CLE Seminar for In-House Counsel
October 11, 2013
Washington, DC

A Bankruptcy and
Restructuring Primer: From
Distressed M...
Index

Part A Protecting Your Organization
Part B Bankruptcy Overview
Part C Distressed Mergers, Acquisitions and Opportun...
Part A: Protecting Your Organization
Where you stand depends on where you sit. Are you
the Obligor? Guarantor? Creditor (S...
Part B: Bankruptcy
Bankruptcy Basics

Overview
• Underlying the Bankruptcy Code are policies favoring equal treatment of
c...
Bankruptcy Basics (continued…)

Bankruptcy Court Involvement
• Generally, the Bankruptcy Code does not authorize a debtor ...
Bankruptcy Basics (continued…)

• Chapter 11 – Reorganization (companies or individuals)
•
•
•
•

Balance Sheet Restructur...
Bankruptcy Basics (continued…)

Bankruptcy Jurisdiction: Core versus Non-Core Matters
• Core Matters
• Non-exhaustive list...
Bankruptcy Basics (continued…)

Transactions Beyond the Ordinary Course of Business
• Financing – Debtors/trustees can obt...
Bankruptcy Basics: Applicable Law

Federal versus State Law

• Federal Law
• Law that applies throughout the country, such...
Bankruptcy Basics: The Automatic Stay
Automatic Stay

• Stay of collection against a debtor or its assets. 11 U.S.C. § 362...
Bankruptcy Basics: Adequate Protection

Adequate Protection
• Secured creditor’s collateral is subject to diminution in va...
Bankruptcy Basics: Asset Sales

• Base case under the Bankruptcy Code is a sale subject to liens, claims,
encumbrances and...
Bankruptcy Basics: Asset Sales (continued…)
• Credit Bidding
• In RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank, 5...
Bankruptcy Basics: Setoff and Recoupment

Setoff

• Right created by state law to offset separate, mutual obligations, and...
Bankruptcy Basics: Setoff and Recoupment
(continued…)

Recoupment
• Adjusts interrelated obligations
• Same transaction re...
Bankruptcy Basics: Executory Contracts

Executory Contracts and Unexpired Leases
• What is it? Where neither party has ful...
Bankruptcy Basics: Executory Contracts (continued…)

Limitations
• Period to Assume or Reject Shortened
• Executoriness
• ...
Bankruptcy Basics: Avoidance Actions

Preferential Transfers
• Ability to clawback (i) transfers (ii) on account of antece...
Bankruptcy Basic: Avoidance Actions (continued…)

Fraudulent Transfers (not available in Chapter 15)
• Recoup value of deb...
Bankruptcy Basics: Avoidance Actions (continued…)

Post-Petition Transfers (not available in Chapter 15)
• “[A] trustee ma...
Bankruptcy Basics: Reclamation

• State Law
• Article 2 of the Uniform Commercial Code

• Bankruptcy
• Generally, the Bank...
Bankruptcy Basics: Chapter 11 Plans

Plan Types: Reorganization or Liquidation
• Pre-packaged plan
• Debtors can negotiate...
Bankruptcy Basics: Chapter 11 Plans (continued…)

Plan Types: Reorganization or Liquidation (continued…)
• Pre-negotiated ...
Bankruptcy Basics: Chapter 11 Plans (continued…)

Exclusivity

• Debtor has the exclusive right to propose a plan for 120 ...
Bankruptcy Basics: Chapter 11 Plans (continued…)

Cramdown
• If at least one impaired class accepts the plan, dissenting c...
Bankruptcy Basics: Chapter 11 Plans (continued…)

Plan Features and Issues
• Discharge
• Pre-confirmation debts are discha...
Bankruptcy Basics: Chapter 11 Plans (continued…)

• Gifting
• Consensually providing a distribution to the class just belo...
Bankruptcy Basics: Other Special Provisions

9019 Settlements

• “On motion by the trustee and after notice and a hearing,...
Key Issues and Developments
• Pleading Standards in Avoidance Actions
• Courts scrutinize complaints under Twombly and Iqb...
Key Issues and Developments (continued…)
• Persistence of the Critical Vendor
• Doctrine of necessity allows certain credi...
Part C: Distressed Mergers, Acquisitions and
Opportunities and Alternatives to Bankruptcy
Purchase Through Bankruptcy
• Se...
Overview of Distressed Asset Purchases
UCC or Real Property Foreclosure Sale
• Public/Sheriff’s Sale
• Private
• Strict Fo...
Treatment of Intellectual Property in Bankruptcy
IP Licensor Files Bankruptcy or Shuts Down

• Hold Over Option Under Sect...
Treatment of Intellectual Property In Bankruptcy
(continued…)

IP Licensee Files Bankruptcy
• Initial Limbo Period
• Can G...
Judicial and Non-Judicial Sale Mechanisms

• Bankruptcy Asset Sales - as mentioned, assets may be sold free and
clear of l...
Additional Methods of Purchase

• Stock Purchases:
• Buyer beware – Unknown and Contingent Liabilities Assumed
• Changes i...
Risks: Additional Liabilities

