We are pleased to share with you the Hughes Hubbard Bankruptcy Mid-Year Review for 2017. The review recaps a number of notable developments from this year. We thank our clients for their continued confidence and look forward to providing you with bankruptcy and restructuring guidance.
The United States Bankruptcy Court for the Southern District of New York recently held that it had personal jurisdiction over a foreign defendant that was paid funds pursuant to the Court’s order approving the debtors’ post-petition financing (the “DIP order”), denying defendant Immigon’s motion to dismiss an adversary proceeding commenced by the Motors Liquidation Company Avoidance Action Trust seeking to clawback the funds.
In 2006, General Motors entered into a $1.5 billion Term Loan Agreement under which JP Morgan Chase Bank, N.A. and several other large financial institutions committed to provide funding and had the right to sell interests in the loan in the secondary market. In 2008, in connection with terminating a completely separate transaction, JP Morgan mistakenly authorized the termination of the security interest in the General Motors’ assets securing the loan.
Under the debtors’ DIP order, the Court authorized the debtors’ to pay in full all of General Motors’ obligations under the Term Loan Agreement, subject to the Official Committee of Unsecured Creditors’ right to investigate and challenge the perfection of the liens securing the loan. Following entry of the order, GM paid approximately $1.4 billion to its lenders under the Term Loan Agreement, including approximately $9.8 million to defendant Immigon on account of its $10 million interest in the loan purchased on the secondary market from JP Morgan.
In denying Immigon’s motion to dismiss, including on the grounds that the Court lacked personal jurisdiction over Immigon, the Court found that under the Term Loan Agreement, Immigon had expressly consented to personal jurisdiction in New York and waived the right to object to any New York State or Federal Court as the forum for any disputes arising out of the Agreement. Moreover, the Court found that the consent to jurisdiction and forum selections clauses should be enforced because Immigon “enjoyed the benefits and protection of New York law” in connection with the Agreement.
As a separate basis for exercising jurisdiction, the Court also held that Immigon consented to jurisdiction under the DIP order, which provided that any party receiving funds under the order consented to the jurisdiction of the Bankruptcy Court. Relying on evidence showing that an employee of Immigon had actually received and viewed the DIP order before receiving payment, the Court found that Immigon had knowingly consented to the jurisdiction provision in the DIP order by accepting payment of the funds.
As a third distinct basis for exercising jurisdiction over Immigon, the Court held that even if Immigon had not consented to the Court’s jurisdiction, sufficient minimum contacts existed between the litigation, New York and Immigon for the Court to exercise specific personal jurisdiction over Immigon. Specifically, the Court noted that “the lending relationship under the Term Loan Agreement was centered in New York, governed by New York law, and allowed all of the parties, including [Immigon], to enjoy the benefits of the U.S. banking system and New York’s status as a financial capital.” Immigon selected Bank of New York Mellon for its correspondent bank account and JP Morgan made the disputed payment to Immigon’s New York bank account. The Court found these contacts, among others, sufficient to show that Immigon had purposefully availed itself of the privilege of doing business in New York.
Finally, the Court found that subjecting Immigon to personal jurisdiction on any of these three grounds would not offend due process because the Court has a strong interest in adjudicating claims that arise under the Bankruptcy Code and the Trust has a strong interest in obtaining convenient and effective relief in the Bankruptcy Court. Moreover, the Court found that Immigon’s burden in having to litigate in New York is mitigated by the convenience of modern communication and transportation.
The outcome of this case suggests the need for parties to carefully review proposed Bankruptcy Court orders affecting their rights. Here, in finding that Immigon had knowingly consented to the Bankruptcy Court’s jurisdiction in the DIP order, the Bankruptcy Court relied on evidence showing that an employee of Immigon had received and viewed the DIP order, despite the fact that the consent to jurisdiction provision was on page 26 of the 30-page order. The case also suggests the need for caution by parties purchasing interests in transactions governed by agreements with consent to jurisdiction clauses.
. Immigon, or Immigon Portfolioabbau AG, is a wind-down company operating under Austrian law, and is the successor in interest to OEVAG, or Osterreichische Volksbanken Aktiengesellschaft, which was the central institute of the Austrian co-operative of banks named Volksbanken.
. Motors Liquidation Co. Avoidance Action Trust v. J.P. Morgan Chase Bank, N.A. (In re Motors Liquidation Co.), (Bankr. S.D.N.Y. 2017).
