Bankruptcy Court Research Articles

Bondholders vs. Retirees in Municipal Bankruptcies: The Political Economy of Chapter 9

Financially distressed U.S. municipalities may be eligible for federal bankruptcy protection under chapter 9 of the Bankruptcy Code. These municipal debtors tend to be burdened by the claims of two large classes of creditors: bondholders, on the one hand, and beneficiaries of underfunded retirement plans, on the other. In recent high-profile chapter 9 cases, U.S. Bankruptcy Courts have clarified the legal rights and entitlements of these two types of claimants, paving the way for insolvent cities to use bankruptcy to restructure both bond and pension obligations. Notwithstanding these judicial pronouncements, bankrupt cities have mostly declined to use chapter 9 to adjust their pension promises, instead advancing plans of adjustment that privilege pension claims over all others. This Article constructs detailed case studies to challenge the assumption that employee-centric principles of fairness and equity are driving case outcomes. Rather, the political economy of chapter 9 has enabled large and prominent pension administrators to exert more power and influence over restructurings. Meanwhile, it is not clear that these outcomes actually serve employees’ and retirees’ broader economic interests, as the prototypical municipal bankruptcy restructuring still exacts a heavy toll on past, present, and future city workers and taxpayers. Reforms are needed to both preserve the integrity of the municipal bankruptcy process and better safeguard the interests of employees and retirees.

M&G assets being sold off

Three producers of polyethylene terephthalate (PET) are buying up PET facilities owned by the bankrupt Italian company M&G Chemicals. A joint venture of the three firms—Indorama Ventures, Far Eastern New Century, and Alpek—has agreed to pay $1.125 billion to acquire an M&G plant under construction in Corpus Christi, Texas, that will produce PET and the raw material purified terephthalic acid (PTA). The facility will be the largest integrated PET-PTA plant in the world when it is complete, the partners say. They will each take one-third of its output. Separately, Indorama has agreed to buy M&G’s PET plant in Suape, Brazil, the country’s largest, for an undisclosed sum. Last month, Far Eastern won a bankruptcy court auction of M&G’s PET plant in Apple Grove, W.Va. M&G’s remaining PET plant is in Altamira, Mexico. A likely buyer is Alpek, which supplies the facility with PTA and recently helped arrange a loan to

Taiwanese polyester maker buys U.S. plant

Far Eastern New Century (FENC) is the winning bidder in a bankruptcy court auction of M&G Chemicals’ polyethylene terephthalate (PET) plant in Apple Grove, W.Va. M&G declared bankruptcy in October. The Taiwanese company will pay $33.5 million for the 360,000-metric-ton-per-year plant as well as a research center in Ohio. Thailand’s Indorama also bid on the assets. FENC calls itself one of the top five PET producers globally and a leader in Asia. It says the purchase will allow it to supply the U.S. without hitting trade barriers. U.S. producers recently launched an antidumping case against foreign PET makers.

Brief of Professors of Conflict of Laws As Amici Curiae in Support of Appellants, in Re. Irving H. Picard, Trustee for the Liquidation of Bernard L. Madoff Investment Securities LLC

This amicus brief was filed with the Second Circuit Court of Appeals in the Madoff bankruptcy case. The brief was written by Professor William S. Dodge and joined by Professors George A. Bermann, Hannah L. Buxbaum, Zachary D. Clopton, Anthony J. Colangelo, Maggie Gardner, Ralf Michaels, Aaron D. Simowitz, and Christopher A. Whytock. The question on appeal is the geographic scope of Bankruptcy Code § 550(a), which allows a trustee to recover the property of an avoided transfer not just from the initial transferee but also from “any immediate or mediate transferee of such initial transferee.” Many of the investments in Madoff Investment Securities were made through feeder funds. Some of these funds withdrew money in New York, which they subsequently distributed to their own customers. The Trustee seeks to recover payments made to the subsequent transferees. The bankruptcy court dismissed most of the Trustee’s claims against subsequent transferees based on the choice-of-law analysis adopted in Maxell Communications (which the court called “international comity”) and the presumption against extraterritoriality. The amicus brief argues that under the presumption against extraterritoriality, Section 550(a) applies to the subsequent transferees for two reasons. First, the property to which Section 550(a) refers includes property “wherever located,” providing an affirmative indication that Section 550(a) applies extraterritorially. Second, and in the alternative, the focus of Section 550(a) is the initial transfer that depleted the estate in the United States. The amicus brief also argues that application of Section 550(a) is reasonable under Maxwell Communications because the debtor is American, the initial transfer depleted the estate in the United States, and there are no parallel foreign proceedings.

