Category: Corporate Bankruptcy

  • A Uniform Law Project of Note: Special Deposits Act

    Posted by

    Melissa Jacoby

    Last week, bolstered by a continuing legal education program offered by the American Law Institute, I started studying a new uniform law that will be recommended to your state legislature in the coming days and months. It is called the Special Deposits Act. As of today it has not yet been enacted by a state legislature. But trust me when I predict that you want to study it too – especially because the choice of law rules will work differently for this uniform law than for, say, the digital assets amendments to the Uniform Commercial Code. In other words, if one of the green states in the map below adopts the law, parties can contract for that state to govern the special deposit as well as to be the forum for disputes, even if there's no other relationship with that state.

     

    Special deposit act

     

     

     

     

     

     

     

     

     

    A special deposit is payable on the occurrence of a contingency and the identity of the party entitled to the funds is uncertain until the contingency happens. Right now, the law governing special deposits is nonuniform and the details can be uncertain, including the rights of creditors against those funds. One big impact of this uniform Special Deposits Act is this: in broadest terms, if a bank and depositor agree that a deposit account is a special deposit, and it meets the requirements for permissible purpose under the law, this law says that the funds in that account are not property of the depositor, including if the depositor files for bankruptcy, and cannot be reached by the depositors' creditors. (Fraudulent transfer law still applies and the drafters say there are other anti-fraud measures in place). The bankruptcy world may be interested in this law for an additional reason: possible use of special deposits in a bankruptcy case to pay professionals, or for large numbers of claimants, etc.

    I also find this law interesting because of its implications for loans secured by deposit accounts under Article 9 of the Uniform Commercial Code. Even if a bank has a security interest in all deposit accounts of a debtor held by a bank, and is automatically perfected by control, the bank's enforcement rights are far more limited against the special deposit than against a typical bank account. In general, the bank cannot exercise rights of setoff or recoupment against a special deposit.

    Again, as of today no state has enacted the Special Deposits Act. But given how the law is drafted, it will take just one state to adopt it, and for lawyers to encourage banks and depositors to opt in to that state's law, to have a much broader effect. Check out the materials here.

  • Rapoport on Judicial and Legal Ethics

    Posted by

    Melissa Jacoby

    Just wanted to make sure Credit Slips readers are aware of Professor Nancy Rapoport's new paper forthcoming in the Emory Bankruptcy Developments Jounrnal, accessible here. The abstract:

    In late 2023, news stories picked up stories about a lawsuit alleging that Bankruptcy Judge David Jones of the United States Bankruptcy Court for the Southern District of Texas had been hearing cases in which his live-in romantic partner was appearing as counsel. The Fifth Circuit began disciplinary proceedings, and Judge Jones resigned from the bench. The scandal has affected more than just these two people: it implicates law firms, and potentially implicates other lawyers or judges who might have known more than they were saying. This article explores who had a duty to disclose this particular “connection,” and under what authority.

    Again, paper available here:

  • What’s 43 Years Among Friends?

    Posted by

    Adam Levitin

    One of my recent blog posts took issue with the historical claims in a Supreme Court amicus brief filed by several eminent law professors in the Purdue Pharma appeal. One of the professors, Tony Casey at University of Chicago Law School, fired back with a comment, and I responded at length in the comments section, but I think the exchange is worth elevating to a stand-alone blog post. 

    To recap, the good amici jumped all over my claim that the Framers could not have conceived of nonconsensual nondebtor releases as being within the scope of the Bankruptcy Power. To this end, they cited a couple of English cases from 1618-1620. My original post pointed out that these were not contemporaneously reported decisions; they remained unknown until 1932 when a modern scholar "reported" the cases from his own reassembly of various Chancery documents. Moreover, the decisions were not even bankruptcy decisions, but compositions, not operating under any bankruptcy statute. 

    Professor Casey responded:  

    I really don't understand the argument here. First, how can you say releases were "incomprehensible" to the framers given that Lord Bacon was granting them? Even if the opinion is unreported, I just can't see the leap to arguing that no one designing a judicial system could have thought of or comprehended this thing that the Lord Chancellor had done multiple times. Second, the point about these not being "bankruptcy" cases is semantic. These were part of compositions that look just like Chapter 11 cases today. Third, even if you are right about everything else, our main point was about your 1986 claim. You write this [in your blog post], "because there was no reported decision of these cases until 1932, they do not undercut the fact that Anglo-American bankruptcy law had no notion of nonconsenusal nondebtor releases in until 1986." How do you get from 1932 to 1986? Finally, we point out other historical pedigree including cases from the 1940s.

    Okay. Let's try this again.

