Recent Developments

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Recent Developments

New Bankruptcy Resource: The Absolute Priority Newsletter

As a member of the Bankruptcy & Restructuring Group at Cooley Godward Kronish LLP, I wanted to let you know that we have just launched a new quarterly newsletter called Absolute Priority. The newsletter give updates on current developments in bankruptcies and workouts with the goal of keeping you "ahead of the curve" on these issues. You can access a copy of the first edition here and can register to receive future editions.

The inaugural edition is focused on the first year of experience under the October 2005 Bankruptcy Abuse Prevention and Consumer Protection Act (known as BAPCPA). It includes articles on:

A two-page chart on M&A transactions involving Chapter 11 cases and an update on some of the bankruptcy and workout matters we have handled recently are also included. The newsletter starts with a welcome from my partner, Lawrence Gottlieb, the Chair of our Bankruptcy & Restructuring Group, and a note from another of my partners, Adam Rogoff, the editor of Absolute Priority.

I hope you find Absolute Priority informative and helpful.

Recent Developments

Trade Credit Insurer Predicts 10% Increase In Corporate Insolvencies In 2007

In a report issued last month, trade credit insurer Euler Hermes predicted that corporate insolvencies in the United States will increase by 10% in 2007. You can find details about this estimate, as well as a very interesting global economic analysis, in the full Euler Hermes global macroeconomic and insolvency outlook report.  

This updated report reflects a slightly larger predicted increase in corporate bankruptcy levels from those in its report from July 2006, which I reported on in a prior post. Interestingly, while the July report predicted that corporate insolvencies would fall by 5% in the United States during 2006, this new report states that business bankruptcy filings for 2006 will end up falling by 20% over 2005 levels. 

The report anticipates a "soft landing" for the U.S. economy in 2007, despite decelerating consumer spending, a sharp downturn in construction, an unemployment rate predicted to rise to 5.8%, and a growing current account deficit. The combination of these cyclical factors and the lower level of insolvencies in 2006, however, are likely to drive Chapter 11 bankruptcy levels higher in 2007.

Business Bankruptcy Issues Recent Developments

Bankruptcy Notices: New Rule Lets Creditors Choose A Preferred Address

You’re a creditor in a bankruptcy case and a bankruptcy notice arrives on your desk setting a deadline to object to an important motion. The address on the notice is a P.O. box located a thousand miles away, one used only for customer payments and not for legal notices. As a result, the notice took a long time to be routed to you. When you look at it more closely, you realize that so much time has passed that the deadline to respond was last week and the hearing took place yesterday. The situation can be even worse if the late-arriving notice is about a deadline (also known as a "bar date") for filing a proof of claim or perhaps for responding to an objection to your claim. 

Sound familiar?

Ability To Designate An Address. Well, one of the lesser known changes made by the 2005 amendments to the Bankruptcy Code, the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"), permits creditors to designate a preferred address for receiving bankruptcy notices. Section 342(f) of the Bankruptcy Code, added by BAPCPA, allows creditors to use one preferred address for cases in every bankruptcy court in the country or to designate different addresses for cases in specific bankruptcy courts.

National Creditor Registration Service. To implement this new rule, a National Creditor Registration Service ("NCRS") has been created. According to its website, the NCRS is "a free service provided by the U.S. Bankruptcy Courts to give creditors options to specify a preferred U.S. mail, e-mail address, or fax number to which bankruptcy notices should be sent." Creditors can choose to receive paper notices mailed to one or more designated addresses or faxed to specific fax numbers. Creditors also have the option of receiving bankruptcy court notices via email by registering for the Electronic Bankruptcy Noticing ("EBN") system.