What Drives Bankruptcy Forum Shopping? Evidence from Market Data

Over the past 30 years, the majority of large firms that filed for bankruptcy did so in the US bankruptcy courts of the Southern District of New York and Delaware. Some believe these experienced courts dominate because their expertise makes bankruptcy more predictable. Critics dispute this explanation, arguing instead that “predictability” is a cloak for the true, self-interested motivation of the debtor’s managers, lawyers, and senior creditors who influence the debtor’s choice of venue. In this paper, I look for evidence supporting the views of the proponents and detractors of bankruptcy forum shopping in a large sample of market data. My results suggest that the market is better at predicting the outcomes of bankruptcy cases in New York and Delaware, consistent with the hypothesis that the law there is more predictable. I do not find evidence supporting the view that those courts are biased in favor of senior creditors.

Rejection of Executory Contracts: A Comparative Economic Analysis

This article describes three models used around the world for the treatment of executory contracts in bankruptcy. An economic analysis is made of the ex post incentives of the bankruptcy trustee to reject the contract under each model, based on Jesse Fried's article Executory Contracts and Performance Decisions. This article states that the approach used by Spain is likely to create the most efficient ex post incentives. The contribution of this article is to further the discussion on the treatment of executory contracts in bankruptcy, as it continues to be one of the main day-to-day issues at bankruptcy courts.

Busy Bankruptcy Courts and the Cost of Credit

This paper estimates the effect of bankruptcy court caseload on access to credit by exploiting firms’ plausibly exogenous exposure to the largest recorded drop in court backlog in the United States following the 2005 consumer bankruptcy reform. I show that a drop in court congestion reduces the time firms spend in bankruptcy and increases recovery values, which is priced into credit spreads and loan maturities. Consistent with a shock to credit supply, less congested courts increase firm leverage but leave default risk unchanged. A back-of-the-envelope calculation suggests that backlog in bankruptcy courts costs corporate borrowers at least $740 million per year in interest payments.

Did the time frame associated with the implementation of the Patient Protection and Affordable Care Act noticeably impact consumer bankruptcy filings?

Purpose The purpose of this paper is to examine whether the timing associated with the implementation of the health insurance-related provisions of the Patient Protection and Affordable Care Act (ACA) altered the presence and distribution of medical/non-medical debts accumulated by different types of bankruptcy filers. Design/methodology/approach Data were drawn from the US Bankruptcy Court’s Eastern Washington District over the years 2009, 2011 and 2014 using interval random sampling. Binary probit and Tobit analyses were used to model the existence, and distribution, of medical debts and total debts, respectively, at the time of filing. The impact of the time frame associated with the ACA was operationalized via a Chow test for structural dynamic change. Findings Chapter 13 filers in 2014 (post-ACA-based health exchange implementation) were more likely to report medical debts than Chapter 7 filers in the pre-intervention period, and were also more likely to report a larger proportion of outstanding debts owed to a single creditor. Filers claiming health insurance premium expenses in 2011 were (at the 10 percent significance level) more likely to report a more skewed distribution of medical debts. Originality/value The time frame associated with the implementation of the ACA impacts the distribution of medical debts among filers who have sufficient net disposable income to fund a Chapter 13 plan. The polarization of outstanding medical debts may indicate coverage gaps in existing health insurance policies, whose costs would be disproportionately borne by patients operating on thin financial margins.

