The Year In Bankruptcy: 2022 | Jones Day
One year ago, we wrote that, in early 2021, it was widely anticipated that the unprecedented pressure the COVID-19 pandemic brought to bear on the U.S. economy would lead to a boom in corporate bankruptcy filings. That boom never materialized. Instead, business bankruptcy filings in the U.S. plummeted in 2021. That trend continued until the last quarter of 2022. At that time, the volume of business bankruptcies began to swell due to a maelstrom of factors, including the persistence of the pandemic (especially in China, where vaccination rates are low and the population has little resistance due to strict lockdown protocols); the highest inflation in 40 years; spiking interest rates that put an end to the most recent era of cheap financing and lenders’ willingness to forbear or extend loan maturities; supply-chain disruptions; and high energy costs caused in part by the war in Ukraine. Predictions of yet another recession loomed large at the end of 2022.
In the corporate bankruptcy world, 2022 will be remembered for the “crypto winter” that descended in November with the spectacular collapse of FTX Trading Ltd., Alameda Research and approximately 130 other affiliated companies. In a domino effect, the FTX bankruptcy ignited the meltdown of many other platforms, exchanges, lenders and mining operations because they did business with FTX.
The year 2022 will also be remembered for the continuing controversy over the legitimacy of seeking bankruptcy protection as a way to deal with mass-tort liabilities in chapter 11 plans that release company owners and other insiders from liability as a quid pro quo for funding payments to creditors. Other memorable developments in 2022 included the right-sizing woes of the tech sector, including industry giants Amazon, Meta and Twitter, the increasing incidence of “creditor-on-creditor” litigation in bankruptcy, and the tax-driven year-end rush to liquidate special purpose acquisition companies (SPACs), effectively marking an end to the “blank-check” company gold rush that peaked in 2021.
Business Bankruptcy Filings
According to data provided by Epiq Bankruptcy, a leading provider of U.S. bankruptcy filing data, commercial bankruptcy filings declined in 2022 by five percent, from 22,561 in 2021 to 21,396 last year. Commercial chapter 11 filings, however, increased two percent to 3,816 in 2022 from the previous year’s total of 3,726. By contrast, in 2020, there were 32,517 commercial bankruptcy filings, of which 7,129 were chapter 11 cases. Small business debtor chapter 11 cases under subchapter V also increased in calendar year 2022—the 1,433 filings represented a 13 percent jump from the 1,263 filings recorded in 2021. Epiq also reported that total individual bankruptcy filings in 2022 were at their lowest level since 1985, suggesting that extensive government pandemic relief may have ameliorated financial distress for many individuals.
Data available on legal-research platform Westlaw show that 4,271 chapter 11 cases (business and non-business) were filed in 2022, compared to 4,143 in 2021, and 7,330 in 2020. According to data available from financial research company The Deal Pipeline, 112 companies with liabilities exceeding $50 million filed for chapter 7, 11 or 15 bankruptcy in 2022, compared to 114 in 2021. Chapter 11 filings by companies with at least $1 million in debt numbered 338 in 2022, compared to 378 in 2021.
Reorg, a global provider of credit intelligence, data, and analytics, reported that 2022 business chapter 11 filings in the industrials sector increased steeply (approximately 34% from 2021 levels), health care cases rose by 32%, and consumer staples filings doubled their 2021 levels. For cases with more than $100 million of liabilities, filings in the financials sector increased by 175%, with a wave of crypto bankruptcies in the latter part of the year. Reorg data also show that the sectors that fell the most from 2021 were consumer discretionary, communications, energy, real estate, and utilities.
The Deal Pipeline and Westlaw data indicate that chapter 15 petitions were filed in 2022 on behalf of 88 foreign debtors (including 19 businesses with at least $1 million in debt), compared to 165 foreign debtors (including four businesses with at least $1 million in debt) in 2021. Only two municipalities filed for chapter 9 protection in 2022, compared to three in 2021.
There were 18 billion-dollar (by debt) business chapter 11 filings in 2022, compared to 15 in 2021. Chapter 15 petitions were filed on behalf of seven foreign companies with liabilities of at least $1 billion in 2022.
Notable bankruptcy exits in 2022 included Lehman Brothers Inc., whose liquidation proceeding under the Securities Investor Protection Act—the largest bankruptcy filing ever in U.S. history—finally came to a close 14 years after the 2008-09 financial crisis. On March 15, 2022, Puerto Rico ended its nearly five-year bankruptcy, as the commonwealth successfully restructured $22 billion of debt.
Some of the most notable business bankruptcy filings of 2022 included:
- Cryptocurrency company FTX Trading Ltd., which filed for chapter 11 protection on November 11, 2022, following a loss of faith in the platform and a resulting liquidity crunch.