The Southern District of New York Bankruptcy Court recently limited certain bankruptcy discovery requests pursuant to Federal Rule of Bankruptcy Procedure 2004 by applying the concept of proportionality contained in the 2015 amendments to Federal Rule of Civil Procedure 26 . In re SunEdison, Inc., Case No. 16-10992 (SMB), ECF No. 2280 (Jan. 18, 2017). The court’s decision curtails the ability of non-debtors to conduct so-called “fishing expeditions,” which have become increasingly costly with the spread of requests for electronically stored information (often referred to as “ESI”). The court’s decision will be of particular interest to debtors’ counsel and assist in their efforts to stave off disruptive, costly and distracting Rule 2004 requests.
In re SunEdision arises from the application of CSI Leasing, Inc. and CSI Leasing Malaysia Sdn. Bhd. (collectively, “CSI”) to conduct a Rule 2004 examination of the debtors. CSI was a creditor of both the debtor-subsidiary SunEdison Products Singapore Pte. Ltd. (“SEPS”) and the non-debtor subsidiary SunEdison Kuching Sdn. Bhd. (“SEK”) in connection with a failed equipment lease, entered into by SEK and guaranteed by SEPS. As a result of SEK’s default on the lease and SEPS’s default on the guarantee, CSI had a claim against each for approximately $2.5 million. Notwithstanding the $2.5 million owed to CSI, when SEK received approximately $45 million for the sale of substantially all of its assets in March 2016, SEK transferred the money to the debtors, namely SunEdison, Inc. (“SUNE”), which is the ultimate parent company of both SEK and SEPS.
As part of its overall efforts to collect on its guarantee, CSI filed an application seeking Rule 2004 discovery in the chapter 11 proceedings. CSI requested, among other things, “all documents and communications” generally related to: (i) the transfer of the asset sale proceeds to the debtors; (ii) the debtors’ chapter 11 cases; and (iii) SEK, the Malaysian proceeding, and CSI’s recovery in that proceeding. After initially providing over 1,200 pages of responsive information on a rolling basis, the debtors subsequently objected to CSI’s application and argued that discovery was unnecessary as to CSI’s chapter 11 claims, which had been allowed. Beyond that, the debtors characterized CSI’s application as “premature, overly broad, speculative and unduly burdensome”.
The court began by outlining the law governing Rule 2004 applications, noting that generally a party seeking Rule 2004 examination must demonstrate “good cause” for the examination. “Good cause,” in turn, is typically demonstrated by showing that the “proposed examination ‘is necessary to establish the claim of the party seeking the examination, or … denial of such request would cause the examiner undue hardship or injustice.’”
However, the court noted that Rule 2004 examinations require a balance between the needs of the examiner and the burden imposed on the examinee. This balance is especially necessary when juxtaposed with the immense costs of modern discovery on the producing party. If left unchecked, the court was concerned that a “fishing expedition” could impose astronomical discovery costs on the party being examined.
In weighing this balance between the examiner’s need for discovery and the burden imposed on the examinee, the court found a solution in the Federal Rules of Civil Procedure’s proportionality requirements under Rule 26. Despite the absence of a comparable amendment to Rule 2004, the court drew a parallel between the aims of Rule 2004 and Rule 26. The court used this parallel to support the holding that an when the applicant is seeking the examination in one proceeding for claims in another proceeding, as in this case, there was no good cause for such examination.
The court’s opinion imposes an additional limitation on Rule 2004 examinations, which has often been recognized as allowing wider discovery than that available under the Federal Rules of Civil Procedure. Under Rule 2004, the subject matter open to discovery is broader, there are fewer procedural safeguards, and discovery can generally be wielded against any related entity. Bankruptcy courts have imposed few restraints on this rule, most of which prevent parties from taking advantage of such open-ended discovery when there is an on-going civil action between the same parties. However, by borrowing a constraint on Rule 2004 from the Federal Rules of Civil Procedure, the court has checked what is often a burdensome discovery mechanism.
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The First Circuit’s recent opinion on the Puerto Rico Oversight, Management, and Economic Stability Act (“PROMESA”, 48 U.S.C §§ 2101-2241) outlines initial guidelines for possible future actions against the Puerto Rican government as a result of the Commonwealth’s ongoing debt crisis. Peaje Investments LLC v. García–Padilla, 845 F.3d 505 (1st Cir. 2017). Congress enacted PROMESA in June 2016 to create, among other things, a temporary stay of debt-related litigation against the government of Puerto Rico. The temporary stay was set to expire automatically on February 17, 2017, but has been extended until May 1, 2017. The First Circuit permitted one creditor to move immediately for relief from the stay, but blocked another creditor’s bid. The decision serves as a template for how creditors may move against the Commonwealth when the PROMESA stay expires later this spring.
