Special Bloomberg Brief Bankruptcy Report

1. Friday
Jan. 16, 2015
www.bloombergbriefs.com
Inside ABI's Report on Bankruptcy Code Reform
BY BILL ROCHELLE
Bankruptcy law in the U.S. has been revised extensively by
Congress roughly every 40 years following adoption of the
Bankruptcy Act of 1898. Since the last major overhaul occurred in
1978 with the advent of the Bankruptcy Code, the nonprofit,
non-partisan thought it time to formAmerican Bankruptcy Institute
a commission to study how bankruptcy law should be improved.
Amendments to the Bankruptcy Act in 1938 were in response to
the Great Depression and significant economic crises tend to
encourage reevaluation. So, ABI began a three-year study,
completed in December, because bankruptcy law today is dealing with issues not even
contemplated when the Bankruptcy Code was adopted in 1978.
For example, secured debt is increasingly used and today there are active secondary
markets for debt of financially distressed businesses where none existed in 1978. In the
early 1980s it wasn’t even clear that an entire business could be sold without the
adoption of a Chapter 11 plan. Now entire businesses are sold within six weeks,
sometimes leaving nothing for unsecured creditors who don’t vote on approving a sale.
In this nine-part series, we highlight some of the recommendations of the ABI
commission, which comprised 20 distinguished judges, law professors, and practitioners.
The insight pieces on the following pages originally ran on the Bloomberg terminal and
in Bloomberg Brief: Bankruptcy & Restructuring in late December and early January and
have been compiled here to provide readers a complete picture of our coverage.
Read the commission's online on the ABI's website.full report
CONTENTS
PART ONE: ABI Commission
Examines Professional Role, Fees
PART TWO: ABI Protects Its Own on
Fees; Restricts Lenders
PART THREE: ABI Would Slow
Bankruptcy Sales, Trim Safe Harbors
PART FOUR: ABI Sides With Credit
Bidders, Trademark Holders
PART FIVE: ABI Would Trim
Preference Suits and Help Labor
PART SIX: ABI Proposal Is Cold
Comfort for Madoff Victims
PART SEVEN: ABI Panel Says Rein
In Quick Sales at Low Values
PART EIGHT: ABI Commission Votes
to Make Plan Cramdowns Easier
PART NINE: ABI Wants Chapter 11
to Be Easier for Small Companies
QUOTED
The commission's effort at
reform is “an attempt to catch
up with the current and
economic reality."
— Commission co-chair Robert J. Keach on
Dec. 8 at a press conference in Washington
NUMBER OF INTEREST
332 — Pages in the American
Bankruptcy Institute commission's
report on Chapter 11s, excluding the
appendix.
It's Like They Always Say: A Word Cloud Is Worth 332 Pages
Source: ABI, Tagxedo
A word cloud of the entire ABI Chapter 11 commission report shows which phrases appear most
frequently in the final document. "Bankruptcy," "debtor" and "creditors" are not surprisingly
among the most recurrent. "Reorganization" and "reform" are also top phrases, with "code,"
"claims" and "trustee" helping to round out the list.

2. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 2
I: FINDINGS
ABI Commission Examines Professional Role, Fees
BY BILL ROCHELLE
Recognizing that professional fees in
some major bankruptcy reorganizations
can exceed $100 million, the American
Bankruptcy Institute commission said
there’s a common, public perception that
Chapter 11 has become too expensive,
particularly for small and medium-sized
businesses.
Still, the commission’s report noted that
not everyone advocates “significant
reform.” Some commentators, according
to the commission, said that amending
the Bankruptcy Code “could have
unintended consequences or negatively
impact credit markets.”
The commission voted to retain the
concept of the debtor-in-possession,
under which a bankrupt company’s
officers and directors aren’t supplanted
automatically by a trustee or receiver. The
commissioners concluded that any
potential value of a trustee would be
“outweighed by potential disruption, cost
and inefficiencies.”
The commission recommended only
minor changes in the mechanism for
appointing a Chapter 11 trustee in cases
involving fraud or gross mismanagement.
The most significant recommendation
with respect to a trustee deals with the
exclusive right to propose a
reorganization plan.
The commission would delete the
provision in current law whereby the
appointment of a trustee automatically
results in a loss of so-called exclusivity.
On appointment of a trustee, the
commission would make a subtle change
in procedure. The need for a trustee
should be shown by a “preponderance of
the evidence,” not by “clear and
convincing” evidence required by some
courts.
"The commission said
there’s a common,
public perception that
Chapter 11 has
become too
expensive, particularly
for small and
medium-sized
businesses."
The commission would end the
little-used ability of creditors to elect a
Chapter 11 trustee.
Current law allows for appointment of
an examiner to conduct an investigation
on request in larger cases. The
commission would supplant the examiner
with an “estate neutral.” In appropriate
cases, the estate neutral could also serve
as a mediator or initiate litigation on
behalf of the company.
