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Chapter 11 Reform Analysis: The Absolute Priority Rule Problem for Small Business Debtors

 

 

 
 

April 14, 2015

 
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  NEWS AND ANALYSIS

CHAPTER 11 REFORM ANALYSIS: THE ABSOLUTE PRIORITY RULE PROBLEM FOR SMALL BUSINESS DEBTORS

by Prof. Anne Lawton
ABI Resident Scholar

In this article, the third in a series outlining the Commission's recommendations for SMEs, I discuss the Commission's proposals for amending the Code's current rules in cases involving unsecured creditor cramdown. Small business owners seeking to reorganize their businesses want to retain their pre-petition ownership interests as they have a personal stake in seeing the business succeed. Chapter 11's absolute priority rule, however, raises the prospect that small business owners may be unable to keep their ownership stake in the reorganized business. If a class of unsecured creditors rejects the plan and the firm cannot afford to pay those creditors' allowed claims in full (with interest if paid out over time) or satisfy the jurisdiction’s new value exception, then the debtor's reorganization fails. In order to address this problem, the Commission recommends two significant amendments to the Code's rules on unsecured creditor cramdown. First, it proposes codifying the new value corollary, a recommendation applicable to SME and non-SME debtors alike. Second, for SME debtors without sufficient financial resources to use the new value corollary, the Commission recommends allowing SME debtors to confirm a plan, notwithstanding the absolute priority rule, if they pay the face amount of their unsecured creditors' claims within four years of the plan’s effective date. Click here to read the full analysis.

Make sure to attend ABI's 33rd Annual Meeting, starting Thursday, to hear panels of experts discuss the Final Report of the ABI Commission to Study the Reform of Chapter 11. To register, please click here.

NEW YORK FED CHIEF: DETROIT, STOCKTON BANKRUPTCIES MAY FLAG WIDER PROBLEMS

New York Fed President William Dudley said today that the municipal bankruptcies of Detroit and Stockton, Calif., may foretell more widespread municipal problems in the U.S. than is implied by current bond ratings, Reuters reported today. "We need to focus our attention today on addressing the underlying issues before any problems grow to the point where bankruptcy becomes the only viable option," Dudley said. He did not mention by name any municipalities or states that risked going the way of Detroit and Stockton, but Dudley highlighted the difficulties some jurisdictions face when they issue debt to finance operating deficits, and when they underfund public pensions. In Chicago, for example, unfunded pension liabilities for the city, the board of education and other local governments that draw taxes from it exceed $35 billion, according to the Civic Federation, an independent fiscal watchdog. The city, which received a warning last week from ratings agency Standard & Poor's, has $8.3 billion in general obligation bond debt and frequently uses debt to close its budget shortfalls. Puerto Rico, meanwhile, is struggling with more than $70 billion in total debt and must overcome opposition from local lawmakers, as well as demands from investors for extra security, as it attempts to sell more debt. Dudley said borrowing to pay off a current-year operating deficit is inconsistent with running a balanced budget, leaves the municipality with no new asset, and is "equivalent to asking future taxpayers to help finance today's public services." Read more.

To hear the latest on chapter 9 trends and "at-risk" municipalities, be sure to attend sessions focused on chapter 9 at ABI's Annual Spring Meeting, including a Great Debate on chapter 9, panel session and keynote forum with Bankruptcy Judge Steven Rhodes on the lessons learned from Detroit.

For further analysis on municipal bankruptcies, be sure to pick up a copy of Municipalities in Peril: The ABI Guide to Chapter 9 Second Edition available in the ABI Bookstore.

ANALYSIS: HOW CASINOS FAILED ATLANTIC CITY AND WHY THEY'RE STILL PART OF ITS FUTURE

In the past 18 months, four casinos -- Revel AC, Trump Plaza Hotel and Casino, the Atlantic Club Casino Hotel and Showboat Atlantic City -- have closed their doors, costing 8,000 workers their jobs, according to an analysis yesterday from The Deal. The fading fortunes of Atlantic City's gaming industry have taken a toll on the municipality's fiscal situation. An emergency manager has been tapped to look into the city's dire finances. Three of the four recently shuttered casinos have gone through bankruptcy. Wayne Weitz, managing director at restructuring firm Gavin/Solomonese, pointed out that part of the problem for Atlantic City is the proliferation of other casinos in the Northeast. For many in the Northeast, "you're not going to A.C. for the casino; you can get the casino elsewhere," according to Weitz. Nonetheless, developers haven't given up on the city as new projects promise to make the town an attractive destination for a wider population. The state and local governments are considering regulatory and financial reforms that should make the city more business-friendly. For now, while policymakers and investors try to revive the business, the workers whose jobs depend on the casinos, and those 1.5 million New Jersey residents who bet on the industry, can only watch and hope. Read more.