In Peaje Investments LLC v. Garcia-Padilla, the First Circuit considered the appeal of two creditors whose motions for relief from PROMESA’s stay had been denied by the District Court of Puerto Rico without a hearing. The denied creditor, Peaje Investments LLC (“Peaje”), argued that the stay should be lifted so it could challenge the government’s diversion of toll revenues. The successful creditors, the Altair movants, similarly sought relief based on their interest in certain employee contributions diverted by the Commonwealth. The First Circuit applied the Bankruptcy Code’s “lack of adequate protection” standard to determine cause for lifting the stay.
In Peaje’s case, the creditor alleged that a bond resolution required the government to deposit toll revenues with a fiscal agent to serve as collateral for bonds issued by the Puerto Rico Highways and Transportation Authority. The First Circuit affirmed the District Court’s denial of Peaje’s motion because “toll revenues are ‘constantly replenished,’” allowing Peaje’s security interest to continue as a “stable, recurring source of income that will eventually provide funds for the repayment” of the bonds.
The Altair movants similarly alleged that the Commonwealth had suspended transfers of employee retirement contributions, which served as collateral for their bonds, to the required fiscal agent. The Altair movants, crucially, included in their filings a statement by the Commonwealth’s Employees Retirement System that “uncertainty about future employee contributions could affect” repayment of the bonds held by the Altair movants. The District Court characterized these contributions as “a perpetual revenue stream whose value is not decreased by the Commonwealth’s acts,” much like Peaje’s collateral, but the First Circuit reversed course. It found that the Altair movants deserved a hearing to demonstrate the “alleged uncertainty” of the Commonwealth’s ability to repay the bonds.
The stay will expire in May, at which point an influx of actions against the government of Puerto Rico relating to the debt crisis is expected. The First Circuit’s decision is limited in scope due to the PROMESA stay’s anticipated expiration, but creditors pursuing litigation against the government after the stay is lifted may choose to heed the opinion’s underlying guidance: do not hold back in initial pleadings.
 Peaje Investments LLC v. García–Padilla, 845 F.3d 505, 511 (1st Cir. 2017)
We are pleased to share with you the Hughes Hubbard Bankruptcy Review for 2016. Restructurings are often the ultimate “bet-the-company” case, and we thank our clients for their continuing trust and confidence in our team.
A recent decision in the Bankruptcy Court for the District of Delaware explored the limits of mandatory subordination under section 510(b) of the Bankruptcy Code. In In re FAH Liquidating Corp., No. 13-13087(KG), 2017 WL 95115 (Bankr. D. Del. Jan. 10, 2017), Judge Kevin Gross ruled that membership units in special purpose vehicles that held securities of a debtor were outside the scope of section 510(b) because they were neither “securit[ies] of the debtor” nor securities of “an affiliate of the debtor.” Because the claimants invested in special purpose vehicles that were insulated from the debtor, their securities law claims against the debtor were indirect and therefore not subject to mandatory subordination.
Prior to the Petition Date, the debtor’s predecessor, Fisker Automotive Holdings, Inc. (“Fisker”), issued preferred stock. Fisker engaged Advanced Equities, Inc. (“AEI”) to aid in raising private capital. As memorialized in a Placement Agreement, AEI would receive, among other things, warrants that it could transfer to other broker-dealers that it designated as sub-agents. One such sub-agent, Middlebury Securities LLC (“Middlebury Securities”), entered into a Sub-Placement Agreement with AEI. Middlebury Securities solicited qualified investors for purchase of Membership Units in one or more Special Purpose Vehicles, affiliated with Middlebury Securities, that themselves purchased or held Fisker’s preferred shares. Notably, however, there was no direct contractual relationship between Fisker and Middlebury Securities; rather, each contracted separately with AEI.
Two sets of plaintiffs commenced securities lawsuits against controlling shareholders and current and former officers and directors of Fisker, and filed proofs of claim on account of securities law claims against Fisker. One set of plaintiffs had purchased Fisker’s preferred stock (the “Direct Purchasers”), while the other plaintiffs had purchased membership units in one or more of the Special Purpose Vehicles (the “Membership Unit Purchasers”).
The parties and the Bankruptcy Court agreed that the Direct Purchasers’ claims against Fisker were subject to mandatory subordination under section 510(b) of the Bankruptcy Code, which subordinates any “claim arising from rescission of a purchase or sale of a security of the debtor or of an affiliate of the debtor, for damages arising from the purchase or sale of such a security, or for reimbursement or contribution allowed under section 502 on account of such a claim.”
