Business Restructuring Review Vol. 23 No. 6 | November–December 2024
In This Issue
Hertz: Third Circuit Weighs in on Make-Whole Premiums and the "Solvent-Debtor Exception" in Chapter 11 Cases
In In re Hertz Corp., 117 F.4th 109 (3d Cir. 2024), as amended, 2024 WL 4730512 (3d Cir. Nov. 6, 2024), reh'g denied, Nos. 23-1169 and 23-1170 (3d Cir, Nov. 6, 2024), a divided panel of the U.S. Court of Appeals for the Third Circuit ruled that a bankruptcy court correctly disallowed certain noteholders' claims for a make-whole premium because it was both "definitionally" and the "economic equivalent" of unmatured interest. However, because the debtors were solvent, the Third Circuit panel, concluding that the "solvent-debtor exception" survived enactment of the Bankruptcy Code as part of the "fair and equitable" requirement for cramdown-confirmation of a chapter 11 plan, held that the bankruptcy court erred by ruling that the debtors' plan need not pay postpetition interest on the noteholders' claims at the contract rate of interest, while distributing more than $1 billion to existing shareholders in violation of the "absolute priority rule" and the Bankruptcy Code's priority scheme. [read more …]
New York Bankruptcy Court: "Defensive" Setoff Rights of Creditor that Did Not File Proof of Claim Cannot Be Extinguished Under Chapter 11 Plan
The ability of a creditor to offset any liability it may have to a debtor against the amount of the debtor's obligation to the creditor is an important right. The Bankruptcy Code expressly preserves that right, provided it exists by contract or under applicable non-bankruptcy law, and the debts are "mutual," arose pre-bankruptcy, and do not fall into one of the specified exceptions or limitations. In In re SVB Fin. Grp., 662 B.R. 53 (Bankr. S.D.N.Y. 2024), notice of appeal filed, No. 23-10367(MG) (Bankr. S.D.N.Y. Aug. 9, 2024) [Doc. 1389], direct appeal certified, 2024 WL 4345730 (S.D.N.Y. Sep. 30, 2024), the U.S. Bankruptcy Court for the Southern District of New York considered an objection to confirmation of a chapter 11 plan that purported to extinguish the setoff rights of any creditor that did not timely file a proof of claim in the bankruptcy case and obtain a final order of the bankruptcy court authorizing the setoff. The court sustained the objection, ruling that a creditor need not file a proof of claim to preserve "defensive setoff rights," and that those rights could not be discharged upon confirmation of a chapter 11 plan. [read more …]
Boston Generating: Second Circuit Triples Down on Its Holding that Transfers Made Under Securities Contracts Are Safe Harbored in Bankruptcy if the Debtor-Transferee is a Customer of a Financial Institution
Section 546(e) of the Bankruptcy Code's "safe harbor" provision (which shields transactions from avoidance claims in bankruptcy of certain securities, commodity, or forward-contract payments) has long been a magnet for controversy. Several noteworthy court rulings have been issued in bankruptcy cases addressing the scope of the provision, including its limitation to transactions involving "financial institutions" as transferors or transferees, its preemption of avoidance litigation that could have been commenced by or on behalf of creditors under applicable non-bankruptcy law, and its application to non-public transactions. The U.S. Court of Appeals for the Second Circuit contributed the latest chapter in the continuing debate concerning the breadth of the safe harbor in In re Boston Generating, LLC, 2024 WL 4234886 (2nd Cir. Sept. 19, 2024). In an unpublished decision, the court of appeals affirmed lower court rulings that payments made as part of a pre-bankruptcy recapitalization transaction were shielded from avoidance under the safe harbor because they were made through an agent bank that qualified as a "financial institution," meaning that its customers, including the debtor-transferee, were also financial institutions. [read more …]
Fifth Circuit Requires "Compelling Circumstances" to Amend Proof of Claim Post-Confirmation