The commission would require the
appointment of official creditors’
committees in all but small and
medium-sized cases. Just as trustees or
bankrupt companies can’t be sued
without permission from the bankruptcy
court, the commission would expand the
prohibition so committees, committee
members and professionals couldn’t be
sued.
One of the commission’s significant
recommendations deals with fees for
lawyers representing secured creditors,
ad hoc committees, or anyone paid
directly or indirectly by the bankrupt
company.
In those situations, the bankruptcy court
would approve the fees, using the
“reasonableness” standard applicable to
professionals directly hired by the
company or the creditors’ committee.
The commission would ease some of
the requirements in existing law regarding
professionals who are involved in the
company’s ordinary business affairs, but
not in the bankruptcy process. These
so-called ordinary-course professionals
wouldn’t be required to file formal fee
applications and wouldn’t be subjected to
the so-called disinterestedness test.
(Originally published Dec. 30, 2014)

3. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 3
II: FEES
ABI Protects Its Own on Fees, Restricts Lenders
BY BILL ROCHELLE
The American Bankruptcy Institute
offered little in the way of solutions to the
high cost of Chapter 11 reorganization
where professional fees in large cases
can run into the hundreds of millions of
dollars.
The commission's recommendations
step on the toes of secured lenders when
it comes to some current practices for
financing in Chapter 11.
The drafters of the report admitted that
containing professional expense is
difficult because “a market does not exist
to control or monitor such fees.”
In defense of current practice, with
some lawyers charging more than $1,000
an hour, the report says that professional
fees in larger cases represent “a modest
percentage of the debtor’s assets.” The
perception of high cost, according to a
professor cited in the report, ignores the
value professionals can add to a
reorganization.
To lower costs, the commission
recommends changes in existing law to
encourage alternative billing
arrangements, such as contingencies and
fixed fees.
The report admits that high cost in small
and medium-sized cases encourages
lawyers to conduct quick sales.
Overall, many commissioners believe
high fees are driven “most importantly by
the litigious and contentious posture of a
case.”
In financing a reorganization, the
commission proposes that the law change
to prohibit so-called rollups, where
pre-bankruptcy debt is paid down or
converted into post-bankruptcy debt,
which is often supported by liens on
collateral not covered by pre-bankruptcy
liens.
"The drafters of the
report admitted that
containing
professional expense
is difficult."
The commission would make some
exceptions, allowing pay downs on
pre-bankruptcy debt if a new loan comes
from different lenders or repays old debt,
in the process providing more financing
on better terms.
The report also says that
post-bankruptcy lenders shouldn’t be
allowed
to have liens on lawsuits, which are often
the only unencumbered assets available
for unsecured creditors.
Current bankruptcy law requires making
so-called adequate protection payments
to secured lenders to insulate them from
decline in the value of collateral.
The commission believes that such
payments ordinarily should be based on
foreclosure value of the collateral, not
going concern value. On the other hand,
when there is a bona fide reorganization,
collateral value should be “reorganization
value.”
The report recommends against
securing pre-bankruptcy debt with
post-bankruptcy assets, known as cross
collateralization. The commissioners
would permit cross collateralization, but
only to give adequate protection against
the decrease in the value of collateral.
The commission has complicated
recommendations based on the notion of
“value differential,” or the difference
between foreclosure value and the price
property would command in a bankruptcy
sale. If there is value differential, and the
court later decides to permit foreclosure,
the commission believes there should be
a bankruptcy sale, unless the lender
elects otherwise.
(Originally published Dec. 31, 2014)

4. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 4
III: SALE PROCESS
ABI Would Slow Bankruptcy Sales, Trim Safe Harbors
BY BILL ROCHELLE
In this section, we examine modest,
recommended cutbacks in the sweeping
effect of the so-called safe harbor for
securities transactions and the suggestion
for a minor slow-down in the breakneck
speed at which some entire businesses
are sold in Chapter 11.
The commission recommended that
bankruptcy judges be precluded from
approving loans at the outset of
bankruptcy that require selling the
business in less than 60 days.
The commissioners said that sales
before the early 2000s could “take at least
three months, if not more.” Recently,
according to the report, the “sale process
has become much more abbreviated.” A
slowdown is justified because some “are
proceeding more quickly than is
necessary in many Chapter 11 cases.”
The 60-day prohibition against so-called
milestones would include requirements
for filing a plan or obtaining approval of
disclosure material immediately after
initiation of the Chapter 11 process.
The commissioners would permit a
quick sale only if it’s shown by “clear and
convincing evidence” that there’s a “high
likelihood” the assets will “decrease
significantly in value.” That exception
could be a loophole allowing a quick sale
if a purchaser vows to terminate a
contract absent immediate approval.
The safe harbors were amended and
expanded five times since the adoption of
the Bankruptcy Code in 1978. They have
been “expanded well beyond their original
purpose and now impede a debtor’s
reorganization efforts,” according to the
report.