  • A creditor’s preferred address and delivery method will be substituted for any address used in a bankruptcy mailing matrix (the official list of addresses for its creditors that a debtor files with the bankruptcy court) within 30 days of the creditor’s registration. (Although Section 342(f) itself mentions only Chapters 7 and 13 of the Bankruptcy Code, as implemented the system is being applied to all cases, including Chapter 11 cases.)
  • When registering, it’s important to list all of the different versions of a creditor’s name, including formal corporate names, a "doing business as" name, and even common misspellings of the creditor’s name. The service’s software will attempt to match the names the creditor supplied to the one listed in the debtor’s mailing matrix. If a match cannot be made, the notice will be sent to the address listed by the debtor.
  • NCRS allows you to complete forms online or to print them and send them in. You can find the registration forms here, here, and here, but I suggest going to the NCRS registration website itself to make sure you are using the most up-to-date forms and procedure.
  • A creditor or its bankruptcy counsel can always file a request for special notice with the bankruptcy court in a particular case using a specific address for notices in that case. In that circumstance, the address listed in the case-specific notice request will be used instead of the NCRS-listed address.

Be Prepared. Regardless of which option creditors choose, they should be prepared to handle the volume of notices that may be directed to the physical or email address. If using a physical address, creditors should be sure to monitor that address regularly and be in a position to process the notices received. A dedicated P.O. box may make sense in some cases. If an email address is used, it may be helpful to use a special email address or account for notices, create email rules to direct notices to the right person, or use other software to monitor and process those notices. With good procedures in place, the NCRS and EBN services should help creditors receive important bankruptcy notices in time to protect their rights.

What If Something Goes Wrong? Another new provision, Section 342(g), governs the situation in which notice does not get to the right address. Although courts have not yet answered how it applies in various contexts, the section provides that a notice is not "effective notice" unless it’s sent in compliance with the Bankruptcy Code’s notice rules or it’s actually brought to the creditor’s attention.

  • This section allows a creditor to designate "a person or an organizational subdivision" to be responsible for receiving bankruptcy notices. If the creditor also establishes "reasonable procedures" so that notices are delivered to the designated person or subdivision, a notice sent to the creditor other than in accordance with Section 342’s procedures "shall not be considered to have been brought to the attention of such creditor until such notice is received by such person or such subdivision."
  • In addition, a creditor that did not receive a notice of the bankruptcy filing complying with Section 342’s provisions may have a defense to a claim that it violated the automatic stay.
  • While helpful to creditors, these provisions raise questions about how debtors and trustees can be sure to send out effective notice, especially if they are not aware of which person or subdivision a particular creditor has designated for notice. That problem will be reduced if many creditors register with the NCRS or EBN system.

Get Advice. As always, if you have questions about these procedures or how they may affect you as a debtor or creditor, be sure to get advice from your bankruptcy counsel.

Recent Developments

Two Search Tools For Finding Topics On Legal Blogs

I wanted to let you know about two resources that you may find helpful when trying to locate posts on legal blogs (called blawgs by some), including business bankruptcy topics. 

On the legal blog front, Justia, a company that helps legal and other bloggers design and maintain blogs, has a new service known as Justia Blawg Search. It’s both a search engine and a law blog directory, and you may find it useful if you are looking for articles and other posts by legal bloggers. 

Google also has a special search tool called Google’s Blog Search. Although still in beta, it’s focused on blogs of all kinds, including legal blogs. This tool can be particularly helpful if you want Google search results limited just to blogs. Of course, the main Google search engine includes blogs in its search results when relevant.

 

Recent Developments The Financially Troubled Company

New Delaware Decision Limits Direct Creditor Claims Against Directors In The “Zone Of Insolvency”

The Delaware Court of Chancery has issued another decision involving creditor claims against directors of a financially troubled corporation. In North American Catholic Educational Programming, Inc. v. Gheewalla, et al., 2006 WL 2588971 (Del. Ch. Sept. 1, 2006), Vice Chancellor Noble made two important holdings:

  • First, although derivative claims can be brought, creditors may not assert direct claims against directors of a Delaware corporation for alleged breaches of fiduciary duty that occur while the corporation is in the "zone of insolvency." 
  • Second, assuming Delaware law would allow any creditor to bring a direct, non-derivative claim against directors of an actually insolvent corporation (still an unresolved question), the suing creditor’s right to payment would have to be "clearly and immediately due." Thus, creditors with disputed or contingent claims likely will not be able to assert a direct claim for breach of fiduciary duty, even if the corporation is in fact insolvent.

A copy of the decision is available here. Thanks to the Delaware Business Litigation Report blog for reporting on it first. 

