March 2016 Bankruptcy & Restructuring Litigation Update
Quinn Emanuel Takes Leadership Role for New Potential Bankruptcy Chapter. Quinn Emanuel attorneys do more than argue the law—they help write it. As Chair of the National Bankruptcy Conference’s (“NBC”) Business Debtor Committee, Quinn Emanuel Partner K. John Shaffer played a central role in drafting the NBC’s new proposed addition to the Bankruptcy Code: Chapter 16. In contrast to current Chapter 11 filings, a bankruptcy under the proposed new Chapter 16 could be completed in a few weeks, rather than months or years.
Background. The NBC is an invitation-only organization dedicated to improving the Bankruptcy Code and its administration. It consists of 60 conferees, themselves the nation’s leading bankruptcy judges, professors, and practitioners. Formed in the 1930s at the request of Congress to assist in drafting major Depression-era bankruptcy law amendments, the NBC has provided advice to Congress on bankruptcy legislation and policy for nearly 80 years.
Rethinking the Trust Indenture Act and Chapter 11. The NBC has undertaken a comprehensive project to “Rethink Chapter 11” bankruptcy to evaluate the existing Chapter 11 process, consider improvements to the law and propose legislative changes. As part of this effort, the NBC has addressed the issue of holdouts in certain bond restructurings. Section 316(b) of the Trust Indenture Act (the “TIA”) provides that the rights of a bondholder to payment “shall not be impaired or affected without the consent of such holder.” In effect, the TIA requires the unanimous consent of all bondholders in order to modify or otherwise impair the bondholder’s right to be paid principal or, with limited exceptions, interest. The TIA’s unanimity requirement—which serves the important purpose of protecting minority bondholders from coercion—may also incentivize minority bondholders to use their veto rights to extract incremental value. One potential practical result of this holdout dynamic is to force companies in need of purely financial restructurings into costly, disruptive Chapter 11 filings. This threat may have increased in recent months due to Southern District of New York decisions that have rather broadly interpreted what constitutes “impairment” under the TIA. See Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Corp., 111 F. Supp. 3d 542 (S.D.N.Y. 2015); BOKF v. Caesars Entm’t Corp., 2015 U.S. Dist. LEXIS 113794 (S.D.N.Y. 2015).
In analyzing potential improvements, NBC concluded that the best approach would be a middle ground that alleviates minority bondholder vulnerability without forcing plenary Chapter 11 filings. The NBC proposed a new chapter be added to the Bankruptcy Code, providing a streamlined judicial procedure for restructuring TIA-governed indentures and other “loan agreement” obligations that require unanimous or super-majority consent. The NBC enlisted Quinn Emanuel’s John Shaffer and three other conferees to draft a comprehensive amendment to the Bankruptcy Code that would implement the NBC’s proposal.
The New Chapter 16 Proposal. Chapter 16 would provide a simplified judicial process for modifying TIA-governed bonds and other debts for borrowed money. Although Chapter 16 is modeled after existing Chapter 11, it would focus exclusively on the restructuring of the debt, and thus would avoid many of the costs, delays and complications that accompany most Chapter 11 cases. Among other things, a Chapter 16 filing would not affect the debtor’s contracts, leases, and payments to trade creditors. Nor would court approval be required for asset sales and other transactions outside the ordinary course of business. A Chapter 16 bankruptcy thus could be completed in a few weeks, rather than the likely months that are required by a Chapter 11 filing. The proposed legislation effectively would substitute in-court supervision for the TIA’s unanimity requirement. A court could impose on all members of the affected creditor class a modification of payment terms that has been accepted by creditors holding at least 2/3 in dollar amount of claims in the class (excluding claims held by insiders and affiliates of the borrower), without triggering the whole panoply of Bankruptcy Code provisions, requirements, and limitations that typically accompany a Chapter 11 filing. The court, however, would still have to determine that the restructuring has been proposed in good faith and provides creditors with at least as much consideration as they would have received in a liquidation of the debtor, thus providing minority bondholders with basic judicial protections. Chapter 16 would preserve the TIA’s protections against coercion, while also mitigating the problem of holdouts who refuse to be bound outside the context of judicial restructuring.
Conclusion. On December 18, 2015, the NBC sent its proposed legislation to the House Subcommittee on Regulatory Reform and the Senate Committee on the Judiciary. While its fate in Congress remains uncertain, one thing is for sure: Quinn Emanuel attorneys are helping to sharpen the cutting edge of bankruptcy law as both legal advocates and legislative authors.