Distressed Download - March 2015


The Distressed Download Newsletter is a monthly roundup of news from Orrick's Distressed Download blog, a resource for the latest news and industry trends in the distressed debt and restructuring markets. Check our website for regular blog updates.

Top Story

What Happens in Delaware Does Not Always Stay in Delaware: Caesars Victorious in Venue Battle
By Douglas Mintz, Jeffery Hermann and Joanna McDonald

On Wednesday, January 28, the Bankruptcy Court for the District of Delaware transferred venue for the involuntary bankruptcy of Caesars Entertainment Operating Company to Chicago, frustrating attempts by certain second lien noteholders to administer the $18.4 billion case in Delaware. The junior noteholders had filed an involuntary petition in Delaware against CEOC, three days before CEOC and 172 of its affiliates filed voluntary bankruptcy cases in the Bankruptcy Court in Chicago. As a result of the transfer of venue of the CEOC case, Judge Benjamin Goldgar of the Northern District of Illinois Bankruptcy Court will preside over all of the cases, including determining the validity of the involuntary case. In re Caesars Entertainment Operating Company, Inc., No. 15-10047 (KG), 10-11 (Bankr. D. Del. Feb. 2, 2015).  Read More.

Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations

By Orrick Restructuring Group

Part One of Three
In December, the American Bankruptcy Institute issued its Final Report and Recommendations of the Commission to Study the Reform of Chapter 11. The Report is almost 400 pages long and contains more than 200 recommendations. Twenty-two Commissioners, including attorneys, academics, financial advisors and a former bankruptcy judge spent more than two years taking testimony from over 90 additional restructuring experts and considering the reports provided by 13 advisory committees, each comprised of 10-12 members from the bankruptcy bench, the bankruptcy bar, the financial community and academia. The Commission developed the report with goals including: reducing barriers to entry for debtors, facilitating more efficient resolution of disputed matters, enhancing debtors' restructuring options and creating an alternative restructuring scheme for smaller businesses.

The Report covers nearly every aspect of the chapter 11 process with a multitude of suggested modifications to the Bankruptcy Code and bankruptcy jurisprudence. Below is our analysis of a number of the Commission's most critical recommendations and of the potential impact of the proposed recommendations on the bankruptcy process. We will publish our analysis in three parts.

This first part focuses on issues related to confirmation, valuation, financing and asset sales.  Read More.​

Part Two of Three
This second part focuses on modifications to the Bankruptcy Code's "safe harbors" for derivatives and other complex financial transactions. The final part will focus on professional compensation, treatment of executory contracts and other interesting topics.  Read More.

Puerto Rico Restructuring Developments

Rep. Pierluisi Introduces Bankruptcy Code Amendment to Permit P.R. Municipalities to File Under Ch. 9
By Lorraine McGowen, Douglas Mintz and Thomas Mitchell

Just days after the United States District Court for the District of Puerto Rico struck down the Commonwealth's efforts to pass its own insolvency regime, Resident Commissioner Pedro Pierluisi introduced the "Puerto Rico Chapter 9 Uniformity Act of 2015" into the U.S. House of Representatives last week. The bill, which is substantively similar to one introduced in 2014, would allow the Commonwealth of Puerto Rico to authorize its insolvent public corporations to file a chapter 9 petition; they currently are not able to do so. The bill, H.R. 870, has been assigned to the House Judiciary Committee and is scheduled for a hearing before the Subcommittee on Regulatory Reform, Commercial and Antitrust Law on February 26th. H.R. 870, 114th Cong. (1st Sess. 2015)Read More.

Puerto Rico Debt Recovery Act Ruled Unconstitutional
By Lorraine McGowen, Douglas Mintz and Thomas Mitchell

On Friday February 6, the Puerto Rico Federal District Court ruled the Debt Enforcement and Recovery Act (the "Recovery Act") unconstitutional. Franklin Calif. Tax-Free Trust, et al. v. Comm. Of Puerto Rico et al., (D.P.R., Feb. 6, 20150)(Case No. 3:14-cv-01518-FAB).

The opinion is extensive and addresses each of the constitutional challenges raised by both Blue Mountain and the Franklin/Oppenheimer plaintiffs, and the Commonwealth's request that the bondholder complaints be dismissed as being "unripe", among other defenses.  A summary of the key findings by the Court is provided here. Read More.

European Restructuring Developments

Debtwire European Distressed Debt Market Outlook 2015
By Stephen Phillips

Distressed investments will be on the rise in 2015, particularly in Europe, according to Debtwire Europe's 11th European Distressed Debt Outlook, produced in association with Orrick and Rothschild. High yield bonds, in-court workouts and direct lending are also expected to gain traction in 2015, with economic growth in the EU anticipated to be low or stagnant.

Orrick Partner and Co-head of Europe Restructuring, Stephen Phillips, recently spoke on the Debtwire panel addressing these issues. For additional information, please contact Stephen

The full report is attached here.

Restructuring and insolvency in France: New regime and other hot topics
By Saam Golshani and Alexis A. Hojabr

France has been the most active market in Europe for financial restructurings over the past two years due to the high level of economic challenges currently facing the country. As part of a plan to simplify and shore up the laws governing restructuring and insolvency, dating back to the introduction of the 'sauvegarde' procedure in 2005, the French government has put in place a number of new orders that have the potential to significantly affect debtors and creditors facing insolvency proceedings.

