I don’t know if Congress foresaw, when it enacted new Subchapter V of Chapter 11 of the Code[1] in the Small Business Reorganization Act of 2019 (“SBRA”), that debtors in pending cases would seek to convert or redesignate their cases as Subchapter V cases when SBRA became effective on February 19, 2020, but it was foreseeable.
As we mentioned in a previous post, the COVID-19 pandemic has generated a wave of bankruptcies that we expect to continue into 2021. Companies entering 2020 in a strong financial position may now need to quickly shed distressed assets and generate cash. A Chapter 11 reorganization is likely to be too long and burdensome for companies in this position.
For years, small business debtors have struggled with the intricacies of Chapter 11, the debt limitations of Chapter 13 and Chapter 7 bankruptcy liquidations. Stringent requirements and procedural hurdles often made restructuring a prohibitively expensive option for many small business debtors. Congress attempted to address these issues with H.R. 3311, the Small Business Reorganization Act (the “SBRA”). The SBRA, which was signed into law on August 23, 2019, creates a new subchapter, Subchapter V, of Chapter 11 of the Bankruptcy Code.
On May 6, 2020, in the case of In re Peabody Energy Corporation, 958 F.3d 717 (8th Cir.), the U.S. Court of Appeals for the Eighth Circuit held, in an apparent case of first impression, that state statutory and common-law climate change tort claims are dischargeable in bankruptcy and were in fact discharged in this case, affirming the decisions of the lower courts.1
A recent New York Timesarticle highlights what it calls a “tidal wave of business bankruptcies” that are coming due to financial fallout from the COVID-19 pandemic. A number of high profile businesses have already declared bankruptcy, including J.C. Penney, Hertz, J. Crew, Neiman Marcus, 24-Hour Fitness, Borden Dairy, and Pier 1 Imports. More are sure to follow.
The Second Circuit ruled last week in Lehman Bros. Special Fin. Inc. v. Bank of Am. Nat'l Ass'n, No. 18-1079 (2d Cir. 2020) that a Lehman Brothers affiliate cannot claw back $1 billion in payments made pursuant to swap agreements that were terminated when Lehman Brothers Holdings Inc. (“LBHI”) and certain of its affiliates filed for bankruptcy in 2008. The panel concluded that the Bankruptcy Code provides a safe harbor for the liquidation of such swap agreements and also the distribution of proceeds from the collateral.
Capital intensive businesses often raise capital from multiple sources, including loans from senior and subordinated lenders and hybrid financing – most typically loans accompanied by warrants – from so-called mezzanine lenders. A borrower’s cost of funds with respect to each depends on the quantum of risk associated with the particular credit. Senior lenders enjoy priority in payment and recourse to discernible collateral and are able to offer lower interest rates and lower fees.