LFI’s Special Situations team attended ABI’s Views from the Bench conference in Washington DC last Friday, where 20+ bankruptcy judges from around the country discussed trends in DIP financing, third-party releases, the solvent debtor exception, real estate leases, and the inevitable topic of AI, among other things. We share our takeaways from the event below.
Bankruptcy financing over the last two years has trended toward complexity and favorable creditor economics, with equity-linked DIP facilities marking a point of departure from previous norms. Judge Jones (SDNY) discussed the stress involved in evaluating novel DIP facilities due to debtor claims of necessity and the complex consequences they pose. Judge Beckerman (SDNY) underscored the importance of close-up financial due diligence, studying market comparisons and questioning financial advisors to understand the market for DIP packages. WeWork and Enviva were cited as especially “mysterious, complex packages” where the economics of the facilities were difficult to determine. In cases where DIP lenders make the package so valuable that non-RSA parties are willing to sign on, value may be taken away from the entire class. Despite debtor protests urging immediate access to bankruptcy financing, Judge Lopez (SDTX) emphasized the grounds for terminating a case hinge on the evidence presented, which is crucial when evaluating DIP packages.
Third-party releases remain in focus following the Supreme Court’s decision in Purdue. The releases permitting certain non-debtor parties to be absolved from liability as part of a bankruptcy plan have garnered controversy since Judge Drain (SDNY) approved the Sackler third-party releases in 2021. More recently, the Supreme Court has limited the use of third-party releases in June—the debate now revolves around opt-in and opt-out provisions and the implications for creditor distributions and equitable treatment of claims. Judge Goldblatt (Delaware) pointed out that the bankruptcy system “tends to assume the sky will fall” after key Supreme Court decisions, though the sky rarely ever actually falls.
The treatment of solvent debtors came under debate in a session moderated by none other than Judge Isgur (SDTX). The heart of the matter is whether solvent debtors are required to pay post-petition interest before returning any value to equity, invoking such high-profile cases as Hertz, Ultra Petroleum, and PG&E. Isgur affirmed the relevance of the solvent debtor exception, as seen in the case of Ultra, according to which post-petition interest and make-whole claims must be paid. The absolute priority rule was invoked to suggest that “parties at the bottom of the pile get no sunshine,” though it was noted that the vast majority of debtors are insolvent, and bankruptcy norms have developed accordingly. The Code states that claims for unmatured interest are disallowed, with very clearly defined exceptions, while the best interests test applies exclusively to impaired claims, Judge Harner (Maryland) argued. Harner reminded the room that the law is a matter for Congress to decide and the courts to apply, with the bankruptcy court wedded to a plain reading of the Code.
Real estate distress, particularly among multifamily properties, has brought certain nuances of bankruptcy law to the fore. At the same time, real estate bankruptcies have grown more complex, with such cases as Pier 1 and Yellow highlighting the challenges of assuming and assigning leases. Ground leases present unique legal challenges with no clear precedent, deemed by one judge to be “the most esoteric, metaphysical, incomprehensive topic in real estate.” Section 502(b)(6) of the Code provides a calculation of the cap on damages resulting from lease termination, effectively striking a compromise between landlords and tenants. Still, rent cap calculations and the treatment of stub rent obligations remain contentious, with recent divergent opinions from the 4th Circuit illustrating the ongoing legal debates.
The adoption of new technologies in the typically hidebound realm of corporate law is becoming increasingly relevant to bankruptcy practice. The American Bar Association recently issued a formal opinion on the ethical use of AI, stressing the need for confidentiality and the implementation of ethical walls. One panelist compared the output of AI in a legal context to his teenage son, who he said makes very stupid statements very confidently. Later in the session, however, a GPT4 model trained on the contents of a legal library was asked to write an opinion in the style of Judge Goldblatt—it produced a thorough and articulate opinion that Goldblatt himself determined to be impressive.
Evan DuFaux
evan.dufaux@levfininsights.com
+1 917 654 0333
