The list of 2014’s ten largest bankruptcy filings included companies from nine different industries. 2015’s list, in contrast, includes six fossil fuel-related companies. Three of these companies were coal companies and three others were oil and gas exploration and service companies. Given years of consolidation, the number of remaining large coal companies that are likely to file for bankruptcy in the future is somewhat limited, especially as Arch Coal—the second largest coal company in the United States—filed for bankruptcy last month. That is far from true for oil and gas exploration (also called “E&P”) companies.
Over 40 E&P companies filed for bankruptcy in 2015. Of these companies, five had debt obligations greater than $1 billion. Absent a significant increase in oil prices, more E&P companies are likely to follow. Once a bankruptcy for an E&P company has been filed, the cases have been—at least in most instances—relatively straightforward. At the heart of any E&P bankruptcy are two related issues: (a) which assets are encumbered by secured creditors; and (b) what is the value of the company’s assets. The answer to the questions has real consequences. Given differences in oil and gas law across jurisdictions and the difficulties in perfecting liens on certain assets, secured creditors may not hold secured interests in the assets they believe they have encumbered. If an asset is not encumbered, of course, it inures to the benefit of general unsecured creditors. Likewise, if the value of the company is sufficient to cascade down the waterfall to more junior creditors, the junior creditors become the future owners of the company, rather than the senior creditors. Our final article analyzes these and other issues that have arisen in the five $1 billion plus E&P filings of 2015.
Municipal-related issues were also active in 2015. Puerto Rico hit a roadblock when the United States District Court struck down the law Puerto Rico created to permit debt restructuring of public corporations (necessary because Chapter 9 of the Bankruptcy Code is not available to Puerto Rico and its public entities) on the ground that it was pre-empted by U.S. law and was likely unconstitutional. This decision was later affirmed by the Court of Appeals for the First Circuit. That decision has now been accepted for consideration by the Supreme Court. Unless the Supreme Court overrules the First Circuit, Puerto Rico’s next legal steps seem to be severely limited, as addressed in detail later in this issue, as they continue to pursue a political solution in Congress. 2015 also saw changes by a number of states to statutory lien laws intended to persuade investors that the municipal general obligation bonds they hold are still among the safest municipal securities, a risk that was highlighted in Detroit’s bankruptcy case. Other municipal cases and issues that arose in 2015, and are also highlighted in this issue, involve the ability of a bankruptcy court to give favorable treatment to pension claims and a dispute among bankruptcy judges of “Christmas past” (specifically, Jefferson County, Detroit and Stockton) as to whether a Chapter 9 case can become equitably moot following confirmation, thus effectively negating challenges to the confirmed plan.
Equitable mootness outside of the municipal arena is also a legal theme worthy of note for this year’s review. The Ninth and Third Circuits both suggested that equitable mootness would be even more narrowly applied in the future, so long as a court could fashion an appropriate remedy. As a result, we may see additional post-confirmation attacks on plans in the future. The Third Circuit also reached the conclusion this year that a buyer of an asset in a section 363 sale is able to direct sums directly to general unsecured creditors, bypassing more senior creditors. Because the sums are not property of the estate, this was found not to be gifting, which is generally prohibited. The availability of this tool in the Third Circuit may create real flexibility in structuring section 363 sales.
Once again, as a result of the Supreme Court’s “narrow” ruling in Stern v. Marshall four years ago, battles continued to be waged in 2015 regarding the scope of a bankruptcy court’s power to decide certain issues. This is certainly a distraction that courts would rather not be required to address. Although the Supreme Court has had the opportunity to provide clarity on certain of the Stern issues over the last several years, the most recent decision in the Wellness Int’l Network, Ltd. v. Shari again left open a number of challenging issues. Clarity on a different front was obtained, however, when the issue of contractual “make-wholes” was again raised and debated in 2015. In a decision reached in the Energy Future Holdings Corp. case, the Delaware bankruptcy court essentially adopted the approach taken in last year’s Momentive decision, a New York case, which required that make-whole premiums were to be approved only if clear and unambiguous language existed that made a make-whole premium due.
Chapter 15 filings were numerous in 2015. 95 companies filed for Chapter 15 in 2015, more than half of which were filed in the Southern District of New York. Among the cases of note, one case confirmed that despite major differences between U.S. and Brazilian insolvency law, a U.S. court should still recognize the Brazilian foreign proceeding under Chapter 15. Another cross-border case (which was not a Chapter 15 case) also should serve as a reminder that bankruptcy courts are not required to exercise jurisdiction over all matters. The court found that a major Bahamian hotel project restructuring was best handled by the Bahamian courts.
Finally, 2015 marked an explosion in the attempted use of the Trust Indenture Act to seek to protect minority bondholders from forced out-of-court restructurings. While these cases wind their way through the courts, for the time being it is important to note that whether such out-of-court restructurings are intended to be beneficial to the minority or simply
to oppress the minority, the Trust Indenture Act may provide the minority with a real remedy.
So what does the 2016 hold for bankruptcy cases in the United States? A few thoughts:
With the recent rise in the Federal Reserve’s borrowing rates and, seemingly, a recent modest slowing of the economy, we believe it is likely that corporate bankruptcy filings may increase.
On the municipal front, 2016 is likely to be the year that some sort of restructuring of Puerto Rico related debt occurs, either out of court, or through a legislatively crafted process. Domestically, major credits in Illinois (e.g., Chicago and the Chicago Board of Education) and Michigan (e.g., Flint and the Detroit Public Schools) as well as New Jersey (e.g., Atlantic City) will see movement towards
Unless oil prices drastically increase, oil and gas companies will continue to file for bankruptcy at an alarming rate (given the assumption on oil prices, this is less of a prediction than a certainty).
We suspect that chapter 15 cases will continue to be filed at a brisk pace given the benefits they provide to foreign entities.
Douglas Deutsch is a partner in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group. Joshua Apfel is an associate in Chadbourne & Parke’s New York Office in the firm’s bankruptcy and financial restructuring group.