The Year in Bankruptcy: 2019
Except for disastrous fires that sparked the largest bankruptcy filing of the year, liabilities arising from the opioid crisis, the fallout from price-fixing, and corporate restructuring shenanigans, economic, market, and leverage factors generally shaped the large corporate bankruptcy landscape in 2019. California electric utility PG&E Corp. ("PG&E") filed the biggest bankruptcy of 2019 when it sought chapter 11 protection for the second time at the end of January to deal with billions of dollars of liabilities arising from its alleged role in causing the most deadly wildfires in California history. Fentanyl-based painkiller maker Insys Therapeutics Inc. and privately held OxyContin maker Purdue Pharma L.P. filed for chapter 11 protection in June and September, respectively, hoping to implement global settlements of nationwide claims arising from their manufacture and sale of opioids. Canned seafood distributor Bumble Bee Tuna floundered into chapter 11 in November after spending millions of dollars defending against antitrust lawsuits related to its admitted role in a price-fixing scheme with competitors. Finally, internet service provider Windstream Holdings, Inc. sought chapter 11 protection in February in response to a $310 million judgment against it in a lawsuit alleging that a two-year-old spinoff of the company's fiber-optic cable network violated the covenants on one of its bond issuances.
According to data provided by Epiq Systems, Inc., the 38,944 total commercial bankruptcy filings during 2019 increased 2.4% from the commercial filing total of 38,032 during 2018. The commercial chapter 11 filing total of 5,502 during 2019 represented a 0.36% increase from the 5,482 commercial chapter 11 filings in 2018. There were 22,797 commercial chapter 7 filings in 2019, compared to 21,907 in 2018.
One hundred twenty-eight petitions seeking recognition of a foreign bankruptcy proceeding under chapter 15 of the Bankruptcy Code were filed in 2019, compared to 100 in 2018. One hundred seven of the 2019 chapter 15 filings were by businesses, compared to 91 in 2018. Five municipal debtors filed for chapter 9 protection in 2019, compared to four in 2018.
Research firm Reorg reported that 2019 was the busiest year for chapter 11 filings since it started tracking them in 2015. For chapter 11 cases filed by companies with more than $100 million in liabilities, the filing frequency increased 24% from 2018. One hundred fourteen companies with liabilities exceeding $100 million filed for chapter 11 protection in 2019, compared to 87 in 2018. The most cases were filed in the energy sector, followed by the consumer discretionary and health care sectors.
Four hundred companies with liabilities exceeding $10 million filed for chapter 11 in 2019, compared to just over 330 filings in 2018, a 21% increase. Consumer discretionary sector companies grabbed the largest share of the filings, with companies in the real estate, industrials, energy, and health care sector making up roughly equal shares of the filings. Delaware, the Southern District of New York, and the Southern District of Texas were the most popular venues for chapter 11 filings by such companies. Fifty-two of the 400 chapter 11 filings (13%) were prepackaged or prenegotiated cases.
According to data provided by New Generation Research, Inc.'s BankruptcyData.com, bankruptcy filings for "public companies" (defined as companies with publicly traded stock or debt) increased for the first time since 2016, with the volume of prepetition assets nearly tripling to its highest level since the end of the Great Recession. The number of public company bankruptcy filings in 2019 was 63, compared to 58 in 2018. At the height of the Great Recession, 138 public companies filed for bankruptcy in 2008 and 211 in 2009.
The combined asset value of the 63 public companies that filed for bankruptcy in 2019 was $150 billion, compared to $52 billion in 2018. By contrast, the 138 public companies that filed for bankruptcy in 2008 had prepetition assets valued at $1.2 trillion in aggregate.
Companies in the oil and gas and chemicals and allied products sectors led the charge in public company bankruptcy filings in 2019, with 21% (13 cases) and 16% (10 cases), respectively, of the year's 63 public company bankruptcies. Other sectors with a significant number of public company filings in 2019 included telecommunications (five cases), health care and medical and transportation (four cases each). Three cases each involved companies in the banking and finance, computers and software, mining, and retail sectors. Half of the 20 largest public company bankruptcy filings in 2019 came from the oil and gas sector.
