07 Mar The Year in Bankruptcy: 2008
For bankruptcy and insolvency specialists, 2008 was the year that was.
In a 3-part article appearing on registration-based Mondaq.com (and available in one spot here), Jones Day’s Restructuring Practice Communications Coordinator Mark Douglas offers a bird’s-eye view of what may have been the most economically tumultuous 12 months since the early 1930’s. In summarizing the article, there is little need for further hyperbole: The statistics speak for themselves.
Among the tidbits offered by Mr. Douglas in parts 1 and 2:
– 136 public companies filed for bankruptcy protection during, a 74 percent increase from 2007, when there were 78 public-company filings.
– In 2008, 10,084 chapter 11 cases were filed, compared to only 6,200 in 2007, representing a 62.6 percent increase.
– No fewer than 25 names were added to the public-company billion-dollar bankruptcy club in 2008 (the most since 2002 and a sixfold increase over 2007), including the two largest bankruptcy filings ever in U.S. history—Lehman Brothers Holdings Inc. and Washington Mutual, Inc.—as well as the 10th-largest bankruptcy filing of all time—IndyMac Bancorp, Inc.
– Southern California-based financial institutions comprised 4 of the top ten filings for 2008. These included Pasadena-based IndyMac Bancorp, Inc. (which, until July 11, 2008, was the holding company for hybrid thrift/mortgage bank IndyMac Bank prior to being placed into receivership by the Office of Thrift Supervision), Newport Beach-based Downey Financial Corp. (which operated as the holding company for Downey Savings and Loan Association, F.A., until November 21, 2008, when federal regulators seized the bank due to its failure to satisfy minimum capital requirements), Brea-based Fremont General Corporation (a financial services holding company that, through its subsidiary Fremont General Credit Corporation, owned the California bank Fremont Investment & Loan), and Rancho Cucamonga-based PFF Bancorp, Inc., the parent company of PFF Bank & Trust (which was seized by federal regulators on November 21, 2008, together with Downey Savings and Loan Association, F.A. – No. 4 on the Top 10 List – after posting losses from subprime-mortgage loans aggregating nearly $290 million through the first three quarters of 2008).
What does 2009 have in store? Part 3 suggests that:
The fundamental strategy of commercial bankruptcies may also change in 2009, given the enduring difficulties in lining up debtor-in-possession (“DIP”) and exit financing (DIP loans dropped from $7.9 billion in the second quarter of 2008 to $2.9 billion in the fourth quarter, according to statistics published by the Deal Pipeline) and the more abbreviated “drop dead” dates built into the Bankruptcy Code for the debtor’s exclusive right to propose and solicit acceptances for a chapter 11 plan and to assume or reject unexpired leases of nonresidential real property. This means that more companies may resort to bankruptcy protection in 2009 to effect an orderly liquidation, rather than to reorganize, or to effect expeditious cash-generating asset sales under section 363 of the Bankruptcy Code. This year may also see a greater volume of “pre-packaged” chapter 11 cases, a trend that began in late 2005 after the new deadlines were implemented.
Part 3 also provides a helpful summary of current case law developments of note – including the following summaries of some recent Ninth Circuit decisions:
– In a matter of apparent first impression in the federal circuit courts of appeal, the Ninth Circuit ruled in Aalfs v. Wirum (In re Straightline Investments, Inc.), 525 F.3d 870 (9th Cir. 2008), that although “diminution of the estate” is required to support an avoidance recovery under sections 547 or 548 of the Bankruptcy Code, which involve preferential and fraudulent pre-petition transfers, no such requirement exists with respect to liability under section 549, which provides for the avoidance of unauthorized post-petition transfers. Thus, the Ninth Circuit held, a transferee who purchased receivables from an estate outside the ordinary course of business was not entitled to defend against a section 549 suit, based upon the fact that he paid the estate more than the receivables were worth.
– An oversecured creditor’s right to interest, fees, and related charges as part of its allowed secured claim in a bankruptcy case is well established in U.S. bankruptcy law. Less clear, however, is whether that entitlement encompasses interest at the default rate specified in the underlying contract between the creditor and the debtor. The answer to that question can be a thorny issue in chapter 11 cases because the Bankruptcy Code provides that a chapter 11 plan may cure and reinstate most defaulted obligations, and courts disagree as to whether the power to cure defaults nullifies all consequences of default, including the obligation to pay default interest. The Ninth Circuit Court of Appeals had an opportunity in 2008 to examine the interplay between these seemingly incongruous provisions of the Bankruptcy Code. In General Elec. Capital Corp. v. Future Media Productions, Inc., 536 F.3d 969 (9th Cir. 2008), the court reversed a bankruptcy court order disallowing default interest and costs as part of the claim of a secured creditor whose collateral was sold by the debtor outside of a chapter 11 plan, ruling that the court erred by applying the Bankruptcy Code’s plan-confirmation provisions in a situation where cure and reinstatement of the secured creditor’s debt were neither contemplated nor possible.
– A secured creditor’s right to “credit-bid” its claim in a proposed sale of the underlying collateral free and clear of interests under section 363(f) of the Bankruptcy Code was the subject of a significant ruling in 2008 by a bankruptcy appellate panel from the Ninth Circuit. In Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), 391 B.R. 25 (Bankr. 9th Cir. 2008), the court ruled that section 363(f)(5) of the Bankruptcy Code does not allow a senior secured creditor to credit-bid its claim and, by doing so, wipe out the junior secured creditor’s interest. Adopting an extremely narrow view of when section 363(f) applies, the panel concluded that the debtor must establish that there is some form of legal or equitable proceeding in which the junior lienholder could be compelled to take less than the value of the claim secured by the lien. The court also held that section 363(m), which makes approved sale transactions irreversible unless the party objecting obtains a stay pending appeal, does not apply to lien stripping under 363(f).
Overall, this is not recommended beach reading for the upcoming spring and summer holiday season.
But for anyone grasping for a bit of economic and legal perspective on the year that was, it’s a all-too-quick-moving page-turner.