Contained in Sections 544, 545, 547
and 548 of the Bankruptcy Code, the safe
harbor allows the termination of certain
types of financial arrangements despite
"The commissioners
would permit a quick
sale only if it’s shown
by 'clear and
convincing evidence'
that there’s a 'high
likelihood' the assets
will 'decrease
significantly in value.'"
bankruptcy and bars fraudulent-transfer
or preference attacks.
Current law allows a lawsuit under
federal law based on transfers within two
years of bankruptcy made with actual
intent to hinder, delay or defraud
creditors. The commission would expand
the carve-out to permit suits under state
law barring the same types of fraudulent
transfer with actual intent.
If adopted by Congress, the change
would allow suits going back as long as
six years before bankruptcy. If that were
already the law, it’s possible the trustee
for Bernard L. Madoff Investment
Securities Inc. would have been able to
maintain lawsuits sufficient to repay the
entire $17 billion lost by investors in his
record Ponzi scheme.
A second reform would render the safe
harbor inapplicable to leveraged buyouts
of privately held companies. As the law
now stands, owners of a nonpublic
company can be bought out with
proceeds from liens placed on the
business by the buyer, even when the
new debt renders the business insolvent
or without sufficient capital.
The commission would retain safe
harbor protections for owners of publicly
traded securities.
According to the report, the
commissioners couldn’t “reconcile the
protections that courts were affording
owners of privately issued securities with
the original purpose of the legislation.”
They were “most troubled” by leveraged
buyouts that leave the debtor “with
insufficient capital.”
The report suggested trimming back
protected repurchase agreements by
re-instituting the definition that existed
before amendments in 2005.
(Originally published Jan. 2, 2015)

5. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 5
IV: EXECUTORY CONTRACTS
ABI Sides With Credit Bidders, Trademark Holders
BY BILL ROCHELLE
The American Bankruptcy Institute
would give more protections to labor
unions and holders of trademark licenses
when businesses are sold in Chapter 11.
The report’s authors found few flaws in
current practice allowing entire
businesses to be sold quickly, before a
reorganization plan is even proposed.
The commissioners recommended that
the Bankruptcy Code be modified by
explicitly adopting the definition of
executory contracts proposed by the late
Vern Countryman in a landmark 1973 law
review article. The Harvard law professor
submitted that a contract is executory —
and therefore susceptible to rejection or
termination by a bankrupt — if failure to
perform on either side would constitute a
breach of contract.
The commission decided not to adopt a
proposal made by University of Texas
Law School’s Jay Westbrook in a 1989
law review article. Westbrook put forth a
functional approach, under which a
contract should be considered executory
if assumption or rejection would confer a
benefit on the bankrupt.
The commission even considered doing
away entirely with the executory
requirement.
The commission concluded that altering
the definition would only change the
subject of litigation while not diminishing
the amount of litigation over contract
rejection. As for Westbrook’s concept, the
commission said it would be unfair to
counterparties.
Although the Countryman approach is
“imperfect,” the report’s authors said, it
“strikes an appropriate balance.”
The commission next considered what
happens to the non-bankrupt third party
when a contract is rejected.
Most significantly, it recommended that
Section 365(n) of the code be amended
so the right to use a trademark continues
even if a license is rejected as an
executory contract. Click to view onhere
the Bloomberg terminal the July 10, 2012,
Bloomberg bankruptcy report of an
opinion by U.S. Circuit Judge Frank
Easterbrook, who differed with the 1985
Lubrizol decision from the U.S. Court of
Appeals in Richmond, Virginia, which held
that rejecting a license deprives the
licensee of the continued right to use a
trademark.
Congress didn’t intend for rejection of a
contract to be a so-called avoiding power,
according to the report.
If a third party can continue using a
trademark, the law should be changed so
bankrupts can continue enforcing quality
requirements and compliance with other
contractual provisions related to products,
materials and processes, the commission
recommended.
Significantly, the commissioners said a
bankrupt should be entitled to sell an
intellectual-property license even if the
counterparty’s consent is required by the
contract or non-bankruptcy law. The court
could bar sale if the harm to the third
party “significantly outweighs the benefit
to the estate.”
The commission would also expand the
scope of current executory contract law to
cover foreign patents and copyrights.
In 2005, Congress made a major
change in bankruptcy law by requiring the
assumption or rejection of real-estate
leases within seven months. That change
seems to have caused more liquidations
or resulted in fewer retail bankruptcies,
according to the report. The commission
recommended allowing a year to decide
whether to assume or reject a real-estate
lease.
The commission would resolve a
subject on which courts disagree by
providing for a proration of rent, making
an administrative claim for the time after
the filing of the petition. The
administrative portion would be paid
within 30 days, if Congress sees things
the commission’s way.
The commission also suggested
revising the definition of the claim that
results from rejection of a real-estate
lease.
Through the 1980s, it was unclear
whether an entire business could be sold
before the adoption of a Chapter 11 plan.
Now, businesses are sometimes sold as
little as four to six weeks after bankruptcy,
often with little or nothing for unsecured
creditors. Some commentators want the
law changed so secured lenders, in
substance, pay a fee to unsecured
creditors for the right to effect a
bankruptcy sale.
