The Year In Bankruptcy: 2023

Jones Day

Jones Day

One year ago, we wrote that 2022 would be remembered in the corporate bankruptcy world for the "crypto winter" that descended in November 2022 with the spectacular collapse of FTX Trading Ltd., Alameda Research, and approximately 130 other affiliated companies that ignited the meltdown of many other platforms, exchanges, lenders, and mining operations because they did business with FTX.

We also wrote that 2022 would 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 rising inflation and soaring energy costs due, among other things, to wartime supply chain disruptions, the right-sizing woes of the tech sector, the increasing incidence of "creditor-on-creditor" litigation in bankruptcy, and the tax-driven year-end rush to liquidate special purpose acquisition companies, or SPACs, effectively marking an end to the "blank-check" company gold rush that peaked in 2021.

Business Bankruptcy Trends in 2023

The business bankruptcy landscape in 2023 was similar, but with some notable differences. Many of the trends developing or continuing in 2022 persisted. However, although predictions in late 2022 of a recession proved to be overblown, the long-anticipated wave of business bankruptcy filings caused by higher interest rates, high inflation (albeit easing significantly in the later part of the year), and the collapse of zombie companies that had survived on COVID-era government support produced a significant increase in the volume of business bankruptcy filings in 2023.

If 2022 kicked off the crypto winter, 2023 was the year for "crypto accountability," both in the nation's bankruptcy and criminal courts, as well as a surprising "crypto rebound." The year also included some spectacular bank failures triggered by the inability of lenders like Silicon Valley Bank and First Republic Bank to deal with a stampede to withdraw billions in customer deposits because they were tied up in long-term investments—leading to urgent regulatory action to prevent systemic risk in the banking sector.

The long-smoldering controversy regarding the validity of chapter 11 provisions that release non-debtors from liability continued to be center stage in 2023, with the U.S. Supreme Court finally taking up the issue in the bankruptcy case of Purdue Pharma L.P. (with a ruling expected later this year), whose confirmed chapter 11 plan released the founding Sackler family from opioid liabilities in exchange for up to $6 billion to fund a trust for the payment of such claims. Also prominent in the courts in 2023 was the propriety of the "Texas Two-Step," a corporate reorganization technique recently used by several prominent companies in combination with a bankruptcy filing to deal with mass tort liabilities. In addition, disputes continued in 2023 over the validity of "liability-management transactions" (including drop-down, uptiering, and double-dip transactions). Court rulings issued in some of these cases are discussed in more detail below in the section titled "Notable Business Bankruptcy Decisions in 2023."

Business Bankruptcy Filings in 2023

According to data provided by Epiq AACER, a leading provider of U.S. bankruptcy filing data, commercial bankruptcy filings in calendar year 2023 increased 19% to 25,627 from the 21,479 registered the previous year. By contrast, there were 32,506 commercial bankruptcy filings during the height of the pandemic in 2020. Commercial chapter 11 filings increased 72% in 2023 to 6,569 from the previous year's total of 3,819—but still short of the 7,128 commercial chapter 11 filings during pandemic-fueled 2020. Subchapter V elections for small business debtors within chapter 11 also substantially increased in calendar year 2023, as the 1,939 filings represented a 45% increase from the 1,334 recorded in 2022.

According to data produced by Reorg, a global provider of data, analytics, and credit intelligence for leveraged finance and restructuring professionals, there were 450 chapter 11 filings in 2023 by companies with at least $10 million in debt, representing an 70% increase over 2022. Of those chapter 11 filings, the real estate sector led with 23% of the cases in 2023, followed by consumer discretionary with 17% and health care with 16%. Approximately 140 companies filed for chapter 11 in 2023 with at least $100 million in debt, compared to 60 in 2022. Reorg also reported that there were 31 chapter 11 filings in 2023 by companies with liabilities exceeding $1 billion, compared to 21 in 2022.

Bloomberg Law data indicate that chapter 15 petitions were filed in 2023 on behalf of 164 foreign debtors, compared to 89 foreign debtors. Only a single municipality filed for chapter 9 protection in 2023, compared to two in 2022.

