Recent Bankruptcy Trends
The era of 'easy money' may be coming to an end soon, as there are signs of increasing economic pressure in certain sectors of the economy. At the same time, the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (BAPCPA), the principle provisions of which became effective in October 2005, is fundamentally changing certain aspects of the Chapter 11 process. Although no one is able to predict with certainty what will happen in the restructuring field in the near future, here are some of the signs that the bankruptcy field is about to undergo a substantial change.
Farmland Industries Creditors Paid in Full
Maximizing the recovery for unsecured creditors is the primary goal of every liquidating trustee. In proposing the Farmland Industries liquidating plan, the debtor estimated that the maximum recovery for unsecured creditors would not exceed 85% of their allowed claims and that it would take the liquidating trustee approximately 5 years to reach that payout. Instead, JPMorgan, the appointed liquidating trustee, paid unsecured creditors more than 100% of their allowed claims 3 years earlier than anticipated. Several factors played a crucial role in maximizing the payout for Farmland Industries' unsecured creditors; these are explained in this article.
Trenwick America
The September Issue of this newsletter discussed the Delaware Bankruptcy Court's recent decision, In re Scott Acquisition Corp., 2006 WL 1732277 (Bankr. D. Del. 2006), which ruled that directors and officers of insolvent subsidiary companies owe fiduciary duties to both its creditors and the subsidiary itself. Hot on the heels of that decision, the Delaware Chancery Court, Vice-Chancellor Leo E. Strine presiding, has again waded into the breach of fiduciary duty and zone of insolvency arena with its decision in <i>Trenwick America Litigation Trust v. Ernst & Young, L.L.P., et al.</i>
Debtor Strategies for Avoiding Unfavorable Tax
The treatment of loans to a debtor's former employees can result in unforeseen and unfavorable tax consequences. An unwary trustee or administrator of a plan of reorganization (each a 'Responsible Individual') who employs the wrong approach can expose the estate to unanticipated payroll tax liability. Moreover, if the Responsible Individual fails to reserve sufficient funds for payment of such payroll tax liability, he may be forced to pay such liability out of his own pocket. As a result, it is critical that a Responsible Individual be familiar with the issues, and employ the strategies discussed herein.
Litigation
Recent rulings of interest to you and your practice.
Priority for Unpaid Workers' Comp Premiums
Priorities are the alchemist's stone of the Bankruptcy Code ' they have the power to turn worthless claims into pots of gold. Without priority status, unsecured claims typically receive little or no distributions from the bankruptcy estate. When these claims fall within one of the statutory priorities of ' 507(a) of the Bankruptcy Code, however, they often lead to significant distributions ' sometimes even payment in full. What often separates the 'haves' from the 'have-nots' in the bankruptcy arena is the ability to fit one's claim into the finite list of priorities set forth in ' 507(a).
Fiduciary Duties Owed to Subsidiary
On June 23, 2006, the jurisdiction that invented the 'zone of insolvency' delivered its latest lesson on the fiduciary duties of directors and officers of insolvent companies. The Delaware Bankruptcy Court, in <i>In re Scott Acquisition Corp.</i>, ___ B.R. at ____, 2006 WL 1731277 (Bankr. D.Del. 2006), ruled that directors and officers of insolvent subsidiary companies owe fiduciary duties to both its creditors and the subsidiary itself. Before this, leading cases on this issue held that fiduciary duties were owed only to creditors and the single-shareholder, parent companies. Though the decision stands on some firm legal ground, it is sure to create more uncertainty and doubt in the boardroom.
Postpetition Plan Support Agreements
The propriety of postpetition plan support agreements (aka 'lockup' agreements) has been the subject of considerable controversy since 2002 when Judge Mary Walrath of the U.S. Bankruptcy Court for the District of Delaware issued two unreported decisions announcing a 'bright-line' rule that such agreements are 'solicitations' within the meaning of ' 1125(b) of the Bankruptcy Code. In light of these rulings, parties seeking to memorialize a heavily negotiated consensus to support confirmation of a plan of reorganization have run the risk that any such consensus that is reduced to writing could be deemed a violation of ' 1125(b) unless it was accompanied by a prior court-approved disclosure statement. Furthermore, parties to such agreements also faced the significant risk that they could be disenfranchised from the Chapter 11 process through designation of their votes regarding the plan that they have agreed to support.
