money."

Judge Beckerman said that from the judicial perspective she is looking at how far out is what I’m being asked to do?  She said "I did hedge funds. If it’s bothering me, it’s way out there." 

She also said that she asks three questions:

Is there any basis for this?

Who is this going to harm?

What is going to happen if I don’t approve it?

Judge Beckerman said she also looks at whether she is being faced with a "faux emergency."  She also said that she is wary of parties who make a big ask on the first day and it is essentially a first round of negotiation with the court.  She added that "sometimes the parties are testing you."

She addressed how to know when the sky is falling. She said that when the debtor is down to $250,000 in cash and they can't get by on cash collateral, there is little choice other than to approve the financing. However, she said that when she is told that everyone is in agreement, she is looking at who is being left out of the deal and who is going to get damaged if they are not part of the financing.

Ms. Hagle asserted a very realpolitik view of large cases. She said that for lenders, "certainty is currency" (which was actually the second time she used that phrase) and that for a creditor's committee, time and expense and delay are its currency.

Prof. Jacoby returned to defend the role of rules. She said that "the exception shouldn’t swallow the rule" and asked whether a  subset of private parties should be able to get together and override rule of law and say this is the only way to get this done. She added that as a matter of policy, the benefits of bankruptcy are a subsidy and that private parties have the ability to capture the big government subsidies that government offers. 

Judge Beckerman said that she looks at the story I’m being told. When I probe I ask is that really accurate? Did people really have a negotiation session or is there something suspicious? She looks for validation. Was the company marketed for a year? Was this the only purchaser that came forward? Did they explore financing?

Ms. Hagle stressed the need for integrity in the process. She said that having an independent director or directors mans that they must have real independence. Having an investigation means having a real investigation.  

One of the judges (Judge Beckerman or Judge Hammond I believe) said that there are things that we will routinely approve and there are things we don't. She stressed the importance of the Delaware first day guidelines and the efforts of other courts to lay out some hard and fast rules. One of the speakers (I think Ms. Hagle) said that she was all for due process as long as it's not on the first day. There was plenty of room for due process on the second day. (I think that was a joke).

There was also a discussion about the role of the judge in putting the brakes on overly aggressive requests. Sometimes the judge needs to suggest to the parties that they take a break and go out in the hall. Judge David Jones was given as an example of a judge who will independently review the assumptions in the bank's spreadsheet. However, Ms. Hagle asked "What is the judge's role in trying to renegotiate what has already been negotiated?" She also said that you can give someone all the time in the world except that the economics are already baked in. If there is funny business going on (my words, not hers), the Committee had an obligation to track it down after the fact. 

Bleedover Into Smaller Cases

Another topic beyond whether traffic laws apply in Delaware and New York was whether we are developing divergent systems. While there was some agreement that we are developing one system for mega cases and one for everyone else, there was some discussion about bleedover into smaller cases.

Someone (from the audience I believe) asked whether lawyers who do small cases and consumer cases get to be as creative as lawyers in the mega cases? Someone (probably Prof. Jacoby) raised the specter of the exception swallowing the rule. Lawyers in other cases are going to look for precedents in the big cases.   Judges have to be willing to say "that was a very bespoke set of circumstances" that led to that result.

Judge Hammond echoed that lawyers in smaller cases are picking up on what they see the big cases doing. She said that it’s not just pro ses that pick up things on the internet. She added that it goes to fees as well. She has seen counsel for chapter13 debtors requesting $700 per hour. (Note: There are practical limits here. I could charge as much as a third year associate in New York, but where would I find the client who could pay that much?)

Tort Cases and Equitable Mootness

Ms. Hagle pointed out that the mass tort cases might be different than the melting ice cream cases. In the Purdue Pharma case, the court was told that without third party releases, there would be no billions going to tort victims. The District Court said no and called their bluff. 

