The Year in Bankruptcy: 2020
One year ago, we wrote that the large business bankruptcy landscape in 2019 was generally shaped by economic, market, and leverage factors, with notable exceptions for disastrous wildfires, liabilities arising from the opioid crisis, price-fixing fallout, and corporate restructuring shenanigans.
The year 2020 was a different story altogether. The headline was COVID-19.
The pandemic may not have been responsible for every reversal of corporate fortune in 2020, but it weighed heavily on the scale, particularly for companies in the energy, retail, restaurant, entertainment, health care, travel, and hospitality industries. Mandatory shutdowns beginning in the spring of 2020 wreaked havoc on the bottom lines of thousands of companies confronting a precipitous drop in demand for their products and services. Some were able to weather the worst of the storm with packages of government assistance or by adapting their business models to meet the unique challenges of the pandemic. Others could not and either closed their doors or sought bankruptcy protection to attempt to restructure their balance sheets or sell their assets.
Business Bankruptcy Filings
According to data provided by Epiq AACER, there were 32,506 commercial bankruptcy filings in 2020, compared to 39,050 in 2019—a 26% decrease. By contrast, commercial chapter 11 filings increased by 29% in 2020 to 7,128, compared to 5,519 in 2019. The 2020 commercial chapter 11 filing total was the highest since the 7,789 filings registered in 2012. Recognition of a foreign bankruptcy proceeding under chapter 15 was sought on behalf of 221 commercial debtors in 2020, compared to 113 in 2019.
S&P Global Market Intelligence reported that U.S. corporate bankruptcies reached their highest levels in a decade in 2020 as the pandemic upended global industries and struggling companies faced their breaking points. A total of 630 public companies with either assets or liabilities valued at $2 million, or private companies with public debt and at least $10 million in assets or liabilities, declared bankruptcy in 2020, compared to 578 in 2019. This surpassed the number of such filings in every year since 2010, when there were 800. The top five sectors represented by the filings were consumer discretionary, industrials, energy, health care, and consumer staples.
Public Company Bankruptcies
According to New Generation Research, Inc.'s BankruptcyData.com, bankruptcy filings for "public companies" (defined as companies with publicly traded stock or debt) reached the highest level in more than a decade in 2020. The number of public company bankruptcy filings in 202 was 110, compared to 64 in 2019. 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 110 public companies that filed for bankruptcy in 2020 was $292.7 billion, compared to $150 billion in 2019. 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 sector led the charge in public company bankruptcy filings in 2020, with 26% (29 cases) of the year's 110 public company bankruptcies. Thirteen of the 30 largest public company bankruptcy filings in 2020 came from the oil and gas sector. Other sectors with a significant number of public company filings in 2020 included retail (14 cases), health care (seven cases), pharmaceuticals (six cases), and entertainment, software, and airlines (four cases each).
The year 2020 added 51 public company names to the billion-dollar bankruptcy club (measured by value of assets), compared to 21 in 2019.
The largest public company bankruptcy filing of 2020—car rental company The Hertz Corporation, with $25.8 billion in assets—was the 24th largest public company bankruptcy case of all time. By asset value, the largest public company bankruptcy filings in 2020 also included air carrier LATAM Airlines Group S.A. ($21 billion in assets); specialty finance company Emergent Capital, Inc. ($17.5 billion in assets); telecommunications provider Frontier Communications Corporation ($17.4 billion in assets); natural gas production company Chesapeake Energy Corporation ($16.2 billion in assets); offshore drilling services company Valaris plc ($13 billion in assets); satellite services provider Intelsat S.A. ($11.6 billion in assets); pharmaceutical company Mallinckrodt plc ($9.6 billion in assets); and oilfield service company McDermott International, Inc. ($8.8 billion in assets).
Twenty-five public companies with assets valued at more than $1 billion obtained confirmation of chapter 11 plans or exited from bankruptcy in 2020. Continuing a trend begun in 2012, many more of those companies reorganized than were liquidated or sold.