The last significant changes to the current regime result from the orders dated 12 March 2014 and 26 September 2014 and are applicable to proceedings opened as of 1 July 2014.

In the attached presentation we outline how these new orders alter the current law and the affect they may have on French insolvency proceedings. Specifically, we cover:

  • The key points you need to know about the new orders, including the impact on creditors versus debtors;
  • An overview of the current regime, including mandat ad hoc, conciliation, safeguard proceedings, reorganisation and liquidation;
  • Specifics rules applicable to listed companies; and
  • French banking monopoly rules and debt trading.

View the full presentation here.

Lehman Brothers Pension Scheme – The treatment of pensions claims in a UK insolvency process
By Stephen Phillips, Michael Crosby, Scott Morrison and Jack Mead

When the Lehman Brothers group imploded in September 2008, the impact of events on the Lehman Brothers U.K. pension scheme was not seen as a key concern for anyone other than the members themselves. Yet as time progressed, the scheme featured heavily in resolving the administration of many U.K. Lehman Brothers group entities and in the process, important legal principles relating to defined benefit pension schemes were decided. Many ancillary points were decided during the litigation (some of which are discussed below), but the most important issue, that of the priority of debts on a winding up, is of great significance.

This article focuses on the operation of anti-avoidance pension legislation in relation to U.K. defined benefit pension schemes. In particular, we discuss the litigation over the imposition of pension liabilities on certain Lehman group companies and attempts of those companies to clarify the nature and extent of their obligations. Read More.

Distressed Debt – UK Tax Changes
By Michael Crosby, Stephen Phillips, Ed Denny and Will Gay

Currently, if a UK company is released from a debt owed to an unconnected creditor, the default position is that this will be a taxable event for the debtor company and its accounts will recognise a (taxable) credit in respect of this release. Further, where a debt that was previously held by an unconnected party to the debtor company becomes "connected" a "deemed" release of debt may arise, which may give rise to the same issues (although there is a limited exception where debt becomes connected as part of a corporate rescue). In addition, if an "amend and extend" restructuring of debt is undertaken and this gives rise to a "substantial modification" or a reduction in the net present value of the cashflows arising under the relevant loan by at least 10 per cent, the debts may need to be re-recognised in the parties' accounts and this may result in the UK debtor recognising unfunded taxable credits.

It is important to note, however, that there are exemptions to the tax charge for debtor companies described above, and these rules generally need to be considered carefully in a restructuring scenario.

We discuss here changes to UK tax law in respect of corporate debt which take effect from the beginning of this year which will improve the UK tax position for distressed debt of a UK company. Read More.

Decoding the Code

Preferences Under Section 547 of the Bankruptcy Code
By Debra Felder and Laura Metzger

This is the first post in our "Decoding the Code" Series. The Series will cover various sections of the Bankruptcy Code in a clear and easy to understand manner. Our first stop: preferences.

Why do I care about preferences?

Scenario 1: Your company sells products and services to a large retail electronics chain. You have been doing business with the electronics chain for years and they have been paying your invoices as they come due. Recently, however, their payments have become sporadic and you are worried they have fallen on financial hard times. You soon learn that they have filed for bankruptcy. You know you have received payments from the now-bankrupt electronics chain within the last three months and you have heard something about preference claims but what does it all mean? 

Scenario 2: You are a claims trader interested in buying claims filed against bankrupt companies. You know that some claims you are thinking about buying could be subject to preference litigation but are there ways to defend against it?

Let's decode the basics: Read More.

Other Top Bankruptcy and Restructuring News

Momentive: Where does it stand?
By Peter Amend and Raniero D'Aversa

On September 9, 2014, following a hotly contested four-day confirmation hearing, Robert Drain, U.S. Bankruptcy Judge for the Southern District of New York, issued a bench ruling approving Momentive's chapter 11 plan. See In re MPM Silicones, LLC, No. 14-22503-rdd, 2014 Bankr. LEXIS 3926 (Bankr. S.D.N.Y. Sept. 9, 2014). Momentive's plan provided for the company's first and 1.5 lien noteholders to receive new notes with extended maturities at a reduced interest rate, while fully equitizing the second lien noteholders. Holders of senior subordinated notes did not receive any recovery. At the heart of the plan was a $600 million rights offering backstopped by the second lien noteholders.

In this article we examine the proceedings before District Court and Second Circuit and what's next for Momentive and its creditors.  Read More.

The Limited Power and Authority of Bankruptcy Judges: Wellness International Network, Limited v. Sharif
By Frederick Holden, Jr. and John A. Farmer

In January, the U.S. Supreme Court heard oral argument in Wellness International Network, Limited v. Sharif, an appeal of a decision by the U.S. Court of Appeals for the Seventh Circuit in Chicago. The ruling by the Supreme Court could have significant consequences for the constitutional power and authority of the bankruptcy courts and magistrates. Wellness stems from a dispute about the authority of bankruptcy judges to issue final judgments on claims against a bankruptcy estate that involve State-law rights. Bankruptcy judges routinely resolve State-law issues in their judgments. This appeal raises a question of constitutional law that could significantly alter the operations of bankruptcy courts and magistrates.  Read More.


DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

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