Consistent with precedent in its sister circuits, the U.S. Court of Appeals for the Fifth Circuit in CLO Holdco, Ltd. v. Kirschner (In the Matter of Highland Cap. Mgmt. LP), 102 F.4th 286 (5th Cir. 2024), held that to amend a proof of claim after confirmation of a chapter 11 plan, the party seeking to amend must demonstrate compelling circumstances to do so because plan confirmation is akin to a final judgment in a civil case, and reopening a confirmed plan could unfairly prejudice the debtor or other parties. [read more …]
Imputation of Agent's Knowledge to Transferee in Bankruptcy Avoidance Litigation Defeats Good-Faith Defense
It is generally well understood that a transferee in bankruptcy avoidance litigation can evade liability if it can demonstrate that it received the transfer "for value …, and without knowledge of the voidability of the transfer." What constitutes "knowledge" in that context is sometimes murky when the transfer involves an agent of the transferee. The U.S. Court of Appeals for the Fifth Circuit addressed examined this question in In re Black Elk Energy Offshore Operations, LLC, 114 F.4th 343 (5th Cir. 2024). The court ruled that a "mediate transferee" of a fraudulent transfer cannot benefit from the good-faith defense in section 550(b)(1) of the Bankruptcy Code if the subsequent transferee's agent was aware of the fraud, even when the agent's conduct was criminal, provided it was within the scope of the agent's authority. [read more …]
Second Circuit: Settlement Allocating Value to Unsecured Creditors Without Paying Disputed Secured Claim Did Not Violate Supreme Court's Jevic Ruling Prohibiting Priority-Skipping Final Distributions
In In re Nordlicht, 115 F.4th 90 (2d Cir. 2024), the U.S. Court of Appeals for the Second Circuit affirmed lower court rulings approving a settlement and related sale of estate claims that would distribute value to unsecured creditors without first paying disputed secured claims. According to the court, the settlement was reasonable and in the best interests of the estate, and the estate claims could be sold free and clear of the purported secured creditors' interest because their liens were subject to bona fide dispute and any funds distributed to unsecured creditors under an indemnity provision were not property of the bankruptcy estate. The settlement therefore did not violate the U.S. Supreme Court's ruling in Czyzewski v. Jevic Holding Corp., 137 S. Ct. 973 (2017), prohibiting final distributions in a chapter 11 case that fail to adhere to the Bankruptcy Code's ordinary priority rules without the consent of creditors. [read more …]
Newsworthy
Heather Lennox (Cleveland/New York), Jasper Berkenbosch (Amsterdam), Nicholas J. Morin (New York), and Dan T. Moss (Washington/New York) were recognized by the Turnaround Management Association ("TMA") with the 2024 TMA International Company Turnaround/Transaction of the Year Award for their representation of Diebold Holding Company, LLC as in-court legal counsel in proceedings in both the United States and the Netherlands. This was the first‐ever cross-border restructuring involving dual main proceedings under chapter 11 of the U.S. Bankruptcy Code and a scheme of arrangement under the Dutch Act on Confirmation of Extrajudicial Plans ("WHOA") and required novel and complex analyses on the scope and synthesis between the two insolvency regimes.
The inaugural edition of The Best Law Firms in Germany™, in cooperation with Handelsblatt, one of Germany's leading business publications, recognized Jones Day in the practice area Restructuring and Insolvency Law.
A team of Jones Day Business Restructuring & Reorganization lawyers led by Heather Lennox (Cleveland/New York), Carl E. Black (Cleveland), Gary L. Kaplan (Miami), and T. Daniel Reynolds (Cleveland), and including Nick Buchta (Cleveland), Benjamin C. Sandberg (New York), S. Christopher Cundra IV (Washington), Isel M. Perez (Miami), Alex Sapp (New York), and Abraham R. Tawil (New York), is advising Vintage Wine Estates on the sale of substantially all of its assets under section 363 of the Bankruptcy Code. In under three months, the Firm negotiated and closed asset sales including more than 30 brands, 11 wineries, and nine tasting rooms to 11 different purchasers, representing an aggregate value of approximately $158 million.
