Author: Stephen Lubben

  • Maybe it’s not a new problem after all

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    Stephen Lubben

    Consider:

    Seldom are business bankruptcy cases initiated under Chapters I to VII, inclusive, as well as under Chapters X and XI, where all or substantially all of the assets have not been pledged as collateral for the payment of debts. This pledging of assets tends to create serious questions in connection with the administration of the estates. In cases where the debtor is engaged in business, the receiver or trustee is quite often without free assets with which to carry on operations. There is no money in hand and no means of raising funds necessary to take care of fixed and direct charges essential for the maintenance of the business, without impinging upon the rights of the secured creditors. Debtors who might otherwise be reorganized in the public interest are unable to continue in business long enough to develop alternate means of financing and negotiate accommodations with their creditors.

    Charles Seligson, Major Problems for Consideration by the Commission on the Bankruptcy Laws of the United States, 45 Am. Bankr. L.J. 73, 87-88 (1971).

  • No comment

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    Stephen Lubben

    In this morning's email:

    Moody's Investors Service downgraded its Probability of Default Rating (PDR) for American Tire Distributors, Inc. … following the company's announcement that it had initiated Chapter 11 bankruptcy proceedings…

  • ISDA Promotes a Race to the Bottom

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    Stephen Lubben

    Frustrated that Congress did not decide to collapse the CFTC and SEC as part of Dodd-Frank, and facing the reality that the SEC is still working on its rules under Title VII of Dodd-Frank, ISDA, the swaps industry trade group, is out with a white paper that urges the adoption of a "safe harbor."

    This is not the infamous bankruptcy safe harbors, but rather a rule that would be adopted by both regulators. The basic idea is that compliance with one regulator's rule is "good enough." That is, swaps traders could choose which regulator they want.

    What could possibly go wrong?

  • Excuse Me?

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    Stephen Lubben

    Barry Ritholtz has a generally sensible column about the ten-year anniversary of the financial crisis, but the bankruptcy stuff really makes no sense at all. Start with this proposition:

    I believed then (and still believe) that the best course of action would have been prepackaged bankruptcies for all the insolvent institutions instead of bailouts.

    How precisely would that work? A prepack involves pre-bankruptcy solicitation of votes from creditors – largely bondholders if we are talking about a SIFI's holding company. Under the securities laws, the solicitation will take at least 20 days. That is about 19 days more than will be required for the run on the SIFI to be fully commenced.

    And then we have:

    I would have had the federal government provide debtor-in-possession financing, allowed qualified private institutional investors to bid on the assets thereby letting markets set the valuations, with the government picking up the rest.

    So this is not a prepack at all. If we are bidding on assets post-bankruptcy, there is no pre-bankruptcy plan for creditors to vote on. Indeed, until we see how the sale goes, there is no plan at all.

    In short, we are just doing chapter 11, Lehman style. Maybe with a bit more pre-planning, which could not hurt. But if you assume better facts, you are bound to think you have found a better way. 

    I continue to doubt that bankruptcy has much to offer with regard to a SIFI failure – which is really much more a question of ex ante regulation, and post default politics.

  • Available at finer booksellers everywhere (and Amazon too!)

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    Stephen Lubben

    CoverMy new book is out – the Law of Failure.

    The sub-title is "A Tour Through the Wilds of American Business Insolvency Law," which pretty much tells the whole story. I try to cover all business insolvency law – not just the Bankruptcy Code. State laws, and federal laws like Dodd-Frank's OLA are covered too. All in a concise little volume.

    In my research I discovered that many states have specialized receivership and other insolvency laws for specific types of businesses. And some states – I'm looking at you New Hampshire – still have corporate "bankruptcy" statutes on the books from the days when there was no federal bankruptcy law, or (as was the case with the early Bankruptcy Act) the law did not extend to all types of businesses. Can any of these laws really work? It is hard to say, since the Supreme Court has not dealt with a bankruptcy preemption issue in a very long time.

    I welcome discussion on this question, or the book in general, from Slips readers, either below or via email.

  • Jay Alix v. McKinsey Update

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    Stephen Lubben

    As my summer of poutine, donairs, and nippy waters winds down, a quick post to note that the long-expected motion to dismiss has been filed in the battle between the chapter 11 financial advisors. A McKinsey spokesperson also provided the following statement, which gives some insight into how they intend to respond to this case:

    “Jay Alix has waged a years-long crusade against McKinsey & Company to stifle competition in the bankruptcy advisory market. His attempt to bootstrap a disclosure dispute into a RICO action is devoid of any legal basis and obviously intended to do nothing but inflict reputational damage. Courts have previously upheld the appropriateness of McKinsey’s disclosures. This lawsuit is just one more part of Mr. Alix’s anticompetitive campaign to push out of the market a competitor whose deep expertise and unmatched scale deliver superior bankruptcy outcomes.”