- Cineworld Group plc (d/b/a Regal Entertainment), the world’s second-largest theater chain after AMC Theaters, which filed for chapter 11 protection on September 7, 2022, with more than $10 billion in both assets and debt, having failed to rebound from the pressure inflicted by the pandemic and a massive debt load.
- Core Scientific Inc., one of the largest U.S.-listed bitcoin miners, which filed for chapter 11 protection in the fall out from the FTX collapse on December 21, 2022, with $1.4 billion in assets and $1.3 billion in debt.
- American International Group Inc. subsidiary AIG Financial Products Corp., which filed for chapter 11 protection on December 14, 2022, with $152 million in assets and $37.9 billion in legacy liabilities stemming from the 2008-09 financial crisis.
- Financial services and consumer lending company Reverse Mortgage Investment Trust Inc., which filed for chapter 11 protection on November 30, 2022 with $10 billion in both assets and debt due to rising interest rates and overall volatility in the fixed-income and mortgage markets.
- Cryptocurrency lender BlockFi Inc., the first major bankruptcy spawned by the sudden collapse of FTX. BlockFi filed for chapter 11 protection on November 28, 2022, listing $1 billion in both assets and debt.
- Sports and energy-beverage provider Vital Pharmaceuticals Inc. (d/b/a VPX Sports), which filed for chapter 11 protection on November 10, 2022, after it was ordered to pay $293 million in damages to Monster Beverage Corp. for interfering with Monster’s dealings with retailers and falsely advertising the mental and physical benefits of Bang Energy drinks.
- Medical imaging supply company Carestream Health Inc., which filed for chapter 11 protection on August 23, 2022, with $2.3 billion in assets and $1.5 billion in debt, to implement a pre-negotiated chapter 11 plan that wiped $470 million in debt from its balance sheet.
- Healthcare and pharmaceuticals company Endo International plc, which filed for chapter 11 protection on August 16, 2022, with $6.3 billion in assets and $9.5 billion in debt, to end a multiyear effort to resolve opioid liabilities.
- Cryptocurrency lender Celsius Network LLC, which filed for chapter 11 protection on July 13, 2022, with $10.7 billion in assets and $10.2 billion in debt, roughly a month after suspending customer withdrawals.
- Scandinavian air carrier SAS AB, which filed for chapter 11 protection on July 5, 2022, with $2.5 billion in assets and $3.5 billion in debt, to complete a restructuring in the wake of the Covid-19 pandemic.
- Cosmetics giant Revlon Inc., which filed for chapter 11 protection on June 15, 2022, with $2.3 billion in assets and $3.7 billion in debt, as it grappled with an onerous debt load and supply chain problems.
- Power plant owner Talen Energy Supply LLC, which filed for chapter 11 protection on May 5, 2022, with $4.1 billion in assets and $9.3 billion in debt, due to volatile weather patterns, commodity and fuel pricing challenges and unsupportable debt.
Notable Business Bankruptcy Decisions in 2022
Bankruptcy Asset Sales. Until 2022, only two federal courts of appeals had weighed in on whether real property may be sold in bankruptcy free and clear of a leasehold interest. In Precision Industries, Inc. v. Qualitech Steel SBQ, 327 F.3d 537 (7th Cir. 2003), the U.S. Court of Appeals for the Seventh Circuit held that a real property lease can be extinguished in a free-and-clear bankruptcy sale. In In re Spanish Peaks Holding II, LLC, 872 F.3d 892 (9th Cir. 2017), the U.S. Court of Appeals for the Ninth Circuit essentially endorsed this position, with certain caveats. The U.S. Court of Appeals for the Fifth Circuit was the latest circuit court to examine this issue, but in an oblique way. In In re Royal Street Bistro, L.L.C., 26 F.4th 326 (5th Cir. 2022), the court denied certain tenants’ motion for a writ of mandamus directing a district court to issue a stay pending appeal of a bankruptcy court order approving the sale of leased real property free and clear of the tenants’ leasehold interests. However, the Fifth Circuit agreed with the result reached by the lower courts, but cautioned courts against “blithely accepting Qualitech‘s reasoning and textual exegesis.”
In Archer-Daniels-Midland Co. v. Country Visions Cooperative, 29 F.4th 956 (7th Cir. 2022), the U.S. Court of Appeals for the Seventh Circuit examined the scope of 363(m) of the Bankruptcy Code, which prohibits reversal or modification on appeal of an order approving a sale of assets in bankruptcy to a good-faith purchaser unless the party challenging the sale obtains a stay pending appeal. The Seventh Circuit affirmed lower court rulings denying a motion by a buyer of bankruptcy estate property to bar an entity holding a right of first refusal on the property purchased from the debtor “free and clear” of all interests pursuant to section 363(f) from continuing state court litigation seeking to enforce its right. According to the Seventh Circuit, because the buyer had actual and constructive knowledge of a right of first refusal held by a party who had not received notice of the bankruptcy, yet never informed the bankruptcy court, the buyer had not acted in good faith and was not entitled to the protections of section 363(m).
