Crude oil and natural gas prices reached multiyear lows of approximately $26 per barrel for crude oil (as of January 2016) and $1.50 per million British thermal units (mmbtu) for natural gas (as of March 2016). This represented a 75 percent decline in the price of oil from its peak of approximately $105 per barrel in mid-2014 and an 80 percent decline in the price of natural gas from its early 2014 peak of over $8 per mmbtu. At the time, many industry observers predicted that depressed commodity prices would result in numerous bankruptcy filings and an uptick in M&A activity.

On January 17, 2017, the U.S. Court of Appeals for the Second Circuit issued an opinion in Marblegate Asset Management v. Education Management Corp., 15-2124-cv(L), 15-2141cv(CON) (2nd Cir. Jan. 17, 2017), overturning a broad interpretation of the Trust Indenture Act (TIA) by the U.S.

In a May 4, 2015, decision, the U.S. District Court for the Southern District of New York rejected secured lenders’ appeals of a controversial bankruptcy court decision confirming the Chapter 11 plan of reorganization of MPM Silicones, LLC (also known as “Momentive”). The district court opinion, by Judge Vincent Briccetti, affirms the bankruptcy court’s decision that Momentive’s senior secured lenders could be “crammed down” at a below-market interest rate, without payment of a make-whole premium.

Despite lower-than-average Chapter 11 activity in 2014, the legal landscape for distressed investors has continued to evolve, with significant legal developments in credit bidding, make-whole premiums and intercreditor agreements. By staying apprised of the evolving jurisprudence in these areas, distressed investors can mitigate risks that have foiled lenders in recent cases.

Credit Bidding

The Bankruptcy Code's so-called "cramdown" statute provides debtors with a significant tool that can be used to impose a reorganization plan upon recalcitrant secured lenders, subject to fulfillment of certain requirements. In particular, Section 1129(b) of the Bankruptcy Code allows a bankruptcy court to approve a debtor's reorganization plan over the objections of a secured creditor so long as the plan is "fair and equitable" to the creditor.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 contains two sets of provisions for managing the insolvency of financial institutions. First, the legislation creates an Orderly Liquidation Authority (OLA), a comprehensive regime for resolving a financial institution whose failure is determined to potentially endanger the U.S. financial system.

Corporate Chapter 11 filings remained relatively low in 2014, down slightly from 2013, due to a robust capital market environment, low interest rates and easy access to financing. These and other factors allowed highly leveraged borrowers that might otherwise have been Chapter 11 restructuring candidates to refinance or pursue other nonjudicial restructuring alternatives. Among those companies that filed corporate bankruptcies, the District of Delaware and the Southern District of New York continued to capture the lion's share of cases.

The Bankruptcy Code authorizes a bankruptcy trustee to avoid (i.e., obtain the return of) certain types of prepetition property transfers so that the bankrupt estate can be divided among creditors fairly. For example, a trustee may bring actions to set aside transfers made within a specified period before the bankruptcy (preferences) and transfers made deliberately to defraud creditors (fraudulent transfers).

New York's position as a global financial center means litigants often have sought to use New York courts as a forum to enforce judgments or arbitration awards against foreign entities. In reality, the burden of enforcement proceedings often falls on third parties, such as financial institutions that hold (or are alleged to hold) the judgment debtor's assets.

In 2014, the health care industry continued to see a high level of M&A activity, with announced transactions approaching $440 billion globally by the end of November. In the United States, consolidation continues to occur in the hospital and health care services subsector, often involving distressed health care providers. For many distressed providers — often small and midsized hospitals and hospital systems — acquisition by a financially strong counterparty is the only way to survive.