In Chapter 11 cases, one of a vendor’s best shots at getting paid its pre-petition debt is being designated as a “critical vendor”.

In connection with the Zachry Holdings Chapter 11 case filed in the Southern District of Texas on May 21, 2024, the Bankruptcy Court made disturbing comments regarding treatment of critical vendors.

Material Chapter 11 cases have morphed to the point that the outcome is often predetermined at the “first day” hearing. Unsecured creditors with material credit exposure should engage early to protect their interests and reduce risk of loss.

The world economy is experiencing the perfect storm of inflation, interest rate increases, supply chain disruption, and a potential global recession. These conditions exert pressure on trading partners who may have nowhere to turn but each other to relieve pressure. Contract parties are experiencing requests for price increases, extended payment terms, and cancellation of some or all orders. How a contract party addresses these issues depends on the business leverage between the parties and the importance of the business relationship.

WE WON. WE MADE NEW LAW.

In the Chapter 11 case of Beaulieu Group, LLC (carpet industry in Dalton, Georgia) in the U.S. Bankruptcy Court for the Northern District of Georgia, we defended Auriga Polymers Inc. (a subsidiary of Indorama Ventures) in a preference claim filed by the Beaulieu Liquidating Trustee. 

As a result of recent high profile Chapter 11 cases, such as Purdue Pharma and Johnson & Johnson, there has been great Congressional and media attention to controversial Chapter 11 practices. These include debtors’ forum and judge shopping, nonconsensual third-party releases of nondebtors in the Plan of Reorganization, and the use of divisional mergers to isolate liabilities into special purpose entities.

In 2021, to address these concerns, two bills were introduced in the U.S. Senate and House of Representatives:

According to the American Bankruptcy Institute, total commercial Chapter 11 filings in July 2021 decreased 62 percent from the previous year. Commercial Chapter 11 filings totaled 244 in July 2021, down from the July 2020 total of 644. Lender forbearance, continued low interest rates, and massive financial intervention by the U.S. and economies world-wide have allowed financially distressed companies to survive during the pandemic. As relief programs recede, however, we will likely see an increase in Chapter 11 filings.

According to the American Bankruptcy Institute, 3,600 companies filed Chapter 11 in the first half of 2020. Chapter 11 filings for 2020 are on pace to eclipse any year since 2012. During the same period, businesses worldwide sold $2.1 trillion of bonds, up 50 percent from 2019, according to the July 17, 2020 New York Times.

I am pleased to share a great article on the recent reform of German insolvency law regarding avoiding pre-insolvency transactions by my good friend and colleague Annerose Tashiro, a leading cross-border insolvency specialist in Germany. This is important in the event a contract counter-party becomes insolvent in Germany. Also, German avoidance laws are likely applicable should an insolvent German company also file a Chapter 15 proceeding in the U.S.

INTRODUCTION

THE RULING: CHAPTER 15 DEBTORS CAN ASSERT AVOIDANCE ACTIONS UNDER STATE LAW