Restructuring

We promise not to make our next trivia contest too hard!  Not counting our one unfair question (see below), only four respondents missed fewer than two questions, so we are donating an additional $100 to inMotion’s second annual Story by Story event on October 6.  Of those four, though, three only missed one question, and one was randomly selected to win our Weil Back to School collection.  To help you look like a real restructuring guru at your next ABI or TMA event, here are the answers.
Q:  What is the name of the principle under which it is routinely held that the postpetition draw of a letter of credit does not violate the automatic stay in the account party’s bankruptcy, and what infamous decision is said to have violated that principle?

A:  As we discussed in our very first blog entry, under the “independence principle,” a letter of credit, once issued, is an independent obligation of the issuer to the beneficiary, and its draw cannot be enjoined upon the occurrence of the debtor’s bankruptcy filing.  The only decision to have held otherwise — Twist Cap, Inc. v. Southeast Bank of Tampa (In re Twist Cap, Inc.), 1 B.R. 284 (Bankr. M.D. Fla. 1979) — was universally rejected and roundly criticized.

Q: What well-known supermarket chain, founded in Harrisburg, Pennsylvania, had over 500 locations at its peak only to file for bankruptcy in 1978 after a disastrous series of expansions and acquisitions, including the purchase of J.M. Fields department stores and expansions into drug stores, gasoline stations, and shoe stores?

A: Food Fair was the supermarket chain that owned about 90 J.M. Fields department stores and hundreds of Pantry Pride supermarkets at the time of its bankruptcy filing in 1978.  In a recent column in the Philadelphia Business Journal, a former executive of Food Fair draws comparisons between Food Fair’s case and the Borders chapter 11 case.

Q.  With all the recent hooplah about the collision of bankruptcy law and Constitutional matters, it is interesting to note that the Federalist Papers only make one mention of bankruptcy throughout the series of 85 articles.  Who wrote this article and what did he say?

A.  On January 22, 1778, James Madison published The Federalist No. 42, in which he stated, “The power of establishing uniform laws of bankruptcy is so intimately connected with the regulation of commerce, and will prevent so many frauds where the parties or their property may lie or be removed into different States, that the expediency of it seems not likely to be drawn into question.”

Q.  Which American author filed for bankruptcy in 1894 as a result of an investment in an unsuccessful publishing venture and worthless typesetting machine?

A.  Samuel L. Clemens, a.k.a. Mark Twain, filed for bankruptcy in 1894, after investing $300,000 in his friend James Paige’s typesetting machine.  The typesetting machine was rendered obsolete after the introduction of Linotype.  At least Mr. Clemens could fall back on one of his famous quotes, from the 1873 novel A Gilded Age:  A Tale of Today:  “Beautiful credit!  The foundation of modern society.  Who shall say that this is not the golden age of mutual trust, of unlimited reliance upon human promises?  That is a peculiar condition of society which enables a whole nation to instantly recognize point and meaning in the familiar newspaper anecdote, which puts into the mouth of a distinguished speculator in lands and mines this remark:  ‘I wasn’t worth a cent two years ago, and now I owe two millions of dollars.’”

Q.  Name two tenets of plan confirmation, though well known by bankruptcy practitioners and judges, that are not actually named in the Bankruptcy Code.

A.  We were thinking of the absolute priority rule and cramdown, but respondents also came up with the best interest of creditors test and feasibility, which are also great answers.

Q. In what year did the United States abolish federal imprisonment for unpaid debt?

A.  In 1833, the United States abolished federal imprisonment for unpaid debts.  According to The New York Times, debtors’ prisons go back as far as Ancient Greece, although imprisonment for unpaid debts was stopped in Ancient Greece after so many farmworkers were put in jail that there weren’t enough workers to tend the crops.

Q.  What corporation filed the first bankruptcy case under the Bankruptcy Act of 1898?

A.  OK, we admit this was a trick question as even we do not know the answer.  We do know, though, that the Bankruptcy Act of 1898 was called the “Nelson Act.”  Our personal favorite of the made-up responses to this question was the Dunning Brothers Company.

Q.  What is a chapter 33, and what company has availed itself of this protection?

A.  A “chapter 33” occurs when a company files for chapter 11 protection not once, not twice, but three times (presumably under the “third time’s the charm” principle).  A list of “chapter 33” filings is included in Dr. Edward I. Altman’s presentation, on which we reported in our March 23, 2011 blog entry:  Anchor Glass Container Corp.; Grand Union Co.; Harvard Industries; PLVTZ (Levitz and subsequently Levitz Home Furnishing); Memorex Telex Corp.; Salant Corp.; Samuels Jewelers (subsequently Barry’s Jewelers); The Penn Traffic Co.; Tetragenex Pharmaceuticals; TWA; and United Mechanic’s & Mfg.  Although many respondents listed Trump Casinos, we believe that the same Trump Casino entity has only filed for chapter 11 twice, and the other Trump filers are not the same entities.

Q.  What quirk in Italian bankruptcy law allowed the family of Modigliani (the artist, not the originator of the Modigliani-Miller Theorem) to escape complete financial ruin when Modigliani’s father was forced into bankruptcy shortly after Modigliani was born?

A.  According to The Intimate Sex Lives of Famous People, by Irving Wallace, David Wallechinsky, and Amy Wallace, Modigliani was born just as his father was forced into bankruptcy.  A quirk in Italian bankruptcy law allowed debtors to keep a bed in which a woman had recently given, or was about to give, birth.  Accordingly, Modigliani’s family piled their most valuable possessions on top of the bed to protect them from being seized.  For more on Modigliani, also see Meryle Secrest’s recent book, Modigliani:  A Life.

Q: In what case did the Supreme Court allow a corporate debtor to use section 525 of the Bankruptcy Code against the federal government to prevent cancellation of its licenses?

A: FCC v. Nextwave Personal Communications, Inc., 537 U.S. 293 (2003).