The year 2019 added 18 public company names to the billion-dollar bankruptcy club (measured by value of assets), compared to 12 in 2018. The largest public company bankruptcy filing of 2019—PG&E, with more than $71 billion in assets—was the sixth largest bankruptcy of all time. By asset value, the remaining public companies among the 10 largest bankruptcy filings in 2019 were Ditech Holding Corporation ($14.2 billion in assets); Windstream Holdings, Inc. ($13.1 billion in assets); Weatherford International plc ($6.6 billion in assets); Thomas Cook Group plc ($6.6 billion in assets); EP Energy Corporation ($4.2 billion in assets); Bristow Group Inc. ($2.9 billion in assets); Southern Foods Group, LLC (Dean Foods Company) ($2.3 billion in assets); Sanchez Energy Corporation ($2.2 billion in assets); and Hexion Holdings LLC ($2.1 billion in assets).
Twenty public and private companies with assets valued at more than $1 billion obtained confirmation of chapter 11 plans or exited from bankruptcy in 2019. Continuing a trend begun in 2012, many more of those companies reorganized than were liquidated or sold.
Ten, or 16%, of the 63 public company bankruptcy filings in 2019 were prenegotiated or prepackaged chapter 11 cases, compared to 12% (seven cases) in 2018. The "rapid-fire prepack" was in vogue in 2019. Information technology company Sungard Availability Services Capital Inc. established a new record when it obtained bankruptcy court approval of a prepackaged chapter 11 plan on May 2, 2019, a mere 19 hours after filing for bankruptcy. The expedited confirmation process surpassed the previous 24-hour record set on February 4, 2019, by women's plus-size retailer Fullbeauty Brands Inc.
Some of the notable court rulings involving issues of bankruptcy law in 2019 included:
- Mission Product Holdings, Inc. v. Tempnology, LLC, 139 S. Ct. 652 (U.S. 2019). The U.S. Supreme Court ruled that the rejection in bankruptcy of a trademark license agreement, which is deemed a breach of the agreement under section 365(g) of the Bankruptcy Code, does not terminate the rights of the licensee that would survive the licensor's breach under applicable nonbankruptcy law.
- In re MPM Silicones, LLC, 596 B.R. 416 (S.D.N.Y. 2019). The U.S. District Court for the Southern District of New York ruled that if a secured lender's liens are preserved under a cramdown chapter 11 plan providing the secured lender with a stream of payments having a present value equal to the value of the lender's collateral, the secured lender's lien does not extend to the reorganized equity issued under the chapter 11 plan. The district court also affirmed the bankruptcy court's decision that second-lien lenders did not violate the terms of an intercreditor agreement by voting in favor of the plan, signing a restructuring support agreement, and agreeing to backstop a rights offering by the reorganized debtor that raised new capital.
- In re Tribune Co. Fraudulent Conveyance Litig., 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019). The U.S. District Court for the Southern District of New York denied a litigation trustee's motion to amend a complaint seeking to avoid alleged fraudulent transfers made to selling shareholders as part of the debtor's 2007 LBO, ruling that the safe harbor in section 546(e) of the Bankruptcy Code continues to bar such federal fraudulent transfer claims notwithstanding the U.S. Supreme Court's decision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883, 200 L. Ed. 2d 183 (2018). According to the district court, payments made to shareholders as part of the LBO transaction were insulated from avoidance as constructive fraudulent transfers because Tribune hired a commercial bank to serve as the exchange agent for the transfers. As the "customer" of a "financial institution," the court reasoned, Tribune became a "financial institution" itself, thereby triggering application of the safe harbor and avoiding the strictures of Merit.