Bankruptcy Discharge. In In re U.S. Pipe & Foundry Co., 32 F.4th 1324 (11th Cir. 2022), a divided three-judge panel of the U.S. Court of Appeals for the Eleventh Circuit ruled that certain debtors’ alleged obligation to pay retiree health benefits mandated by the Coal Industry Retiree Health Benefit Act of 1992 were discharged in 1995 upon the confirmation of a chapter 11 plan, even though the payment obligation was not triggered until 2016. According to the majority, the payment obligation was a “claim” in 1995 and was therefore discharged upon confirmation of the debtors’ plan.
Chapter 11 Plans. In In re LATAM Airlines Grp. S.A., 2022 WL 2206829 (Bankr. S.D.N.Y. June 18, 2022) (unpublished opinion), corrected, 2022 WL 2541298 (Bankr. S.D.N.Y. July 7, 2022), aff’d on other grounds, 643 B.R. 741 (S.D.N.Y. 2022), aff’d, 2022 WL 17660057 (2d Cir. Dec. 14, 2022), the U.S. Bankruptcy Court for the Southern District of New York overruled an objection to confirmation of a chapter 11 plan based on, among other things, the debtors’ alleged violation of the Bankruptcy Code’s chapter 11 plan solicitation requirements by entering into agreements with certain creditors, prior to the court’s approval of a disclosure statement, that obligated them to vote in favor of a plan in exchange for allowance of their claims. According to the court, even if those plan support agreements were improper, the only remedy for the violation was disallowance of the creditors’ votes, which would not change the outcome of the voting process. Both the district court and the Second Circuit affirmed the decision on appeal, albeit on other grounds (discussed below).
Cross-Border Bankruptcy Cases. In In re Black Gold S.A.R.L., 2022 WL 488438 (B.A.P. 9th Cir. Feb. 17, 2022), a Bankruptcy Appellate Panel for the Ninth Circuit (the “BAP”) held that the judicially created “good faith” filing requirement for chapter 11 cases does not apply to a petition seeking recognition of a foreign bankruptcy under chapter 15 of the Bankruptcy Code. The BAP accordingly reversed a bankruptcy court order denying chapter 15 recognition of a Monaco bankruptcy proceeding. The bankruptcy court reasoned that the petition was inconsistent with the objectives of chapter 15 because the debtor acted in bad faith by filing a chapter 15 case as a ploy to evade payment of a judgment and shield its principals from tort liability. On appeal, according to the BAP, once the Bankruptcy Code’s requirements for chapter 15 recognition are satisfied, recognition is mandatory unless it would be “manifestly contrary” to U.S. public policy—a threshold that is rarely met in chapter 15 cases.
In In re Talal Qais Abdulmunem Al Zawawi, 637 B.R. 663 (M.D. Fla. 2022), appeal filed, No 22-11024 (11th Cir. Mar. 31, 2022), the U.S. District Court for the Middle District of Florida affirmed a bankruptcy court ruling that chapter 15 has its own eligibility requirements, and that the eligibility requirements for debtors in cases under other chapters of the Bankruptcy Code do not apply in chapter 15 cases. In so ruling, the district court distanced itself from the Second Circuit’s ruling in In re Barnet, 737 F.3d 238 (2d Cir. 2013), where the court of appeals held that the provision of the Bankruptcy Code requiring U.S. residency, assets, or a place of business applies in chapter 15 cases as well as cases filed under other chapters.
In In re Modern Land (China) Co., Ltd., 641 B.R. 768 (Bankr. S.D.N.Y. 2022), the U.S. Bankruptcy Court for the Southern District of New York granted a petition seeking recognition of a debtor’s Cayman Islands restructuring proceeding under chapter 15 for the purpose of enforcing a court-sanctioned scheme of arrangement that canceled New York law-governed notes in exchange for new notes (also governed by New York law). Because the debtor conducted business through its subsidiaries in China before filing its Caymans restructuring proceeding, the U.S. bankruptcy court considered the possibility that the debtor might seek to enforce the scheme in Hong Kong, where a court recently suggested that chapter 15 recognition by a U.S. court of a foreign proceeding involving the cancellation of U.S. law-governed debt does not discharge the debt. The U.S. bankruptcy court explained that the Hong Kong court misconstrued U.S. law on this point, writing: “To be clear, in recognizing and enforcing the Scheme in this case, the Court concludes that the discharge of the Existing Notes and issuance of the replacement notes is binding and effective.”