The parties also agreed that the Membership Units were “securities” and that the plaintiffs’ claims arose from the purchase or sale of securities. However, the parties disputed the application of section 510(b) to the claims of the Membership Unit Purchasers.
Although the Membership Units did not represent direct interests in Fisker, the Liquidating Trustee argued that purchases of Fisker securities were “part of the causal link leading to” the alleged injuries, and thus the Membership Unit Purchasers’ claims arose from the purchase or sale of a debtor’s securities. The Liquidating Trustee further argued that there was a “complete identity of economic interest” between the Membership Units and Fisker’s securities.
In the alternative, the Liquidating Trustee argued that the Membership Unit Purchasers’ claims arose from the purchase or sale of securities of “an affiliate of the debtor” because Middlebury Securities acted as an intermediary between Fisker and investors for purposes of raising capital for Fisker. In the Liquidating Trustee’s view, the Special Purpose Vehicles were “affiliates” of Fisker because they were operated under the Placement Agreement between Fisker and AEI, pursuant to which AEI designated Middlebury Securities as its sub-agent.
The Bankruptcy Court first rejected the Liquidating Trustee’s argument that the Membership Units were securities “of the debtor.” The Bankruptcy Court noted that the Membership Units were distanced and insulated from Fisker due to the Special Purpose Vehicles: the Special Purpose Vehicles were not debtors, the Membership Units were not part of Fisker’s capital structure, and the Membership Unit Purchasers did not have actual ownership interests in Fisker.
The Bankruptcy Court next addressed the Liquidating Trustee’s contention that the Membership Units were the securities of Fisker’s affiliates. Section 101(2) of the Bankruptcy Code defines an “affiliate” as, among other things, a “person whose business is operated under a lease or operating agreement by a debtor, or [a] person substantially all of whose property is operated under an operating agreement with the debtor.” Focusing on that definition, the Bankruptcy Court emphasized that there was no contract between Fisker and Middlebury Securities. The Placement Agreement was between Fisker and AEI; AEI separately contracted with Middlebury Securities as sub-agent to sell Membership Units. The Special Purpose Vehicles thus fell outside the scope of section 101(2)(C): they were not “operat[ing] under an operating agreement with the debtor” (emphasis added).
The Bankruptcy Court further noted that the Fifth Circuit has applied a more expansive view of section 101(2)(C) where a debtor is “in full control” of another entity. However, the Bankruptcy Court found that the Debtors did not exert sufficient control to make the Special Purpose Vehicle entities mere “shell conduit[s] between [the] debtor and [the] entity.” AEI acted as an independent contractor, and it used its own authority to contract with Middlebury Securities. In fact, Fisker’s agreement with AEI even prohibited Fisker from communicating directly with sub-agents (like Middlebury Securities) without AEI’s authority.
The Bankruptcy Court’s decision shows that even the broad terms of section 510(b) have limits. Where a special purpose entity is sufficiently insulated from the debtor whose securities it holds, an investor in the special purpose entity may be able to maintain unsubordinated claims against the debtor (or the debtors’ directors and officers). Purchasers of securities should be aware that claims against debtors on account of purchases of membership interests in unaffiliated special purpose vehicles may potentially be due a higher priority than claims on account of direct purchases of the debtor’s securities. For their part, debtors and trustees should be aware that they may not be able to rely on section 510(b) in defending against such claims.
. The decision notes that only one Special Purpose Entity— Middlebury Ventures II— was identified by name on the record, although the term was used in the plural by the Plaintiffs. Id. at *5-6. Thus, it was “unclear from the record whether [Middlebury Ventures II] is the only Special Purpose Vehicle that issued the Membership Units.” Id. at *7.
. 11 U.S.C. § 510(b).
. 11 U.S.C. § 101(2)(C).
After a 2014 decision in the Southern District of New York holding that section 316(b) of the Trust Indenture Act (“TIA”) barred any non-consensual restructuring that impaired a creditor’s actual ability to receive payment, issuers, creditors and the financial markets more generally have been uncertain as to the contours of permissible out-of-court restructurings. The recent decision by the Second Circuit Court of Appeals in Marblegate Asset Management, LLC v. Education Management Finance Corp., 2017 WL 164318 (2d. Cir 2017) reversed the 2014 ruling and held that section 316(b) only bars restructurings that that impact a creditor’s core payment right, which is different from the practical ability to demand payment. The Second Circuit’s Marblegate ruling will help resolve the disquiet among practitioners and issuers and restore expectations as to the ability of companies to conduct out-of-court restructurings without being hamstrung by non-consenting creditors.