- In re Tribune Co. Fraudulent Conveyance Litig., 2019 WL 6971499 (2d Cir. Dec. 19, 2019). The U.S. Court of Appeals for the Second Circuit reaffirmed, in light of the superseding ruling in Merit, its 2016 decision that creditors' state law fraudulent transfer claims were preempted by the safe harbor of section 546(e). Like the district court in its April 23, 2019, ruling regarding federal claims, the Second Circuit concluded that a debtor may itself qualify as a "financial institution" covered by the safe harbor, and thus avoid the implications of Merit, by retaining a bank or trust company as an agent to handle LBO payments, redemptions, and cancellations.
- In re Ultra Petroleum Corp., 913 F.3d 533 (5th Cir. 2019). In January 2019, the U.S. Court of Appeals for the Fifth Circuit ruled that: (i) a "make-whole" premium owed on unsecured notes constituted "unmatured interest" disallowed by section 502(b)(2) of the Bankruptcy Code; and (ii) because the Bankruptcy Code, rather than the debtor's chapter 11 plan itself, disallowed the noteholders' claim for a make-whole premium and postpetition interest at the contractual default rate, the noteholders' claims were not "impaired" for the purpose of confirming the plan.
- In re Ultra Petroleum Corp., 943 F.3d 758 (5th Cir. 2019). In November 2019, the Fifth Circuit vacated its prior ruling after agreeing to rehear the case. The court doubled down on its earlier decision to reverse the bankruptcy court's impairment ruling in keeping with "the monolithic mountain of authority holding the Code—not the reorganization plan—defines and limits the claim in these circumstances." However, whereas the Fifth Circuit previously held that the Bankruptcy Code disallows a claim for a make-whole premium as unmatured interest, it declined to reiterate that portion of its decision. According to the Fifth Circuit, the bankruptcy court was "best able" to make that determination, including a determination as to whether the claim might be allowed under the pre-Bankruptcy Code "solvent-debtor exception."
- PG&E Corp. v. FERC (In re PG&E Corp.), 603 B.R. 471 (Bankr. N.D. Cal. 2019), as amended and direct appeal certified, 2019 WL 2477433 (Bankr. N.D. Cal. June 12, 2019). The recent chapter 11 filings by PG&E Corp. and FirstEnergy Solutions Corp. reignited the debate over the power of a U.S. bankruptcy court to authorize the rejection of power supply contracts regulated by the Federal Energy Regulatory Commission ("FERC") under the Federal Power Act ("FPA"). In PG&E, the U.S. Bankruptcy Court for the Northern District of California ruled that the lack of any exception for FERC in section 365 of the Bankruptcy Code "simply means that FERC has no jurisdiction over the rejection of contracts.
- FirstEnergy Solutions Corp. v. FERC (In re FirstEnergy Solutions Corp.), 945 F.3d 431 (6th Cir. 2019). The U.S. Court of Appeals for the Sixth Circuit held that, when a chapter 11 debtor seeks authority to reject a filed energy contract that is otherwise regulated by FERC, the bankruptcy court must invite FERC to participate and provide an opinion within a reasonable time in accordance with the ordinary approach under the FPA. In addition, the Sixth Circuit held that, although "Congress intended to grant comprehensive jurisdiction to the bankruptcy courts so that they might deal efficiently and expeditiously with all matters connected with the bankruptcy estate," it did not authorize bankruptcy courts to "invade[ ] FERC's regulatory turf" by modifying or abrogating filed rates in its place. The Sixth Circuit accordingly ruled that the bankruptcy court did not have jurisdiction to enjoin FERC from initiating proceedings or considering whether to modify or abrogate the filed rates—just as FERC would have no authority under the FPA to enjoin the bankruptcy court from rejecting executory contracts.
- In re Ditech Holding Corp., 606 B.R. 544 (Bankr. S.D.N.Y. 2019). The U.S. Bankruptcy Court for the Southern District of New York overruled several objections to confirmation of a chapter 11 plan that proposed to sell home mortgage loans "free and clear" of the claims and defenses of the homeowner creditors, contrary to a provision of the Bankruptcy Code—section 363(o)—that was enacted in 2005 to prevent free and clear sales of consumer credit agreements in most bankruptcy cases. The court ultimately ruled that section 363 of the Bankruptcy Code does not apply to a sale in a chapter 11 plan and that the debtors proposed their plan in good faith.