More than half of the chapter 11 plans confirmed in 2020 by billion-dollar public companies were in prepackaged or prenegotiated bankruptcy cases. As in 2019, the "rapid-fire prepack" was in vogue in 2020. In 2019, women's plus-size retailer Fullbeauty Brands Inc. and information technology company Sungard Availability Services Capital Inc. established new records when they obtained bankruptcy court approval of prepackaged chapter 11 plans in 24 and 19 hours, respectively. In 2020, in-store music and interactive mobile marketing services provider Mood Media Corp. set a new record when it not only obtained confirmation of a plan in less than a day but emerged from bankruptcy in just 31 hours.
Notable Bankruptcy Rulings
Notable court rulings in 2020 examined: (i) the bankruptcy "safe harbor" protecting payments made as part of certain securities transactions from avoidance as fraudulent transfers; (ii) the payment of claims for "make-whole" premiums under a chapter 11 plan; (iii) the enforcement of contractual subordination agreements under a plan; (iv) debtor-in-possession financing; (v) rent relief during bankruptcy for commercial tenants due to the pandemic; and (vi) the rejection in bankruptcy of executory contracts regulated by the Federal Energy Regulatory Commission ("FERC").
Securities Transactions Safe Harbor. In 2019, the U.S. Court of Appeals for the Second Circuit made headlines when it ruled in In re Tribune Co. Fraudulent Conveyance Litig., 946 F.3d 66 (2d Cir. 2019), petition for cert. filed, 2020 WL 3891501 (U.S. July 6, 2020), that creditors' state law fraudulent transfer claims arising from the 2007 leveraged buyout of Tribune Co. were preempted by the safe harbor for certain securities, commodity, or forward contract payments set forth in section 546(e) of the Bankruptcy Code. 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 the U.S. Supreme Court's decision in Merit Mgmt. Grp., LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), by retaining a bank or trust company as an agent to handle LBO payments, redemptions, and cancellations.
Picking up where the Second Circuit left off, the U.S. Bankruptcy Court for the Southern District of New York held in Holliday v. K Road Power Management, LLC (In re Boston Generating LLC), 617 B.R. 442 (Bankr. S.D.N.Y. 2020), that: (i) section 546(e) preempts intentional fraudulent transfer claims under state law because the intentional fraud exception expressly included in section 546(e) applies only to intentional fraudulent transfer claims under federal law; and (ii) payments made to the members of limited liability company debtors as part of a pre-bankruptcy recapitalization transaction were protected from avoidance under section 546(e) because, for that section's purposes, the debtors were "financial institutions," as customers of banks that acted as their depositories and agents in connection with the transaction.
The U.S. District Court for the Southern District of New York joined the Tribune bandwagon in In re Nine W. LBO Sec. Litig., 2020 WL 5049621 (S.D.N.Y. Aug. 27, 2020), appeal filed, No. 20-3290 (2d Cir. Sept. 25, 2020). The court dismissed $1.1 billion in fraudulent transfer and unjust enrichment claims brought by a chapter 11 plan litigation trustee and an indenture trustee against the debtor's shareholders, officers, and directors. Citing Tribune, the district court ruled that the payments were protected by the section 546(e) safe harbor because they were made by a bank acting as Nine West's agent. According to the court, "[w]hen, as here, a bank is acting as an agent in connection with a securities contract, the customer qualifies as a financial institution with respect to that contract, and all payments in connection with that contract are therefore safe harbored under Section 546(e)."
In SunEdison Litigation Trust v. Seller Note, LLC (In re SunEdison, Inc.), 2020 WL 6395497 (Bankr. S.D.N.Y. Nov. 2, 2020), the U.S. Bankruptcy Court for the Southern District of New York invoked section 546(e) to dismiss a chapter 11 plan litigation trustee's complaint seeking to avoid and recover alleged constructive fraudulent transfers made by a subsidiary of renewable-energy development company SunEdison, Inc., in connection with the acquisition of a wind and solar power generation project. According to the court, even though the trustee sought to avoid part of a two-step transaction that did not involve an agent financial institution, the "overarching transfer" was made as part of an "integrated transaction" insulated from avoidance under the safe harbor.