Background of the Marblegate Rulings:
The Second Circuit’s decision arose from the restructuring of the debt of Education Management Corporation (“EDMC”). EDMC is a for-profit higher education company that had: (i) $1.3 billion in secured obligations that were collateralized by virtually all of EDMC’s assets, and (ii) $217 million of unsecured notes (the “Notes”) that were issued by a subsidiary of EDMC and governed by an indenture qualified under the TIA (the “Indenture”). The Notes were guaranteed by EDMC, but the guarantee was basically worthless as it had been issued solely to satisfy EDMC’s reporting obligations and would be automatically released if any secured creditor provided a release of any separate guarantee of EDMC (a fact that was clearly disclosed to potential Noteholders in the offering circular for the Notes).
Cash-strapped EDMC entered into negotiations with its secured creditors that resulted in a restructuring proposal. Under the proposed restructuring, the secured lenders would exercise their rights under their credit agreement and Article 9 of the Uniform Commercial Code to foreclose on all of EDMC’s assets and release EDMC from their guarantee (thereby automatically releasing EDMC from the Note guarantee). The secured lenders’ collateral agent would then transfer all of the foreclosed assets to a newly created subsidiary of EDMC that would then issue new secured debt and stock to the secured lenders and any unsecured lenders that consented to the restructuring. Importantly, the restructuring did not change the actual payment terms of the Indenture or limit the Noteholders’ ability to sue the EDMC subsidiaries that issued the Notes to collect the payment due on the Notes (albeit a futile exercise, because the EMDC subsidiaries would have no assets after the restructuring).
All of EMDC’s creditors, representing 98 percent of the company’s debt, consented to the proposed restructuring. The sole holdout creditor was Marblegate Special Opportunity Master Fund (“Marblegate”), which sued to enjoin the restructuring on the grounds that it violated the TIA.
The District Court Decision
Noting that the TIA itself was ambiguous, the District Court agreed with Marblegate and held that the proposed restructuring violated Section 316(b) of the TIA, which prohibits any restructuring that “impair[s] or affect[s]” the “right” of any security holder to receive payment due under a note. After reviewing the text and legislative history of Section 316(b), the District Court concluded that the TIA “protects the ability” of the Note holders “to receive payment in some circumstances.” Even though the Indenture payment terms remained the same, the District Court held, Section 316(b) is violated whenever a transaction “effect[s] an involuntary debt restructuring.”
EDMC appealed and argued that the prohibition contained in section 316(b) of the TIA applies only to non-consensual amendments to an Indenture’s core payment terms (here the ability of Marblegate to commence suit to demand payment from the EDMC issuers).
The Second Circuit’s Ruling
The issue before the Second Circuit therefore was whether section 316(b)’s prohibition on any restructuring that “impair[s]” or “affect[s]” a “right . . . to receive payment” contained in Section 316(b) of the TIA should be read narrowly to bar only non-consensual amendments to an indenture’s core payment terms, or whether it should be read broadly to prohibit any restructuring that affects the ability of a noteholder to receive payment. After a review of the parties’ competing readings of the statute, the Second Circuit agreed that the text of Section 316(b) was ambiguous on this issue. The court noted that the use of “‘right’ to describe what it sought to protect from non-consensual amendment suggests a concern with the legally enforceable obligation to pay that is contained in the Indenture, not with a creditor’s practical ability to collect on payments.” However, the Court also noted that the section of 316(b) stated that such a right “cannot be ‘impaired or affected,’” and Congress’ inclusion of these terms implied that a creditor’s payment right could not validly be reduced or “otherwise affect[ed] in an injurious manner.”
To resolve these competing interpretations, the Second Circuit analyzed the legislative history of the TIA and ultimately concluded that Congress intended a limited application of the prohibition contained in Section 316(b). Based on its review, the court determined that Congress was well aware of “possible forms of reorganization available to issuers, up to and including foreclosures like the one that occurred in this case” and noted that “foreclosure-based reorganizations were widely used at the time the TIA was drafted.” This fact, combined with the expert testimony submitted to Congress at the time of the TIA’s drafting on the limited purposes of the TIA, demonstrated that Congress intended section 316(b) of the TIA to be applied narrowly to bar revisions to the core payment terms of an indenture but did not intend to prohibit the type of foreclosure-based restructuring employed by EDMC.
