Beginning with Baird and Rasmussen’s End of Bankruptcy, and including papers by Westbrook, LoPucki, and yours truly, much recent corporate bankruptcy scholarship has focused on the frequent exercise of pervasive control by secured lenders in chapter 11 cases.

A key aspect of this new reality is the prevalence of sales of "substantially all" (corporate speak for "all") of the debtor’s assets under section 363, before formulation of a plan.  Lenders are willing to fund short cases leading to sales of the debtor as a going concern — not "old fashion" reorganization plans.  Sale of the debtor’s assets under section 363 importantly invokes § 363(f) of the Bankruptcy Code, which appears to allow the new buyer to acquire "clean" title to the debtor’s assets.

But along comes Judge Markell, writing for the 9th Circuit Bankruptcy Appellate Panel in Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), to throw cold water on this reliance on section 363(f).  Judge Markell summarizes his opinion as follows:

outside a plan of reorganization, does § 363(f) of the Bankruptcy Code permit a secured creditor to credit bid its debt and purchase estate property, taking title free and clear of valid, nonconsenting junior liens? We hold that it does not.

I discuss this conclusion — which many chapter 11 practitioners and scholars will find shocking — after the jump.

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Tomorrow I’m going to be busy at the law school’s graduation, so I think I’ll make this my last post.  I really appreciate the chance to post here at Credit Slips.  I’ll end with my musing about one of many puzzles I see in the Bankruptcy Code.

Courts and academics often proclaim, with little analysis,
that the Bankruptcy Code prohibits non-debtor termination of contracts. Specifically, because section 362(b) of the
Bankruptcy Code does not mention termination of contracts with the debtor,
several courts have held that non-debtor parties are precluded from
unilaterally terminating a contract or lease with the debtor, absent relief
from the automatic stay. Why this should
be so, especially in cases where the contract would be terminable outside of
bankruptcy, is unclear. Arguably the
automatic stay should not give the debtor greater contractual rights than it
enjoys outside of bankruptcy.

Instead, I argue that careful reading of sections 362 and
365 shows that the Bankruptcy Code simply ensures that the non-debtor party
will have to pay full breach damages if it terminates a contract solely because
of the debtor’s bankruptcy filing. In
most cases paying damages is an unattractive option, since the debtor will
likely incur substantial costs to cover. In short, the Code often effectively precludes termination by the
non-debtor party, by making it prohibitively expensive, but there may be
instances in which a party could advance sufficient “cause” to lift the
automatic stay for purposes of breaching a contract.

Am I wrong? What are
some other puzzles you see in the Code?

Some that I wonder about are: (a) where does it say in the Code
that administrative expenses come after secured claims (it was the other way around
in receiverships with regard to "six month" claims) and (b) where exactly does it say that a chapter 11 debtor
can’t pay prepetition debts in the ordinary course of business?

As some of you know, I spend a good deal of my time thinking
about professional fees in chapter
11. One thing that has always puzzled me
is the issue of "overhead." It is still
common to find courts stating that certain items (e.g., secretarial overtime,
attorney late night meals, word processing) are not recoverable in bankruptcy
because they constitute "overhead." A
variation on this same theme is those courts who announce that certain
categories of expenses are not compensable "in this district."

Assuming these items are passed on to the client outside of
chapter 11, the bankruptcy court that adopts this approach is essentially accusing
the professional of double charging its clients.

More to the point, I wonder how the bankruptcy court knows
that these items are overhead? Indeed,
the fact that some law firms have two hourly rate structures, one with separate
charges for expenses and one, higher hourly rate structure without these
charges, suggests that these items are not part of overhead. And since law firm billing systems can easily
assign these items to specific client and matter numbers, why assume they are
overhead? 

In short, is it time for bankruptcy judges (and the U.S.
Trustee) to drop the notion of "overhead"?

For a person interested in the history of
corporate bankruptcy, living in Northern New Jersey can be great fun, as
every day provides reminders of the great bankruptcy cases of the past,
particularly those involving the many railroads
that once converged here, all of which were in receiverships and/or section 77
proceedings at various points in time. The
sign pictured here is one I see every morning at the Newark’s Pennsylvania Station, even though
the last Penn
Central train departed several decades ago. I’m sure this has confused more than a few tourists over the past few
years!