The panelists pointed out that the mass tort cases run the risk that the legislature steps in to fix the problem. A legislative fix was presented as only one step worse than the Supreme Court ruling on a case. 

Professor Jacoby argued that equitable mootness allows for the law to get remade without the involvement of the legislature.  She said the rules have changed. They haven’t changed because of Congress or the Supreme Court or even that much from circuits.  Equitable mootness is a big carve out of circuit courts doing their job.

Overall the circuits may want to leave things going the way they’re going. Do they want to resolve these issues? To the extent there are concerns about what’s going on in big cases, circuits have some responsibility. Is it constitutional? Where did this come from?

Judge Beckerman said that some circuits are more willing to look at substantive issues in confirmation. She pointed to the Fifth Circuit's recent Highland Capital case as one where the court reversed a confirmation order in part notwithstanding equitable mootness. She pointed out that the Fifth Circuit has a lot of big cases.

Prof. Jacoby argued that  the Fifth Circuit is different than the 2nd or 3rd circuits when it comes to equitable mootness.

Ms. Hagle noted that the Supreme Court has repeatedly passed on taking on equitable mootness.  They have not wanted to spend their time on it. However, she said that the landscape is changing and what is changing it is the mass tort cases. She argued that these cases were not crisis driven, but rather public policy driven.  She said that in the mass tort context there is a lot more willingness to grant stays pending appeal (which avoids equitable mootness).  She said that it’s just different than when you have the  DIP exploding.

Judge Beckerman said that she does not make decisions thinking about whether she is going to get overturned. People make decision based on what they think right decision is.

Prof. Jacoby said that mass tort cases and equitable mootness are a terrible combination. She said that in the Third Circuit oral argument on the Johnson and Johnson/LTL case, J & J's lawyers were asked whether it was better to resolve these mass tort cases through the bankruptcy system or the Multiu-District Litigation system. While this was not central to the issue of whether LTL filed in bad faith, it showed that the courts are thinking about how these cases get resolved.

Judge Beckerman added that the appellate court has to look at commercial reality.

Take-Aways

I thought the dynamic of this panel was interesting. You had the academic saying "stop, you can't do this" and the practitioner saying "we must do this" while the judge was left in the middle as the umpire trying to call balls and strikes in a setting where the strike zone is getting fuzzier. 

This panel focused on issues that came up throughout the conference. Is bankruptcy a better way to resolve mass tort claims? Has equitable mootness become a monster gobbling up appellate review? Will practitioners go so far that they push Congress into taking ill-advised action?

The benefit of NCBJ is to hear what people are talking about at a high level. I think there was a recognition here (and in other programs) that some aspects of bankruptcy practice are going too far and may end up snapping back. I have a section in a law review article I am working on that talks about the revolt of the Article III judiciary against third party releases. Third party releases are one area where practice may be getting out ahead of the language of the code. However, at the opposite end of the spectrum, equitable mootness is an area where the Article III judiciary are arguably shirking their duty. 

I also think that Jennifer Hagle (the panel's equivalent of Gordon Gecko) had a point that it is one thing to bend the rules in the name of economics and be candid that is what is happening. And there is a role for the judiciary to impose limits and call the  lender's bluff. For example, a firm rule that chapter 5 causes of action are not subject to adequate protection liens will keep lenders from making that ask. On the other hand, the mass tort cases are clearly different and call for a different approach. Very often these are companies with a good business model who just can't handle the cost of litigation. It is not the case that the business will shut down unless the DIP lender's demands are met. As will be discussed in other articles from the conference, there is a major philosophical debate going on about whether the bankruptcy system or the MDL (multi-district litigation) system is better equipped to handle mass tort cases and whether the Bankruptcy Code as written furnishes the flexibility necessary to make it the better system. 

Author's Note: My summary of this (and other programs) is only as good as my ability to listen and take notes at the same time. I apologize in advance if I have misquoted anyone. I have rearranged the order of some topics to make the summary flow better.

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