S&P Global Market Intelligence reported that U.S. private equity portfolio company bankruptcies spiked to record high in 2023. Bankruptcy filings by private equity and venture capital-backed companies in the United States increased to 104 in 2023, the highest annual total on record. This represents 174% growth over the 38 U.S. portfolio company bankruptcy filings in 2022.

Some of the most notable business bankruptcy filings of 2023 included the following.

WeWork, Inc., the real estate company that offered 20 million square feet of office space in more than 660 locations in 37 countries, which filed for bankruptcy protection in on November 6, 2023, in the District of New Jersey with $3.8 billion in debt (against only $45 million in assets) and a pre-negotiated chapter 11 plan to trim its portfolio of office space.

Diebold Nixdorf, Inc., an international manufacturer, seller, installer, and servicer of self-service transaction systems (such as ATMs), which, together with its U.S., Canadian, and European subsidiaries (collectively, "Diebold"), successfully restructured more than $2.7 billion in debt through coordinated cross-border restructuring proceedings in just 71 days. Those proceedings included a restructuring case under the Dutch Act on Confirmation of Extrajudicial Plans (Wet Homologatie Onderhands Akkoord ("WHOA")), a chapter 11 filing for Diebold's U.S. subsidiary Diebold Holding Company Inc., and a chapter 15 case in which a U.S. bankruptcy court recognized Diebold's WHOA proceeding and enforced the terms of Diebold's Dutch court-approved scheme of arrangement as part of the first-ever cross-border restructuring involving dual main proceedings under chapter 11 of the U.S. Bankruptcy Code and the WHOA. Jones Day represented Diebold in the restructuring.

Johnson & Johnson indirect subsidiary LTL Management, LLC ("LTL"), which filed for chapter 11 protection for the second time on April 4, 2023, in the District of New Jersey hours after a bankruptcy court ordered the dismissal of its 2021 chapter 11 filing following a Texas Two-Step corporate reorganization designed to manage billions of dollars in anticipated liabilities from talc-related litigation. The bankruptcy court dismissed LTL's second chapter 11 case on July 28, 2023, concluding, in accordance with a January 2023 ruling by the U.S. Court of Appeals for the Third Circuit, that the bankruptcy filing was not made in good faith due to the lack of any immediate financial distress. Jones Day represented LTL in its first chapter 11 case.

Mall owner Pennsylvania Real Estate Investment Trust, which filed for chapter 11 protection in the District of Delaware on December 10, 2023, with $2.2 billion in debt and a prepackaged plan to implement a $880 million balance sheet restructuring in the face of an imminent $1.2 billion debt maturity. The filing came after a 2020 prepackaged bankruptcy that culminated in the confirmation of a chapter 11 plan in December 2020 under which the company was recapitalized.

Diamond Sports Group LLC ("Diamond"), an American media and entertainment company operating as Bally Sports, a group of regional sports channels that was formerly known as the Fox Sports Networks. Diamond filed for chapter 11 protection on March 14, 2023, in the Southern District of Texas with $13.5 billion in debt in an effort to resolve disputes with many professional sports teams over broadcasting rights and revenues generated by televised or streamed sporting events.

Ninety-nine-year-old Nashville-based trucking company Yellow Corp., which filed for chapter 11 protection on August 6, 2023, with $1.2 billion in debt in the District of Delaware, blaming a labor dispute with the International Brotherhood of Teamsters union for its demise. The filing came little more than a week after it terminated its 30,000 employees and three years after it tapped $700 million in unrepaid pandemic relief funds.

SVB Financial Group, the former parent company of Silicon Valley Bank ("SVB"), which filed for chapter 11 protection on March 17, 2023, in the Southern District of New York with $3.3 billion in debt one week after its banking subsidiary SVB, a key lender to the technology industry, was seized by federal regulators because its tech-concentrated customer base withdrew tens of billions of dollars in deposits in just two days, causing bank stocks around the world to plummet.

