The results from Round One of the Bankruptcy Bracket are in and, unlike the NCAA Tournament, there were very few surprises. Lionel rolled through Whiting Pools like a freight train, and 203 North LaSalle showed its absolute dominance over Till. Marathon Pipeline didn’t give an inch to TMT Trailer Ferry, and Bildisco had no trouble sending STN home. In an epic shootout of Kansas v. Princeton proportions, Butner finally edged out Pepper by just a few votes (but rest assured, we won’t take Pepper for granted anymore – it can certainly go back to the Bankruptcy Reporter with its head held high). Most surprisingly, the Second Circuit sent the Supreme Court packing with Chateaugay’s big win over Ron Pair. Apparently, Ron Pair’s oft-cited “plain language of the statute” standard couldn’t keep up with Chateaugay’s hazardous zone defense.
But the tournament is far from over, and our Elite Eight of Bankruptcy now face their toughest competition. As with the Sweet Sixteen, you pick the winner. This time, members of Weil’s Business Finance & Restructuring Department will be making the case for each match-up, and your votes will determine the Final Four. Voting will close Tuesday at 12:00 p.m. Eastern Time.
| The Classics |
| Northern Pipeline Co. v. Marathon Pipeline Co. |
| Butner v. United States |
| Early Bankruptcy Code Years |
| National Labor Relations Board v. Bildisco and Bildisco |
| In re Lionel |
| Getting Settled In |
| United Savings Assn. of Texas v. Timbers of Inwood Forest |
| United States v. The LTV Corp. (In re Chateaugay Corp.) |
| New Kids on the Block |
| Bank of Am. Nat’l Trust & Sav. Assoc. v. 203 North LaSalle St. P’ship |
| In re Owens Corning. |
Footnotes:
- Northern Pipeline left the restructuring world in chaos when the Supreme Court declared that the Bankruptcy Act of 1978 was unconstitutional because it impermissibly vested Article III judicial power in the bankruptcy courts. Congress fashioned a fix in the Bankruptcy Amendments and Federal Judgeship Act of 1984 that allowed Article III district courts to refer bankruptcy cases to be administered by Article I bankruptcy judges in courts that are adjuncts of the Article III district courts. The fix, however, resembles the system that was found unconstitutional in Northern Pipeline, the constitutionality of which has not since been tested. Although Butner established a bedrock principle of bankruptcy law, that state law should resolve issues regarding the nature and extent of property rights, Northern Pipeline caused the entire structure of the bankruptcy courts to be declared unconstitutional. No case before or since has had such a profound impact on the entire United States bankruptcy system.
- Our love affair with Butner started at a tender young age – when we drafted our very first bankruptcy legal memo and needed to find a case citation to support the basic (and now seemingly self-evident) proposition that bankruptcy courts should look to state law, absent an overriding federal interest, to determine the nature and extent of property rights. Since then, there have been countless times that we depended on the principle espoused in Butner to come through for us, and we are certain that many in the bankruptcy bar can say the same. How many briefs and opinions have cited to Butner in reliance on this bedrock principle since the opinion was handed down by the Supreme Court in 1979? Too many to count. In how many of our own cases have we looked to Butner for certainty and comfort in defining the property rights of the various parties? Every single one. Although Northern Pipeline could be argued by some as having a profound impact on the bankruptcy world, it is undeniable that its practical effect was short-lived. It is the equivalent of a flashy, one-season wonder. Butner, on the other hand, not only made a deep and broad impact on the bankruptcy world, but a permanent one. It is the equivalent of the old standby team you can always depend upon to give you its “A” game and consistently work hard for a win. Its unwavering dependability and persistent staying power justify propelling it to the Final Four.
- If current political relevance were the equivalent of a game-winning, half-court, buzzer beater, Bildisco would certainly be going to the Final Four. In this landmark 1984 decision, the Supreme Court determined that collective bargaining agreements constitute executory contracts and can be rejected by a debtor in possession if the agreement burdens the estate and the equities favor rejection (a standard notably more stringent than the business judgment standard). The immediate response by Congress to Bildisco - enactment of section 1113 of the Bankruptcy Code - did not vitiate the “rejectability” aspect of the Court’s decision, but rather delineated the procedures that a debtor must comply with to successfully reject a collective bargaining agreement. While the importance of 363 sale jurisprudence is undeniable, the Bildisco story includes the Supreme Court, a Congressional response, current political relevance, and all the right moves to end the Lionel Cinderella story. Do the right thing, use your business judgment and reject Lionel.