The commission rejected that idea,
saying surcharges shouldn’t be
mandatory. Instead, the “parties should
remain free to negotiate these types of
set-asides based on the facts of any
given case.”
In several recent cases, approved sales
have been reopened after another buyer
appeared with a higher offer. The
commission would end that practice,
saying “more value alone” shouldn’t be
grounds for reopening an auction or
setting aside a sale order.
The commissioners said property
should continue being sold in bankruptcy
free of claims and liens to the extent
permitted by the Constitution, including
freedom from successor liability claims
except those under labor law.
A bankrupt company shouldn’t be able
to shortcut lengthy procedures for
modifying labor contracts simply by
selling property free of claims and liens,
according to the report.
If all of a bankrupt’s property is being
sold, all creditors should receive notice
equivalent to proposal of a Chapter 11
plan, the commission said.
Quick bankruptcy sales often involve
secured lenders who credit bid, or buy
property using secured debt rather than
cash. Some observers have said quick
sales with credit bids shortchange
unsecured creditors, according to the
report.
The commission conceded that a quick
sale combined with a credit bid “could, in
fact, depress the value of the property.”
The commissioners nonetheless
recommend continuing to allow credit
bidding, while admonishing courts to
“mitigate any chilling effect through the
auction and sale procedures.”
Also in the report, the commissioners
recommended barring loans that require
selling a business in less than 60 days.
(Originally published Jan. 5, 2015)

6. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 6
V: PREFERENCE SUITS
ABI Would Trim Preference Suits and Help Labor
BY BILL ROCHELLE
The American Bankruptcy Institute
commission recommended allowing
greater freedom to sue for recovery of
fraudulent transfers while narrowing
situations where creditors can be sued for
preferences.
U.S. law historically has allowed suits
over preferences, or payments on
overdue debt received within 90 days of
bankruptcy. Before the 1978 law,
preferences were difficult to recover
because the trustee had to show the
recipient knew the bankrupt was
insolvent. That requirement was
discarded with adoption of the Bankruptcy
Code, although creditors were given
defenses that often can defeat a
preference claim.
Preferences became the bane of
creditors’ lives because they could mean
two losses. The creditor would sustain a
first loss when the company owing the
debt went bankrupt. As much as two
years later, the creditor might face a
second loss when a trustee sued for a
preference and demanded return of
payments received within three months of
bankruptcy.
Preference law was intended to put all
creditors an equal footing, so a supplier
who has leverage to force payment of
debt before bankruptcy comes out no
better than other creditors who don’t.
The commission said there’s evidence
that preference suits these days often
don’t benefit unsecured creditors. They
point to cases in which preference
recoveries went to secured lenders or to
pay expenses of bankruptcy.
The ABI commission was also
concerned about potential abuses, such
as trustees simply demanding repayment
of everything received within 90 days of
bankruptcy without stopping to determine
whether any defenses would bar a
preference claim. In those situations,
creditors can feel compelled to pay the
trustee even if there is a good defense,
just to avoid the cost of litigation.
The commission recommended that
Congress modify the statute by requiring
the trustee to conduct “reasonable due
diligence” before demanding return of a
preference, including a search for
“reasonably knowable” defenses.
The commissioners said the trustee
should also be required to lay out the
elements of a preference “with
particularity” and without using legal
"The commission said
there’s evidence that
preference suits these
days often don’t
benefit unsecured
creditors."
conclusions or “speculative allegations.”
Most significantly, the commissioners
would prevent preference suits for less
than $25,000, instead of the current
$5,900 cutoff. The commission would also
require a trustee to sue in the recipient’s
hometown for preferences less than
$50,000.
The commissioners recommended
changes in Section 550(a) of the code,
which permits recovery of fraudulent
transfers from so-called subsequent
recipients, that is, those who receive
payment from the party that initially
received the fraudulent transfer.
The commissioners would change
current law so the subsequent recipient
can be sued at the outset, without
awaiting a judgment against the initial
recipient. If the subsequent recipient isn’t
known initially, the commissioners would
require a suit when that identity becomes
known. The subsequent recipient should
also be permitted to raise any defenses
that would have been available to the
initial recipient.
In the liquidation of Bernard L. Madoff
Investment Securities LLC, a district
judge barred the trustee from suing a
foreign subsequent recipient where the
initial payment also went to a foreigner.
The ABI commission would modify the
law to permit recovery of payments
entirely outside the U.S., as long as the
court considers legal principles known as
international comity.
To resolve a split among courts, the law
should be modified so benefit to anyone,
including shareholders, supplies the basis
for recovery of a fraudulent transfer,
according to the ABI report.
Labor unions also need more protection
on modification of collective bargaining
agreements, according to the report. The
law should be changed to ensure there
are bona fide negotiations and several
status conferences with the judge before
the company goes to court demanding
concessions. The trial on labor
concessions should begin within six
months of the first status conference.
Some courts don’t give workers any
claims if a union contract is modified. The
commission would allow unsecured
claims in the form of monetary damages.
