July/August 2011 Bankruptcy Section Newsletter

Section News

CLLA Staff

Submit A Nomination For The Lawrence P. King Award!

The CLLA annual breakfast will feature the presentation of the Lawrence P. King Award For Excellence In Bankruptcy, which is given to a recipient who exemplifies the best in bankruptcy scholarship, advocacy, judicial administration or legislative activities.

  • Download the nomination form here  and...
  • Read more about the CLLA's events at NCBJ here.

CLLA’s Bankruptcy Section Announces Programming For Its NCBJ Events In Tampa, Florida This Fall!

Network with bankruptcy attorneys, accountants, judges and other industry leaders while attending a CLLA-hosted event at the National Conference of Bankruptcy Judges!

The CLLA-sponsored events at NCBJ on Oct. 13, 2011 include:   

  • Our annual breakfast, featuring keynote speaker/CBS sports broadcasting personality Greg Gumbel.
  • Three educational sessions on Chapter 11 issues and bankruptcy ethics -- each features four or more industry experts, including attorneys and judges, and offers an in-depth look at some of today's hottest legal topics.

Find out more about the conference - or how you can market your company or firm to a targeted sector of the legal industry by becoming a sponsor for one of the CLLA events.

Become An Active Member Of The League And Advance Your Career!

The Bankruptcy Section is always looking for ways to involve members and help them develop leadership roles within the section and the League. Serving on a Bankruptcy Section committee will help you to learn from your peers, make more business contacts and develop your leadership skills -- while also helping develop the section. Volunteer and leadership roles exist in many facets of the section, such as:

  • Education – Gain speaking opportunities as a continuing legal education instructor or help develop our programs.
  • Legislative affairs – Voice your opinion on pending legislation.
  • Marketing – Provide ideas to get the word out to the bankruptcy industry about our upcoming events.
  • Mentorship – Serve as a mentor to a new CLLA member.
  • Publications – Write for this e-newsletter and/or our print magazine, Commercial Law World.

If you are interested in any of these opportunities, please contact Meghan Flesch at the League office (mflesch@clla.org, 312-240-1400).

Earn CLE Credit At The New York Meeting’s Outstanding Bankruptcy Programs!

Attorneys may attend this afternoon session of 4 CLE courses (worth 4.75 CLE credits) and attend the evening cocktail party – all for only $300! The program is included for all meeting registrants.

The Value of Everything And The Worth of Nothing: Legal And Practical Perspectives On Understanding Both
Nov. 11, 2011
1:00 – 6:15 p.m. (with cocktail party to follow)
Sheraton New York Hotel and Towers, New York, N.Y.

1:00 – 2:30 p.m.
Valuation: A Primer For Determining How To Determine Value And Analyzing The Numbers Alleged By Your Client (Debtor Or Creditor)
This program will introduce bankruptcy practitioners with general theories and uses of valuation reports and highlight practical limitations of valuation opinions in small businesses and private corporations. Attendees will understand:

  • How to dispel the common myths surrounding the valuation process.
  • How to avoid the accounting assumptions and fuzzy math employed by valuation professionals.
  • Learn practical skills to cross-examine valuation experts and isolate speculative estimates often employed in valuation practice.

Speaker: David Wall, David Wall, EP Forensic & Valuation Services LLP, Ontario, CA
               
2:45 – 3:45
Valuation From The Trustees’ Perspective
A panel of U.S. Bankruptcy Trustees will discuss their perspective of valuation. Speakers:

  • Lori Lapin Jones, Principal, Lori Lapin Jones PLLC
  • Kenneth P. Silverman, Partner, Silverman Acampora
  • Gregory Messer, Principal, The Law Office of Gregory Messer

4:00 – 5:15 p.m.
Valuation From The Bench: A Panel Of Judges Comments On The "Hot Issues" They See From The "Other Side Of The Bench."
Bankruptcy judges will discuss how to avoid some of the troubling issues valuation may cause in exemptions, preference claims, pleadings and sec. 363 sales. In addition, the panel will discuss the new value exception. Speaker:

  • The Hon. Carla Craig, Chief Bankruptcy Judge, U.S. Bankruptcy Court for the Eastern District of New York               

5:15 – 6:15 p.m.
Ten Bankruptcy Cases From This Year Which Affect Your Practice
The presentation will cover 10 cases from all levels, including the Supreme Court. The speaker will offer practical advice derived from the decisions, including suggestions for keeping your case in the bankruptcy court, after Stern v. Marshall. Attendees will leave the program with:

  • Practical knowledge about recent bankruptcy case law decisions that are relevant to their practice.
  • An understanding of the hot and emerging issues in the current bankruptcy climate.