- With bankruptcy courts increasingly becoming marketplaces, the significance of Lionel cannot be understated. This precedent-setting Second Circuit decision established an “articulated business justification” as the applicable test for section 363 sales, clearing the way for momentous cases such as General Motors and Chrysler. Section 363 sales are now an accepted and viable bankruptcy strategy, averaging just under a quarter of large public company bankruptcies per year over the past decade. With the Southern District of New York’s bankruptcy court continuing to be a popular venue for large public companies, the Second Circuit’s decision in Lionel is of paramount importance. Bildisco’s “balancing the equities” standard for rejecting executory contracts, which was immediately overruled legislatively as to collective bargaining agreements, is now limited to the rare contract rejections implicating the “public interest.” Meanwhile, Lionel’s continued vitality as a landmark precedent for popular section 363 sales is indisputable.
- Major conference powers don’t always beat their Mid-Major opponents on the way to the Final Four, but the Supreme Court’s Timbers shouldn’t have a problem dispatching the Second Circuit’s Chateauguay. After years of heated debate among lower courts, in Timbers, the Supreme Court interpreted the “adequate protection” requirement of section 362(d) of the Bankruptcy Code. The Court held that although secured creditors have a protected right to payment from their collateral, this does not include a right to immediate possession of their collateral. Thus, “adequate protection” does not require a debtor to make payments to creditors (and thereby compensate them for the time value of money) solely because a debtor retains the creditors’ collateral. Moreover, the Court drew a clear line in the sand between oversecured and undersecured creditors, finding that only the former are entitled to postpetition interest, and only to the extent the value of their collateral exceeds their lien. When it came down, Timbers rocked the business world and fueled the use of so-called “bankruptcy remote” SPEs as creditors sought to isolate collateral that would otherwise be part of the bankruptcy estate and maintain cash flows even in the face of bankruptcy. Still today, reverberations of Timbers can be seen in the ongoing battle to value collateral that underlies many business reorganizations.
- “Life all comes down to a few moments. This is one of them. ” Bud Fox, played by Charlie “Warlock” Sheen, probably wasn’t thinking of the Bankruptcy Sweet 16 when he uttered those fateful words in the movie Wall Street, but they hold true to this day. Your decision to yell “Timbeeeeeeeer” and fell United Savings Assn. of Texas v. Timbers of Inwood Forest and, in doing so, to sweep Chateaugay to the Final Four will be felt long after the fateful click of your mouse button. In Chateaugay, the Second Circuit delved into deep philosophical questions on whether an environmental injunction from the Environmental Protection Agency, combined with a demand for cleanup costs, relating to debtors that owned and operated dozens of hazardous waste sites, could be considered as dischargeable claims. Unlike Timbers, a case that Gordon Gekko would have been proud of, where general unsecured creditors unsuccessfully tried to enshrine into law the right to collect postpetition interest on their claims, Chateaugay sits at the crossroads of our society’s support for the environment and our ability to balance the competing interests of the government in protecting Mother Earth, while supporting our ability to allow debtors to restructure. In a decision that gives the EPA a boost in its negotiating position in chapter 11 cases, the Court noted that the EPA was entitled to assert an administrative expense claim for postpetition costs it incurred related to environmental clean-up, so long as there was a benefit to the debtor’s estate. Considering that confirmation of a debtor’s plan requires allowed administrative claims to be capable of being paid following confirmation, this decision has cemented the EPA’s ability to influence the outcome of chapter 11 cases involving debtors with significant environmental liability. Bottom line? Chateaugay is special, being infused, as it is, with tiger blood and Adonis DNA. What would constitute “winning?” – giving Timbers the chop!
- Clearly 203 N. LaSalle should move on to the Final Four as it added so much “new value” to the bankruptcy bar, but the Supreme Court has taught us that new value isn’t enough if others aren’t afforded the same opportunities. Thus, we’ll let other cases have an equal opportunity to advance. Still, Owens Corning doesn’t stand a chance against 203 N. LaSalle unless it is allowed to consolidate with another case, which we all know it isn’t.
- This case has it all – swords and shields, single survivors, alter egos, piercing veils (the corporate kind, anyway), underhanded plots to make off with more of the gold, and hopelessly tangled knots of, well, books and records--about as close as it gets to swashbuckling fare in the bankruptcy bar. While we eagerly await the summer blockbuster adaptation “Pirates of the Third Circuit: The Curse of Reliance on Single Entities” starring Johnny Depp (hey, he still has to pay the bills), you should pay due respect to the original screenplay authored by Judge Ambro and vote this case into the Final Four. While its competitor, 203 N. LaSalle, may be of a more “supreme” class, Owens Corning has all the substantive fun of all of the “New Kids” bracket cases consolidated into one!