• Trust Fund Taxes
• Certain Other Taxes
• Certain Employee Claims
• Guarantees
• General P...
Health Care Overview
• Reimbursements, especially for Medicare and Medicaid, being reduced
• Other specialized niches suff...
Distressed Acquisitions: Energy
• Oil & Gas, Coal Mining, Power Generation, and Renewables
• State Law Issues
• Lean Prior...
Part D: Distressed Governments and Municipal
Bankruptcies
Root Causes
• Continued Economic Challenges
• End of TARP/Stimul...
Businesses Impacted

• Hospitals (For Profit and Not for Profit)
• Other Health Care
• Higher Education (For Profit and No...
Dealing with Distressed Governments

• Potential Solutions
• Chapter 9 Bankruptcy (Certain States Only)
• Emergency Manage...
Sequestration, Government Closure and the DC
Region
• Sequestration budget cuts could hit DC area hardest at a time when
i...
Sequestration Fall Out
• HUD-related services, such as FHA-back loans, could decline (See Statement of Secretary
Donovan, ...
Municipal Bankruptcy
Municipal Bankruptcies Increase
• Meredith Whitney in 2010: “There is not a doubt in my mind that you...
Municipal Bankruptcy Overview

• For profit entities generally subject to voluntary or involuntary bankruptcy
petitions
• ...
Chapter 9

• Requires State authority.
• Covers municipalities, e.g. cities, counties, towns; others (e.g., water
district...
Municipal Bankruptcy: Chapter 9
• Notable Chapter 9 Filings
• Detroit, Michigan [2013]
• Jefferson County, Alabama [2011]
...
Bankruptcy Comparison: Chapter 9 v. Chapter 11
• Bankruptcy Court Authority
• Chapter 9  Very Limited, due to concerns re...
Thank you

Sam J. Alberts
Dentons US LLP
1301 K Street
Suite 600, East Tower

Washington, DC 20005
D +1 202 408 7004
F +1 ...
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From Distressed M&A to Detriot

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From Distressed M&A to Detriot