Speaker: The Hon. Harlin "Cooter" Hale, U.S. Bankruptcy Court, Northern District of Texas, Dallas, Texas

Sua Sponte

Peter Califano, Bankruptcy Section chair
Cooper, White & Cooper LLP
San Francisco, Calif.

Recently, Bankruptcy Court Decisions (April 26, 2011) published an articleon a Small Business Administration study analyzing the difficulties of small businesses in bankruptcy.  (See Beyond Bankruptcy: Does the Bankruptcy Code Provide A Fresh Start to Entrepreneurs, available at www.sba.gov/advocacy). 

Since job growth is a key component of solving the current economic malaise, bankruptcy policy could help contribute to the solution by encouraging entrepreneurship. After all, "mom and pop" businesses employ just over half of all private sector employees in America. However, most bankruptcy practitioners would probably agree that reorganization under Chapter 11 of the Bankruptcy Code is too cumbersome and expensive for these types of businesses. 

Judge A. Thomas Small (Ret.), who in the 1980s helped write Chapter 12 for family farmers and fisherman, agrees - and in the recent past, proposed to expand Chapter 12 to include small businesses. 

This is an idea that deserves further review and consideration. Implementation would not only help small business debtors to reorganize but would also help creditors preserve the "going concern" value of their collateral and provide oversight of the case with a trustee -- and all together, may help jobs and job growth prospects in each locale. The Commercial Law League's Legislative Committee is now looking into the matter, and if you have any interest, we invite your participation and/or comment.

Bankruptcy Section members Barbara Barron and Steve Sather just completed briefing and participating in the en banc oral arguments held at the 5th Circuit in the Reed v. Arlington appeal – the court's decision is pending.  As you probably know, this case is an important decision to insure the proper administration of assets that are part of the bankruptcy estate. 

We are also preparing a BAPCPA Survey for our bankruptcy constituents to update current practice under these Bankruptcy Code amendments, and we are fine tuning our section's "critical" legislative reforms list, all for a possible Congressional visit later this summer. 

At the same time, the section will also be participating in the CLLA's overall strategic planning process in August to insure continuity and support for the section for the foreseeable future.  In the meantime, stay busy and have fun-filled summer!

Case Law Analysis

Andrew Abrams
Boodell & Domanskis, LLC
Chicago, IL

Randall Woolley
Askounis & Darcy, P.C.
Chicago, IL

Amendments to Bankruptcy Rules 2019 and 3001

Changes have been proposed to the Federal Rules of Bankruptcy Procedure which will affect bankruptcy practice and should be of interest to parties representing both creditors and debtors in court proceedings.   In particular, the changes to the rules regarding proofs of claim will be of great interest to anyone representing creditors. The amendments to Rules 2019 and 3001 were approved by the Supreme Court on April 26, 2011, and significantly increase the degree of information to be disclosed by creditors when filing certain disclosure statements and proof of claims.  The amended rules also authorize penalties for failing to comply with the heightened disclosure requirements.  Once adopted by Congress, the amended rules will take effect on December 1, 2011 and govern all subsequently filed cases and, "insofar as just and practicable," all pending proceedings.


I. RULE 2019 AMENDMENT – COMMITTEE AND OTHER GROUP DISCLOSURES

Introduction

The degree to which ad hoc committees, including equity holders, bondholders and groups of creditors, must disclose their economic interests in a Chapter 9 or 11 debtor has been frequently litigated, with varying decisions by the courts.  For example, two Delaware bankruptcy courts reached inconsistent rulings on the degree of disclosure required by "groups" of noteholders in the Washington Mutual and "Six Flags" cases.  See In re Washington Mutual, 419 B.R. 271 (Bankr. D. Del. 2009); In re Premier Int’l Holdings, Inc., 423 B.R. 58, 63 (Bankr. D. Del. 2010).  In Washington Mutual, the court found that a "group" of noteholders constituted an ad hoc committee subject to Rule 2019’s requirements.   A New York bankruptcy court reached a similar outcome a few years earlier in the Northwest Airlines case.  See In re Northwest Airlines Corp., 363 B.R. 701 (Bankr. S.D. N.Y. 2007).   More recently, a Delaware bankruptcy court in the "Six Flags" case denied a motion by the official committee of unsecured creditors to compel an informal noteholder committee to comply with Rule 2019.  Rule 2019 did not apply, according to the court, because the group, following the Rule’s existing language, did not represent any persons other than its members.