Some courts have ruled that a bankrupt
company can modify retiree benefits
unilaterally if they are terminable at will.
The commission would adopt the position
of other courts by making Section 1114 of
the code applicable to modification or
elimination of benefits that could be
modified or eliminated at will outside of
bankruptcy.
(Originally published Jan. 6, 2015)

7. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 7
VI: IN PARI DELICTO
ABI Proposal Is Cold Comfort for Madoff Victims
BY BILL ROCHELLE
Victims of Bernard Madoff’s Ponzi
scheme might have recovered all of their
$17 billion in losses had proposals issued
in December by the American Bankruptcy
Institute panel been the law of the land.
Unfortunately for them, a legal doctrine
known as “in pari delicto” prevented the
trustee unwinding Madoff’s firm from
suing banks and others allegedly
complicit in the swindle.
In its report, the ABI commission
recommended amending the law to allow
bankruptcy trustees to bring such cases.
In pari delicto, Latin for “in equal fault,”
is centuries-old judge-made law that bars
one wrongdoer from suing another.
Because trustees are viewed as stepping
into the shoes of bankrupts that
committed fraud, they are viewed as
equally corrupt and can’t sue others over
their roles in the wrongdoing.
In our exploration of the commission’s
recommendations, we turn to in pari
delicto, reclamation claims, severance
benefits and approval of settlements.
The commission recommended that
bankruptcy trustees be exempted from
the in pari delicto rule, as state and
federal court receivers already are. The
commission deadlocked on whether
creditor committees and litigation trustees
likewise should be exempt and made no
recommendation on that score.
If a company in Chapter 11 is a
debtor-in-possession, the in pari delicto
rule should apply because some
wrongdoers might still be in management
or could profit from a successful suit, the
commission said.
The commission said that if a trustee
were appointed, “it would not expose
defendants to claims brought by a party
controlled or influenced by wrongdoers.”
If the recommendation becomes law, it
will affect the conduct of Chapter 11
cases in which there is suspicion of fraud.
To generate the best recovery for
creditors, it would become almost
mandatory to have a trustee supplant
management, ousting the
debtor-in-possession.
When the Bankruptcy Code was
amended in 2005, lawmakers added
Section 503(b)(9), which provides that
creditors who supply goods within 20
days of bankruptcy have so-called
administrative claims and must be paid in
full. Suppliers also have so-called
reclamation rights under the Uniform
Commercial Code for goods delivered
shortly before bankruptcy.
The commission would do away with
"If the
recommendation
becomes law, it will
affect the conduct of
Chapter 11 cases in
which there is
suspicion of fraud."
reclamation rights in bankruptcies while
allowing creditors to have 503(b)(9)
claims for goods that were “drop shipped”
— delivered to a third party, not to the
bankrupt company. In those situations,
courts don’t allow 503(b)(9) claims.
Although Section 1102(a)(2) of the code
allows for appointment of official
committees on top of the usual unsecured
creditors’ panel, the commission would
explicitly prohibit committees to represent
administrative claimants, or those who
provided goods or services during
bankruptcy.
The commission said losses resulting
from bankruptcy are rising higher in the
capital structure as secured debt
becomes more prevalent. These days, it’s
become more common for a bankrupt
company to be unable to pay debts
arising during Chapter 11. For that
reason, some commentators favor official
administrative claim committees.
The commission opposes such
committees, saying they wouldn’t justify
the additional expense or the slowing of
the Chapter 11 process.
The recommendation ignores situations
in which official creditor committees
negotiate settlements that give recoveries
to unsecured creditors while leaving
administrative claims unpaid, even though
bankruptcy priorities would require paying
administrative claims first.
As bankrupt companies liquidate or trim
operations in a quest for profitability,
workers are fired. Some of those
employers have pre-existing severance
policies, and courts differ on the extent to
which severance claims are entitled to
payment, if at all, when a worker is fired
after bankruptcy.
The commission recommended
codifying a rule turning severance claims
into costs of bankruptcy paid in full based
on the time worked after bankruptcy. That
still might not put much money in workers’
pockets because most firings take place
soon after bankruptcy.
Because bankruptcy works best when
contending parties settle, rules governing
settlement approval are paramount, but
courts disagree over the standards for
approving settlements.
The commission considered new
standards, looking at high and low
thresholds, and rejected the often-cited
“lowest point of reasonableness.”
Instead, the commission took a middle
ground and proposed a hybrid: A
settlement must be “reasonable and in
the best interests of the estate.”
Although seemingly a jumble of jargon,
the proposed standard would subject
settlements to a more rigorous
examination than the business judgment
rule, which only demands a valid
business justification for settling.
(Originally published Jan. 7, 2015)

8. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 8
VII: TIMING
ABI Panel Says Rein In Quick Sales at Low Values
BY BILL ROCHELLE
Major corporate bankruptcies these
days can be wrapped up for all practical
purposes within six weeks by selling the
business, without a reorganization plan.