  1. 1. CLE Seminar for In-House Counsel October 11, 2013 Washington, DC A Bankruptcy and Restructuring Primer: From Distressed M&A to Detroit Sam J. Alberts Partner Dentons US LLP sam.alberts@dentons.com +1 202 408 7004
  2. 2. Index Part A Protecting Your Organization Part B Bankruptcy Overview Part C Distressed Mergers, Acquisitions and Opportunities Part D Distressed Governments and Municipal Bankruptcies 2
  3. 3. Part A: Protecting Your Organization Where you stand depends on where you sit. Are you the Obligor? Guarantor? Creditor (Secured, Unsecured)? Lessor? Creditor Bankruptcy Planning • Understand Advantages and Disadvantages of Bankruptcy • Bankruptcy Will Present Some Delays and Costs • Confirm Status and, if Secured, Update Filings as Necessary • Understand the Nature of the Asset and any Collateral • Use “Workout” Negotiations to Your Advantage • Confirm status and obtain concessions • Take Actions Now Which Cannot be Taken Post-Bankruptcy • Application of deposits • Submission of default notices • Back up credit sources, e.g. letters of credit, guarantors 3
  4. 4. Part B: Bankruptcy Bankruptcy Basics Overview • Underlying the Bankruptcy Code are policies favoring equal treatment of creditors, the preservation of economic value, and allowing distressed entities a fresh start. • Significant overlap with respect to the protections and relief available under each Chapter, but each is specially designed to accomplish different results. Very low barrier to entry if company has assets in United States • Advance retainer to United States counsel, and interest in pooled account or claims under documents governed by United States law. 4
  5. 5. Bankruptcy Basics (continued…) Bankruptcy Court Involvement • Generally, the Bankruptcy Code does not authorize a debtor to operate in bankruptcy, or undertake actions outside its ordinary course of business, without court order. • The bankruptcy court is involved from start to end of a case. • Chapter 11 – First Day Motions (Substantive, Operational and Administrative) • • • • • • • Obtain financing Use of cash collateral Continue customer programs Continue use of cash management system Pay prepetition claims of critical vendors Pay prepetition claims of statutory lienholders Continue utilities • Orders entered quickly on an interim basis to facilitate debtor’s transition into Chapter 11, with a final hearing typically following 20-30 days thereafter. 5
  6. 6. Bankruptcy Basics (continued…) • Chapter 11 – Reorganization (companies or individuals) • • • • Balance Sheet Restructuring Operational Restructuring Strategic Restructuring Sale of Going Concern Business • Chapter 7 – Liquidation (companies or individuals) • Chapter 9 – Municipal (municipalities and governmental units) • Chapter 15 – Cross-Border Others • Chapter 12 – Family Farmers/Fishermen • Chapter 13 – Individuals (with income higher than permitted in Chapter 7) 6
  7. 7. Bankruptcy Basics (continued…) Bankruptcy Jurisdiction: Core versus Non-Core Matters • Core Matters • Non-exhaustive list of core matters. 28 U.S.C. § 157(b)(2). • Typically include actions that only arise in the bankruptcy context (ex: objection to claim) • Bankruptcy courts have authority to hear and determine “core” matters, and can enter final orders on “core” matters. 28 U.S.C. § 157. • Non-Core Matters • Largely matters that effect the bankruptcy proceeding, but are not within the exclusive domain of bankruptcy law. • Absent consent of parties in interest, bankruptcy courts may only enter recommended findings, which the district court would then review. 11 U.S.C. § 157(c). • Lenders may benefit from seeking withdrawal of the reference or abstention to deprive a debtor of its preferred forum, the bankruptcy court. 7
  8. 8. Bankruptcy Basics (continued…) Transactions Beyond the Ordinary Course of Business • Financing – Debtors/trustees can obtain credit. The bankruptcy court ensures the debtor cannot obtain financing more cheaply, on an unsecured basis, or with more junior liens. 11 U.S.C. § 364. • Priming liens are frequently approved upon a showing of adequate protection • Use of Cash Collateral – Debtors are forbidden from using cash collateral without consent of secured creditor, or a court order including a finding of adequate protection. See 11 U.S.C. § 363(c). • Asset Sales – Debtors can generate value by selling some or all of their assets. 11 U.S.C. § 363(b). 8
  9. 9. Bankruptcy Basics: Applicable Law Federal versus State Law • Federal Law • Law that applies throughout the country, such as the Bankruptcy Code • Federal law is interpreted by each circuit, with circuits permitted to take different views • United States Supreme Court decides significant issues of dispute between circuits • State Law • Law that applies in a certain state • Governs rights under lending agreements, perfection and validity of liens, and property rights, including in bankruptcy cases (subject to the Bankruptcy Code) • Governs workouts, foreclosures, ABCs • State law is interpreted by all courts in the state • State supreme court decides significant issues and disputes between divisions of courts of appeal • United State Supreme Court only reviews a state supreme court decision if it affects several states or has a significant impact on United States public policy • Bankruptcy courts frequently apply state law to determine rights under lending agreements and property rights 9
  10. 10. Bankruptcy Basics: The Automatic Stay Automatic Stay • Stay of collection against a debtor or its assets. 11 U.S.C. § 362. • Chapters 7 and 11 – Automatically applies to debtors, as well as their assets and operations, wherever located, without notice. • Chapter 15 – Applies automatically when foreign main proceeding is recognized, and applies to assets in United States. • Generally continues while a case is pending • Obtaining Relief From the Automatic Stay • A creditor may seek relief from the stay to commence or continue enforcement for “cause.” 11 U.S.C. § 362(d). • Cause = Debtor has no equity in collateral, and not necessary for an effective reorganization • Cause = Lack of Adequate Protection; harm to creditor. Limitations • Significant Exceptions to the Automatic Stay • Police Power. 11 U.S.C. § 362(b)(4). • Perfection/Continuation of certain security interests. 11 U.S.C. § 362(b)(3). • Forward Contract, securities contract, swap, repo. 11 U.S.C. § 362(b)(6). • Violations of the automatic stay are void/voidable, and sanctionable. 10
