United States Bankruptcy Court for the Southern District of New York

Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations

In December 2014, the American Bankruptcy Institute (ABI) issued its Final Report and Recommendations of the Commission to Study the Reform of Chapter 11. The Report is almost 400 pages long and contains more than 200 recommendations. Twenty-two Commissioners, including attorneys, academics, financial advisors and a former bankruptcy judge spent more than two years taking testimony from over 90 additional restructuring experts and considering the reports provided by 13 advisory committees, each comprised of 10-12 members from the bankruptcy bench, the bankruptcy bar, the financial community and academia. The Commission developed the report with goals including: reducing barriers to entry for debtors, facilitating more efficient resolution of disputed matters, enhancing debtors’ restructuring options and creating an alternative restructuring scheme for smaller businesses.

The recommendations do not constitute proposed legislation. Rather, the Report represents the opinion of the Commissioners and will spur debate. It ultimately could help lead to comprehensive overhaul of the almost 40-year old Bankruptcy Code. Recognizing that major bankruptcy reform generally takes years to wind its way through Congress, the Report implicitly acknowledges that 2018 is an appropriate target date for reform.

That does not mean the Report should be taken lightly, as it represents the consensus view of many well-regarded bankruptcy practitioners, academics and judges. At minimum, the Report will mark the commencement of a conversation about what the Commissioners view as much-needed reforms to the Bankruptcy Code. We also expect the report to receive the attention of judges and litigants in upcoming matters. Parties may look to the Commission’s interpretations of open legal questions as support for their assertions that certain interpretations represent the “better” argument or the “intended” result.

The Report covers nearly every aspect of the chapter 11 process with a multitude of suggested modifications to the Bankruptcy Code and bankruptcy jurisprudence. Below is our analysis of a number of the Commission’s most critical recommendations and of the potential impact of the proposed recommendations on the bankruptcy process.

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SDNY Holds Trustee Cannot Evade Section 546(g) Safe Harbor by Bringing Avoidance Action Under State Law

On June 11, 2013, Southern District of New York Judge Jed Rakoff dismissed the complaint of the Trustee for the SemGroup estate seeking to avoid a novation made to Barclays pre-bankruptcy under a swap agreement.  The Court held that the pre-bankruptcy transaction constituted a safe harbored transfer made in connection with a swap agreement and thus could not be avoided by the estate.  The Court held further that the safe harbor applied to actions brought under state law fraudulent transfer theories, not just those brought under federal law.  Judge Rakoff stated that to permit the trustee to proceed under state law would allow estates to evade the safe harbor by delaying litigation until post-bankruptcy.  Whyte v. Barclays Bank PLC, 12 Civ. 5318 (JSR), 2013 U.S. Dist. Lexis 82040 (S.D.N.Y. June 11, 2013).  Read More.

General Motors Bankruptcy Court Applies the Brakes to Unauthorized Termination Statements

Last week, the United States Bankruptcy Court for the Southern District of New York held that a UCC-3 termination statement is effective to terminate a financing statement under the Uniform Commercial Code only if the filing of the termination statement was authorized by the secured party whose security interest was terminated.1 This decision raises the bar on the level of diligence by potential creditors to confirm that any prior liens covering their prospective collateral were effectively terminated. As stated by the Court, “the fact that a termination statement has been filed does not by itself mean that the initial statement came to an end.” Read More.