In In re Global Cord Blood Corp., 2022 WL 17478530 (Bankr. S.D.N.Y. Dec. 5, 2022), the U.S. Bankruptcy Court for the Southern District of New York denied without prejudice a petition filed by the joint provisional liquidators for recognition of a proceeding commenced under the Cayman Islands Companies Act (the “Cayman CA”) for the purpose of investigating allegations that a Cayman company’s board and/or officers caused or allowed an improper expenditure of more than $600 million of corporate funds. According to the court, chapter 15 recognition was unwarranted because the Cayman proceeding was more akin to a corporate governance and fraud remediation effort rather than a collective proceeding for the purpose of dealing with insolvency, reorganization, or liquidation. To rule otherwise, the bankruptcy court wrote, “would be to invite recourse to U.S. bankruptcy courts whenever any foreign corporation sustains losses as a result of officer or director fraud or defalcation, so long as that corporation first commences proceedings in its home jurisdiction seeking to install new fiduciaries and right the wrong that the corporation has suffered.” The court further explained that, although the Cayman CA generally establishes standards and procedures for the liquidation or winding up of insolvent companies, no such liquidation was underway when the liquidators filed their chapter 15 petition, which was “fatal” to their request for chapter 15 recognition.
Executory Contracts and Unexpired Leases. In In re Ultra Petroleum Corp., 2022 WL 763836 (5th Cir. Mar. 14, 2022) (“Ultra I“), the U.S. Court of Appeals for the Fifth Circuit held that the bankruptcy court below properly authorized a debtor to reject a filed-rate gas transportation contract under its chapter 11 plan without obtaining the approval of the Federal Energy Regulatory Commission (“FERC”) and that the debtor was not subject to a separate public-law obligation to continue performance under the rejected contract.
In Gulfport Energy Corp. v. FERC, 41 F.4th 667 (5th Cir. 2022), the U.S. Court of Appeals for the Fifth Circuit tripled down on its nearly two-decades-long view that filed-rate contracts regulated under the Natural Gas Act and the Federal Power Act can be rejected in bankruptcy without FERC’s consent. Reaffirming its previous rulings in In re Mirant Corp., 378 F.3d 511 (5th Cir. 2004), and Ultra I (see above), the Fifth Circuit was highly critical of FERC’s “bizarre view” that the consequences of rejection of filed-rate contracts should be viewed differently than the consequences of rejection of other types of executory contracts in bankruptcy. According to the court, as in its previous rulings, it rejected FERC’s argument because it “patently contradicts the [Bankruptcy] Code’s text and established interpretation.”
In In re J.C. Penney Direct Marketing Services, L.L.C., 50 F.4th 532 (5th Cir. 2022), the U.S. Court of Appeals for the Fifth Circuit affirmed lower court rulings approving a chapter 11 debtor’s decision, at the behest of the purchaser of its assets, to reject a commercial ground lease, even though an agent retained by the debtor to market its shopping center leases acted in bad faith in negotiations with a sublessee intent upon acquiring the ground lessor’s interest. In so ruling, the Fifth Circuit rejected the sublessee’s argument that the debtor’s decision to reject the lease should not receive deference under the business judgment standard due to the agent’s bad faith. According to the Fifth Circuit, in the absence of evidence that the decision to reject did not enhance the bankruptcy estate or was “clearly erroneous, too speculative, or contrary to the Bankruptcy Code,” the presumption created by the business judgment rule could not be overcome. Nor, the court noted, did the sublessee demonstrate that the debtor’s decision was “so manifestly unreasonable that it could not be based on sound business judgment, but only on bad faith, or whim or caprice.”
In In re Hawkeye Entertainment LLC, 49 F.4th 1232 (9th Cir. 2022), the U.S. Court of Appeals for the Ninth Circuit ruled that, even though a default under an unexpired lease has been remedied prior to assumption or is immaterial, the landlord is nonetheless entitled to “adequate assurance of future performance.” The Ninth Circuit concluded that a bankruptcy court erred in ruling otherwise, but that the error was harmless because the defaults either had been cured prior to the debtor’s request to assume the lease or were “minor deviations” from the lease terms, and “any adequate assurance responsive to the alleged defaults would be little more than simple promises not to deviate from the contract terms again.”