In Fairfield Sentry Limited (In Liquidation) v. Theodoor GGC Amsterdam (In re Fairfield Sentry Ltd.), 2020 WL 7345988 (Bankr. S.D.N.Y. Dec. 14, 2020), the U.S. Bankruptcy Court for the Southern District of New York applied the Tribune rationale in a chapter 15 case to dismiss claims under British Virgin Islands ("BVI") law to recover "unfair preferences" and "undervalue transactions" asserted by the liquidators of foreign feeder funds that invested in Bernard L. Madoff Investment Securities LLC. According to the court, redemption payments made to investors in the funds were safe harbored under section 546(e) in accordance with Merit and Tribune because, among other things, the BVI law claims were constructive, rather than intentional, fraudulent transfer claims, and the funds were "financial institutions," as the customers of the banks that made the redemption payments as the funds' agent.
In In re Greektown Holdings, LLC, 2020 WL 6218655 (Bankr. E.D. Mich. Oct. 21, 2020), reh'g denied, 2020 WL 6701347 (Bankr. E.D. Mich. Nov. 13, 2020), the U.S. Bankruptcy Court for the Eastern District of Michigan ruled that a pre-bankruptcy recapitalization transaction involving the issuance of notes underwritten by a financial institution and payment of a portion of the proceeds to parties later sued in avoidance litigation fell outside the section 546(e) safe harbor because: (i) neither the transferor nor the transferees were financial institutions in their own right; (ii) the defendants failed to establish that the transaction was "for the benefit" of the underwriter financial institution by showing that it "received a direct, ascertainable, and quantifiable benefit corresponding in value to the payments"; and (iii) the evidence did not show that the underwriter was acting as either the transferor's agent or custodian in connection with the transaction, such that the transferor itself could be deemed a financial institution.
In In re Lehman Bros. Holdings Inc., 2020 WL 4590247 (2d Cir. Aug. 11, 2020), the U.S. Court of Appeals for the Second Circuit held that section 560 of the Bankruptcy Code, which creates a safe harbor for the liquidation of swap agreements, prevented a debtor from recovering payments made to certain noteholders in accordance with a priority-altering "flip clause" in agreements governing a collateralized debt obligation transaction. According to the court, even if the provisions were "ipso facto" clauses that are generally invalid in bankruptcy in other contexts, section 560 creates an exception to this rule in connection with the liquidation of swap agreements.
Make-Whole Premiums and Postpetition Interest. In In re Ultra Petroleum Corp., 2020 WL 6276712 (Bankr. S.D. Tex. Oct. 26, 2020), direct appeal certified, No. 16-32202 (Bankr. S.D. Tex. Dec. 1, 2020) [Docket No. 1897], the U.S. Bankruptcy Court for the Southern District of Texas issued a long-awaited ruling on whether Ultra Petroleum Corp. must pay a make-whole premium to noteholders under its confirmed chapter 11 plan and whether the noteholders were entitled to postpetition interest on their claims. The bankruptcy court held that: (i) the make-whole premium was not disallowed under section 502(b)(2) of the Bankruptcy Code as "unmatured interest" or its "economic equivalent" but represented liquidated damages enforceable under New York law; and (ii) the noteholders were entitled to postpetition interest on their claims at the contractual default rate, rather than the federal judgment rate, in accordance with the "solvent-debtor exception."
Enforcement of Subordination Agreements in a Chapter 11 Plan. In In re Tribune Co., 972 F.3d 228 (3d Cir. 2020), the U.S. Court of Appeals for the Third Circuit ruled that a debtor's confirmed chapter 11 plan did not unfairly discriminate against senior noteholders who contended that their distributions were reduced because the plan improperly failed to strictly enforce pre-bankruptcy subordination agreements. The court held that a nonconsensual chapter 11 plan that does not enforce a subordination agreement does not necessarily discriminate unfairly against a class of creditors that would otherwise benefit from subordination. The Third Circuit agreed with the lower courts that the "immaterial" reduction in the senior noteholders' recovery did not rise to the level of unfair discrimination.