Sometimes, senior secured creditors
buy the business in exchange for debt,
leaving junior creditors nothing or almost
nothing. There are even cases in which
sale proceeds don’t cover bankruptcy
expenses.
The American Bankruptcy Institute
report recommended changing the laws
and procedures governing sales and plan
approval to ensure that companies aren’t
snapped up in Chapter 11 at artificially
low values.
In this section, we’ll review those
proposals, as well as the commission’s
conclusions about the role of a bankrupt
company’s officers, directors and
executives.
The ABI commission’s
recommendations on sales fall into two
categories. First, sales in advance of a
plan shouldn’t be approved without some
of the protections lower-ranked creditors
would have in the plan-approval process,
aside from voting.
Second, the commission latched onto
the notion of “redemption option value” to
ensure that junior creditors have a chance
to realize some value if the worth of the
business increases within three years
after a sale or plan approval.
The commission advised Congress to
modify the code so sales can’t be
approved unless expenses of the
bankruptcy are paid in full, just as the law
would require under a confirmed plan.
In addition to barring sales within the
first 60 days of bankruptcy and requiring
notice to all creditors and shareholders,
an entire company shouldn’t be sold
without the satisfaction of
plan-confirmation requirements such as
good faith and disclosure of payments
and
fees, the commission said.
Most significantly, the commission
proposed an elaborate set of rules to
ensure that some creditors aren’t wiped
out by a sale or plan effectuated at a
trough in value, when they might have
had a recovery were the transaction
carried out later.
The commission developed the concept
"Highly complex, the
new plan and sale
requirements could
foster costly and
protracted litigation.
The proposals, on the
other hand, might
increase the likelihood
of settlements to avoid
such expense and
delay."
of “redemption option value” to account
for the possibility that the company’s
worth could rise enough within three
years for full payment to secured creditors
who bought the company for debt.
A plan or sale could be approved over
the objection of a creditor class otherwise
wiped out only if that class is given
redemption option value, based on right
within three years to pay off senior
lenders in full, with interest at the
non-default rate plus fees.
The requirement wouldn’t apply in small
and midsize Chapter 11 cases. In large
cases, the court could also hold a
valuation trial and decide whether the
business is worth so little there is no such
value.
To prevent junior creditors from fighting
even if they are made an offer they
should have accepted, the commission
would bar the junior class from receiving
anything if it opposes a sale despite being
offered proper redemption option value.
Highly complex, the new plan and sale
requirements could foster costly and
protracted litigation. The proposals, on
the other hand, might increase the
likelihood of settlements to avoid such
expense and delay.
Ordinarily, ownership is wiped out in
bankruptcy. The commission would codify
the so-called new value exception by
providing that shareholders can retain
ownership if they contribute value
“reasonably proportionate” to what they
keep and there is a “reasonable market
test.”
Managers and board members can be
confronted with ethical dilemmas because
of conflicting fiduciary responsibilities to
creditors and shareholders. The
commission recommended that, in some
instances, the company be relieved of
fiduciary responsibility to creditors when
proposing a plan. Otherwise, state laws
on corporate responsibility should
continue to govern management in
Chapter 11, the commission said.
Shareholder votes shouldn’t be required
to approve plans or major transactions
such as sales, according to the report.
But the commission wouldn’t abrogate
requirements in state corporate law to
hold shareholder meetings. To prevent
interference with a reorganization, courts
sometimes bar demands for such
meetings.
(Originally published Jan. 8, 2015)

9. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 9
VIII: CRAMDOWNS
ABI Commission Votes to Make Plan Cramdowns Easier
BY BILL ROCHELLE
A company should be able to emerge
from bankruptcy reorganization using the
so-called cramdown process even when
all creditor classes oppose its plan, the
American Bankruptcy Institute
commission said in its recommendations.
In its report, the commission advocated
doing away with a cardinal feature of the
code: A requirement that at least one
creditor class vote in favor of a plan
before it can be imposed, or “crammed
down,” on classes that voted against.
In this piece, we look at some of the
more granular proposals in the ABI report
related to approval of Chapter 11 plans.
A company sometimes finds itself
unable to win creditor approval of a plan
when a dominant creditor has objectives
at odds with other creditors. Under
current law, half of creditors by number
and two-thirds in amount of claims in
each class must vote “yes” for a plan to
be accepted by that class.
If at least one class votes in favor, the
court can cram the plan down on the
others, assuming specified creditor
protections are provided.
Consequently, a creditor holding
one-third of the claims in a class can bar
approval by that class. If a secured
creditor’s collateral is worth less than the
debt, that creditor might also be able to
cause the unsecured creditor class to
vote “no.”
To void “delay, cost, gamesmanship
and value destruction,” the commission
endorsed changing current law so an
accepting class isn’t a prerequisite for
cramdown.
On voting, the commission advocated
another significant change. Endorsing a
“one creditor-one vote” rule, the
commission would treat creditors under
common control as one creditor, thus
disabling a creditor or creditors from
artificially controlling a class by splitting
up claim ownership.