The short list of nominees for the Global Restructuring Review's "Debtor-side law firm of the year" included Jones Day for its representation of the following debtors: (i) Ohio-headquartered cash machine manufacturer Diebold Nixdorf, in a landmark restructuring including the first dual proceeding under chapter 11 of the U.S. Bankruptcy Code and the Dutch WHOA, as well as a case under chapter 15 of the U.S. Bankruptcy Code, to cut more than $2.1 billion of debt through an equity swap with creditors; (ii) German–U.S. dating apps operator Spark Networks, in a restructuring carried out via a court-approved StaRUG plan in Germany and the first U.S. recognition of a StaRUG in a chapter 15 case; (iii) British cosmetics group The Body Shop and joint administrators, which secured a sale of the group's UK parent out of administration to French specialist investor Auréa Group in one of the largest retail insolvencies of the year spanning multiple jurisdictions; and (iv) automotive supplier Marelli Holdings, in the first-ever use of simplified rehabilitation proceedings in Japan to cram down minority creditors.
Jones Day was also shortlisted for the "Pioneering Spirit" award celebrating a bold move by a firm or team of advisers in connection with the Diebold matter (listed above and in respect of which Jones Day was also shortlisted as debtor counsel of the year), together with its representation of the shareholder on the $1 billion restructuring of international shipping company the Vroon Group in the first-ever parallel Dutch WHOA with an English scheme of arrangement.
An article written by Mark A. Cody (Chicago) titled "Changes to Confirmed 'Toggle' Chapter 11 Plan Required No Additional Disclosure and Voting Where Creditors' Rights Not Materially and Adversely Affected" was posted on October 8, 2024, on the Harvard Law School Bankruptcy Roundtable.
An article written by Sushma Jobanputra (Singapore), Vinay Kurien (Singapore), Corinne Ball (New York), and Dan T. Moss (Washington/New York) titled "First Impressions: Singapore International Commercial Court Approves Cross-Border Prepackaged Scheme of Arrangement for Unregistered Foreign Company" was published on September 20, 2024, in Lexis Practical Guidance.
An article written by Corinne Ball (New York), Dan T. Moss (Washington/New York), and Randi C. Lesnick (New York) titled "Ownership Dispute Regarding Foreign Debtor's U.S. Assets Must Be Resolved Before a U.S. Bankruptcy Court Can Approve Sale Under Section 363 in Chapter 15 Case" was published on September 20, 2024, in Lexis Practical Guidance.
An article written by Daniel J. Merrett (Atlanta) titled "New York District Court: Cap on Landlord Claims in Bankruptcy Applies to Claims Against Lease Guarantors, and Cap Should Be Calculated Using Time Approach" was published on September 20, 2024, in Lexis Practical Guidance.
An article written by Oliver S. Zeltner (Cleveland/Houston) titled "Ohio Bankruptcy Court Adopts Actual Test to Determine Whether Certain Unassignable Contracts Can Be Assumed in Bankruptcy" was published on September 20, 2024, in Lexis Practical Guidance.
Lawyer Spotlight: Joshua M. Mester
Josh Mester, a partner in the Los Angeles Office, focuses his practice on complex corporate reorganization and bankruptcy matters and distressed litigation. He has represented debtors, creditors, investors, and shareholders in some of the largest restructuring cases for a range of industries including gaming and entertainment, health care, retail, media, professional sports, airlines, cryptocurrency and financial services, and utilities.
Significant creditor representations include senior creditors holding more than $7 billion in debt of iHeartCommunications, as well as second priority noteholders of Caesars Entertainment Operating Company, where Jones Day negotiated a settlement that resulted in more than $3 billion of additional value for noteholders. He also represents debtors in creatively solving financial challenges such as the out-of-court restructurings for ContextMedia Health, LLC, a health care media company; and shareholders in public company restructurings, like PG&E Corporation, the largest restructuring in California; Garrett Motion; and Silvergate Capital Corporation. Josh also advises investors looking to acquire distressed assets, including Adventist Health White Memorial's acquisition of Beverly Community Hospital.
Prior to joining Jones Day in 2012, Josh was a crucial member of the legal team that represented the Los Angeles Dodgers in its chapter 11 case resulting in a $2.15 billion sale of the team. He also represented a number of debtors in chapter 11 proceedings, including California Coastal Communities, Factory 2-U Stores, LTV Steel Company, Solidus Networks, and Weststar Cinemas.