Amended Rule 2019 was intended to clarify the disclosure requirements for these "ad hoc" groups, as well as to expand its scope, in part, to official committees.

Who is Covered

Amended Rule 2019 expands its coverage to every group or committee in a Chapter 9 or 11 case that consists of or represents, and every entity that represents, "multiple creditors or equity security holders that are (A) acting in concert to advance their common interests, and (B) not composed entirely of affiliates or insiders of one another."  The carve-out for affiliated creditors means a group of affiliated companies or even a group of affiliated funds would not be subject to Amended Rule 2019’s disclosure requirements.
According to the Advisory Committee Notes, Amended Rule 2019 applies to all such groups "even if the group does not call itself a committee."   This means that so called "ad hoc" committees of bondholders, or other parties acting together are subject to Amended Rule 2019 so long as they are acting in concert to advance their common interests.  Amended Rule 2019 also extends its coverage to all committees that consist of more than one creditor or equity security holder, including equity and creditors’ committees formed under Section 1102 of the Bankruptcy Code or retiree committees formed under Section 1114.  Previously, members of an official committee were not required to disclose their economic interests. 

Unless a court orders otherwise, Amended Rule 2019 does not apply, solely because of its status, to an indenture trustee, an agent for one or more entities under an agreement for the extension of credit, a class action representative or a governmental unit that is not a person.

The amendments to Rule 2019 also expressly define the meaning of "represent" in an effort to clarify precisely which groups must conform to the Rule’s disclosure requirements.  "Represent" is defined at Amended Rule 2019(a)(2) to mean active representation in a case, on behalf of another, by "tak[ing] a position before the court" or "solicit[ing] votes regarding the confirmation of a plan.  Therefore, an attorney can informally monitor a case on behalf of several creditors, but so long as he or she does not advocate on behalf of his clients, Amended Rule 2019 would not apply.

What Must Be Disclosed

Amended Rule 2019(b) requires that the court-filed verified statement include:

  • For groups or committees (other than committees appointed pursuant to Sections 1102 or 1114 of the Code), the pertinent facts or circumstances concerning the formation of the group, including the name of each group at whose instance the group or committee was formed or for whom the group has agreed to act;
  • For an entity representing multiple creditors or equity security holders, the facts and circumstances concerning the employment of the entity including the name of each entity at whose instance the employment was arranged;
  • For each entity representing multiple creditors or equity security holders and each member of the group or committee (including official committees), their names and addresses, and the nature and amount of its "disclosable economic interest" (discussed below) held in relation to the debtor as of, for an entity, its employment, or for the member, as of the date the group or committee was formed.  Each member (except  for official committees) must also disclose the date of acquisition by quarter and year of each of disclosable economic interest, unless acquired one year before the petition date;
  • For each member of a group or committee represented by the entity, group or committee (other than an official committee), and if not otherwise disclosed, its name, address, and the nature and amount of each disclosable economic interest held in relation to the debtor as of the filing date; and
  • A copy of the instrument, if any, authorizing the entity, group or committee to act on behalf of its members.

Amended Rule 2019(a) defines a "disclosable economic interest" as "any claim, interest, pledge, lien, option, participation, derivative instrument, or any other right or derivative right granting the holder an economic interest that is affected by the value, acquisition, or disposition of a claim or interest."   Notably, the date on which a creditor or equity security holder acquired its disclosable economic interest is required to be disclosed only by (i) an entity representing multiple creditors or equity security holders and (ii) each member of a group or committee (except official committees) so long as its interest was acquired within a year of the filing date.  Members represented by a group or unofficial committee need only disclose their economic interest in the debtor as of the filing date without regard to the acquisition date.