Since cramdown would be possible
without an accepting class, current law
could be modified to say that the failure of
anyone to vote in a class is the equivalent
of rejection. Under current law, failure to
vote is considered acceptance.
"The commission
advocated doing away
with a cardinal feature
of the code: A
requirement that at
least one creditor
class vote in favor of a
plan before it can be
imposed, or 'crammed
down,' on classes that
voted against."
Disputes arise when a plan is crammed
down by paying a creditor in full in
installments. Often, there are
disagreements over the discount rate and
the present value of future payments.
The commission said a U.S. Supreme
Court decision, called Till, shouldn’t be
applied in Chapter 11.
To decide what represents full payment,
the ABI group would generally analyze
the cost of capital for similar debt. If there
is no recognized market, the court could
use a risk-adjusted rate taking several
factors into account, not Till’s “prime plus”
formula, the commission said.
The commission also proposed a bar on
“gifting,” when a senior class gives value
to a lower-ranking in class in a plan,
disregarding statutory creditor priorities.
Two circuit courts prohibit using a
Chapter 11 plan to absolve non-bankrupts
from liability, except in the case of
asbestos claims. The commission would
allow so-called third-party releases, as
long as the plan satisfies a five-part test.
Subordination agreements, in which
junior bondholders agree to turn over
recoveries to senior bondholders until the
senior class is paid in full, sometimes also
give the junior creditors’ plan-voting rights
to the senior class. The ABI commission
said junior creditors should retain their
voting rights and the ability to object to
plan approval.
A vibrant market in trading claims in
bankrupt companies has arisen in recent
years. Some observers favor limits on
claims trading because a turnover in
creditor composition can halt progress
already made on a plan.
The commission said there’s no need
for new laws, and “little benefit to
increased regulation of claims trading.”
Section 506(c) of the code makes a
secured creditor liable for the cost of
preserving that creditor’s collateral. The
commission said the protection has
become essentially worthless because
bankrupt companies are forced to waive
Section 506(c) rights at the outset of most
cases. The commission would bar
waiving those rights.
Similarly, the commission would bar
waiver of rights under Section 552(b),
which permits the court to cut off a
pre-bankruptcy lien on assets acquired
after bankruptcy.
(Originally published Jan. 9, 2015)

10. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 10
IX: SMALL BUSINESSES
ABI Wants Chapter 11 to Be Easier for Small Companies
BY BILL ROCHELLE
In our ninth and last discussion of an
American Bankruptcy Institute
commission’s recommended changes to
the U.S. Bankruptcy Code, we look at the
panel’s suggestions for making
reorganization law more hospitable to
companies with less than $50 million in
assets or debt.
We also note how the commission, in its
three-year review, sidestepped the
controversial issue of venue, or where a
company can file Chapter 11. The group
also deferred recommending
modifications in Chapter 11 for
individuals. Our review of the December
ABI report closes with a look at so-called
structured dismissals.
Excluding those people who can be
forced into Chapter 11 because they don’t
qualify for either Chapter 13 or Chapter 7,
85 percent to 90 percent of companies
filing in Chapter 11 have $10 million or
less in assets or debt, the ABI
commission calculated. The commission
refers to them as small and medium-sized
enterprises, or SMEs.
The report explains how existing
Chapter 11 law, designed with large
companies in mind and last
comprehensively overhauled in 1978, is
too slow, too costly and “not working” for
SMEs, dissuading them from even
attempting reorganization.
The commission recommended that
Congress make any $10 million company
automatically eligible for treatment as an
SME, while one with less than $50 million
in assets or debt could petition the court
for SME treatment. Companies with
publicly traded securities and individuals
wouldn’t qualify.
The commission set out ways to make
Chapter 11 simpler and less costly for
SMEs while providing tools for them to
reorganize effectively.
For starters, an unaudited SME could
use good-faith valuation estimates.
Further reducing costs, there ordinarily
wouldn’t be an official creditors’
committee, although the court could
appoint a so-called estate neutral to help
the SME formulate a plan.
The commission would repeal existing
provisions in the Bankruptcy Code that
require a small business to complete its
reorganization within 300 days of the
Chapter 11 filing, and get its plan
confirmed at most 45 days after
presenting it to the court. Those deadlines
are often impossible to meet, the panel
said.
Instead, the ABI commission advocated
"The report explains
how existing Chapter
11 law ... is too slow,
too costly and 'not
working' for SMEs,
dissuading them from
even attempting
reorganization."
letting the SME propose a time line for
plan submission within two months of its
Chapter 11 filing, subject to a judge’s
approval.
So-called absolute priority rules don’t
work well with SMEs because they
require wiping out shareholdings if even
one creditor class votes against a plan.
The commissioners proposed allowing
existing shareholders to retain ownership,
as long as creditors are fully paid within
four years of the company’s emergence
from Chapter 11.
If all creditor classes vote for a plan,
existing shareholders retain their stock. If
there isn’t universal acceptance,
pre-bankruptcy owners can keep 100
percent of the common stock, with the
right to receive only 15 percent of
“economic
distributions.”