Voluntary Bankruptcy as Preemptive Persuasion

This paper examines the phenomenon of management-initiated, court-supervised reorganization of companies in U.S. bankruptcy court. The proposed in-court persuasion mechanism reconciles excessive reorganizations of non-viable companies (and subsequent repeat failures) with management-initiated filings and a judge who aims to always take appropriate action. In the model, management makes a preemptive voluntary filing to retain control of the process, and thereby engage in a game of Bayesian Persuasion with asymmetric information vis-a-vis the judge. This mechanism endogenously results in the reorganization of some non-viable companies, and exclusively management-initiated (i.e., voluntary) bankruptcy filings. This paper, therefore, explains why non-viable companies could be permitted to reorganize and why there are repeat offender firms that enter bankruptcy multiple times.

Bankruptcy and the Cost of Organized Labor: Evidence from Union Elections

Unionized workers are entitled to special treatment in bankruptcy court. This can be detrimental to other corporate stakeholders in default states, with unsecured creditors standing to lose the most. Using data on union elections covering several decades, we employ a regression discontinuity design to identify the effect of worker unionization on bondholders in bankruptcy states. Closely won union elections lead to significant bond value losses, especially when firms approach bankruptcy, have underfunded pension plans, and operate in non-RTW law states. Unionization is associated with longer, more convoluted, and costlier bankruptcy court proceedings. Unions further depress bondholders' recovery values as they are assigned seats on unsecured creditors' committees.

PERTANGGUNGJAWABAN PIDANA KURATOR BERDASARKAN PRINSIP INDEPENDENSI MENURUT HUKUM KEPAILITAN

This article aimed to criticize the juridical basis of scope of crime mentioned on Law Number 37 of 2004, focuses on criminal responsibility of a curator based on independence principle of bankruptcy law. Essentially, bankruptcy is a part of civil law. However, some bankruptcy cases eventually evolve into criminal matters when a bankruptcy curator who is responsible in handling and administering bankruptcy case is positioned as defendant charged for conducting criminal acts. As stated on Article 234 Verse 2 of Law Number 37 of 2004, a curator who is proven not independent during bankruptcy court may be charged with criminal law. Criminal sanctions for non-independent curators aimed at preventing the curator from committing criminal acts in the course of the execution of the duty and maintenance tasks. Here, the role of criminal law is as a guardian of the norms that exist in the Law on Bankruptcy related to the duties and responsibilities of the curator. In order for a curator or committee before declaring his willingness to accept the duties and responsibilities of the consequences of the bankruptcy verdict or the postponement of the debt obligation obligation (PKPU) really ensure that he will not commit a disgraceful act of.

Get in Line: Chapter 11 Restructuring in Crowded Bankruptcy Courts

Bankruptcy costs depend not only on the laws that govern financial distress but also on the ability of the court to rehabilitate distressed firms. This paper tests whether Chapter 11 restructuring outcomes are affected by time constraints in busy bankruptcy courts. Using the passage of the Bankruptcy Abuse Prevention and Consumer Protection Act as an exogenous shock to caseloads, I find that commercial banks report lower charge-offs on business lending when court caseloads decline, suggesting that the costs of financial distress are lower in less-congested courts. Further, court caseload affects how restructuring takes place. Less-busy bankruptcy judges liquidate fewer small firms, but more large firms. When caseload declines, large firms spend less time in court and firms that are dismissed from court are less likely to refile for bankruptcy. In addition, firms are less likely to sell assets or obtain debtor-in-possession financing in less-busy courts. The online appendix is available at https://doi.org/10.1287/mnsc.2017.2808 . This paper was accepted by Amit Seru, finance.