Make-Whole Premiums, Postpetition Interest on Unsecured Claims, and the Solvent-Debtor Exception. In In re Ultra Petroleum Corp., 51 F.4th 138 (5th Cir. 2022) (“Ultra II“), the U.S. Court of Appeals for the Fifth Circuit ruled that debtors were obligated to pay a $201 million make-whole premium to noteholders under their confirmed chapter 11 plan and that the noteholders and certain other unsecured creditors were entitled to postpetition interest on their claims pursuant to the “solvent-debtor exception.” In affirming a bankruptcy court’s 2020 ruling, a divided three-judge panel of the Fifth Circuit held that the Bankruptcy Code disallowed the make-whole premium “as the economic equivalent of unmatured interest,” but held that, “because Congress has not clearly abrogated the solvent-debtor exception,” it applied to the case. Given the debtors’ solvency, the Fifth Circuit majority also ruled that the debtors were obligated to pay postpetition interest to their noteholders and certain other unsecured creditors at the agreed-upon contractual default rate to render their claims unimpaired by the debtors’ chapter 11 plan.
In In re PG&E Corp., 46 F.4th 1047 (9th Cir. 2022), reh’g denied, No. 21-16043 (9th Cir. Oct. 5, 2022), stayed pending petition for cert., No. 21-16043 (9th Cir. Oct. 27, 2022), a divided three-judge panel of the U.S. Court of Appeals for the Ninth Circuit ruled that a solvent debtor’s chapter 11 plan must pay postpetition interest to unsecured creditors to render their claims unimpaired. “We clarify today,” the Ninth Circuit majority wrote, “that pursuant to the solvent-debtor exception, unsecured creditors possess an ‘equitable right’ to postpetition interest [under section 1124(1) of the Bankruptcy Code] when a debtor is solvent.” The Ninth Circuit acknowledged the presumption that unimpaired creditors in a solvent chapter 11 case should receive postpetition interest at the contractual or default rate absent contrary and compelling equitable considerations. However, finding that it lacked adequate evidence to balance the equities, the court of appeals remanded the case to the bankruptcy court for a determination of the appropriate interest rate (or rates).
In In re Hertz Corp., Adv. Proc. No. 21-50995 (MFW) (Bankr. D. Del. Nov. 21, 2022), the U.S. Bankruptcy Court for the District of Delaware held that, examining the economic substance of a transaction rather than the formalistic labels given to it, a “redemption price” payable to unsecured noteholders upon default or early repayment must be disallowed as unmatured interest under section 502(b)(2). The court also declined to reconsider, in light of PG&E and Ultra II, its previous decision in In re Hertz Corp., 637 B.R. 781 (Bankr. D. Del. 2021), that the solvent-debtor exception only partially survived enactment of the Bankruptcy Code. According to the court, the exception survives only if a secured creditor is oversecured, a chapter 7 debtor is solvent, or an impaired creditor does not accept a chapter 11 plan. In the same opinion, the court certified a direct appeal of its ruling to the Third Circuit.
In In re LATAM Airlines Grp. S.A., 2022 WL 2206829 (Bankr. S.D.N.Y. June 18, 2022), corrected, 2022 WL 2541298 (Bankr. S.D.N.Y. July 7, 2022), aff’d, 643 B.R. 741 (S.D.N.Y. Aug. 31, 2022), aff’d, 2022 WL 17660057 (2d Cir. Dec. 14, 2022), the U.S. Bankruptcy Court for the Southern District of New York ruled that: (i) unsecured creditors were not impaired under a chapter 11 plan that did not provide for the payment of postpetition interest on their claims because section 502(b)(2) of the Bankruptcy Code (disallowing claims for unmatured interest), rather than the plan, altered their legal, equitable, or contractual rights under applicable bankruptcy law and their debt instruments; and (ii) the solvent-debtor exception survived the enactment of the Bankruptcy Code, but because the debtor was insolvent, unsecured creditors were not entitled to postpetition interest under the exception.
Both the district court and the Second Circuit affirmed the ruling on appeal. The district court noted that it was unnecessary to resolve the debate over whether the solvent-debtor exception survived the enactment of the Bankruptcy Code because the bankruptcy court’s finding that the debtor was insolvent was not clearly erroneous. The Second Circuit similarly found no fault with the bankruptcy court’s reasoning. Like the Third, Fifth, and Ninth Circuits, the Second Circuit ruled—as a matter of first impression—that postpetition interest is barred by the Bankruptcy Code itself and that creditors can claim impairment “only when the plan of reorganization, rather than the Code [here, section 502(b)(2)], alters the creditor’s legal, equitable, or contractual rights.” The Second Circuit also ruled as a matter of first impression that that the solvent-debtor exception survived the enactment of the Bankruptcy Code. It was the third circuit court of appeals to do so in 2022.
In In re RGN-Grp. Holdings, LLC, 2022 WL 494154 (Bankr. D. Del. Feb. 17, 2022), the U.S. Bankruptcy Court for the District of Delaware agreed with the rationale articulated in Hertz (discussed above), in ruling that the solvent-debtor exception survived the enactment of the Bankruptcy Code only to a limited extent. The court held that a landlord was entitled to postpetition interest on its allowed unsecured claim, but at the federal judgment rate rather than the contract rate.
