In Harrington v. Purdue Pharma LP, in a 5-4 decision, the Supreme Court held that the Bankruptcy Code does not authorize bankruptcy courts to confirm a Chapter 11 bankruptcy plan that discharges creditors’ claims against third parties without the consent of the affected claimants. The decision rejects the bankruptcy plan of Purdue Pharma, which had released members of the Sackler family from liability for their role in the opioid crisis. Justice Gorsuch wrote the majority decision. Justice Kavanaugh dissented, joined by Chief Justice Roberts and Justices Kagan and Sotomayor.
Once again, we reflect on the prior year for restructuring trends impacting private credit lenders. Last year it was all about “liability management”—the latest trend in which the limits of sponsor-favorable loan documents are being tested, in some cases past the breaking point.
Introduction
A common yet contentious liability management strategy is an “uptier” transaction, where lenders holding a majority of loans or notes under a financing agreement seek to elevate or “roll-up” the priority of their debt above the previously pari passu debt held by the non-participating minority lenders. In a recent decision in the Boardriders case, the minority lenders defeated a motion to dismiss various claims challenging an uptier transaction.
In an important decision to private credit lenders, the Fifth Circuit Court of Appeals held that a make-whole premium for an unsecured creditor tied to future interest payments is the “functional equivalent of unmatured interest” and not recoverable under Section 502(b)(2) of the Bankruptcy Code. Ultra Petroleum Corp. v. Ad Hoc Committee of OpCo Unsecured Creditors (In re Ultra Petroleum Corp.), No. 21-20008 (5th Cir. Oct. 14, 2022) (“Ultra”). Ordinarily, the story ends here.
What happens when a shady businessman transfers $1 million from one floundering car dealership to another via the bank account of an innocent immigrant? Will the first dealership’s future chapter 7 trustee be allowed to recover from the naïve newcomer as the “initial transferee” of a fraudulent transfer as per the strict letter of the law? Or will our brave courts of equity exercise their powers to prevent a most grave injustice?
Creditors of distressed businesses are often frustrated by shareholder-controlled boards when directors pursue strategies that appear to be designed to benefit shareholders at the creditors’ expense. In these circumstances, creditors might consider sending a letter to the board to convince the directors to pivot and adopt alternative strategies or face risk of liability for breaching fiduciary duties. The efficacy of this approach depends on many factors, including the company’s financial condition, the board’s composition and the underlying transactions at issue.
In a previous alert, we covered the Delaware Chancery Court’s decision in Stream TV Networks last year.
A foreign (non-U.S.) company can be dragged unwillingly into a U.S. bankruptcy case if the bankruptcy court has “personal jurisdiction” over the company.
A foreign (non-U.S.) company can be dragged unwillingly into a U.S. bankruptcy case if the bankruptcy court has “personal jurisdiction” over the company.