     

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  • Let’s End Bankruptcy Judge Shopping

    Posted by

    Bob Lawless

    Credit Slips bloggers Adam Levitin, Stephen Lubben, and I joined eight other academics in putting our names to a letter calling for the Southern District of Texas to end its practice of having a "complex chapter 11" panel composed of two bankruptcy judges. This procedure ensures that large corporate debtors filing chapter 11 know their cases will be heard by one of these two judges rather than being randomly assigned among the judges on the court. Congress has authorized up to six bankruptcy judges for the Southern District of Texas. Although I do not speak for Levitin and Lubben, I wanted to elaborate on my reasons for signing the letter.

    Corporate bankruptcy venue abuse remains overdue for reform as explained by Credit Slips bloggers just a few times both on and off the blog. For some examples, see here, here, here, here, here, and here. The problem with the complex chapter 11 panel is even worse because it creates the appearance of being able to pick your own judge. Whatever benefits there are from having a specialized panel for large cases, and I am sure there are some, they are not worth the corrosive effect on public confidence in an impartial system of justice. Because the bankruptcy court created the complex chapter 11 panel as a local administrative procedure, the same court could end it with a stroke of a pen.

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  • What’s 300 Years Among Friends?

    Posted by

    Adam Levitin

    It often doesn't end well when law professors play at being legal historians. The Purdue Pharma Supreme Court appeal is a case in point. 

    A group of prominent bankruptcy law professors filed an amicus brief in support of the appellee, Purdue Pharma. Their brief takes direct aim at my amicus brief in support of the appellant, the United States Trustee. Specifically, the good professors challenge my claim that nonconsensual nondebtor releases were entirely unknown in Anglo-American law until the Johns Manville case in 1986. They write: 

    One amicus has argued that releases would have been “incomprehensible to the Framers” and “were entirely unknown in American bankruptcy” prior to 1986. Adam J. Levitin Amicus Br. 4-5. This is a puzzling claim that misses the mark by at least 367 years.

    Third-party releases have been known and comprehended in bankruptcy law as means to achieve global resolution since at least 1619, when the Lord Chancellor used his injunctive powers to release third-party sureties from the non-debtor claims in exchange for compelled contributions to a bankruptcy composition. See Tiffin v. Hart (1618-19), in John Ritchie, Reports of Cases Decided by Francis Bacon 161 (London 1932). Similar to the releases at issue in the present, the injunction in Tiffin was directed at dissenting creditors to facilitate a resolution that had been approved by the majority. Ibid.; see also Finch v. Hicks (1620), in Ritchie, Reports, at 166-167 (enjoining creditors from pursuing actions at common law against non-debtor sureties of an insolvent individual).

    So, according to Purdue's amici, I'm wrong on the history because I failed to account for a 1619 case. But there's a HUGE problem with their argument…

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  • Rite Aid Pulls a Purdue Pharma to (Sorta) Pick Its Judge

    Posted by

    Adam Levitin

    Last night I did a post about the Rite Aid bankruptcy. I assumed that the first affiliate to file was Lakehurst and Benson Corp. because that case had the lowest number of any case up on the public docket. But it seems that not all petitions had been posted to the public docket at that time, and instead the first to file was Rite Aid of New Jersey, Inc. (RANJ), which turns out to be a more interesting story than Lakehurst's petition.

    Like Lakehurst, RANJ is a New Jersey corporation that is listed in NJ corporate records (both incorporation and UCC filings) as being based in Pennsylvania. So New Jersey venue is appropriate under the venue statute. But on its petition, RANJ, unlike Lakehurst, lists a principal place of business in New Jersey, specifically, "820 Beaverton Road, West Trenton, New Jersey 08628." That would seem to trigger the New Jersey local bankruptcy rules to have the case automatically assigned to one of the two judges in the Trenton vicinage.

    But what happens when you plug that address into Google?  You get… nothing. Google does not know of a Beaverton Road anywhere in New Jersey.  Hmmm.

    Google, however, in its artificial intelligence, does know of an "820 Bear Tavern Road, Ewing, New Jersey 08628." A look on the map indicates that Ewing is right next to West Trenton (and the post office doesn't actually care about the name of the town, just the ZIP…)

    Bear Tavern Road

    So it looks as if some Kirkland associate (do we really think Cole Schotz did the drafting?) had a bit of fauna mix up: "Beaverton" is actually "Bear Tavern".  If that's the case, what is actually at 820 Bear Tavern Road?  Well, it's the address of the Corporate Trust Company, a business that serves as the registered agent for other businesses.

    You might be thinking at this point that Rite Aid is starting to look a lot like Purdue Pharma, where the White Plains venue was based on the address of the registered agent, not the actual business. (At least Rite Aid had the decency not to change registered agents in order to get a favorable address…)

    Last time I checked, a registered agent is just an agent for service of process and the like. It is not a principal place of business, which is what matters for bankruptcy law: by definition the agent isn't the principal. In fact, RANJ has represented to the State of New Jersey that its principal business address is "30 Hunter Lane, Camp Hill, PA17001." And RANJ has made the same representation to the State of New York.