Bankruptcy Financing. In In re LATAM Airlines Grp. S.A., 2020 WL 5506407 (Bankr. S.D.N.Y. Sept. 10, 2020), the U.S. Bankruptcy Court for the Southern District of New York initially refused to approve a proposed debtor-in-possession financing agreement involving insider shareholders, finding that the agreement was a prohibited "sub rosa" chapter 11 plan because it provided that the debtor could elect to repay the shareholder loan with discounted stock in lieu of cash and effectively prevented confirmation of any plan other than the debtor's. However, after the parties modified the financing agreement to remove the equity election feature, the bankruptcy court approved it.
In GPIF Aspen Club LLC v. Aspen Club Spa LLC (In re Aspen Club Spa LLC), 2020 WL 4251761 (B.A.P. 10th Cir. July 24, 2020), a Tenth Circuit bankruptcy appellate panel ruled that section 364(d)(1) of the Bankruptcy Code could not be used to approve chapter 11 plan exit financing that primed the liens of an existing secured lender, and it remanded the case to the bankruptcy court to determine whether the cram-down plan provided the primed lender with the "indubitable equivalent" of its secured claim.
Commercial Rent Relief During the Pandemic. In response to the devastating impact of the pandemic on restaurants, retailers, and other "nonessential" businesses forced to shutter or severely curtail their operations, many bankruptcy courts deployed their statutory and equitable powers during 2020 to defer or suspend timely payment of rent and other expenses that would otherwise be obligatory under the Bankruptcy Code. See, e.g., In re Hitz Restaurant Group, 616 B.R. 374, 379 (Bankr. N.D. Ill. June 3, 2020) (due to a force majeure clause in a lease, abating the debtor's rent payments "in proportion to its reduced ability to generate revenue due to the executive order"); In re Bread & Butter Concepts, LLC, No. 19-22400 (DLS) [Docket 219] (Bankr. D. Kan. May 15, 2020) (holding that "these unprecedented circumstances require flexible application of the Bankruptcy Code and exercise of the Court's equitable powers … to grant further relief" such as deferring rent payments); In re True Religion Apparel, Inc., No. 20-10941 (CSS) (Bankr. D. Del. May 12, June 22, and Aug. 7, 2020) [Docket Nos. 221; 367; 465] (extending time to perform rent obligations for four months by order extending for 60 days and two additional orders, each extending for additional 30-day increments); In re Pier 1 Imports, Inc., 2020 WL 2374539 (Bankr. E.D. Va. May 10, 2020) (delaying debtors' payment of certain accrued but unpaid rent during a "limited operations period" when their stores were closed due to stay-at-home orders entered in connection with the pandemic); In re CraftWorks Parent, LLC, No. 20-10475 (BLS) (Bankr. D. Del. Mar. 30, 2020) [Docket No. 217] (temporarily suspending certain aspects of a chapter 11 case under section 105(a)); In re Modell's Sporting Goods, Inc., No. 20-14179 (VFP) [Docket Nos. 166, 294, and 371] (Bankr. D.N.J. Mar. 27, Apr. 30 and June 5, 2020) (suspending a bankruptcy case under sections 105 and 305 and deferring payment of nonessential expenses, including rent obligations).
However, some courts concluded that their equitable powers could not be used to circumvent the express language of the Bankruptcy Code mandating the payment of rent. See, e.g., In re CEC Entertainment Inc., 2020 WL 7356380 (Bankr. S.D. Tex. Dec. 14, 2020) (denying a chapter 11 debtor's motion for a further abatement of rent and holding that: (i) a court cannot use its equitable powers to override section 365(d)(3)'s unequivocal rent payment requirement; and (ii) force majeure clauses in the leases did not excuse timely payment of rent due to the pandemic or government shutdown orders).