Retail drugstore chain Rite Aid Corporation, which filed for chapter 11 protection on October 15, 2023, in the District of New Jersey with nearly $4 billion in debt amid weak sales, store closings, and a deluge of litigation over its alleged role in the U.S. opioid epidemic.

Aerospace supplier Wesco Aircraft Holdings (d/b/a Incora), which filed for chapter 11 protection on June 1, 2023, in the Southern District of Texas with $7.1 billion in debt, citing depressed demand for aircraft maintenance and litigation over its efforts to restructure its debt outside of bankruptcy.

Fifty-two-year-old retailer Bed Bath & Beyond, which filed for chapter 11 protection on April 23, 2023, in the District of New Jersey with $5.2 billion in debt and a plan to liquidate its inventory and close its stores after miscalculating the popularity of online shopping.

Giant theater chain Cineworld Group, the parent company of Regal Cinemas, which filed for chapter 11 protection on September 7, 2023, in the Southern District of Texas with $10.7 billion in debt and a plan to transfer ownership of the company to lenders after the increased popularity of online streaming and the suspension of film production during the pandemic saddled it with an unmanageable debt load.

Notable bankruptcy exits in 2023 included: (i) drug maker Mallinckrodt PLC, which emerged from bankruptcy in November 2023 (for the second time in three years) after obtaining confirmation of a prepackaged chapter 11 plan that significantly reduced the amount required to fund a trust to pay opioid claimants and provided for a debt-for-equity swap to cancel more than $2 billion in debt; (ii) Diebold Nixdorf, Inc., an international manufacturer, seller, installer, and servicer of self-service transaction systems (such as ATMs), which, together with its U.S., Canadian, and European subsidiaries, successfully restructured more than $2.7 billion in debt through coordinated cross-border restructuring proceedings in just 71 days; (iii) Bed Bath & Beyond Inc., a big-box retailer chain specializing in housewares, furniture, and specialty items, which obtained confirmation of a liquidating chapter 11 plan in September 2023 after selling its name and associated intellectual property to in a bankruptcy auction; (iv) party products retailer Party City Holdco., which emerged from bankruptcy in October 2023 after obtaining confirmation of a chapter 11 plan that provides for a transfer of ownership of the company to creditors pursuant to a $1 billion debt-for-equity swap; and (v) physician staffing company Envision Healthcare, which emerged from bankruptcy in early November 2023 after obtaining confirmation of a pre-negotiated chapter 11 plan that trimmed more than $7 billion in debt from the company's balance sheet and split the reorganized debtor into two companies.

Notable Business Bankruptcy Decisions in 2023

Bankruptcy Appellate Standing. Federal appellate courts have traditionally applied a "person aggrieved" standard to determine whether a party has standing to appeal a bankruptcy court order or judgment. However, this standard, which requires a direct, adverse, and financial impact on a potential appellant, is derived from a precursor to the Bankruptcy Code and does not appear in the existing statute. It also arguably conflicts with the general constitutional standing rule that governs litigation in federal courts, which, among other things, requires a litigant to demonstrate "a concrete and particularized injury in fact."

The U.S. Court of Appeals for the Ninth Circuit addressed the interplay between these standards in Clifton Capital Group LLC v. Sharp (In re East Coast Foods Inc.), 66 F.4th 1214 (9th Cir. 2023). The Ninth Circuit reversed a district court ruling affirming a bankruptcy court order approving an award of enhanced fees to a chapter 11 trustee, concluding that the appellant lacked constitutional standing to appeal the fee order because any injury to the appellant was "too conjectural and hypothetical." In so ruling, the Ninth Circuit held that an appellant must satisfy the requirements for constitutional standing in the first instance rather than the more exacting "person aggrieved" standard.

In Truck Insurance Exchange v. Kaiser Gypsum Co. (In re Kaiser Gypsum Co.), 60 F.4th 73 (4th Cir. Feb. 14, 2023), cert. granted, No. 22-1079 (Oct. 13, 2023), the U.S. Court of Appeals for the Fourth Circuit ruled that a chapter 11 debtor's insurer did not have standing to appeal an order confirming a chapter 11 plan as a "party in interest" under section 11109(b) of the Bankruptcy Code because the plan, which created a trust for the payment of the uninsured claims of asbestos injury plaintiffs, was "insurance neutral," meaning that the insurer had no financial stake underpinning its objection, and the insurer lacked standing under Article III of the U.S. Constitution to object to other aspects of the plan. The U.S. Supreme Court agreed to review the ruling on October 13, 2023, to resolve a claimed split among the federal circuit courts of appeals concerning the interplay of section 1109(b) and Article III in bankruptcy cases.