In addition, the court noted that the broad reading of section 316(b) put forth by Marblegate and endorsed by the District Court raised a number of practical problems, as it would require courts in every case to divine “whether a challenged transaction constitutes an ‘out-of-court debt restructuring . . . designed to eliminate a non-consenting holder’s ability to receive payment.’” The practical requirement of determining the subjective intent of the parties to the restructuring, as opposed to a review of the transaction itself, ran afoul of the Second Circuit’s “particular distaste for interpreting boilerplate indenture provisions based on the ‘relationship of particular borrowers and lenders’ or the ‘particularized intentions of the parties to an indenture,’ both of which undermine ‘uniformity in interpretation.’”
The Second Circuit’s ruling provides a framework by which companies can achieve out-of-court restructurings even though they might deprive dissenting creditors of the value of their notes. The fact that core payment terms remain unchanged, though, may encourage companies to take a more aggressive stance with creditors. Nevertheless, creditors are not without remedies, as the preservation of core payment terms allows dissenting creditors to pursue judicial remedies. The ability of dissenting creditors to pursue successor liability or fraudulent conveyance claims may operate as a check against restructurings that are not conducted at arms’ length or with improper intentions to deprive certain credit groups of payment.
 See Marblegate Asset Mgmt. v. Educ. Mgmt. Corp., 75 F.Supp.3d 592, 612-615 (S.D.N.Y. 2014); see also BOKF, N.A. v. Caesars Entm’t Corp., 144 F. Supp. 3d 459, 466-67 (S.D.N.Y. 2015); Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Corp., 111 F. Supp.3d 542 (S.D.N.Y. 2015).
 EDMC was unable to commence a bankruptcy proceeding because such a filing would cause it to lose its eligibility for Tile IV funds pursuant to 20 U.S.C. § 1002(a)(4)(A).
 15 U.S.C. § 77ppp(b).
 Section 316(b) of the TIA, entitled “Prohibition of impairment of holder’s right to payment,” provides:
Notwithstanding any other provision of the indenture to be qualified, the right of any holder of any indenture security to receive payment of the principal of and interest on such indenture security, on or after the respective due dates expressed in such indenture security, or to institute suit for the enforcement of any such payment on or after such respective dates, shall not be impaired or affected without the consent of such holder, except as to a postponement of an interest payment consented to as provided in paragraph (2) of subsection (a) of this section, and except that such indenture may contain provisions limiting or denying the right of any such holder to institute any such suit, if and to the extent that the institution or prosecution thereof or the entry of judgment therein would, under applicable law, result in the surrender, impairment, waiver, or loss of the lien of such indenture upon any property subject to such lien.
 Marblegate Asset Mgmt. v. Educ. Mgmt. Corp., 75 F.Supp.3d 592, 612-615 (S.D.N.Y. 2014).
 Judge Straub dissented on this basis and believed that the text of the TIA was clear and unambiguous and supported the District Court’s ruling. Judge Straub noted that if Congress had “intended merely to protect against modification of an indenture’s payment terms, it could have so stated” and that “nothing in the text of the statute requires the narrow reading that Section 316(b) merely prohibits modification of an indenture’s core payment terms (amount and due date) by noteholder majority action without consent of the individual noteholder.” He recognized the practical difficulties and uncertainty that his interpretation of the TIA would cause, but noted that such concerns were insufficient to override what he reasoned was the correct reading of the statute.
 Marblegate Asset Management, LLC v. Education Management Finance Corp., 2017 WL 164318 at *4 (2d. Cir 2017).
 Starting in 1936, the Securities and Exchange Commission (SEC) published a comprehensive eight-part report examining the role of protective committees in reorganizations.5 Part VI of that report, published in 1936 and entitled “Trustees Under Indentures” (the “1936 SEC Report”), led to enactment of the TIA. Additionally, the Court reviewed subsequent congressional reports, testimony, and other statements by SEC officials in reaching its decision.
 Marblegate Asset Management, LLC v. Education Management Finance Corp., 2017 WL 164318 at *7 (2d. Cir 2017).
 Id. at *12.
 Id. at *12 (citing to Sharon Steel corp. v. Chase Manhattan Bank. N.A., 691 F.2d 1039, 1048 (2d Cir. 1982)).
This article can be found in the New York Law Journal‘s Corporate Restructuring and Bankruptcy special report.