  11. 11. Bankruptcy Basics: Adequate Protection Adequate Protection • Secured creditor’s collateral is subject to diminution in value, but lenders are prevented from repossessing collateral by the automatic stay. • Adequate protection serves to compensate secured creditors for this diminution of value. • Flexible concept, with no exclusive means of provision. 11 U.S.C. § 361. • Types of adequate protection include: • • • • • Equity cushion; Cash payment or periodic cash payments to the extent of diminution in value; Additional or replacement liens to the extent of diminution in value; Administrative expense claim priority for diminution in value; and/or Indubitable equivalent. Month Day Year Dentons US LLP Document reference # 11
  12. 12. Bankruptcy Basics: Asset Sales • Base case under the Bankruptcy Code is a sale subject to liens, claims, encumbrances and interests. 11 U.S.C. § 363. • Assets may be sold free and clear of liens, claims, encumbrances and interests if: (1) Applicable non-bankruptcy law permits it; (2) Secured creditor consents; (3) The creditor’s interest in the property is a lien and the price at which such property is to be sold is greater than the aggregate value of all liens on such property; (4) The creditor’s interest in the property is in bona fide dispute; or (5) The creditor could be compelled, in a legal proceeding, to accept money. • Asset transfer taxes can be avoided only if assets are sold pursuant to a plan. Fla. Dep’t of Rev. v. Piccadilly Cafeterias, Inc., 554 U.S. 33 (2008). Month Day Year Dentons US LLP Document reference # 12
  13. 13. Bankruptcy Basics: Asset Sales (continued…) • Credit Bidding • In RadLAX Gateway Hotel, LLC, et al. v. Amalgamated Bank, 566 U.S. ___, 132 S. Ct. 2065, 182 L. Ed. 2d 967 (2012), the Supreme Court unanimously found that a Secured creditor may use its secured debt to purchase its collateral from the debtor in a sale. • • • • Purchase outright (full or partial satisfaction of debt) Set a floor for cash bids Theory: May credit bid to take assets free and clear without payment of any claims Practice: Must pay administrative expense claims as a consequence of free and clear sale approval Limitations • Credit bid is not guaranteed if: • Validity of liens are subject to challenge; or • Court “for cause” prevents a credit bid (ex: bad acts). 11 U.S.C. § 363(k). • Successor Liability • Sub Rosa Plan • Asset sales (financings and settlements) cannot be used to effect a sub silentio plan, either to dictate plan terms or in order to avoid confirmation requirements. • Court Approval Month Day Year Dentons US LLP Document reference # 13
  14. 14. Bankruptcy Basics: Setoff and Recoupment Setoff • Right created by state law to offset separate, mutual obligations, and respected in bankruptcy • Elements • Creditor must have pre-bankruptcy claim • Creditor must owe pre-bankruptcy debt to debtor • Mutuality • • • Same parties Same capacity Not necessarily same transaction • Same Right • • Debtor’s obligation owed to two or more entities generally cannot be setoff by one creditor against separate debts Potential exception – If other creditor’s claim is not extinguished • Claim and debt are valid obligations • Limitations • • • • • Setoff must be valid under state law Majority of jurisdictions do not permit setoff if oversecured (undersecured and unsecured claims eligible for setoff) Triangular setoffs not permitted (limited pre-bankruptcy contract exception) Claim acquired from creditor post-bankruptcy – not eligible for setoff. 11 U.S.C. § 553(a)(2)(A). Claim acquired from creditor within 90 days pre-bankruptcy while debtor was insolvent (presumed) = not eligible for setoff. 11 U.S.C. § 553(a)(2)(B). • Generally subject to the automatic stay 14
  15. 15. Bankruptcy Basics: Setoff and Recoupment (continued…) Recoupment • Adjusts interrelated obligations • Same transaction requirement • Logical relationship test – obligations have a “logical relationship” • Integrated transaction test – obligations arise out of single, integrated transaction, so obligations due to multiple transactions under same contract may not suffice (test in Second and Third Circuits) • Results in very limited use of recoupment • Majority view – Pre- and post-bankruptcy claim/debt may be recouped • Contractual right not required, some courts permit equitable recoupment • Exempt from the automatic stay 15
  16. 16. Bankruptcy Basics: Executory Contracts Executory Contracts and Unexpired Leases • What is it? Where neither party has fully performed under the contract, and a failure to do so by either will result in a material breach • Options (court approval required) • Rejection – Does not terminate the agreement, but constitutes a prepetition breach with resulting damages being general unsecured claims. • Assumption – Cure any default, compensate counterparty for any loss as a result of default, and give adequate assurance of future performance. • Assumption and Assignment – Cure any default, and give adequate assurance that assignee will perform its obligations. • Chapter 11 debtor has until plan confirmation (advanced by court order). • Generally, provisions for modification or termination of an agreement upon the debtor’s filing for bankruptcy, financial condition, or the appointment of a trustee or receiver, are invalid. • Non-debtor counterparties generally required to continue to perform pending assumption or rejection. 16