STUDY: MORE THAN 15 PERCENT OF NFL PLAYERS GO BANKRUPT WITHIN 12 YEARS OF RETIRING

A recent study found that players who make it through six years in the NFL earn more than a typical college graduate does in a lifetime, but they go bankrupt more often, and more quickly, once they retire, according to QZ.com yesterday. Researchers from the California Institute of Technology, the University of Washington and George Washington University took a look at all NFL players drafted from 1996 to 2003, from their entry to the league up to their first 12 years after retirement, to find out more about when those bankruptcies occur. Active players almost never declare bankruptcy, according to the study, but quite a few are bankrupt just two years after retirement. Even the most conservative estimate, according to the study, predicts that about 15 percent of all NFL players will have declared bankruptcy within 25 years after retiring. Read more.

For more on sports player/celebrity bankruptcies, be sure to read this article from the ABI Journal.

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NEW CASE SUMMARY ON VOLO: MASTAN V. SALAMON (IN RE SALAMON; 9TH CIR.)

Summarized by Joel Newell of Lane & Nach, P.C.

The Ninth Circuit BAP affirmed the bankruptcy court's order disallowing the amended proof of claim filed by chapter 7 trustee Peter Mastan. A condition precedent to a creditor's enjoyment of the status set forth in 11 U.S.C. Sect. 1111(b) is that the creditor must hold "a claim secured by a lien on property of the estate."

There are nearly 1,700 appellate opinions summarized on Volo, and summaries typically appear within 24 hours of the ruling. Click here regularly to view the latest case summaries on ABI's Volo website.

NEW ON ABI'S BANKRUPTCY BLOG EXCHANGE: WHY MARKETPLACE LENDERS MAY SNUFF OUT CREDIT CARDS

Marketplace lenders are aggressively marketing their loans as a way to refinance expensive credit card debt, according to a recent blog post. And with more affordable interest rates and faster loan application processes, there's reason to believe that firms like Lending Club and SoFi will beat out banks.

To read more on this blog and all others on the ABI Blog Exchange, please click here.

INSOL INTERNATIONAL

INSOL International is a worldwide federation of national associations for accountants and lawyers who specialize in turnaround and insolvency. There are currently 43 member associations worldwide with more than 9,000 professionals participating as members of INSOL International. As a member association of INSOL, ABI's members receive a discounted subscription rate. See ABI's enrollment page for details.

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  CALENDAR OF EVENTS
 

2015

April
- Annual Spring Meeting
April 16-19, 2015 | Washington, D.C.

May
- Credit and Bankruptcy Symposium
May 7-8, 2015 | Uncasville, Conn.
- New York City Bankruptcy Conference
May 14, 2015 | New York, N.Y.
- Forty-Hour Bankruptcy Mediation Training
May 17-21, 2015 | New York, N.Y.
- Litigation Skills Symposium
May 19-22, 2015 | Chicago, Ill.

June
- Memphis Consumer Bankruptcy Conference
June 5, 2015 | Memphis, Tenn.

 

 

- Central States Bankruptcy Workshop
June 11-14, 2015 | Traverse City, Mich.
- Cross-Border Insolvency Program
June 18, 2015 | New York

July
- Northeast Bankruptcy Conference
July 9-12, 2015 | North Falmouth, Mass.
- Northeast Consumer Bankruptcy Forum
July 9-11, 2015 | North Falmouth, Mass.
- Beijing Insolvency & Restructuring Symposium
July 13-14, 2015 | Beijing, China
- Southeast Bankruptcy Workshop
July 23-26, 2015 | Amelia Island, Fla.

August
- Mid-Atlantic Bankruptcy Workshop
Aug. 6-8, 2015 | Hershey, Pa.

 

 
 
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