Jones Day represents Kaiser Gypsum Company, Inc. in connection with the litigation.

Bankruptcy Asset Sales. The finality of asset sales or leases in bankruptcy is an indispensable feature of U.S. bankruptcy law designed to maximize the value of a bankruptcy estate as expeditiously as possible for the benefit of all stakeholders. To promote such finality, section 363(m) of the Bankruptcy Code prohibits reversal or modification on appeal of an order authorizing a sale or lease to a "good-faith" purchaser or lessee unless the party challenging the sale obtains a stay pending appeal.

Bankruptcy and appellate courts, however, have long disagreed as to whether this provision is jurisdictional—meaning that it can never be waived and an appellate court lacks jurisdiction to hear any appeal of an unstayed sale or lease authorization order—or instead a defense that can be invoked by the proponents of the sale (e.g., the debtor, the bankruptcy trustee, or the purchaser) on appeal subject to waiver, forfeiture, and similar doctrines. The U.S. Supreme Court settled this question in MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927, 2023 WL 2992693 (2023). A unanimous court ruled that that section 363(m) is not jurisdictional, and that an appeal of a 2019 bankruptcy court order approving the assignment of a lease between Sears, Roebuck & Co. and MOAC Mall Holdings LLC as part of Sears's sale of substantially all of its assets was not moot.

In addition, what constitutes "good faith" has sometimes been disputed by the courts. The U.S. Court of Appeals for the Fifth Circuit revisited this issue in SR Construction Inc. v. Hall Palm Springs LLC (In re RE Palm Springs II LLC), 65 F.4th 752 (5th Cir. 2023). The court reaffirmed its earlier decisions that a buyer or lessee's good faith under section 363(m) is not defeated merely because it is aware of objections to the proposed sale or lease. Instead, the claims of the party challenging the sale or lease must rise to the level of an "adverse interest" in the ownership of the property. The Fifth Circuit also held that transparency in the sale or lease process is of paramount importance in establishing good faith.

Bankruptcy and appellate courts disagree over the standard that should apply to a request for payment of a break-up fee or expense reimbursement to the losing bidder in a sale of assets outside the ordinary course of the debtor's business. Some apply a "business judgment" standard, while others require that the proposed payments satisfy the more rigorous standard applied to administrative expense claims. The U.S. Court of Appeals for the Fifth Circuit addressed this question in Matter of Bouchard Transportation Co., Inc., 74 F.4th 743 (5th Cir. 2023). The Fifth Circuit affirmed lower court orders approving a $3.3 million breakup fee and more than $885,000 in expense reimbursement to a disappointed "stalking-horse" bidder in an auction of the debtors' assets, finding that the payments satisfied both the business judgment test under section 363(b) of the Bankruptcy Code and the standard for approval of administrative expense claims under section 503(b).

Chapter 11 Plan Provisions. In In re Serta Simmons Bedding, LLC, 2023 WL 3855820 (Bankr. S.D. Tex. June 6, 2023), notice of appeal filed, No. 23-90020 (Bankr. S.D. Tex. June 6, 2023), stay pending appeal denied, No. 23-90020 (Bankr. S.D. Tex. June 21, 2023), stay pending appeal denied, No. 4:23-cv-2173 (S.D. Tex. June 29, 2023), direct appeals certified, No. 23-90026 (5th Cir. Sept. 18, 2023), the U.S. Bankruptcy Court for the Southern District of Texas confirmed the chapter 11 plan of bedding manufacturer Serta Simmons Bedding, LLC and its affiliates (collectively, "Serta"). In confirming Serta's plan, the court held that: (i) a 2020 "uptier," or "position enhancement," transaction ("PET") whereby Serta issued new debt secured by a priming lien on its assets and purchased its existing debt from participating lenders at a discount with a portion of the proceeds did not violate the terms of a 2016 credit agreement; (ii) the plan's nonconsensual exculpation provision was overly broad because it covered Serta's independent directors and managers, but was approved as amended to remedy this defect; (iii) the plan did not impermissibly indemnify lenders that participated in the PET; and (iv) distribution under the plan of $1.5 million to existing equity holders without paying in full the claims of nonparticipating lenders did not violate the "absolute priority rule" because equity provided "new value" in exchange.