  17. 17. Bankruptcy Basics: Executory Contracts (continued…) Limitations • Period to Assume or Reject Shortened • Executoriness • Generally, failure to perform by either party results in material breach • Assumable if not Assignable? • Split of Authority • Cum Onere Principle • Must reject, assume, or assume and assign agreement as a whole • Essentially, one cannot assume the benefits without the burdens 17
  18. 18. Bankruptcy Basics: Avoidance Actions Preferential Transfers • Ability to clawback (i) transfers (ii) on account of antecedent debt (iii) within 90 days prior to a bankruptcy filing (or 1 year for an insider) (iv) while the debtor was insolvent (presumed for 90 days before bankruptcy filing) (v) to the extent a creditor received more than it would have in a Chapter 7 liquidation. 11 U.S.C. § 547. • Insiders = Directors, officers, controlling shareholders and persons in control. • Secured creditors can be “insiders” if they exert control over a debtor beyond that of an arm’s-length lender, increasing exposure to clawback. Limitations • Preference Period • Several statutory defenses, most common of which is that payment was made in the ordinary course. 11 U.S.C. § 547(c). 18
  19. 19. Bankruptcy Basic: Avoidance Actions (continued…) Fraudulent Transfers (not available in Chapter 15) • Recoup value of debtor’s transfers that hinder, delay, or defraud creditors • Can be used to recoup payments, avoid liens, and/or avoid guarantees • Two theories of recovery • Actual fraud. 11 U.S.C. § 548(a)(1)(A). • Constructive fraud. 11 U.S.C. § 548(a)(1)(B). • Assets transferred or liabilities incurred for less than reasonably equivalent value; and • Debtor was insolvent at the time of the transfer, or became insolvent as a result. • Recoverable from subsequent transferees as well. • Debtor can use state fraudulent conveyance laws pursuant to Strong-Arm Power. 11 U.S.C. § 544(b). Limitations • Very difficult to prove actual intent • Reach-back periods • Safe Harbors 19
  20. 20. Bankruptcy Basics: Avoidance Actions (continued…) Post-Petition Transfers (not available in Chapter 15) • “[A] trustee may avoid a transfer of property of the estate--(1) that occurs after the commencement of the case; and (2)(A) that is authorized only under section 303(f) or 542(c); or (B) that is not authorized under this title or by the court.” 11 U.S.C. § 549(a). • Creates risk for payments made to vendors • Cash may be subject to a perfected security interest • Check the cash-collateral order to ensure secured-creditor consent • Vendor’s lack of knowledge or fact that payment was made in the ordinary course are unlikely to defeat an action to avoid an unauthorized post-petition transfer 20
  21. 21. Bankruptcy Basics: Reclamation • State Law • Article 2 of the Uniform Commercial Code • Bankruptcy • Generally, the Bankruptcy Code validates a seller’s reclamation rights under state law. 11 U.S.C. § 546(c). • Sellers are entitled to an administrative expense claim for the value of any goods received by Buyer within 20 days of the Petition Date. 11 U.S.C. § 503(b)(9). 21
  22. 22. Bankruptcy Basics: Chapter 11 Plans Plan Types: Reorganization or Liquidation • Pre-packaged plan • Debtors can negotiate with creditors to prepare, solicit and accept ballots on a plan of reorganization or liquidation prior to a bankruptcy filing, and then file a bankruptcy to have the plan confirmed on an expedited timetable. See 11 U.S.C. § 1126(b). • Drastically reduces the cost of a traditional Chapter 11, minimizes the effects/stigma of bankruptcy, and restructures the company quickly • Not always a realistic option, particularly where company is running out of money or there are many impaired creditor classes to negotiate with • Must also comply with securities laws due to pre-bankruptcy solicitation 22
  23. 23. Bankruptcy Basics: Chapter 11 Plans (continued…) Plan Types: Reorganization or Liquidation (continued…) • Pre-negotiated or Pre-arranged plan • Similar to a pre-packaged plan as a debtor negotiates the plan with creditors outside of the bankruptcy court • However, the debtor does not solicit acceptances of a pre-negotiated plan prior to the bankruptcy filing • Similar benefits to a prepackaged plan, though slightly less expedient • But, since there is no pre-petition solicitation, risk of violating securities laws is reduced • “Lock-up” or “Plan Support” Agreements • Agreements whereby creditors will support the plan so long as the plan remains consistent with the parties’ agreement • Cannot constitute a sub rosa / sub silentio plan, but can determine creditors’ treatment • Debtor may get remedies, including injunctive relief, when a creditor violates agreement 23
  24. 24. Bankruptcy Basics: Chapter 11 Plans (continued…) Exclusivity • Debtor has the exclusive right to propose a plan for 120 days and solicit it for 180 days. Can be extended up to 18 months and 20 months, respectively. 11 U.S.C. § 1121. • Upon expiration of exclusivity, any party in interest may file a plan. 11 U.S.C. § 1121(c). Plan Approval Process • Plan and Disclosure Statement filed • Disclosure Statement approved as having sufficient information • Solicitation of votes on plan and voting • Classification – Separate classes for different priority claims, and possibly for claimholders with different rights • Solicitation – Impaired classes receiving a distribution (not impaired = accept; not getting a distribution = reject) • Voting – Class accepts if 66.66% in amount and 50% in number of those voting in class accept; rest of class is bound • Confirmation 24
  25. 25. Bankruptcy Basics: Chapter 11 Plans (continued…) Cramdown • If at least one impaired class accepts the plan, dissenting creditors can be bound so long as the terms of the plan are “fair and equitable” and rejecting classes will receive a distribution under the plan equal to or larger than they would have in a Chapter 7 liquidation. 11 U.S.C. § 1129(b). • If the dissenting class consists of secured claims, they must: (i) receive the “indubitable equivalent” of their secured claims (ex: a debt-for-debt swap, or rights to offset impairment), (ii) retain their liens and receive deferred payments totalling their allowed secured claims, or (iii) have their liens transferred to the proceeds of collateral in a free and clear sale, with such liens on proceeds treated pursuant to (i) or (ii). Claims Under the Plan • Priority of Claims (1) secured (priority claim recovery limited to collateral); (2) super-priority administrative expense claims (lenders for value diminution); (3) administrative expense claims; (4) priority unsecured claims; (5) general unsecured claims; and (6) equity interests. • Absolute Priority – Absent consent, plan must adhere to the waterfall distribution scheme 25
