Stock Trading Injunctions in Chapter11
The implementation of restrictions on stock and/or claims trading has become almost routine in large Chapter 11 cases involving public companies on the basis that such restrictions are vital to prevent forfeiture of favorable tax attributes that can be triggered by a change in control. Continued reliance on stock trading injunctions as a means of preserving net operating loss carry forwards, however, may be problematic, after the controversial ruling handed down in 2005 by the Seventh Circuit Court of Appeals in <i>In re UAL Corp.</i>, 412 F.3d 775 (7th Cir. 2005).
Pension Plan Protection Act Leaves Door Open
Legacy costs, the common term for worker pension and health care benefits negotiated in past collective bargaining agreements, are rising at a rapid pace ' driven by weak projected returns on pension portfolios, strong growth in health care costs and aging baby boomers tipping the scale between the number of workers supporting each retiree.
Bankruptcy Court Demolishes Baseless Lender Liability Complaint
A Delaware bankruptcy court held on Nov. 16 that a secured lender with a $128 million claim could credit bid at a judicial sale of a Chapter 11 debtor's assets, after dismissing the expansive complaint filed against the lender by the creditors' committee in the debtor's case (claims for recharacterization of debt as equity; equitable subordination; breach of fiduciary duty; invalid loans; voidable liens; and preference liability).
Chapter 15's First Major Case
The continuing drama relating to the demise of the Yukos Oil Company, Russia's leading oil company, has generated two U.S. bankruptcy proceedings that have raised some of the most interesting cross-border insolvency issues in the last year. Both proceedings emanate from the pitched battle between Yukos' management and equity investors, on the one hand ' who assert that the Russian government is expropriating the company for its own benefit in violation of Russian and international law ' and the Russian government and an interim insolvency receiver appointed by a Russian court (the 'Receiver'), on the other hand ' who assert that Yukos' management caused the company to commit a tax fraud of approximately USD $27.5 billion that can only be resolved in a Russian court.
Deepening Insolvency Is Sinking Fast
Uniformity among courts on this question has not been and may never be reached. Nevertheless, recent decisions from the Third Circuit, the Delaware Chancery Court, and the Southern District of New York reflect an unmistakable and growing trend toward restricting significantly or even rejecting claims for deepening insolvency. This article describes this emerging trend, and demonstrates that each of these cases reflects an approach that appears to have developed within these respective courts. The common thread underlying these decisions is a concern that recognition of a claim for deepening insolvency would discourage good faith efforts to turnaround a troubled company that qualify for protection under the business judgment rule. This article concludes by identifying serious weaknesses from which deepening insolvency claims suffer in light of these significant rulings.
Special Issue: The 'Hottest Issues' Get Hotter; The Bayou Hedge Funds Fraud
Investor confidence and market behavior can be impacted greatly by events that do not necessarily correlate. In the case of the Bayou Hedge Funds fraud, these unique and non-recurring events fueled a fire in the hedge fund industry that has spread, but not necessarily due to the particulars of the Bayou Hedge Funds failure. But, when dealing with significant investments made by pension funds, corporate entities, along with foundations and trusts, a healthy dose of skepticism is natural and appropriate. Not unlike the transition from the Enron scandal to the formation of the Public Company Accounting Oversight Board, hedge fund investors may extrapolate the troubles at the Bayou Hedge Funds to all hedge funds. As a result, questions of the need for regulatory oversight for a stronger accountability within the industry arise.
Beware the Gatekeeper
Last month, we explained that valuation issues come into play throughout Chapter 11 business reorganization cases. We discussed how to recognize the uncertainties underlying expert valuation conclusions; enterprise/going concern value; and the fact that the goal of any valuation is to make an estimate based on an informed judgment that embraces all facts relevant to future earning capacity and hence to present worth, including, of course, the nature and conditions of the properties, the past earnings record, and all circumstances that indicate whether or not the record is reliable criterion of future performance. We conclude this month with a discussion of expert evidence.
Automotive Insolvencies
The unique environment of the automotive industry has resulted in the insolvencies of tier-one and tier-two suppliers developing distinct characteristics. Unlike many industries, automotive suppliers typically have only a handful of customers, without whom they have no business to reorganize or sell in an effort maximize values for creditors. This gives customers significant control in the options a debtor has when faced with severe financial distress. However, because of Original Equipment Manufacturers' (OEM) just-in-time methods of production ' unlike customers in many businesses that can simply decide not to do business with an insolvent entity ' OEMs and large tier-one suppliers cannot purchase automotive parts or assemblies elsewhere.
Claims Trading Restrictions Dealt Setback
In recent years, debtors in large corporate bankruptcies have sometimes sought and obtained, in varying degrees, authority at the outset of bankruptcy cases for severe restrictions on trading in claims against the debtors by substantial claimholders. In practice, however, these debt-trading orders have chilled the market for trading in debt securities and served to entrench existing management by effectively precluding substantial investors from acquiring meaningful positions in the debtor's debt securities.