Distress-Triggered Liabilities and the Agency Costs of Debt

This chapter discusses distress-triggered liabilities: contingent obligations of a corporate debtor that are likely to be triggered by the debtor’s own financial distress. Three common examples of such liabilities are loan default penalties, loan prepayment fees such as make-whole premiums, and intragroup guarantees. Because the risk that a distress-triggered liability will become payable correlates positively with the debtor’s insolvency risk, the incurring of the liability shifts expected losses onto the debtor’s general creditors. The result is an incentive-distorting value transfer from creditors to shareholders that generates the agency costs of debt. Bankruptcy courts could prevent these costs by subordinating distress-triggered claims to general creditor claims. Subordination would preserve the positive economic functions of distress-triggered claims, which in most instances require only that the claims be enforceable to the extent the debtor is solvent. A subordination rule would be consistent with both the purpose and the text of the Bankruptcy Code.

AN ANATOMY OF U.S. PERSONAL BANKRUPTCY UNDER CHAPTER 13

We build a structural model of Chapter 13 bankruptcy that captures salient features of personal bankruptcy under Chapter 13. We estimate our model using a novel data set we construct from bankruptcy court dockets recorded in Delaware between 2001 and 2002. Our estimation results highlight the importance of debtor’s choice of repayment plan length on Chapter 13 outcomes under the restrictions imposed by the bankruptcy law. We use the estimated model to conduct policy experiments to evaluate the impact of more stringent provisions of Chapter 13 that impose additional restrictions on the length of repayment plans. We …nd that these provisions would not

Australia's Bankrupt Chinese Furniture Manufacturers, 1880–1930

The proprietors of almost 100 Chinese furniture factories in Australia went bankrupt during the late nineteenth and early twentieth centuries. With a substantial stake in furniture production for decades following the gold rushes of the 1850s and 1860s, Chinese furniture factory operators were vilified and legislated against in a push for ‘White‐Australian’ industrial advancement. Historians have consistently concentrated on such campaigns when explaining Chinese‐Australian business failures of this period. Yet informed principally by their bankruptcy court testimony, this paper contends that Chinese furniture manufacturers went bankrupt largely because of economic difficulties and, thus, failures are not sufficiently explained by ‘White Australia’.

Restructuring of Insolvent Corporations in Canada

This paper gives a very general outline of the formal restructuring of insolvent corporations in Canada. For a South African audience, it is important to understand that in Canada a distinction is made between an "insolvent person" and a "bankrupt". A "bankrupt" means a person who has made an assignment into bankruptcy (voluntarily), or against whom a bankruptcy order has been made. An "insolvent person" means a person who is not bankrupt and who resides, carries on business or has property in Canada, whose liabilities to creditors amount to $1 000, and who is for any reason unable to meet his obligations as they generally become due, or who has ceased to pay his current obligations in the ordinary course of business as they generally become due, or the aggregate of whose property is not, at a fair valuation, sufficient, or, if disposed of at a fairly conducted sale under legal process would not be sufficient to enable payment of all his obligations, due and accruing due. An "insolvent person" in Canada may avoid bankruptcy by resorting to restructuring processes created by statute. The fact that a person becomes insolvent does not necessarily spell bankruptcy. Canadians are fortunate to have access to bankruptcy courts and insolvency practitioners with a high level of commercial and legal skills to assist them in restructuring their financial affairs and avoiding bankruptcy.

Restructuring sovereign debt after NML v Argentina

... Although it is relatively easy for a lender to get a court judgment against a defaulting sovereign (this is a sovereign’s great vulnerability in comparison with a corporate debtor eligible for the protection of the bankruptcy court), it is often difficult for the creditor to enforce that judgment in light of the paucity of attachable assets outside of the sovereign debtor’s own jurisdiction (this is a sovereign’s great strength). A recognition of this state of affairs gives both sides an incentive to negotiate, rather than litigate, their way out of a sovereign debt problem. NML v Argentina1 upset this strategic balance. For the first time, holdout creditors in a sovereign debt workout were given a new judicial remedy—an injunction preventing the borrower from making payments to its other equally-ranking creditors without making a ‘ratable’ payment to the holdouts.2 The legal theory that purported to support the issuance of such an injunction focused on the pari passu clause in the bonds held by the holdout creditors. That provision, a boilerplate clause in cross-border debt instruments of both sovereign and corporate borrowers, promises to maintain the equal ranking of the obligation with the debtor’s other senior external indebtedness. The US federal courts sitting in New York interpreted such a promise by Argentina to maintain the equal ranking of its external debt instruments as justifying an injunction ordering Argentina to pay those instruments ratably with other debt.