  26. 26. Bankruptcy Basics: Chapter 11 Plans (continued…) Plan Features and Issues • Discharge • Pre-confirmation debts are discharged under a plan of reorganization. 11 U.S.C. § 1141(d). • Certain debts may be excepted from discharge (ex: unknown tort claims) • No discharge if (i) plan provides for sale of substantially all assets, or (ii) debtor will not continue in business, but this rule is swallowed by the releases, injunctions and exculpations discussed below, which are common even in liquidating plans. • Releases, Injunctions and Exculpations • Third-party Releases – Though barred in some jurisdictions, such releases have become commonplace for those principally involved in the case (management, lenders, committee, etc.). Will draw objections and close scrutiny. • Injunctions – Block non-bankruptcy litigation/claims against debtors and those principally involved in the case pursuant to bankruptcy court’s residual equity powers. 11 U.S.C. § 105. Again, these provisions are subject to scrutiny. • Exculpation Clauses – Debtors and those principally involved in the case may be exculpated pursuant to bankruptcy court’s residual equity powers. 11 U.S.C. § 105. 26
  27. 27. Bankruptcy Basics: Chapter 11 Plans (continued…) • Gifting • Consensually providing a distribution to the class just below yours in the waterfall to obtain their consent to the plan. • The gift may not skip over a class to provide distribution to creditors two or more levels below. • A workaround to the absolute priority rule in order to get unsecured creditors’ consent. • Deathtraps • Consensually providing a recovery to a class just below yours in the waterfall in order to obtain their consent to the plan, which recovery is eliminated if the junior class votes to reject the plan. • Global settlements • Courts favor plan settlements, including as to treatment of claims. See 11 U.S.C. § 1123(b)(3)(A). • Can enable principal creditors to determine their treatment through the plan despite dissenters, and then obtain approval of the treatment as a settlement – which only needs to be above the lowest threshold of reasonableness for approval. • Debtors can argue a settlement is not severable from the plan, thus pressuring the bankruptcy court to confirm the plan and approve the settlement for fear of the impact of not doing so. 27
  28. 28. Bankruptcy Basics: Other Special Provisions 9019 Settlements • “On motion by the trustee and after notice and a hearing, the court may approve a compromise or settlement.” Fed. R. Bankr. P. 9019(a). • Enables parties to get court approval of settlements, discrete or global Limitations • Must be “fair and equitable” and benefit the bankruptcy estate 2004 Examinations • “On motion of any party in interest, the court may order the examination of any entity.” Fed. R. Bankr. P. 2004(a). • Allows an interested party to depose witnesses or request documents regarding the Debtor and its finances without need for pending litigation. • Broad Scope Limitations • Cannot be used in connection with pending litigation • Usually, party seeking discovery must have a claim in the proceeding • May be curtailed by discovery limitations in (a) arbitration clauses and (b) securities law 28
  29. 29. Key Issues and Developments • Pleading Standards in Avoidance Actions • Courts scrutinize complaints under Twombly and Iqbal, which require a trustee or debtor to plead (1) the elements of the claim and (2) facts sufficient to state a plausible claim for relief. See Bell Atl. Corp. v. Twombly, 550 U.S. 544 (2007); Ashcroft v. Iqbal, 556 U.S. 662 (2009). • Why it matters: makes avoidance actions more difficult to prosecute, sets stage for early 12(b)(6) motion, provides leverage in settlement negotiations. • Expanding Safe Harbors • Many Circuit Courts have adopted expansive views of the Bankruptcy Code’s safe-harbor provisions. • Why it matters: expanding safe harbors provide significant leverage for an avoidanceaction defendant, in some cases, can result in virtual immunity. • Stern v. Marshall, 131 S. Ct. 2594, 180 L. Ed. 2d 475 (2011) • Absent consent, certain state-law claims cannot be finally adjudicated in bankruptcy court. • Why it matters: provides leverage, potential to deprive debtor of its preferred forum; also, the Supreme Court granted cert to hear Executive Benefits Insurance Agency v. Arkinson, 702 F.3d 553 (9th Cir. 2012), which may affect whether parties can consent to a bankruptcy court’s entry of a final order on issues that are state law based. 29
  30. 30. Key Issues and Developments (continued…) • Persistence of the Critical Vendor • Doctrine of necessity allows certain creditors to get paid post-petition • Why it matters: important right for counterparties/companies that provide debtors with certain products or services, still, not automatically granted in all jurisdictions. See In re Kmart Corp., 359 F.3d 866 (7th Cir. 2004). • Mirant: Heightened Standard For Assumption and Rejection? • Assumption or Rejection of FERC or other public contracts subject to higher standard? • Why it matters: normally, court’s are deferential to a debtor’s decision, however, this decision suggests a higher standard may be appropriate where the contract affects a “public interest.” See Mirant Corp. v. Potomac Electric Power Co., 378 F.3d 511 (5th Cir. 2004). • The Rise of Cross-Border Insolvency and Chapter 15 • Permits foreign representative to administer assets within territorial jurisdiction of the US • Why it matters: US companies and creditors may need to compete with foreign-insolvency administrators or find themselves bound by a restructuring plan approved in a foreign proceeding • Private Equity and Successor Liability • Private equity fund was a “trade or business” under ERISA, for purposes of multiemployer pension withdrawal liability. Sun Capital Partners v. New Eng. Teamsters & Trucking Indus. Pension Fun, 724 F.3d 129 (1st Cir. 2013). • Why it matters: analysis could extend to other types of pension liabilities, also, some argue that such an approach may have tax implications 30