In In re Moore & Moore Trucking, LLC, 2022 WL 120189 (Bankr. E.D. La. Jan. 12, 2022), the U.S. Bankruptcy Court for the Eastern District of Louisiana held that the solvent-debtor exception remains in force but cannot prevent a solvent debtor from extending the maturity date of a prepetition promissory note under a chapter 11 plan.
Mass Tort Chapter 11 Cases. In In re Imerys Talc America, Inc., 38 F.4th 361 (3d Cir. 2022), the U.S. Court of Appeals for the Third Circuit ruled as a matter of first impression that a future claims representative (“FCR”) in an asbestos chapter 11 case must be more than merely a “disinterested person”—the standard applied to some professional retentions in bankruptcy. Instead, like the members of official creditors’ committees, an FCR must be not only free of conflicts of interest but also fulfill fiduciary duties to future claimants, including duties of undivided loyalty and honesty.
In In re LTL Mgmt., LLC, 637 B.R. 396 (Bankr. D.N.J. 2022), direct appeal certified, No. 22-2003 (3d Cir. May 11, 2022) (oral argument on Sept. 19, 2022), the U.S. Bankruptcy Court for the District of New Jersey denied motions to dismiss the chapter 11 case of LTL Management LLC (“LTL”), an indirect subsidiary of Johnson & Johnson that filed for bankruptcy to manage thousands of claims against LTL’s predecessor-in-interest alleging that Johnson’s® Baby Powder caused ovarian cancer and/or mesothelioma. In denying the dismissal motions, the bankruptcy court: (i) determined that bankruptcy provides the optimal forum to resolve the mass tort liability at issue; and (ii) found that the implementation of a “Texas Two-Step” divisional merger prior to the bankruptcy filing did not harm talc claimants. Despite a series of objections by representatives for talc claimants, the bankruptcy court ruled that LTL filed its chapter 11 case in good faith—and not as an improper litigation tactic—and concluded that, as compared with the U.S. tort system, bankruptcy offers both present and future LTL talc claimants the best opportunity to obtain equitable and timely recoveries.
Jones Day represents LTL in its chapter 11 case.
Valuation. In In re Sears Holding Corp., 51 F.4th 53 (2d Cir. 2022), the U.S. Court of Appeals for the Second Circuit examined collateral valuation in a chapter 11 case for the purpose of determining whether junior secured creditors were entitled to super-priority administrative claims to compensate them for alleged diminution in the value of their collateral during the period from the bankruptcy petition date until the bankruptcy court approved a sale of the debtors’ business as a going concern. The Second Circuit held that, given the uncertainty surrounding the retail debtors’ fate at the time they filed for bankruptcy, the bankruptcy court did not err in valuing inventory collateral at its “net orderly liquidation value,” rather than book value, going-out-business sale value, or forced liquidation value. The Second Circuit also found no fault with the bankruptcy court’s decision to value non-borrowing base inventory at zero and to ascribe full face value to undrawn letters of credit where, among other things, the junior lenders failed to meet their evidentiary burden of suggesting a reasonable alternative.
2022 U.S. Supreme Court Bankruptcy Roundup. In Siegel v. Fitzgerald, 142 S. Ct. 1770 (2022), the U.S. Supreme Court held unconstitutional certain aspects of a 2017 amendment to 28 U.S.C. § 1930(a)(6) (the “2017 amendment”) that dramatically increased the quarterly fees charged by the United States Trustee (“UST”) in chapter 11 cases. When Congress created the UST program in the mid-1980s, it established the program in only 88 of the 94 judicial districts across the country (“UST districts”). In the six judicial districts in North Carolina and Alabama (“BA districts”), however, Congress continued to allow bankruptcy cases to be administered by Bankruptcy Administrators (“BAs”), which comprise a department of the Judicial Branch and overseen by the Judicial Conference.
In 2017, Congress sought to address funding problems with the UST program by enacting the 2017 amendment, which raised the quarterly fees payable by large chapter 11 debtors in UST districts by more than 700%. In UST districts, the amended fee structure took effect in both new and pending chapter 11 cases on January 1, 2018. However, in the six BA districts, the fees did not take effect until the Judicial Conference adopted them in September 2018. And, even then, the Judicial Conference decided to apply the fees only prospectively for new chapter 11 cases filed after October 1, 2018. As a result, debtors whose cases were filed in a UST district prior to October 1, 2018, were required to pay significantly higher quarterly fees than they would have if their cases were pending in a BA district.