The New Bond Workouts

Bond workouts are a famously dysfunctional method of debt restructuring, ridden with opportunistic and coercive behavior by bondholders and bond issuers. Yet since 2008 bond workouts have quietly started to work. A cognizable portion of the restructuring market has shifted from bankruptcy court to out-of-court workouts by way of exchange offers made only to large institutional investors. The new workouts feature a battery of strong-arm tactics by bond issuers, and aggrieved bondholders have complained in court. The result has been a new, broad reading of the primary law governing workouts, section 316(b) of the Trust Indenture Act of 1939 (“TIA”), which prohibits majority-vote amendments of bond payment terms and forces bond issuers seeking to restructure to resort to exchange offers. This Article exploits the bond market’s reaction to the shift in law to reassess a long-standing debate in corporate finance regarding the desirability of TIA section 316(b). Section 316(b) has attracted intense criticism, with calls for its amendment or repeal because of its untoward effects on the workout process and tendency to push restructuring into the costly bankruptcy process. Yet section 316(b) has also been staunchly defended on the ground that mom-and-pop bondholders need protection sharp-elbowed issuer tactics. We draw on a pair of original, hand-collected data sets to show that many of the empirical assumptions made in the debate no longer hold true. We show that markets have learned to live with section 316(b)’s limitations, denuding the case for repeal of any urgency. Workouts generally succeed, so that there is no serious transaction cost problem stemming from the TIA; when a company goes straight into bankruptcy there tend to be independent motivations. We also show that workout by majority amendment will not systematically disadvantage bondholders. Indeed, the recent turn to secured creditor control of bankruptcy proceedings makes them all the more attractive to unsecured bondholders. Based on this empirical background, we cautiously argue for the repeal section 316(b). Section 316(b) no longer does much work, even as it prevents bondholders and bond issuers from realizing their preferences regarding modes of restructuring and voting rules. We do not know what contracting equilibrium would obtain following repeal, but think that the matter is best left to the market. Still, we recognize that markets are imperfect and that a free-contracting regime may result in abuses. Accordingly, we argue that repeal of section 316(b) should be accompanied by the resuscitation of the long forgotten doctrine of intercreditor good faith duties, which presents a more fact-sensitive and targeted tool for policing overreaching in bond workouts than the broad reading of section 316(b).

Higher Ed Do Not Resuscitatee Orders

Congress has effectively precluded all institutions of higher education from reorganizing in the bankruptcy courts because it was concerned about exploitative profiteers opening fly-by-night colleges, defrauding students, and then finding refuge there. This choice harms students, employees, creditors and communities. As such, this Article advocates that Congress should reverse its decision and allow colleges to reorganize in bankruptcy. To support this argument, this Article contrasts the bankruptcy treatment of healthcare enterprises to that of higher education enterprises. In doing so, this Article builds on my own prior work and contributes to the literature on higher education bankruptcies.

Horizon Lines, Inc.

It is recommended that this case be taught either just before or just after another Chapter 11 case. Students must to decide whether Horizon Lines should seek Chapter 11 protection or attempt a voluntary financial restructuring. Students have a wide range of financial restructuring alternatives to consider that should give them an appreciation of the advantages and disadvantages faced by a firm choosing to use the bankruptcy court. The case also is best taught to experienced students who understand corporate finance fundamentals and, in particular, grasp the principes of valuation and capital structure.