  31. 31. Part C: Distressed Mergers, Acquisitions and Opportunities and Alternatives to Bankruptcy Purchase Through Bankruptcy • Section 363 Asset Sale • Section 365 Contract or Lease Assignment • Chapter 11 Sale Plan • Chapter 11 Reorganization Plan Assignments for the Benefit of Creditors or Receivership Sale • Benefits • Risks 31
  32. 32. Overview of Distressed Asset Purchases UCC or Real Property Foreclosure Sale • Public/Sheriff’s Sale • Private • Strict Foreclosure • Commercially Reasonable Sale • Certain Consents • Successor Liability Risks • Getting Effective Control Over Purchased Assets Out of Court • Quick • Successor Liability Risks • Certain Consents 32
  33. 33. Treatment of Intellectual Property in Bankruptcy IP Licensor Files Bankruptcy or Shuts Down • Hold Over Option Under Section 365(n) of the Bankruptcy Code if Bankrupt Licensor Attempts to Reject License of Intellectual Property • May Not Get Ancillary Support - Just Bare Right to Continue to Use the Licensed Intellectual Property • Bankruptcy Code Definition of Intellectual Property is Narrower Than Common Expectation. Especially on Trademark Licenses or Heavy Trademark Mixed IP Licenses • Watch Out for Attempted Section 363 “Free and Clear” Sales Including IP • Some Smaller IP Licensors Simply Shut Down Without Filing Bankruptcy • Techniques to Protect Yourself on Front End • Techniques to Protect Yourself in a Work Out 33
  34. 34. Treatment of Intellectual Property In Bankruptcy (continued…) IP Licensee Files Bankruptcy • Initial Limbo Period • Can Generally Assume for Itself, Assume And Assign Executory Contracts to a Third Party or Reject Executory Contracts. • Needs to Pay Cure Costs (if Timely Raised) and Provide “Adequate Assurance of Future Performance” • Assigning IP Licenses is Difficult • Assuming IP License Difficult in Some Jurisdictions • Rejection Damage Claims Generally Treated as Pre-petition, Unsecured Claims (Cents on the Dollar) 34
  35. 35. Judicial and Non-Judicial Sale Mechanisms • Bankruptcy Asset Sales - as mentioned, assets may be sold free and clear of liens, claims, encumbrances and interests. • Assignment for the Benefit of Creditors (an “ABC”) - often used to quickly sell some or all of a business as a going concern or to conduct an orderly winddown. • Foreclosure Sales - public or private, judicial or non-judicial; creditors may also accept collateral in full or partial satisfaction of debt; process can be slow and there is substantial litigation risk as well as the threat of priming liens (i.e., Mechanics’, Materialman’s, or Warehouseman's’ liens) 35
  36. 36. Additional Methods of Purchase • Stock Purchases: • Buyer beware – Unknown and Contingent Liabilities Assumed • Changes in Control • Shareholders’ Derivative Suits and Usurpation of Corporate Opportunity • Out of Court Purchases: • • • • Quick Successor Liability Risks Certain Consents Concerns regarding “reasonably equivalent value” and state fraudulent conveyance actions • Other liabilities: environmental, taxes, bulk-sales law 36
  37. 37. Risks: Additional Liabilities • Trust Fund Taxes • Certain Other Taxes • Certain Employee Claims • Guarantees • General Partner Liability • Illegal Dividends or Distributions • Aiding and Abetting Fraudulent Transfer • Pension Plan Fiduciaries • Fraud or Securities Fraud • Environmental 37
  38. 38. Health Care Overview • Reimbursements, especially for Medicare and Medicaid, being reduced • Other specialized niches suffer when regulations or practices change, for instance, durable medical equipment providers • Costs continue to increase • Some hospitals have inefficient facilities or bad locations for profitable operations • Delayed payments from cash strapped states (like Illinois) means either health care provider needs more working capital or needs to stretch its payables • Delayed payments can result in covenant defaults or challenges • Increased audit and review activity by regulators • Controversy of health care reform results in very politicized environment • Few effective remedies to accelerate or force payors to more timely pay • Risk shifting to health care providers 38
  39. 39. Distressed Acquisitions: Energy • Oil & Gas, Coal Mining, Power Generation, and Renewables • State Law Issues • Lean Priorities and Property Interests • Bankruptcy • Leases: subject to Section 365 of the Bankruptcy Code? • Admin Priority under Section 503(b)(9)? • Use of SPVs in Financing Structures • Regulatory Concerns • Environmental and Other Regulation Continues to Expand • Government Promotion of Certain Resources • Governmental Agencies: FERC Jurisdiction Disputes • Valuation Issues • Price Volatility • Uncertainty 39
  40. 40. Part D: Distressed Governments and Municipal Bankruptcies Root Causes • Continued Economic Challenges • End of TARP/Stimulus Funding • Federal Budget Cutbacks in General or Specific Areas (e.g. Medicare) • Pension, Medical and Other Costs and Difficulties in Modifying Them • Increasing Operational and Other Costs • Deteriorating Credit Ratings/Increase Borrowing Cost • Reduced State and Local Tax Revenues • End of Budget Liquidity Shortfalls or Ability of State to be Slow Payor • Debt Maturities and Defaults • Decline in Tax and Fee Revenue • Health and Pension Obligations • Swaps and Derivatives • Population migration • Political Gridlock Objectives 40