One other change from the existing Rule 2019 removes the requirement that the disclosure statement include the price paid for the economic interest.   However, the advisory committee notes provide that nothing in Amended Rule 2019 prevents such information from being disclosed through discovery or court order in accordance with other authority.

Duty to Supplement

If any fact in the most recently disclosed statement has changed materially, Amended Rule 2019(d) requires that a verified supplemental statement be filed whenever the entity, group or committee takes a position before the court or solicits votes on plan confirmation. The supplemental statement must set forth the material changes to the information required to be disclosed.

Sanctions

Whether on its own motion, or the motion of any party in interest, the court may determine non-compliance with Amended Rule 2019 and enter an appropriate sanction.  Upon a finding of non-compliance, the court may (i) refuse to permit the entity, group or committee to be heard or to intervene in the case, (ii) invalidate any authority, acceptance, rejection, or objection given, procured or received by the entity group or committee or (iii) grant other appropriate relief.

II. RULE 3001 AMENDMENT – PROOF OF CLAIMS

Introduction

Bankruptcy Rule 3001 governs the filing of proof of claims.  Both section (c) of Rule 3001 and the proof of claim form (Official Form B10) have been significantly revised.  Creditors of individual debtors must provide a much more detailed account of their claims and face sanctions for failing to do so. 

Disclosures Required

The amendments clarify the "long-established disclosure requirement that a creditor presenting a claim in an individual-debtor case provide an itemized statement of the interest, fees, expenses and other charges incurred before the petition was filed."  See Report of the Judicial Conference, Committee on Rules of Practice Procedure.  The current version of Rule 3001 does not specifically require such disclosure and creditors reasonably could have complied with Rule 3001 simply by attaching the contract or other writing upon which their claim was based.  Creditors may now be sanctioned for failing to provide an itemized statement of account.

Creditors must also provide additional information regarding secured claims.  A creditor claiming a security interest in the debtor’s property must provide a statement of the amount necessary to cure any default as of the date the petition was filed.  A creditor claiming a security interest in the debtor’s principal residence must also include the attachment prescribed by the appropriate Official Form.

Sanctions

The sanctions authorized under Rule 3001(c)(2)(D) include precluding the creditor from presenting the omitted information, in any form, as evidence in any contested matter or adversary proceeding unless the failure was substantially justified or is harmless.  The bankruptcy court may also award other appropriate relief, including reasonable expenses and attorney’s fees caused by the failure to comply with the disclosure requirements.  As a practical matter, as a result of the new potential sanctions resulting from inadequate disclosures on a proof of claim form, attorneys who represent creditors and execute proofs of claim on behalf of their clients may decide that it is advisable to have proofs of claim forms be executed directly by their clients instead.

New Proof of Claim Form

The proof of claim form has been modified to assist creditors in meeting these new disclosure requirements.  Section 1 now requires creditors to check a box if interest or other charges are included, and indicates that an itemized statement should be attached.  In Section 5, creditors must now identify the amount past due as of the date the case was filed and provide the annual interest rate.   

Filers now must also declare under the penalty of perjury that the information is true and correct to the best their knowledge, information and reasonable belief.  Given the supporting information required and potential for sanctions, creditors will need to spend additional time reviewing documents and preparing claims before filing.

Pending State Legislation

California AB 506: A bill related to local government bankruptcy and neutral evaluation.

Status: Comm. Action: Do pass as amended and re-refer to the committee on rules (7/12/11).

California SB 664: A bill related to banking and financial institutions.

Status: From committee: Do pass. Ordered to consent calendar (7/13/11).

Minnesota HF 382: Receiverships and assignments for the benefit of creditors and nonprofit corporations; relevant statutes amended.

Status: Referred to Judiciary and Public Safety – 4/5/11.

New Jersey S 2985: A bill concerning rights of financial counterparties to terminate and settle certain agreements with certain insurers in the event of insolvency or liquidation.

Status:  Introduced in the Senate, Referred to Senate Commerce Committee (6/29/11).

Washington Hot News:

New Report Questions Value Of Bankruptcy Code

According to a July 19th Government Accountability Office report to Congress, entitled: "Bankruptcy: Complex Financial Institutions and International Coordination Pose Challenges," (GAO-11-707), the effectiveness of the bankruptcy code ("Code") in resolving failed complex financial institutions compared with using other processes, e.g., Federal Deposit Insurance Corporation receivership under the Orderly Liquidation Authority (OLA), is unclear.