Several debtors in various UST districts challenged the 2017 amendment, arguing that, among other things, by making debtors in UST districts pay significantly higher fees than similarly situated debtors in BA districts, the 2017 amendment violated the Constitution’s requirement that bankruptcy laws be geographically uniform throughout the country. The Fourth, Fifth, and Eleventh Circuits rejected the debtors’ uniformity arguments, but the Second and Tenth Circuits agreed with the debtors and ordered a refund of fees. The Supreme Court granted certiorari in Siegel to resolve the circuit split.
In a 9–0 decision, the Supreme Court determined that the 2017 amendment violated Congress’s constitutional authority under the “Bankruptcy Clause … to establish ‘uniform Laws on the subject of Bankruptcies throughout the United States.’ U.S. Const., Art. I, § 8, cl. 4.” The Court stated that, while “[t]he Bankruptcy Clause affords Congress flexibility to ‘fashion legislation to resolve geographically isolated problems,’ … the Clause does not permit Congress to treat identical debtors differently based on an artificial funding distinction that Congress itself created.”
The Supreme Court did not decide whether chapter 11 debtors were entitled as a remedy to refunds for overpayments of quarterly fees to the UST program. Even though the Court agreed to review appeals in several other cases addressing the issue, it remanded the cases below to decide the remedy.
Guided by Siegel, the U.S. Court of Appeals for the Tenth Circuit adhered to its original decision by holding in In re John Q. Hammons Fall 2006 LLC, 2022 WL 3354682 (10th Cir. Aug. 15, 2022), petition for rehearing filed, No. 20-3203 (10th Cir. Oct. 31, 2022), that the UST must pay a refund to a chapter 11 debtor based on what the debtor would have paid over the same time were its case in a BA district. The U.S. Court of Appeals for the Second Circuit came to the same conclusion shortly afterward in In re Clinton Nurseries, Inc., 53 F.4th 15 (2d Cir. 2022). Other cases regarding the proper remedy are working their way through various bankruptcy and lower appellate courts. See, e.g., Siegel v. U.S. Trustee Program (In re Circuit City Stores, Inc.), 2022 WL 17722849 (Bankr. E.D. Va. Dec. 15, 2022) (holding that the trustee of a chapter 11 liquidating trust is entitled to a refund for overpayment of unconstitutional UST fees).
In Kirschner v. Fitzsimons, 2022 WL 516021 (U.S. Feb. 22, 2022), the U.S. Supreme Court denied a petition seeking review of a 2021 ruling by the Second Circuit that largely upheld lower court dismissals of claims asserted by the chapter 11 liquidation trustee of media giant The Tribune Co. (“Tribune”) against various shareholders, officers, directors, employees, and financial advisors for, among other things, avoidance and recovery of fraudulent and preferential transfers, breach of fiduciary duties, and professional malpractice in connection with Tribune’s failed 2007 leveraged buy-out.
In Citibank, N.A. v. Picard, 142 S. Ct. 1209 (2022), the Court denied a petition seeking review of a 2021 ruling by the Second Circuit reviving litigation filed by the Securities Investor Protection Act trustee administering the assets of defunct investment firm Bernard L. Madoff Inv. Sec. LLC (“MIS”), seeking to recover hundreds of millions of dollars in allegedly fraudulent transfers made to former MIS customers and certain other defendants as part of the Madoff Ponzi scheme. The Second Circuit ruling vacated a 2019 bankruptcy court ruling, in which the bankruptcy court dismissed the trustee’s claims against certain defendants because the trustee failed to allege that the defendants had not received the transferred funds in “good faith.” The Second Circuit’s ruling, which involved test cases for approximately 90 dismissed actions, breathed new life into avoidance litigation seeking recovery of $3.75 billion from global financial institutions, hedge funds, and other participants in the global financial markets.
In Estate of Fontana v. ACFB Administração Judicial Ltda.-ME, 142 S. Ct. 1229 (Mar. 7, 2022), the Court denied a petition seeking review of a 2021 decision by the U.S. Court of Appeals for the Eleventh Circuit regarding the finality of a discovery order in a chapter 15 case. The Eleventh Circuit held in a nonprecedential ruling that an order denying a request to quash a subpoena in the chapter 15 case of a Brazilian airline was not final and could not be appealed immediately because the order was “merely a preliminary step” in the context of a broader proceeding. In dicta, however, the Eleventh Circuit appeared to limit its ruling to the facts before it and noted that if the only purpose of the chapter 15 case is to obtain discovery, a discovery order may be final and immediately appealable because the discovery order is effectively the entire proceeding.
On June 6, 2022, the Court declined to review an Eleventh Circuit decision dismissing, under the doctrines of constitutional and equitable mootness, appeals of bankruptcy court orders disallowing through estimation a secured claim and confirming a chapter 11 plan. See KK-PB Financial LLC v. 160 Royal Palm LLC, 142 S.Ct. 2778 (2022).