  41. 41. Businesses Impacted • Hospitals (For Profit and Not for Profit) • Other Health Care • Higher Education (For Profit and Not for Profit) • Municipalities • Energy and Utility Companies • Defense Contractors • Counties • School Districts • Special Purpose Districts (Sanitary, Sewer, Water, etc.) • Toll Roads, Transit Authorities and Bridges • Other Public Private Partnerships 41
  42. 42. Dealing with Distressed Governments • Potential Solutions • Chapter 9 Bankruptcy (Certain States Only) • Emergency Manager, Receiver, or Board (Certain States Only) • Merger with Other Governmental Units or Cost Sharing • Refinance and Out of Court Workouts 42
  43. 43. Sequestration, Government Closure and the DC Region • Sequestration budget cuts could hit DC area hardest at a time when interest rates are expected to rise • Softening DC-Area market (cnbc.com) • Rising Unemployment (washingtonpost.com) • Affected entities: • Government-related industries (i.e., defense, healthcare, education, law enforcement) will suffer • As counterparties, these entities will struggle to timely pay • Private and municipal-entity bankruptcies may increase 43
  44. 44. Sequestration Fall Out • HUD-related services, such as FHA-back loans, could decline (See Statement of Secretary Donovan, Feb. 14, 2013) • Healthcare (http://blogs.law.harvard.edu/) • Potential layoffs of healthcare workers • Slow-down for drug approval • Medicare reimbursements slashed • Energy (energysolutionsforum.com) • Federal R&D Cuts (decrease in DOD and DOE investment) • DOE, DOA, and Tax-relief programs reduced • Education (washingtonpost.com & baltimoresun.com) • Research budgets cut • Financial aid reduced • Infrastructure and State & Local Governments may also suffer (http://blog.columbiamanagement.com/) • Creditors/Counterparties of at-risk entities will need to evaluate risk, take protective measures, and where possible, capitalize on the misfortune of others (that is, through distressed M&A, not schadenfreude) 44
  45. 45. Municipal Bankruptcy Municipal Bankruptcies Increase • Meredith Whitney in 2010: “There is not a doubt in my mind that you will see . . . . [f]ifty to 100 sizable [municipal bond] defaults. . . . This will amount to hundreds of billions of dollars worth of defaults.” • Today: “defaults have gone up, but not to the extent that she called for. . . . [f]ewer than five defaults per year is hardly a crisis. . . . It’s not defaults that are leading the selling pressure in munis; it's all about higher rates. Whitney was wrong; it's the Fed, not bankruptcies, pushing municipal bonds lower.” [SeekingAlpha.com, July 2, 2013] • Detroit Files For Chapter 9 Protection on July 18, 2013 • Municipalities continue to struggle • Default/bankruptcy remains a risk • Substantial liabilities 45
  46. 46. Municipal Bankruptcy Overview • For profit entities generally subject to voluntary or involuntary bankruptcy petitions • Most not for profits can file for voluntary bankruptcy protection but cannot be put into bankruptcy on an involuntary basis • States Not Eligible For Federal Bankruptcy Filing (For Now) • Municipalities and Other Local Governmental Units. Possible Regimes: • Chapter 9 at their discretion (if state legislature authorized previously) (e.g. City of Vallejo, California) • Chapter 9 only if governor or some other state official approves or certain preconditions satisfied (e.g. Harrisburg, Pennsylvania, Jefferson County, Alabama) • Receiver Model State Insolvency Regime (e.g. Flint, Michigan) • Oversight Board State Insolvency Regime (e.g. Nassau County, New York) • Negotiated Solutions (e.g. New York City in 1970s) 46
  47. 47. Chapter 9 • Requires State authority. • Covers municipalities, e.g. cities, counties, towns; others (e.g., water districts, hospitals, Off-Track Betting). • NOT STATES. • Requires a determination of eligibility (often litigated). • Limited Bankruptcy Court power due to sovereign immunity concerns. • Growing in frequency (Detroit, Michigan; Vallejo and San Bernadino, California; Jefferson County, Alabama). • Often pits bond holders against employees and/or retirees. 47
  48. 48. Municipal Bankruptcy: Chapter 9 • Notable Chapter 9 Filings • Detroit, Michigan [2013] • Jefferson County, Alabama [2011] • Stockton, California [2012] • Vallejo, California [2008] • San Bernardino, California [2012] • Central Falls, Rhode Island [2011] • Harrisburg, Pennsylvania [2012] • Also applicable to certain governmental sub-units (Hospitals, Utilities, etc.) 48
  49. 49. Bankruptcy Comparison: Chapter 9 v. Chapter 11 • Bankruptcy Court Authority • Chapter 9  Very Limited, due to concerns regarding Sovereign Immunity • Chapter 11  Nearly unlimited, outside the ordinary course of business • Role of U.S. Trustee • Chapter 9  Limited, appointment of committees • Chapter 11  Supervise case, reporting requirements • Paying Prepetition Debt • Chapter 9  Yes, without court approval, thus, can exercise preference for certain creditors • Chapter 11  No, cannot pay prepetition debt • Involuntary Petitions • Chapter 9  No, but state law may restrict access • Chapter 11  Yes • Postpetition Credit • Chapter 9  May obtain without court approval • Chapter 11  Cannot obtain without court approval and must adhere to statutory requirements • Retention and Payment of Professionals • Chapter 9  No, approval not needed and court cannot order debtor to pay (but disclose in Plan) • Chapter 11  Yes, approval required and court can order debtor to pay • Liquidation • Chapter 9  No • Chapter 11  Yes, via Plan or Conversion to Chapter 7 49
  50. 50. Thank you Sam J. Alberts Dentons US LLP 1301 K Street Suite 600, East Tower Washington, DC 20005 D +1 202 408 7004 F +1 202 408 6399 © 2013 Dentons Dentons is an international legal practice providing client services worldwide through its member firms and affiliates. This publication is not designed to provide legal or other advice and you should not take, or refrain from taking, action based on its content. Please see dentons.com for Legal Notices.

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