No direct claim in the "zone of insolvency." The court’s refusal to permit a creditor to assert a direct claim — as opposed to a derivative claim — against corporate directors for breach of fiduciary duty in the zone or vicinity of insolvency was based on its careful analysis of the arguments for and against such claims. The court summed up its reasoning:

Indeed, it would appear that creditors’ existing protections—among which are the protections afforded by their negotiated agreements, their security instruments, the implied covenant of good faith and fair dealing, fraudulent conveyance law, and bankruptcy law—render the imposition of an additional, unique layer of protection through direct claims for breach of fiduciary duty unnecessary. Moreover, any benefit to be derived by the recognition of such additional direct claims appears minimal, at best, and significantly outweighed by the costs to economic efficiency. One might argue that an otherwise solvent corporation operating in the ‘zone of insolvency’ is one in most need of effective and proactive leadership—as well as the ability to negotiate in good faith with its creditors—goals which would likely be significantly undermined by the prospect of individual liability arising from the pursuit of direct claims by creditors.

Unclear if direct claims can be brought at all, even in a case of actual insolvency. The court engaged in a different analysis, focused more on the deficiency of the actual allegations in the complaint, in dismissing direct claims against the directors during the corporation’s alleged actual insolvency. However, the court commented that, to the extent Delaware law would permit a creditor to have a direct claim against directors of an insolvent corporation for breach of fiduciary duty, the claim would have to involve invidious conduct directed at that creditor. In so holding, the court relied heavily on two earlier decisions of the Court of Chancery, one by Vice Chancellor Strine in Production Resources Group v. NCT Group, Inc., 863 A.2d 772 (Del. Ch. 2004) (discussed in an earlier post) and the other by Vice Chancellor Lamb in Big Lot Stores, Inc. v. Bain Capital Fund VII LLC, et al., 2006 WL 846121 (Del. Ch. March 28, 2006) (available here). These decisions, taken together, suggest that most if not all creditor claims for breach of fiduciary duty against directors of insolvent Delaware corporations will be characterized as derivative and not direct claims.

Developing trend against expanding a director’s exposure to creditor claims. The Production Resources, Big Lot Stores, and now North American Catholic Educational Programming decisions, together with the recent Trenwick America Litigation Trust case refusing to recognize a cause of action for deepening insolvency (discussed in an earlier post), reflect the Delaware Court of Chancery’s resistance to attempts by creditors to expand the liability of directors when a corporation is insolvent or in the zone of insolvency. Although well-stated derivative claims by creditors for breach of fiduciary duty may be recognized by the courts in some cases, a direct claim by a creditor — if such a claim exists at all under Delaware law — seems to be limited to the rare circumstance in which that particular creditor was the only creditor harmed by an alleged breach of fiduciary duty. The Delaware Supreme Court has yet to weigh in, but these four decisions from three different Vice Chancellors indicate that the Court of Chancery is developing a consistent view on these issues.

Recent Developments

Inside The Fed’s Thinking About Economic Conditions And Trends

Earlier today the Federal Reserve Board released minutes from the Federal Open Market Committee’s ("FOMC") most recent meeting, held on August 8, 2006.  Having made some recent posts about the number of corporate defaults and bankruptcies predicted for 2007 (see earlier posts here and here), I thought you might be interested to see what the FOMC’s minutes had to say about current economic conditions and indicators about the economy’s future direction.

Here are a few key excerpts:

In their discussion of the economic situation and outlook, meeting participants noted that the slowing of GDP growth in the second quarter was generally in line with expectations, reflecting the continued cooling of the housing market, the restraining influence on demand of higher energy prices, and the lagged effects of past increases in interest rates. Going forward, output was expected to advance at a pace at or slightly below the economy’s potential rate of growth, but several participants noted that the annual revision to the national income and product accounts suggested this growth rate likely was lower than previously believed. Incoming information with regard to inflation had not been encouraging. Still, most participants thought that, with energy prices possibly leveling out, aggregate demand moderating, and long-term inflation expectations contained, core PCE inflation likely would decline gradually from its recent elevated level, though the upside risks to inflation were significant.