Amidst the sometimes dramatic fluctuations in commodity prices that buffet the oil and gas industry, investors generally relied on one segment of the market to be safe and stable: so-called “midstream” companies that own the pipelines that transport oil and gas. The rationale was that the oil and gas had to travel, and the fare had to be paid, regardless of the commodity price – not to mention that “take or pay” contracts were the norm in the industry. Investors’ perception of the safety of investments in midstream companies – i.e. the owners of the pipelines – was shaken by a March 2016 decision out of the Southern District of New York Bankruptcy Court permitting a bankrupt oil exploration company to reject its midstream service contracts. In re Sabine Oil & Gas Corp., (No. 15-11835 SCC) (Bankr. S.D.N.Y. March 8, 2016, ECF No. 872) (“Sabine”). Sabine set the stage for several heated battles over a debtor’s ability to reject midstream contracts, and, in the process, introduced concern regarding midstream companies’ cash flows. These conflicts arise at the intersection of the core bankruptcy tool of contract rejection, centuries-old state property law, and how the financing that supported the recent expansion of domestic oil and gas production was structured.
This article discusses the details of these conflicts and how the parties have achieved either resolution or the ability to move on despite the continuing lack of definitive answers in every case.
Please click below to view the full article.
There is at least one thing that both President-Elect Donald Trump and Senator Elizabeth Warren claim to agree on: restoring the Glass-Steagall Act. Senators John McCain and Bernie Sanders are on record in agreement, as well. This strange collection of bedfellows in support of reviving a depression-era law gives simultaneous reason for optimism and suspicion that restored legislation will be achieved.
The Glass-Steagall Act is the common reference to Sections 16, 20, 21, and 32 of the Banking Act of 1933, which separated commercial banking from investment banking. In particular, the Glass-Steagall Act:
- prohibited banks that are members of the Federal Reserve System from underwriting any issue of securities (Section 16);
- restricted banks from affiliating with securities dealers (Section 20);
- precluded securities companies from acting as depository institutions (Section 21); and
- limited the directors and officers of banks from being directors and officers of securities companies (Section 32).
The separation of commercial banks and investment banks eroded over time and then was reversed in the Clinton Administration. The Financial Services Modernization Act of 1999, more commonly known as the Gramm-Leach-Bliley Act, repealed Sections 20 and 32 of the Glass-Steagall Act. That allowed for the creation of financial holding companies that offered an array of financial services through banking, securities, and insurance subsidiaries.
Some have argued the repeal of the Glass-Stegall Act and the creation of large financial holding companies contributed to the collapse of large banks, securities dealers, and insurance companies in 2008. The Senate Permanent Subcommittee on Investigations, for example, concluded that the changes to financial institutions after repeal “made it more difficult for regulators to distinguish between activities intended to benefit customers versus the financial institution itself.” As a result, repeal critics say, some large banks engaged in high risk investments with conflicts of interest and without adequate regulatory oversight.
Restoring the Glass-Steagall Act had been associated with liberal Democrats – like Senator Warren who introduced the “21st Century Glass-Steagall Act of 2015” in the 114th Congress – and non-traditional Democrats like Lyndon LaRouche. But the “21st Century Glass-Steagall Act of 2015” was co-sponsored by Republican Senator and former Presidential candidate John McCain. The 2016 Republican Party Platform supported “reinstating the Glass-Steagall Act of 1933 which prohibits commercial banks from engaging in high-risk investment.” Candidate Donald Trump blamed “lifting Glass-Steagall” as a primary cause of the financial recession and called for “a 21st century Glass Steagall.”
In theory, the Glass-Steagall Act could be restored based on what appears to be broad support across the aisle, with both sides claiming victory. A unified Republican government could attempt to restore it in the 115th Congress in order to appeal to the populist groundswell in the 2016 election. Restoring the Glass-Steagall Act could be offered as a compromise to placate Democrats for deregulating other aspects of the financial services sector.
As a practical matter, in spite of the bi-partisan election year support for restoring some form of the Glass-Steagall Act, there are good reasons for skepticism.
Separating commercial banks from investment banks would require significant government intervention and regulation of the financial services market. That degree of intervention and regulation is opposed to other pervasive Republican-led efforts to reverse the perceived over-regulation of banks. The call for “reinstating the Glass-Steagall Act” in the Republican Party Platform appears in a section on the “quiet tyranny” of federal regulation that “hamstrings American businesses and hobbles economic grown.” If the Volcker Rule is too much regulation for the Republican majority, then it is hard to see how a 21st Century Glass-Steagall Act could succeed.
