ABI Supports Passage of Three New Bankruptcy Bills

Petition to file for bankruptcy

Photo by Melinda Gimpel on Unsplash

For more than three decades, Norman Kinel has practiced bankruptcy law in the Greater New York City area. He is currently a partner at Squire Patton Boggs, LLP, handling bankruptcy, and restructuring cases. Active in his professional community, Norman Kinel belongs to the American Bankruptcy Institute (ABI).

Since 1982, ABI has provided bankruptcy attorneys, judges, lenders, and other professionals with continuing education opportunities, legal research information, and networking events. Recently, the organization announced that the United States Senate passed three new bills that will modernize bankruptcy code in the country. These three bills are the HAVEN Act, the Small Business Reorganization Act of 2019, and the Family Farmer Relief Act of 2019. ABI testified in support of these bills and regards the Senate’s decision to pass them as a positive potential change in bankruptcy law.

The HAVEN Act affects veterans and injured individuals in the United States. According to this new bill, which was included in June’s National Defense Authorization Act, disability payments from the Department of Defense and Department of Veterans Affairs are to be excluded from income calculations used during bankruptcy filings. 

Meanwhile, the Family Farmer Relief Act of 2019 makes changes to Chapter 12 of the US Bankruptcy Code to reflect the financial challenges facing distressed farmers and fishers today.

Finally, the Smaller Business Reorganization Act of 2019 adds a subchapter to Chapter 11 that provides small businesses a better way to solve debt problems by reducing liquidations, increasing creditor recoveries, and saving jobs.

Article Examines the Future of Unsecured Creditors’ Recovery Efforts

A partner with Squire Patton Boggs, Norman Kinel brings more than 30 years of experience to bear as a bankruptcy attorney involved in some of today’s most complex Chapter 11 cases. Recently, Squire Patton Boggs served as lead counsel for the Official Committee of Unsecured Creditor in the Chapter 11 cases of Constellation Enterprises, LLC, et al. As Normal Kinel outlines in a recent journal article, the ruling in this case, based on an interpretation of a recent Supreme Court decision, may have significant implications for future recovery efforts by unsecured creditors.

In many of today’s large Chapter 11 cases, because the debtors are so over-leveraged, general unsecured creditors do not have a strong chance of a meaningful recovery. To improve the chances of a recovery, it is therefore a common practice for official unsecured creditors’ committees to try and leverage their position by asserting their rights under the U.S. Bankruptcy Code. This often involves raising good faith objections to a number of matters, then seeking to negotiate a settlement of these objections. At times, such a settlement may involve the “gifting” of certain non-estate assets to a trust (either liquidating or litigation) that has been established for general unsecured creditors’ benefit. In essence, this practice may have the effect of skipping certain claimants who have a higher priority than that of general unsecured creditors.

However, as a result of the recent Supreme Court ruling in Czyzewski v. Jevic Holding Corp., bankruptcy courts are now generally deemed not to have the legal power to order a distribution scheme that skips priority claimants and must not deviate from ordinary priority rules without the consent of the affected creditors or unless it is in furtherance of some other permissible bankruptcy code based objective. Consequently, in the Constellation Chapter 11 cases, the Bankruptcy Court did not approve the settlement agreement, reasoning that it was not permissible under Jevic. Although the Committee in Constellation disagreed and appealed the denial of the settlement, while the appeal was still pending, the Constellation Chapter 11 cases were converted to Chapter 7. In an opinion issued by the District Court, the Committee was determined to have been automatically dissolved upon conversion and as a result, the settlement appeal was dismissed.

If in the future courts follow the Bankruptcy Court’s ruling in Constellation, creditors’ committees may find their options and leverage for recoveries to be significantly impaired. For a closer look at the Constellation case and its implications, see Norman Kinel’s article, authored with his partner Nava Hazan, in the November/December 2018 issue of the Journal of Corporate Renewal.

Norman Kinel Co-Authors Article for the Journal of Corporate Renewal

A graduate of the American University Washington College of Law, Norman Kinel is a partner with Squire Patton Boggs’ Restructuring and Insolvency Group. Recently, Norman Kinel co-authored an article published in the Journal of Corporate Renewal titled “Did Jevic Doom Future Chapter 11 Recovery Efforts by Unsecured Creditors?”

The article begins with a focus on a Chapter 11 bankruptcy case involving Constellation Enterprises, LLC, et al., a private entity which produces metal parts for companies in the oil and gas, air transportation, nuclear, and rail transportation industries. An official committee of Constellation's unsecured creditors entered into a settlement agreement with Constellation and its senior secured lenders and submitted a motion for approval of the settlement agreement to the federal bankruptcy court. The settlement agreement provided for the contribution by the senior secured lenders of certain non-bankruptcy estate assets -- including cash and certain litigation claims -- to a trust to be established for the benefit of unsecured creditors. However, the proceeds of the trust would not be distributed in strict accordance with the Bankruptcy Code's "absolute priority rule." 

Due to the disparate proposed distribution of the assets to be received under the settlement agreement to priority claimants, such as the IRS, as well as to a group of delayed-draw term loan lenders (DDTL), the IRS, the United States Trustee and the DDTL lenders filed objections to the settlement agreement. The bankruptcy court, however, deferred action on the matter until the U.S. Supreme Court made a ruling in a case known as Czyzewski v. Jevic Holding Corp. 

Ultimately, in the Jevic case the high court reversed a 3rd U.S. Circuit Court of Appeals ruling that had allowed the distribution of non-estate assets to general unsecured creditors, even when skipping distribution higher-priority unsecured claimants.

As a result of the Supreme Court’s ruling in Jevic, the bankruptcy court declined to approve the settlement. On appeal, the committee disputed the applicability of the Supreme Court's Jevic ruling to their settlement, but the appeal was ultimately dismissed when the Chapter 11 case was converted to a Chapter 7 bankruptcy case. 

As a result, according to the journal article, the appeal was never determined on its merits, and an important issue has yet to be decided by an appeals court: whether the ruling set forth in Jevic prevents priority-skipping settlements where the property to be given in consideration is not property of the bankruptcy estate.

A Look at the Lehman Brothers Case

An alumnus of the American University, Washington College of Law, Norman Kinel has pursued a distinguished career in bankruptcy law spanning more than three decades. Over the years, Norman Kinel has worked on many major bankruptcy cases, including the Lehman Brothers case, where he represented individual clients and was also later selected to serve as a court-approved mediator.

The largest bankruptcy case in American history, the 2008 collapse of Lehman Brothers sent shockwaves through the financial markets and helped to precipitate a global financial crisis that devastated world economies and led to substantial regulatory and market reforms. This collapse was due in part to Lehman Brothers’ rapid acquisition of mortgage lenders in previous years and a reliance on subprime mortgage securities, which left the financial giant exposed to the housing collapse that began in earnest in 2007.

Now, 10 years after Lehman Brothers filed for bankruptcy, the trustee in charge of the proceedings has stated that the case is winding down. According to a court filing by James Giddens, only a few hundred of the more than 140,000 initial claims against Lehman Brothers remain open. According to the filing, secured creditors were repaid in full, while unsecured creditors received nearly 40 cents on the dollar for their claims.