Rejection of Natural Gas Agreements in Bankruptcy. In a leading precedent—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)—the U.S. Court of Appeals for the Second Circuit upheld rulings authorizing a chapter 11 debtor to reject certain natural gas gathering and handling agreements under section 365 of the Bankruptcy Code. According to the Second Circuit, the agreements could be rejected because, under Texas law, they contained neither real covenants "running with the land" nor equitable servitudes that would continue to burden the affected property even if the agreements were rejected.
In 2020, bankruptcy courts in Delaware and Texas joined the fray in the ongoing debate on this issue.
In Extraction Oil & Gas, Inc. v. Platte River Midstream, LLC and DJ South Gathering, LLC (In re Extraction Oil & Gas, Inc.), 2020 WL 6694354 (Bankr. D. Del. Oct. 14, 2020), Chief Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware entered a declaratory judgment that certain gas transportation service agreements did not create covenants running with the land under Colorado law and could therefore be rejected in bankruptcy, because the agreements did not "touch and concern" the land but merely dealt with hydrocarbons after they were produced from the debtor's real property.
In In re Extraction Oil & Gas, Inc., 2020 WL 6389252 (Bankr. D. Del. Nov. 2, 2020), stay pending appeal denied, No. 20-01532 (D. Del. Dec. 7, 2020), Judge Sontchi authorized the debtor to reject the gas transportation service agreements, ruling that: (i) even if the agreements created covenants that run with the land, the agreements could still be rejected, after which any covenants would be unenforceable against the debtor and its assigns; (ii) the "business judgment" test rather than "heightened scrutiny" should be applied to the debtor's request to reject the agreements; and (iii) there is "no prohibition on or limitation against rejecting a [FERC] approved contract" under section 365(a) of the Bankruptcy Code.
In In re Chesapeake Energy Corp., 2020 WL 6325535 (Bankr. S.D. Tex. Oct. 28, 2020), the U.S. Bankruptcy Court for the Southern District of Texas authorized the debtor to reject a natural gas production agreement after concluding that the agreement did not create a covenant running with the land or an equitable servitude under Texas law because it expressly indicated that the debtor did not intend to create any such encumbrances or to convey a real property interest but merely conveyed an interest in produced gas.
In Southland Royalty Company LLC, v. Wamsutter LLC (In re Southland Royalty Company LLC), 2020 WL 6685502 (Bankr. D. Del. Nov. 13, 2020), Judge Karen B. Owens of the U.S. Bankruptcy Court for the District of Delaware ruled that gas gathering agreements did not contain covenants running with the land or equitable servitudes under Wyoming law but were merely service contracts relating to the debtor's personal property (produced gas), and that, even if they did, the debtor could either reject the agreements or sell its assets free and clear of any associated covenants. Following rejection, the court noted, the contract counterparty would have a prepetition claim against the estate for damages resulting from the debtor's nonperformance.
In In re Ultra Petroleum Corp., 2020 WL 4940240 (Bankr. S.D. Tex. Aug. 21, 2020), the U.S. Bankruptcy Court for the Southern District of Texas granted the debtors' motion to reject a FERC-regulated gas transportation agreement. Addressing the standard for rejection, the court held that a bankruptcy court should engage in a fact-intensive analysis of whether the rejection of the agreement would lead to direct harm to the public interest through an "interruption of supply to consumers" or a "readily identifiable threat to health and welfare," none of which was shown to exist in this case. The court wrote that it "is not authorized to graft a wholesale exception to § 365(a) of the Bankruptcy Code … preventing rejection of FERC approved contracts." It further noted that, whether the rejection of such a contract is "good or bad public policy" must be decided by Congress and not by the court or FERC.
Much of the bankruptcy legislative activity during 2020 was understandably focused on alleviating the impact of the pandemic. Enacted legislation and executive orders included:
The Coronavirus Aid, Relief, and Economic Security ("CARES") Act. Signed into law on March 27, 2020, as an initial response to the economic fallout of the pandemic, the CARES Act created a $600 unemployment bonus that lasted until July 31, 2020, for those who lost their jobs as a result of the shutdowns due to COVID-19. The law also set up the Paycheck Protection Program ("PPP") to provide up to $659 billion to small businesses to pay up to eight weeks of payroll costs, mortgage interest, rent, and utilities. Originally set to expire on June 30, 2020, the PPP was extended to August 8, 2020, after which it lapsed. The CARES Act also provided temporary relief for federal student loan borrowers by deferring student loan payments for six months without penalty.
