On March 15, 2007, with Jones Day’s assistance as bankruptcy counsel, FLYi, Inc. (“FLYi”), Independence Air, Inc. (“Independence”) and their affiliated debtors (collectively, the “Debtors”) obtained confirmation of their chapter 11 plan under the “cramdown” provisions of the Bankruptcy Code. The plan, which become effective on March 30, 2007, will distribute approximately $150 million to unsecured creditors. In ruling on confirmation of the plan, the U.S.

One of the most significant changes to chapter 11 of the Bankruptcy Code in the 2005 amendments was the absolute limit placed on extensions of the exclusivity periods. Courts no longer have the discretion to extend a debtor’s exclusive periods to file and solicit a plan beyond 18 months and 20 months, respectively, after the petition date. Although the legislative history contains no explanation for why this change was made, Congress presumably intended to accelerate the reorganization process or facilitate the prospects for competing plans in large, complex cases.

While the Bankruptcy Code’s safe harbor provision in section 546(e) previously provided comfort for brokerdealers, the Bankruptcy Court’s decision in Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund, Ltd.), 359 B.R. 510 (Bankr. S.D.N.Y. 2007), chips away at this provision and creates new risks for those providing brokerage account services. Always at risk as a deep pocket, new duties have been thrust upon brokerdealers that go far beyond the terms of the account agreement.

Factual Background

Owners of bank loan participations take on two kinds of credit risk: (i) the borrower’s failure to pay the underlying bank loan, and (ii) the loan participation grantor’s bankruptcy. The first risk is well understood and carefully analyzed in each transaction. This memorandum focuses on the second kind of credit risk assumed by a participant -- grantor insolvency.

The rapid growth in derivatives as hedging instruments, particularly through equity swaps, credit default swaps ("CDS") and loan credit default swaps ("LCDS"), has challenged fundamental assumptions underlying corporate governance law, federal shareholder disclosure requirements and bankruptcy law. Corporate law has long relied on a "one share one vote" model, which presumes that a shareholder's economic interests in a corporation are inextricably linked to their voting power.

In a recent opinion,1 the U.S. District Court for the Southern District of New York emphasized that foreign confidentiality statutes do not deprive an American court of the power to order a party subject to its jurisdiction to produce evidence — even though the act of production may be considered a criminal offense in a foreign jurisdiction and subject the party to serious consequences, including imprisonment and fines.

Background

The November/December 2007 issue of Insolvency Notes featured an article highlighting a Manhattan-based federal bankruptcy court's refusal to officially recognize proceedings commenced in the Cayman Islands to liquidate two Bear Stearns-managed hedge funds that collapsed in June of that year.

The credit default swap (“CDS”) has never been tested in bankruptcy proceedings on any significant scale, particularly under recent amendments to the Bankruptcy Code. In part, this is because the CDS market is a very recent phenomenon. CDS market participants also make considerable efforts to avoid holding a credit default swap where the counterparty has gone into bankruptcy.

Bankruptcy Court Hearing Regarding Sale of Lehman’s Investment Management Division

The collapse of Lehman Brothers was a major test of the procedures developed by market participants to address counterparty credit risk and has uncovered deficiencies in risk management policies and their application.