- In re Buffets LLC, 597 B.R. 588 (Bankr. W.D. Tex. 2019), In re Circuit City Stores, 606 B.R. 260 (Bankr. E.D. Va. 2019), and In re Life Partners Holdings, Inc., 606 B.R. 277 (Bankr. N.D. Tex. 2019). Each of these bankruptcy courts ruled that 2018 amendments to the quarterly fees charged in large chapter 11 cases by the U.S. Trustee are unconstitutional when applied retroactively. However, the bankruptcy court in In re Clinton Nurseries, Inc., 608 B.R. 96 (Bankr. D. Conn. 2019), came to the opposite conclusion. The dramatic increase in the quarterly fees has ignited a fierce debate in the bankruptcy and appellate courts.
- In re Insight Terminal Solutions, LLC, 2019 WL 4640773 (Bankr. W.D. Ky. Sept. 23, 2019). The U.S. Bankruptcy Court for the Western District of Kentucky denied a motion to dismiss the chapter 11 cases of two affiliated limited liability companies that, at the behest of their secured lender, amended their organizational documents to provide that the companies could not file for bankruptcy without the consent of all holders of one of the company's membership units, which had been pledged to secure the loan. According to the court, this attempt by the lender to circumvent the bankruptcy laws and federal public policy was ineffective.
- Leslie v. Mihranian (In re Mihranian), 937 F.3d 1214 (9th Cir. 2019), the U.S. Court of Appeals for the Ninth Circuit considered whether the creditors of a non-debtor must be given advance notice of a motion to substantively consolidate the non-debtor with the bankruptcy estate of a debtor. In an apparent matter of first impression among the circuits, the Ninth Circuit ruled that such notice is required.
- Monarch Midstream, LLC v. Badlands Production Company (In re Badlands Energy Utah LLC), 608 B.R. 854 (Bankr. D. Colo. 2019). The U.S. Bankruptcy Court for the District of Colorado denied a chapter 11 debtor's motion to sell its oil and gas assets free and clear of a gas gathering and processing agreement and a saltwater disposal agreement, finding that the agreements were covenants that "ran with the land" under Utah law, thereby preventing a free and clear sale.
- Alta Mesa Holdings, LP v. Kingfisher Midstream, LLC (In re Alta Mesa Resources, Inc.), Adv. Proc. No. 19-03609 (Bankr. S.D. Tex. Dec. 20, 2019). The U.S. Bankruptcy Court for the Southern District of Texas held that oil and gas gathering agreements could not be rejected by a chapter 11 debtor because the agreements formed real property covenants that ran with the land under Oklahoma law rather than executory contracts. In so ruling, the Alta Mesa court and the Badlands court (see above) distinguished the landmark decision of the U.S. Court of Appeals for the Second Circuit in Sabine Oil & Gas Corp. v. Nordheim Eagle Ford Gathering, LLC (In re Sabine Oil & Gas Corp.), 734 Fed. Appx. 64 (2d Cir. May 25, 2018), in which the court upheld rulings authorizing a chapter 11 debtor to reject certain gas gathering and handling agreements because, under Texas law, the agreements contained neither real covenants running with the land nor equitable servitudes.
- In re Millennium Lab Holdings II, LLC, 945 F.3d 126 (3d Cir. 2019). In a long-anticipated opinion, the U.S. Court of Appeals for the Third Circuit upheld a decision by a Delaware bankruptcy court confirming a chapter 11 plan with nonconsensual third-party releases. Although the Third Circuit has not yet given such releases its wholesale approval, it held that the bankruptcy court's order confirming the plan did not violate Article III of the Constitution and that, "[o]n the specific, exceptional facts of this case," the bankruptcy court "was permitted to confirm the plan because the existence of the releases and injunctions was 'integral to the restructuring of the debtor-creditor relationship.'"
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