The Consolidated Appropriations Act, 2021 ("CAA"). Signed into law on December 27, 2020, the CAA was a $2.3 trillion spending bill that combined $900 billion in stimulus relief for the pandemic with a $1.4 trillion omnibus spending bill for the 2021 federal fiscal year. The CAA was one of the largest spending measures ever passed by Congress. It provided for $600 in direct payments to millions of Americans, as well as $300 per week in supplemental federal unemployment benefits for 11 weeks. It also included: (i) $284 billion to revive the lapsed PPP, along with additional small-business aid; (ii) $15 billion in payroll support to airlines; (iii) $25 billion in rental assistance and eviction moratoriums; and (iv) a ban on most surprise medical bills.
The CAA also included various bankruptcy-related provisions for both consumer and business debtors. The business bankruptcy provisions included:
- Amendment of sections 501 and 502 of the Bankruptcy Code, which govern the filing and allowance of claims, to implement a procedure for creditors to file proofs of claim for amounts lost due to forbearance periods mandated by the CARES Act.
- Amendment of section 365(d)(3), which obligates a debtor to continue performing its obligations under an unexpired lease of nonresidential real property, to provide that debtors in subchapter V small business chapter 11 bankruptcy cases may ask the court to provide an additional 60-day delay (120 days total) to pay rent if the debtor is experiencing a material financial hardship due to the pandemic. Landlord claims arising from an extension will be treated as administrative expenses for purposes of confirming a subchapter V small business plan.
- Amendment of section 365(d)(4), which provides that an unexpired lease of nonresidential real property is deemed rejected unless assumed by the trustee or the chapter 11 debtor-in-possession ("DIP") within 120 days following the filing of the bankruptcy case, to increase the period to 210 days. Under the pre-amendment provision, the court already had the power to increase this period by 90 days. Thus, under the amendment, a trustee or DIP can have up to 300 days to decide whether to assume or reject a lease.
- Amendment of section 547 of the Bankruptcy Code, which governs the avoidance of pre-bankruptcy preferential transfers, to protect from avoidance certain deferred payments made by a debtor after March 13, 2020, to nonresidential real property landlords and suppliers of goods and services.
Amendments to the Small Business Reorganization Act of 2019 ("SBRA"). Even though the SBRA, which created a new subchapter V of chapter 11 of the Bankruptcy Code for small businesses, became effective on February 19, 2020, Congress amended the law shortly afterward to increase the eligibility threshold for businesses filing under the new subchapter so that it could be available to a greater number of small business debtors.
Other Bankruptcy Code Amendments Benefitting Individual Debtors. These included amendments to the Bankruptcy Code: (i) excluding coronavirus-related payments from the federal government from the definition of "income" for the purposes of determining eligibility to file for chapters 7 and 13; (ii) clarifying that the calculation of disposable income for the purpose of confirming a chapter 13 plan does not include coronavirus-related payments; and (iii) permitting chapter 13 debtors to seek payment plan modifications if they are experiencing a material financial hardship due to the pandemic.
Executive Orders. President Trump issued executive orders on August 8, 2020, to address some of the concerns related to the pandemic financial crisis. They included measures providing an additional $400 ($300 in federal funds, $100 contingent on state participation) in weekly unemployment benefits to replace the expired $600-per-week unemployment bonus, suspending certain student loan payments, protecting some renters from eviction, and deferring payroll taxes.
Several other pieces of bankruptcy legislation were introduced in the 116th Congress but were never enacted, although many of them are likely to be reintroduced in 2021. These included bills that would implement the most significant consumer bankruptcy reforms since 2005, make student loans dischargeable in bankruptcy, significantly increase the federal-scheme homestead exemption, and protect employees and retirees in business bankruptcy cases.
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