Commentary Judges Ruling in Momentive Performance Bankruptcy Could Affect Bondholders in Corporate Cases

ABI Bankruptcy Brief | September 2, 2014

September 2, 2014

NEWS AND ANALYSIS

COMMENTARY: JUDGE'S RULING IN MOMENTIVE PERFORMANCE BANKRUPTCY COULD AFFECT BONDHOLDERS IN CORPORATE CASES

Bankruptcy Judge Robert D. Drain's ruling last week in a closely watched corporate case seems to have made the distressed debt market a bit unhinged, according to a commentary by Prof. Stephen Lubben in Friday's New York Times. Judge Drain issued a ruling on the bankruptcy exit plan of Momentive Performance Materials, a specialty chemicals manufacturer owned by the private equity firm Apollo Global Management. Until a few years ago, Lubben said, unsecured bondholders were often converted to equity, and there really was not much point in arguing over whether they should get the "make whole" payment too, because they were getting the equity no matter what. The trick is that in the present case — as with many recent chapter 11 cases — the fight is among differing layers of secured creditors. The rules for secured creditors are somewhat different. If the bankruptcy reorganization plan in the Momentive case had been accepted, the senior creditors would have received cash. Because they objected, and the second lien creditors were getting the new equity, the bankruptcy code's cramdown rules were invoked. In the case of a secured creditor, these rules essentially provide that the objecting creditor must be paid in full. The question then was whether the "make whole" payment was part of getting paid in full. The court said "no," which is what has the distressed debt world in such a dither. The judge's basic argument was that a bankruptcy default was not the same thing as an early payment. Judge Drain left open the possibility that a future agreement might provide for a "make whole" payment as part of a bankruptcy claim, but he wanted to see that expressly set forth in the contract. Read the full commentary.

Looking for further analysis on "make-whole" issues in bankruptcy? Don't miss top experts providing their views on the latest abiLIVE webinar "Understanding Make-Whole and No-Call Provisions: Key Takeaways from Recent Decisions." Click here to register.

ANALYSIS: ARE CONSUMERS READY TO SPEND AGAIN?

Summer brought companies some hopeful signs of economic recovery, but that will be put to the test this fall, the Wall Street Journal reported today. Are consumers — the engine behind more than two-thirds of the American economy — ready to resume spending at significant levels? After years of lackluster growth, corporate revenues for large companies grew more rapidly in the second quarter, and company guidance suggests that trend will continue in the second half of the year. The Conference Board said consumer confidence picked up in August. Still, the retail industry, tied more closely to consumer spending than any other, is struggling. In August, the Commerce Department said U.S. retail spending was flat in July, and household spending declined by 0.1 percent in July, the first drop in personal spending since January. Consumer spending overall also is roughly matching income growth, with consumer confidence at pre-recession levels and debt payments at record lows, said Mark Zandi, chief economist for Moody's Analytics. "As long as the job market continues to improve, and it is, then I think consumers will continue to ramp up their spending consistent with that," or possibly higher if they decide it is safe to borrow more, Zandi says. Read more. (Subscription required.)

COMMENTARY: FINANCIAL REFORMS WILL MAKE THE NEXT CRISIS EVEN MESSIER

To protect taxpayers from picking up the bill for the failure of a systemically important financial institution, central banks and finance ministries are pressing a better capitalized bank to absorb the ailing business through an arranged merger, according to a commentary in yesterday's Financial Times. Unlike a bailout, "bailing in" creditors will inflict losses on other institutions. Indeed, it is becoming clear that this tool of crisis management can no longer be put to use, according to the commentary, raising questions about the authorities' ability to stabilize the financial system in a crisis. The commentary points to Bank of America's $16.7 billion payment last month to resolve allegations that it misled investors in its mortgage-backed securities. The allegations arose not from BofA's activities but from those of Merrill Lynch and Countrywide, which it acquired in 2008. Of course, if the rules of the game had been set by the Federal Reserve and the U.S. Treasury these pre-merger transgressions might not have been punished, which would have raised a different set of questions about justice, or the lack of it. But because the Department of Justice, the Securities and Exchange Commission and six state attorneys-general had an opportunity, the rules conformed to a different logic. The message for the financial community — as with the punishment of JPMorgan Chase for the misbehavior of Washington Mutual before it was absorbed by the bigger bank in 2008 — is that due diligence on a crisis merger would now take too long to be practicable. Read the full commentary.

A discussion draft of the "Financial Institution Bankruptcy Act" was considered in the House Judiciary Committee on July 15. To read the discussion draft on the proposed "bail-in" bill, please click here.