    Now let's be clear: Rite Aid of New Jersey, Inc. is a New Jersey corporation, which means a New Jersey venue is technically proper, but the case should not have automatically been assigned to a Trenton judge under the NJ local rules, as there isn't any real claim for a Trenton vicinage. (It isn't clear how cases are assigned within a vicinage.) In any event, RANJ should have listed its actual Pennsylvania business address on its petition. If it had done so, it would not have had a 1 in 2 chance at getting Judge Kaplan, but would have had a 7 in 8 chance that the case would be assigned to another judge. And Kirkland no doubt knew what it was doing–someone made a deliberate decision to (mis)list the address of the registered agent as the principal place of business.

    In short, this looks like yet another case of judge-picking. I recognize that parties are very hesitant to raise judge-picking before the picked judge, as it implies that at least the debtor thinks that the judge is not impartial. Nevertheless, I hope that there will be some probing questions about the judge-picking.

  • What’s Rite Aid Doing in Trenton?

    Posted by

    Adam Levitin

    The big news this past week in bankruptcy was the resignation of Judge David R. Jones of the Southern District of Texas bankruptcy court after his romantic involvement with an attorney at Jackson Walker, who represented Chapter 11 debtors before him was revealed. That story is still unfolding (to be seen if there is bar discipline or even criminal charges), but let's not beat around the bush:  the real story is venue.

    Specifically, the Jones scandal appears to go straight to the heart of Houston's meteoric rise as the premier Chapter 11 filing destination: Kirkland and Ellis would file large cases, sometimes with no obvious venue hook, in SDTX, where the cases would end up before one of two judges on a complex case panel:  Judge Jones or Judge Marvin Isgur, who was Jones's former law partner. In other words, file in Houston and you've got a 50% chance of getting Judge Jones, and even if you get Judge Isgur, the two judges worked very closely, mediating each others cases, for example.

    Now that's all normal exploitation of the rules, but where a lot of questions emerge is from Kirkland having Jackson Walker as co-counsel. That's something Kirkland only did in Houston, meaning that Jackson Walker was really more like local counsel. It's quite strange as local counsel is not required under SDTX rules and, in any case, Kirkland has its own Houston office with restructuring partners. Other large firms filing cases in Houston have not had on local counsel. This story probably isn't over yet.

    Now, having left a hot mess behind in Houston, now Kirkland is moving on…to Trenton, New Jersey, where once again there seems to be some venue funny business with Rite Aid

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  • Judges as Mediators

    Posted by

    Melissa Jacoby

    With rising interest in the topic of judges as mediators, I am recirculatating the article published last year on this topic. The article reviews prominent accountability measures for judges and how these systems may not operate effectively when judges serve as mediators, especially when lawyers and parties have strong disincentives to object as needed. Given the objective of maintaining the legitimacy of the court system to the public, the appearance of impropriety is a major basis of concern throughout judicial ethics, whether or not there is evidence of actual inpropriety. Again, here is the article. 

  • Nondebtor Releases and the Future of Mass Torts

    Posted by

    Adam Levitin

    Certain members of the bankruptcy academy and bar seem to have their knickers in a twist over the Supreme Court’s grant of certiorari to review the nonconsensual nondebtor releases in Purdue. Conventional wisdom is that SCOTUS is going to find that there’s no statutory authority whatsoever for nonconsensual nondebtor releases outside of the asbestos context (expressio unius and Congress doesn’t hide elephants in mouseholes….).

    Let’s be clear: nonconsensual nondebtor releases are not necessary to resolve mass tort cases.

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  • Treasury in the Red… with Yellow

    Posted by

    Adam Levitin

    Freight company Yellow is on the verge of bankruptcy. It's not a company whose financial distress would normally stand out but for the fact that it received $700M in national security loans from the US Treasury in 2020, and, oh man, are taxpayers going to take it on the chin. 

    The Treasury financing was one of a eleven of national security loans made as part of the CARES Act, and it accounted for 95% of the total dollar amount of those loans.  These weren't PPP loans, but were supposed to play a sort of analogous role, ensuring that companies critical to national security would be able to keep operating. There are really two loans from Treasury to Yellow:  a Tranche A loans and a Trache B loan. 

    The Tranche A loan is for $300M and is secured by a junior lien on Yellow's accounts receivable, cash, and various other squishy stuff. Tranche B is for $400M and is secured by the vehicle fleet it financed—something like 1,100 tractors, 1,600 trailers, and 140 containers.  Both loans are cross-collateralized with each other, meaning that the collateral for Tranche A supports Tranche B and vice-versa. The Tranche A and Tranche B loans sit behind approximately $1B of pre-existing debt in the form of (1) a revolver that's secured by the accounts receivable and cash and (2) a term loan (Apollo) secured by Yellow's terminals and rolling stock (other than those financed by Tranche B). Treasury also took an approximately 30% equity stake in Yellow.

    There's no way to sugar coat this:  Treasury's screwed on the Yellow loans.

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