Section 1124(2) of the Bankruptcy Code gives chapter 11 debtors a valuable tool to use in situations where long-term prepetition debt carries a significantly lower interest rate than the rates available at the time of emergence from bankruptcy. Under this section, in a chapter 11 plan, the debtor can "cure" any defaults under the relevant agreement and "reinstate" the maturity date and other terms of the original agreement, thus enabling the debtor to "lock in" a favorable interest rate in a prepetition loan agreement upon bankruptcy emergence.

For decades, however, courts have struggled to determine exactly what a debtor must do to cure defaults, for purposes of cure and reinstatement in a chapter 11 plan, where payment terms under the loan agreement have been accelerated and the agreement requires the payment of a higher default rate of interest. The U.S. Bankruptcy Court for the Southern District of New York addressed this conundrum in In re Golden Seahorse LLC, 652 B.R. 593 (S.D.N.Y. 2023). The court ruled that, based upon a close examination of sections 365(b)(2)(D), 1123(d), and 1124(2) of the Bankruptcy Code, a debtor was obligated to pay default-rate interest to cure a monetary default under a loan that would be reinstated in a chapter 11 plan.

Good Faith Filing Requirement. In In re LTL Mgmt., LLC, 64 F.4th 84 (3d Cir. 2023), the U.S. Court of Appeals for the Third Circuit reversed a bankruptcy court order denying motions filed by an official committee of talc claimants to dismiss the chapter 11 case of a debtor that was an indirect subsidiary of a manufacturer of talc-based astringent powder. The debtor was created as part of a Texas Two-Step corporate restructuring pursuant to which the debtor had assumed responsibility for the manufacturer's talc-related liabilities. In reversing the bankruptcy court's order and remanding the case below with instructions to dismiss the debtor's chapter 11 case, the Third Circuit held that: (i) in evaluating a debtor's good faith in filing for chapter 11 protection, the court would consider only the financial condition of debtor, and not its pre-bankruptcy predecessor which, due to the pre-bankruptcy corporate restructuring, no longer existed; (ii) despite its massive talc-related liabilities, the debtor was not in financial distress on the bankruptcy petition date and, therefore, could not show its chapter 11 filing served a "valid bankruptcy purpose" for purposes of the good faith filing inquiry; and (iii) "unusual circumstances" did not preclude dismissal of the debtor's chapter 11 case.

Jones Day represents debtor LTL Management, LLC in the litigation.

In In re LTL Mgmt., LLC, 652 B.R. 433 (Bankr. D.N.J. 2023), the U.S. Bankruptcy court for the District of New Jersey dismissed a second chapter 11 case filed by the debtor on April 4, 2023, holding that, in accordance with the Third Circuit's previous ruling, the second chapter 11 case was also filed in bad faith. The Third Circuit agreed to hear a direct appeal of the ruling on October 20, 2023.

In In re Aldrich Pump LLC, 2023 WL 9016506 (Bankr. W.D.N. Car. Dec. 28, 2023), the debtors were created as part of a pre-bankruptcy Texas Two-Step corporate reorganization that: (i) transferred to the debtors contingent liabilities arising from 90,000 asbestos lawsuits; and (ii) created two entities that were contractually obligated to fund payments under any trust established in the debtors' chapter 11 plan pursuant to section 524(g) to fund asbestos liabilities. The debtors proposed a chapter 11 plan under which the funds in the trust would be capped and asbestos claimants would not have the ability to opt out of the proposed treatment of their claims.