On June 27, 2022, the Court granted a petition to review the Second Circuit’s 2021 decision dismissing an appeal brought by Mall of America (“MOA”) challenging the bankruptcy court’s order approving the assignment of MOA’s lease to the purchaser of bankrupt retailer Sears Holdings Corp.’s assets. See In re Sears Holdings Corp., 2021 WL 5986997 (2d Cir. Dec. 17, 2021), cert. granted, 142 S. Ct. 2867 (2022). In its decision, the Second Circuit agreed with the district court below, which concluded that MOA’s appeal was moot under section 363(m) of the Bankruptcy Code because it failed to obtain a stay of the bankruptcy court order approving the assignment. The Court heard argument in the case on December 5, 2022.
On October 11, 2022, the Court declined to hear an appeal seeking to reverse a January 2022 decision by the U.S. Court of Appeals for the Second Circuit reviving a racketeering suit in which Jay Alix (“Alix”) accused McKinsey & Co. (“McKinsey”) of intentionally failing to disclose disqualifying conflicts of interest in large bankruptcy cases. See McKinsey & Co. v. Jay Alix, 2022 WL 6572113 (U.S. Oct. 11, 2022). The Second Circuit reversed a lower court order that dismissed Alix’s racketeering claims, finding that Alix had plausibly alleged that his firm lost business to McKinsey and was harmed by McKinsey’s allegedly inadequate conflict-of-interest disclosures provided to bankruptcy courts.
On November 21, 2022, the Court declined to hear an appeal by Puerto Rican teachers challenging the changes made to their pension benefits by the island territory’s restructuring plan under the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”). See Federación de Maestros de Puerto Rico, Inc. et al. v. Financial Oversight and Management Board for Puerto Rico, 2022 WL 17085185 (U.S. Nov. 21, 2022). Under the prior pension plans, retirees were promised definite payments, while the new plan pledged only certain levels of contributions to employees’ retirement accounts, much like 401(k) retirement plans. In April 2022, the U.S. Court of Appeals for the First Circuit held that Congress enabled the board pursuant to PROMESA to preempt Commonwealth laws calling for forward-going teachers’ pension obligations under existing retirement regime.
Bankruptcy Legislative and Regulatory Developments in 2022
On June 21, 2022, President Joe Biden signed into law the “Bankruptcy Threshold Adjustment and Technical Corrections Act” (S. 3823 and H.R. 7494), which, among other things, raised for an additional two years the debt limit (now $7.5 million) for small businesses electing to file for bankruptcy under subchapter V of chapter 11.
Various amendments to the Federal Rules of Bankruptcy Procedure went into effect on December 1, 2022. A more detailed discussion of the changes is available here.
Several pieces of business bankruptcy legislation were proposed in 2022, but never enacted, including:
- The “Stop Looting American Pensions Act of 2022” or the “SLAP Act” (S. 5097), which would have amended the Bankruptcy Code to: (i) require an employer to continue satisfying the minimum pension plan funding requirement specified in the Employee Retirement Income Security Act of 1974 (“ERISA”) during a bankruptcy case unless the Secretary of the Treasury waived the requirement; (ii) confer administrative expense priority on unpaid pension minimum funding obligations as well as pension plan withdrawal liability arising under ERISA; (iii) except from the automatic stay actions by the Pension Benefit Guaranty Corporation to enforce ERISA’s minimum pension plan funding requirements; (iv) preclude bankruptcy asset sales unless either: (a) each class of creditors has approved the sale or is unimpaired; or (b) the sale does not discriminate unfairly and is fair and equitable with respect to each dissenting class of impaired creditors; (v) prohibit any sale of substantially all of a debtor employer’s assets during the initial 60 days of a bankruptcy case unless, among other things, the bankruptcy court determines that there is a high likelihood that the value of the property will decrease significantly during that period; (vi) provide that the bankruptcy court, in deciding whether to approve any non-ordinary-course sale of assets, must consider the extent to which a bidder has offered to maintain existing jobs, preserve terms and conditions of employment, and assume or match pension and retiree health benefit obligations; (vii) increase the “look-back period” for the avoidance of intentional and constructive fraudulent transfers from two to six years; and (viii) impose additional restrictions on executive compensation enhancements provided during a bankruptcy case.
- The “No Bonuses for Executives Act of 2022” (H.R. 9155), which would have imposed an alternative minimum tax on state-regulated electric utilities in bankruptcy that make incentive-based payments, other than salary, to any of their 13 highest compensated employees, and that own or lease infrastructure other than climate-resilient infrastructure.
- The Lummis-Gillibrand Responsible Financial Innovation Act (S. 4356), which would have added “digital assets” and “digital asset exchanges” to various provisions of the Bankruptcy Code that deal with bankruptcies of commodity brokers and the rights of contract parties and customers.