The largest and most powerful banks and companies in the financial services sector oppose restoring the Glass-Steagall Act. The financial institutions most affected by restoring the Glass-Steagall Act are the largest banks in the United States, which have grown larger during and emerging from the recent financial crisis. President-Elect Trump currently is forming a cabinet and enlisting the help of strategic advisors from among investment bankers and Wall Street executives whose businesses benefited from the repeal of the Glass-Steagall Act.
Since the election and at the time of this post, there has been no mention of Glass-Steagall from the President-Elect, although he and his team continue to advocate dismantling the Dodd-Frank Act and federal regulations adopted during the Obama Administration. As a consequence, restoring the Glass-Steagall Act will likely remain merely a campaign promise.
This post is an in-depth follow up to Scott’s article “Trump Has Been Elected: What Next For Financial Services?” that ran in Bloomberg. The original article can be found here.
As the financial services sector and Republican politicians draft the obituary of the Dodd-Frank Act, it remains to be seen whether that landmark legislation will be survived by the Financial Stability Oversight Council (“FSOC”). Whether FSOC itself survives the advancing wave of deregulation, however, it seems increasingly likely that the FSOC’s reasons for existing will not.
Section 111 of the Dodd-Frank Act created the inter-agency FSOC, made up of the heads of eight independent financial regulators and chaired by the Secretary of the Treasury. In general, the FSOC is tasked with identifying and responding to risks to the financial stability of the U.S. financial system and with encouraging discipline in the financial services market. Like the Department of Homeland Security, the FSOC was created to centralize across federal agencies the analysis and response to financial security threats.
In particular, the FSOC was vested with the authority to determine whether a bank or nonbank financial institution with more than $50 billion in assets is subject to heightened regulation as a “systemically important financial institution” or “SIFI.” SIFIs are the latest incarnation of financial institutions that have long been called “too big to fail,” because they are critically important to our financial system.
In its short life, the FSOC has voted to designate four nonbank financial companies as systemically important: American International Group, Inc., General Electric Capital Corporation, Inc., Prudential Financial, Inc., and MetLife, Inc. In 2016, the FSOC voted to rescind that designation for GE Capital, since it significantly restructured itself over the past three years. Also in 2016, a D.C. federal district court overturned the FSOC’s designation that MetLife – the largest life insurance company in the United States – was a SIFI. The district court concluded that the FSOC’s designation was based on “fundamental violations of established administrative law” and therefore was “arbitrary and capricious.” That decision is now on appeal. As a result, only two nonbank companies remain in the category “systemically important.”
The FSOC also was empowered to designate financial market utilities (or FMUs) as systemically important. The FSOC has designated eight clearing services – such as the Clearing House Payments Company, the Chicago Mercantile Exchange, and the Depository Trust Company – as systemically important FMUs without incident.
House Republicans have criticized the FSOC as a “politicized” structure and part of a “‘shadow regulatory system’ that is both contrary to democratic principles and harmful to the U.S. economy.” Following the November elections, House Financial Services Committee Chair Jeb Hensarling claimed the FSOC is not “adding value to our economy” and as a result it should be tossed “in the trash bin.” “I do not believe any institution in America is too big to fail,” according to Representative Hensarling.
In the 114th Congress, House Republicans introduced legislation that called for:
- limiting when the FSOC can designate a nonbank financial institution for heightened supervision;
- allowing a financial services company to eliminate risk on its own rather than being designated “systemically important”;
- making the FSOC subject to the traditional congressional budget and appropriation process; and
- replacing the $50 billion threshold for bank SIFI designations with a multi-factor test.
Earlier this year, Representative Hensarling introduced the “Financial CHOICE Act of 2016,” which passed his Financial Services Committee and goes even further than his Republican colleagues’ other proposals. Among other forms of deregulation, the CHOICE Act would retroactively repeal the FSOC’s authority to designate nonbank financial companies as “systemically important.” Similarly, the CHOICE Act would retroactively repeal Title VIII of the Dodd-Frank Act, which gives the FSOC authority to designate financial market utilities as systemically important. In short, the CHOICE Act would legislate away the FSOC’s most important reasons for existing.
Representative Hensarling is preparing to introduce a revised version of the CHOICE Act (what he calls a “2.0 version”) early in the new Congress. Increasing congressional oversight and neutering the FSOC as a distinct regulator can be expected to be part of the legislation. Republican legislators will need to offer some concessions to Democrats in order to avoid a filibuster, but the regulatory power of the FSOC will hardly be seen as a grenade worth falling on for the Democrats. In spite of its important statutory mandate, the structure and authority of the FSOC is something only a Washington bureaucrat could love. At least for the FSOC, government regulation of institutions that are too big to fail has likely become too big to survive.