ANALYSIS: TAXPAYERS WOULD LIKELY BE ON THE HOOK FOR A CYBER-TERROR BANK BAILOUT

While bankers and U.S. officials have warned that cyber-terrorists will try to wreck the financial system's computer networks, taxpayers will probably have to cover much of the damage, according to a Bloomberg News analysis yesterday. Even if customers don't lose money from a hacking assault on JPMorgan Chase & Co., the episode is a reminder that banks with the most sophisticated defenses are vulnerable. Treasury Department officials have quietly told bank insurers that in the event of a cataclysmic attack, they would activate a government backstop that doesn't explicitly cover electronic intrusions, two people briefed on the talks said. "I can't foresee a situation where the president wouldn't do something via executive order," said Edward DeMarco, general counsel of the Risk Management Association, a professional group of the banking industry. "All we're talking about is the difference between the destruction of tangible property and intangible property." The attack on New York-based JPMorgan, though limited in scope, underscored how cyber assaults are evolving in ferocity and sophistication, and turning more political, possibly as a prelude to the sort of event DeMarco describes. Not simply an effort to steal money, the attack looted the bank of gigabytes of data from deep within JPMorgan's network. Read more.

Financial cyber-security will be addressed at ABI's Winter Leadership Conference as Theresa Payton, President and CEO of Fortalice LLC, presents her keynote, "Privacy in the Age of Big Data." Payton is the former White House CIO, Cybersecurity Authority, and an expert on identity theft. Click here for more information and to register.

FEDERALIST SOCIETY PODCAST FEATURES AUTHORS TAKING AN IN-DEPTH LOOK INTO ISSUES SURROUNDING CONSUMER CREDIT IN THE U.S.

Professor Todd J. Zywicki participated in a Federalist Society podcast examining current issues in consumer spending, credit and debt. His new book, Consumer Credit and the American Economy, co-authored with Thomas Durkin, Gregory Elliehausen and Michael Staten, examines the economics, behavioral science, sociology, history, institutions, law, and regulation of consumer credit in the U.S. It also examines the psychological, sociological, historical, and legal traditions that go into fully understanding what has led to the demand for consumer credit today. Click here to listen to the podcast.

NEW TO THE LAW PROFESSION? DID YOUR LAW FIRM RECENTLY ADD NEW ASSOCIATES TO THE RANKS? BE SURE TO PRE-ORDER ABI'S SURVIVAL GUIDE FOR THE NEW LAWYER!

Available now for pre-order in ABI's Bookstore is the Survival Guide for the New Lawyer: What They Didn't Teach You in Law School. The Survival Guide provides real-world guidance on the everyday aspects of practicing law, with a special emphasis on bankruptcy law. Full of anecdotal examples and hard-earned advice, this Guide is perfect for the aspiring lawyer fresh out of law school, or for any firm that wants to give its associates a leg up on the competition. Click here to pre-order, and be sure to log in first to obtain the ABI member discount!

NEW CASE SUMMARY ON VOLO: AGRI STAR MEAT & POULTRY LLC V. NEVEL PROPERTIES CORP. (8TH CIR.)

Summarized by Bryan Robinson

The Eighth Circuit Court of Appeals upheld the ruling by the Eighth Circuit district court and the bankruptcy court which concluded that SHF did not have any rights to a well located on land owned by Nevel. The bankruptcy court explained that SHF was never a party to the contract and as such did not have any rights to the contract. The contract was between Agriprocessors and Nevel — not SHF and Nevel — and, while Agriprocessors was in bankruptcy protection under the control of a court-appointed trustee, the contract was deemed rejected as a matter of law under 11 U.S.C. § 365(d)(4)(A). By the time SHF acquired Agriprocessors' assets, the contract was already broken and SHF never acquired any rights to the well as it was not an asset of Agriprocessor at the time of the acquisition.

There are more than 1,400 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: SINGLE-POINT-OF-ENTRY PROPOSALS TRANSLATE TO "NO BANK LEFT BEHIND"

Last December the FDIC put out for comment a proposal for a Single-Point-of-Entry (SPOE) Strategy to implement its Orderly Liquidation Authority (OLA) under Title II of Dodd-Frank. Single-Point-of-Entry has gotten a lot of policy traction. The Treasury Secretary supports it and there's huge buy-in from Wall Street. And it's an approach that is likely to ensure financial stability in the event that a systemically important financial institution gets into trouble. There's just one problem with it, according to a recent blog post: SPOE means "No Bank Left Behind."

Be sure to check the site several times each day; any time a contributing blog posts a new story, a link to the story will appear on the top. If you have a blog that deals with bankruptcy, or know of a good blog that should be part of the Bankruptcy Exchange, please contact the ABI Web team.

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