The report examined:

  • U.S. District Court for the District of Columbia actions in response to the judicial review provision of the OLA;
  • The effectiveness of Code Chapters 7 and 11 assisting in the orderly resolution of failed financial institutions;
  • Proposals for improving the effectiveness of liquidations and reorganizations under the Code; and
  • Mechanisms facilitating international coordination, as well as barriers to such, of financial institution bankruptcies.

The report stated the effectiveness of the Code for facilitating orderly liquidations/reorganizations of complex, international financial institutions is difficult to measure because there have been too few large-scale bankruptcies, there is a lack of data, and often there is government involvement.

The report did indicate that the Administrative Office of the United States Courts, the Department of Treasury, and federal financial regulators previewed a draft of the report and provided technical comments which were incorporated as appropriate.

U.S. Covered Bond Act of 2011

Declares any covered bond issued or guaranteed by a bank is a security issued or guaranteed under specified securities laws.

Penn. Governor Signs Legislation Preventing Cities From Filing For Bankruptcy Petitions

In late June, Gov. Tom Corbett (R-Penn.) signed legislation S.B. 907, which includes a provision barring cities that have been designated as "financially stressed" by the state they are located in from filing a municipal bankruptcy petition under federal bankruptcy law prior to July 1, 2012.

Failure to comply would result in suspension of all state funding to the city. The provision applies only to cities of the third class, which is based on population size and includes 53 Pennsylvania municipalities, including the capital city of Harrisburg.

Bill Introduced To Require Corporations To File Reorganization Cases In Their District

Late last week, House Judiciary Committee Chairman Lamar Smith (R-Texas) and ranking member John Conyers (D-Mich.) introduced H.R. 2533, "The Chapter 11 Bankruptcy Venue Reform Act of 2011," a bill intended to prevent forum shopping in Chapter 11 bankruptcy cases.

The bill requires corporations to file reorganization cases in the judicial district where their principal place of business or principal assets are located, rather than in a district where they have no connection to the community. Specifically, the bill adds the following subsection at the end of 28 U.S.C. §1408:

"(b) A case under Chapter 11 of Title 11 in which the person that is the subject of the case is a corporation may be commenced only in the district court for the district -

(1) in which the principal place of business in the United States, or principal assets in the United States, of such corporation have been located for 1 year immediately preceding such commencement, or for a longer portion of such 1-year period than the principal place of business in the United States, or principal assets in the United States, of such corporation were located in any other district; or

(2) in which there is pending a case under Chapter 11 of Title 11 concerning an affiliate of such corporation, if the affiliate in such pending case directly or indirectly owns, controls or holds with power to vote more than 50 percent of the outstanding voting securities of such corporation."

Subcommittee on Courts, Commercial and Administrative Law Chairman Howard Coble (R-N.C.) and ranking member Steve Cohen (D-Tenn.) are the original co-sponsors of the bill.

"Ten years ago, the discovery of Enron's massive fraud perpetrated on its shareholders, creditors and 7,500 Houston-based employees forced the company to file for bankruptcy," Smith said in a press release. "But rather than face the music in Texas, Enron filed a Chapter 11 case thousands of miles away in New York City, a jurisdiction with a reputation in the bankruptcy community for being management-friendly."

Conyers echoed Smith's sentiment.

"This long-overdue legislation will help level the playing field between employees and management in corporate Chapter 11 bankruptcy cases and restore fairness," he said.
The effective date of the legislation would be the date of enactment.

Are Recess Appointments To The CFPB Coming Soon?

On July 11, Rep. Barney Frank (D-Mass.), speaking at the National Press Club, said that President Obama should make recess appointments to the CFTC, suggesting that Senate Republicans might allow recess appointments during the August break.  
Frank's comment indicates that there could potentially be recess appointments to the Consumer Financial Protection Bureau at the same time.

Bill Introduced To Block Display Or Sale Of Social Security Numbers

On June 15, Sen. Dianne Feinstein (D-Calif.) introduced S. 1199, the Protecting the Privacy of Social Security Numbers Act, a bill to amend the federal criminal code to prohibit the display, sale or purchase of Social Security numbers without the expressed consent of the individual - except in specific circumstances. 
The bill was referred to the Senate Committee on the Judiciary.