Certain asbestos personal injury claimants and their official committee moved to dismiss the debtors' chapter 11 cases on the basis that: (a) the debtors were solvent, able to pay the creditors and not in "financial distress," and were therefore constitutionally barred from filing for bankruptcy; and (b) "cause" existed to dismiss the cases under section 1112(b) of the Bankruptcy Code because, among other things, the Texas Two-Step reorganization was "an improper, prejudicial manipulation of the bankruptcy process designed to delay and suppress recoveries for the asbestos creditors," the debtors were using the chapter 11 process to benefit insiders at the expense of creditors, and the three-year delay in proposing a confirmable chapter 11 plan to deal with the asbestos liabilities was unreasonable and prejudicial to creditors.

The U.S. Bankruptcy Court for the Western District of North Carolina denied the motions. It ruled that "financial distress" or insolvency is not a constitutional or jurisdictional prerequisite for a bankruptcy filing. It deferred to another day the question of whether a capped chapter 11 plan and a "no-opt-out" section 524(g) trust is constitutional if the debtors are neither insolvent nor financially distressed because it may impair asbestos claimants' due process and jury trial rights.

Finally, the bankruptcy court ruled that the debtors did not file for chapter 11 in bad faith. Canvassing relevant a caselaw and applicable precedent, the court concluded that the Fourth Circuit's two-prong test for bad faith dismissal was not met because the movants could not demonstrate that the cases were filed with "objective futility and subjective bad faith." Even though the debtor were not insolvent or in financial distress, the court determined that a chapter 11 filing for the purpose of managing asbestos liabilities was a valid bankruptcy purpose.

Limitations on Avoidance Powers. In In re Nine W. LBO Sec. Litig., 2023 WL 8180356 (2d Cir. Nov. 27, 2023), a divided panel of the U.S. Court of Appeals for the Second Circuit reversed in part a district court's 2020 ruling dismissing fraudulent transfer and unjust enrichment claims brought by a chapter 11 plan litigation trustee and an indenture trustee to recover payments made by apparel and footwear company Nine West Holdings, Inc. as part of a 2014 leveraged buy-out ("LBO"). According to the Second Circuit majority, each component transaction in an LBO should be analyzed individually to determine if it falls within the scope of the "safe harbor" in section 546(e) of the Bankruptcy Code precluding avoidance in bankruptcy of certain securities, commodity, or forward-contract payments. Because the debtor, through its bank agent, qualified as a "financial institution" in relation to payments made to public shareholders as part of the LBO, the majority held that those payments were safe harbored, but that payments made directly to the debtor's officers, directors and other shareholders were not because no financial institution was involved. A dissenting opinion suggests that a "contract-by-contract" analysis would be more appropriate and that all of the transfers should therefore have been shielded from avoidance. Nine West is discussed in more detail elsewhere in this edition of the Business Restructuring Review.

In Petr v. BMO Harris Bank N.A., 2023 WL 3203113 (S.D. Ind. May 2, 2023), appeal filed, No. 23-1931 (7th Cir. May 17, 2023), the U.S. District Court for the Southern District of Indiana broadly construed the section 546(e) "safe harbor" to bar a chapter 7 trustee from suing under state law and section 544(b) of the Bankruptcy Code to avoid an alleged constructive fraudulent transfer made by the debtor shortly after it had been acquired in an LBO. According to the district court: (i) all of the agreements related to the LBO acquisition were "securities contracts" for purposes of the section 546(e) safe harbor, which insulated from avoidance a transfer made by the debtor one month after the LBO to refinance a loan incurred as part of the transaction; (ii) the safe harbor is not limited to transfers involving publicly-traded securities; and (iii) section 546(e) preempted the trustee's state law constructive fraudulent transfer claims.

Property of the Bankruptcy Estate. Although a debtor's non-exempt property (and even the debtor's entire business) are commonly sold during the course of a bankruptcy case by the trustee or a chapter 11 debtor-in-possession ("DIP") as a means of augmenting the bankruptcy estate for the benefit of stakeholders or to fund distributions under, or implement, a chapter 9, 11, 12 or 13 plan, it is less well understood that causes of action that become part of the bankruptcy estate in connection with a bankruptcy case (e.g., fraudulent transfer, preference or other litigation claims) may also be sold or assigned by a trustee or DIP during bankruptcy to generate value.