  • Thoughts: initial thoughts on the Alix-McKinsey lawsuit

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    Stephen Lubben

    The compliant alleges some damming stuff. McKinsey brushes it all off as an anti-competitive ploy. It seems to me that the biggest risk to McKinsey is that the failure to disclose can itself be the basis for an order to disgorge fees.

    McKinsey 2Even if McKinsey might have been retained in these cases if it had made disclosure up front – I don't necessarily agree with the Alix complaint that the alleged connections would have been, in all cases, fatal to their retention – failure to disclose is itself a serious problem. Bankruptcy professionals always have to disclose more than what is required by section 327's adverse interest/disinterested standard, because ultimately what counts as a problem for section 327 purposes is a question for the court, not the professional, to decide.

    And I wonder why the courts approved McKinsey's retention applications in the first place. And where was the US Trustee? It is alleged that many of their retention applications stated that McKinsey had no relevant conflicts to disclose.  As in none. For a company of the size and importance of McKinsey, that frankly is not plausible. 

    The allegations in paragraphs 120 to 122, which I have cut out in the image, are deeply troubling. In short, Jay Alix alleges that McKinsey recommended law firms to clients, and the law firms in turn recommended McKinsey for retention in the case. Not only might this be illegal, as Alix says, but this sort of relationship would have to be disclosed in the McKinsey (and law firms) retention applications even if not illegal.

  • Battle of Giants

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    Stephen Lubben

    I have been studying chapter 11 professionals since before the turn of the century, but today we have a first. Jay Alix, as assignee of AlixPartners LLP, has filed a 150 page complaint against McKinsey & Co., Inc. and others, alleging RICO violations in connection with McKinsey's alleged violations of section 327 and rule 2014.  This apparently comes out of the Wall Street Journal's report last week that McKinsey was suspiciously light and vague in its disclosures in bankruptcy court, as compared with other, similar professionals.

    The alleged conspiracy goes back to cases during my time in practice – that is, long, long ago. It will be interesting to watch this develop.

  • Coming Soonish to a Bookstore Near You

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    Stephen Lubben

    Assuming you still have those in your town. If not, also available for preorder now is my forthcoming book, entitled The Law of Failure.  It is my attempt to consider all of American business insolvency law as a whole. Not just bankruptcy but also assignments, receiverships, and even oddball things like Nevada's campground receivership provisions.

  • The Economic Growth, Regulatory Relief, and Consumer Protection Act

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    Stephen Lubben

    Or EGRRCPA, for short. That is the official name of S. 2155, a bill which seems to be tearing Senate Democrats apart. Republicans are uniformly in favor of the bill, which Bloomberg describes as "another faulty bank-reform bill." Some Democrats see it as needed regulatory relief for small banks, while others, including the one who used to blog here, see S. 2155 as a rollback of keys parts of Dodd-Frank for big banks that remain too big to fail.

    It is both. Indeed, if the bill were stripped of its title IV, I think most people could live with it. But title IV is a doozy.  

    Most notably, it raises the threshold for additional regulation under Dodd-Frank from $50 billion in assets to $250 billion. Banks with more than $50 billion in assets are not community banks.

    The banks in the zone of deregulation include State Street, SunTrust, Fifth Third, Citizens, and other banks of this ilk. In short, with the possible exception of State Street, this is not a deregulatory gift to "Wall Street," but rather to the next rung of banks, all of which experienced extreme troubles in 2008-2009, and all of which participated in TARP.

    My prime concern – given my area of study – is that these banks will no longer be required to prepare "living wills." That is, they will not have to work with regulators on resolution plans.

    How then do we expect to use Dodd-Frank's orderly liquidation authority if they fail? It would be impossible without advanced planning. Same for the misguided attempts at "chapter 14." I have real doubts about the wisdom of "bankruptcy for banks," but if it is ever to work, it will require lots of advanced planning (and luck).

    And we can't use the normal FDIC approach of finding another, bigger bank to take them over, because that would simply create another colossus, like Wells Fargo. Certainly we don't want that.

    Maybe a bailout then? Is that the "new" plan?