A recent chapter 15 decision by Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) suggests that third-party releases susceptible to challenge or rejection in chapter 11 proceedings may be recognized and enforced under chapter 15. This decision provides companies with cross-border connections a path to achieve approval of non-consensual third-party guarantor releases in the U.S.

Background

A recent chapter 15 decision by Judge Martin Glenn of the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) suggests that third-party releases susceptible to challenge or rejection in chapter 11 proceedings may be recognized and enforced under chapter 15. This decision provides companies with cross-border connections a path to achieve approval of non-consensual third-party guarantor releases in the U.S.

Background

The United States Supreme Court recently declined to review the United States Court of Appeals for the Second Circuit’s opinion in Momentive Performance Materials Inc. v. BOKF, NA. BOKF and Wilmington Trust, indenture trustees for Momentive’s First Lien Notes and 1.5 Lien Notes (which we’ll refer to as the “Senior Notes”) respectively, each submitted certiorari petitions after the Second Circuit held that they were not entitled to receive make-whole premiums following Momentive’s bankruptcy.

What Is a Make-Whole?

Weil Summer Associate David Rybak contributed to this post

In Momentive Performance Materials, the Second Circuit declined to dismiss as equitably moot the appeals of certain noteholders.

The United States Second Circuit has issued its ruling in the Momentive Performance Materials casesresolving three separate appeals by different groups of creditors of Judge Bricetti’s judgment in the United States District Court of the Southern District of New York, which affirmed

Good news: structured dismissals have survived Supreme Court scrutiny. Bad news: dismissals may be harder to structure, given yesterday’s 6-2 decision overruling the Third Circuit in Jevic narrowing the context in which they can be approved. We now have guidance on whether or not structured dismissals must follow the Bankruptcy Code’s priority scheme. The short answer is that they must.

“Aside from their inconsistency with empirical data, proposals to “reform” the Bankruptcy Code must overcome a more basic reality: The current Code works exceedingly well.”
– LSTA Response

One of the primary business restructuring goals is the adjustment of a company’s burdensome obligations.  If a business is going to be reorganized, matching a company’s obligations to its value is key to the rehabilitation and “fresh start” concepts that underpin the Bankruptcy Code.

On May 4, Judge Vincent Bricetti of the United States District Court for the Southern District of New York issued a ruling in the Momentive Performance Materials cases affirming the bankruptcy court’s confirmation rulings.  Key themes raised in this case of interest to distressed investors and addressed in Judge Bricetti’s ruling include