In their discussion of the major sectors of the economy, participants noted that residential construction activity had continued to recede over the past few months and cited the housing sector as a downside risk to the outlook for growth. The rate of new home sale cancellations, which was identified as an important leading indicator by some contacts in the construction industry, had spiked higher. Single-family housing starts and permits continued to fall, and inventories of unsold housing appeared to have risen significantly, pointing to continued slowing in this sector. Some participants observed that the slowing seemed to be orderly thus far, but it was also noted that in some areas of the country housing construction had experienced a relatively sharp fall. In general, participants expressed considerable uncertainty regarding prospects for the housing sector.

Meeting participants noted that the continued increases in energy prices and borrowing costs appeared to have restrained consumer spending growth in recent months. Contacts in the retail sector generally reported a continued slowing of growth in sales, although the situation differed somewhat by region and type of good or service. Reliable, comprehensive data were not yet available on recent house price movements, but the rate of appreciation appeared to be moderating and was likely to slow further in coming months. The slower pace of increase in housing wealth would restrain consumption growth, though by how much was uncertain. However, the financial condition of households, as judged by indicators such as bankruptcy filings and loan delinquencies, appeared to remain solid. Overall, consumption spending seemed likely to expand at a moderate pace in coming quarters.

Although business fixed investment in the second quarter was a little lower than had been expected, participants noted that this development appeared mainly to reflect the timing of purchases, particularly of transportation equipment, and not weakness in the underlying trend. Some participants noted that nonresidential construction had continued to strengthen, offsetting some of the contraction in residential construction. Looking forward, strong business balance sheets and high profitability were seen as supporting continued growth in expenditures on software and equipment. However, it was noted that if the reported slowing of increases in retail sales continued, businesses might trim capital spending plans.

In short, it’s unclear whether we’ll see the "soft landing" slowdown in growth that the FOMC expects, or a more significant housing-led downturn as some, such as Professor Nouriel Roubini of the NYU Stern School of Business, are predicting.  Either way, these minutes discuss some of the key factors that are likely to influence the economy — and the Fed — in the coming months. 

For those interested in reading the entire FOMC minutes (including the statement that many participants in the FOMC meeting viewed the August pause in raising interest rates as a "close call"), you can find them here.

 

Recent Developments

Cooley Godward To Merge With Kronish Lieb, Creating Nationwide Bankruptcy Practice

I wanted to share with you some very exciting news about my firm and practice. Yesterday, Cooley Godward announced that the firm will merge with Kronish Lieb Weiner & Hellman LLP, a premier 110-lawyer New York firm with highly ranked bankruptcy, tax and complex commercial and white collar litigation practices. The merger will create a 550-lawyer firm with a coast-to-coast, high-caliber litigation practice, extensive corporate transactional capabilities and a significant presence in New York. The merger will be effective October 1, 2006, and the new firm name will be Cooley Godward Kronish LLP. Click here if you’d like to read the full press release.

The combination brings together Kronish’s leading bankruptcy and restructuring practice, ranked #1 in The Deal’s Bankruptcy Insider league tables in 2006 for Top Unsecured Creditor Law Firms, with Cooley’s deep expertise representing creditors committees, debtors, and other clients in bankruptcy matters involving technology companies and intellectual property assets. The combined firm will have more than 20 bankruptcy and restructuring attorneys nationwide.

Kronish has represented scores of unsecured creditors committees in some of the nation’s largest and best-known bankruptcies and out-of-court workouts, including Montgomery Ward, Federated Department Stores, and Footstar. Kronish has also represented numerous employee and retiree committees including, most notably, the United Airlines ESOP Committee, the Enron Employee Related Issues Committee, the Bonwit Teller Retiree Committee and the LTV Retiree Committee. 

In addition, Kronish has served as reorganization counsel in significant debtor cases, including the $5 billion Metromedia Fiber Network Chapter 11 case and, together with Cooley, the $1.2 billion Old UGC Chapter 11 case. 

Having worked with Kronish’s bankruptcy attorneys on a number of matters over the past several years, I couldn’t be more delighted with the news and look forward to working with my new colleagues to serve our combined firm’s clients.