The U.S. Court of Appeals for the Eighth Circuit examined the circumstance under which estate avoidance claims can be sold in Pitman Farms v. ARKK Food Co. LLC (In re Simply Essentials LLC), 78 F.4th 1006 (8th Cir. 2023). In affirming an Iowa bankruptcy court's ruling that avoidance causes of action can be sold as property of the estate, the Eighth Circuit rejected the argument that such causes of action cannot constitute estate property because avoidance claims "belong" only to the trustee or the DIP. In so ruling, the Eighth Circuit adopted the broad majority view that estate property includes a debtor's "inchoate or contingent" interests.

Sanctions. In In re Markus, 78 F.4th 554 (2nd Cir. 2023), the U.S. Court of Appeals for the Second Circuit affirmed a bankruptcy court decision imposing sanctions on a chapter 15 debtor's lawyer who repeatedly flouted the court's discovery orders and awarding attorney's fees to the debtor's foreign representative incurred in bringing a motion for sanctions. In so ruling, the Second Circuit reaffirmed its earlier decisions concluding that a bankruptcy court has the inherent authority to impose civil sanctions for contempt. However, the Second Circuit expanded the scope of that inherent authority to include punitive civil contempt sanctions in an amount greater than it had approved in its previous rulings. According to the Second Circuit, "we hold that a bankruptcy court's inherent sanctioning authority includes the power to impose civil contempt sanctions in non-nominal amounts to compensate an injured party and coerce future compliance with the court's orders." Markus is discussed in more detail elsewhere in this edition of the Business Restructuring Review.

Third-Party Releases and Exculpation Clauses in Chapter 11 Plans. There is longstanding controversy concerning the validity of third-party release provisions in non-asbestos trust chapter 11 plans that limit the potential exposure of various non-debtor parties involved in the process of negotiating, implementing and funding a plan. In the latest chapter of this debate, the U.S. Court of Appeals for the Second Circuit handed down a long-awaited ruling regarding the validity of non-consensual third-party releases in the chapter 11 plan of pharmaceutical company Purdue Pharma, Inc. and its affiliated debtors (collectively, "Purdue"). In In re Purdue Pharma L.P., 69 F.4th 45 (2d Cir. 2023), cert. granted sub nom. Harrington v. Purdue Pharma L.P., No. (23A87), 2023 WL 5116031 (U.S. Aug. 10, 2023), the Second Circuit reversed a district court decision finding that the bankruptcy court lacked the power to approve a plan provision releasing the founding Sackler family from liabilities arising from Purdue's sale of opioids and affirmed the bankruptcy court order confirming Purdue's chapter 11 plan. The U.S. Supreme Court heard argument in Purdue on December 4, 2023.

Exculpation clauses limiting the liability of certain entities for actions taken in connection with a bankruptcy case are a common feature of chapter 11 plans. However, courts disagree over the permitted scope of such clauses. They also disagree as to whether an order confirming a chapter 11 plan that includes exculpation and third-party release provisions is insulated from appellate review under the doctrine of "equitable mootness." The U.S. District Court for the Southern District of Texas addressed both of these questions in Bouchard v. Bouchard Transportation Co. (In re Bouchard Transportation Co.), 2023 WL 1797907 (S.D. Tex. Feb. 7, 2023). The district court reversed and remanded a bankruptcy court order confirming a chapter 11 plan that included an overbroad exculpation provision, even though the order was not stayed pending appeal, the plan had been substantially consummated, and the plan included a non-severability provision precluding removal or modification of the exculpation provision. Based on Fifth Circuit precedent, the district court held that, to safeguard the integrity of the chapter 11 process, the doctrine of equitable mootness cannot bar appellate review of an order confirming a plan that contains an impermissibly broad exculpation provision.

Read the full Business Restructuring Review here.

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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