Unsecured creditors would get 100
percent of the preferred stock and the
right to receive 85 percent of economic
distributions.
If creditors aren’t paid in full on their
pre-bankruptcy claims within four years,
their preferred stock converts into 85
percent of the common stock.
Venue is one of the most controversial
aspects of contemporary bankruptcy
practice, because companies can file in
any jurisdiction where even a single
affiliate is incorporated or does business.
Most large Chapter 11 cases are
therefore filed in Delaware or New York,
often thousands of miles away from the
company’s headquarters and creditors.
Saying they couldn’t reach a consensus
on venue rules, “the most difficult and
divisive issue considered,” the
commissioners made no
recommendations.
The panel also made no
recommendations on Chapter 11 for
individuals. That issue is the subject of a
separate ABI study.
Structured dismissals are another major
source of controversy. A structured
dismissal ordinarily occurs when assets
are sold and there isn’t enough left after
paying secured creditors to cover
expenses of the Chapter 11 effort and
confirm a liquidation plan for unsecured
creditors.
In those situations, there are sometimes
settlements carving out money for
unsecured creditors, even though
Chapter 11 expenses go unpaid. Third
parties might also be given releases from
potential lawsuits.
In light of the ABI’s recommendations
for asset sales and so-called third-party
releases, the commission in substance
would ban structured dismissals by
requiring companies to adhere to
provisions laid out in Section 349 of the
code, under which property returns to the
bankrupt company on dismissal and any
transactions set aside during bankruptcy
are returned to the status quo ante.
(Originally published Jan. 12, 2015)

11. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 11
RESPONSES
Attorneys, Trade Groups, Academics Weigh In on the ABI Recommendations
In the month since the American Bankruptcy Institute commission released its findings, professionals in the bankruptcy community
have had time to read the more than 300-page report and give their opinions. A sampling of responses from blog posts, tweets and
e-mails to Bloomberg are compiled below. The responses ran the gamut from commendatory to sharply critical.
Loan Syndicators Oppose ABI Changes
BY BILL ROCHELLE
Changes to bankruptcy law recommended by the ABI
commission would “reduce recoveries for secured creditors” and
“lead to higher credit costs,” according to , generalElliot Ganz
counsel of the .Loan Syndications & Trading Association
“There is no empirical evidence or academic research
suggesting that the present code is not working,” Ganz said in an
e-mailed statement. “All the evidence shows that results are
actually quite efficient.”
One of the commission’s bigger recommendations concerned
“adequate protection” payments made during bankruptcy to
secured lenders for use of their collateral. The ABI commission
said the payments should be made based on the liquidation
value of the collateral. Ganz said that would be “very harmful.”
The loan association also took issue with the commission’s
recommendations for protecting junior creditors when a bankrupt
company’s business is sold to senior lenders in exchange for
debt. The commission developed the notion of “redemption
option value” to permit junior creditors a recovery if the value of
the business rises in the succeeding three years sufficient to pay
the senior debt in full.
Ganz called the suggestions “very puzzling” and said they
would make Chapter 11 “more expensive, complex and slower
for reasons that are hard to fathom.”
The ABI commission would ban sales within the first 60 days of
bankruptcy. When existing lenders require quick resolution of a
bankruptcy, Ganz said, there is “no evidence whatsoever” that
so-called milestones “lead to bad results.”
Ganz said the ABI report has no unifying theme because the
commissioners “appear to have engaged in a series of
compromises between their various factions.”
The U.S. Senate and House of Representatives will probably
hold hearings this session, Ganz said in an interview. But he said
he doesn’t see any “imminent risk of legislation.”
The LSTA defines its mission as the promotion of a “fair,
orderly, efficient and growing corporate loan market” that
balances the “interests of all market participants.”
REACTIONS FROM AROUND THE WEB
"In its intellectual property recommendations, the Commission
tackled some of the most common bankruptcy and IP issues
being litigated today. If enacted by Congress, its
recommendations would resolve circuit splits, clarify licensee and
licensor’s rights in bankruptcy, and squarely extend protection to
trademark licensees. Whether or not you agree with every
recommendation, the Commission should be commended for its
serious, thoughtful, and diligent effort to improve Chapter 11 for
debtors, creditors, and the general public."
— , of counsel in the Cooley LLP Corporate Restructuring &Bob Eisenbach
Bankruptcy practice group, in a post published Dec. 16, 2014blog
"While most of the ABI Commission’s recommendations are not
drastic departures from current practice, the proposals related to
the estate neutral and the VIP could, in our opinion, have an
impact on bankruptcy practice. We have seen courts urge parties
to use mediators and appoint independent directors with
seemingly increased frequency lately, and it may be that the
estate neutral could fill a similar role. Given how often valuation
appears to be an issue in chapter 11 cases, having the
information in a valuation information package available to
interested parties could play an important role early in chapter 11
cases and move cases along more quickly if it avoids
time-consuming and extensive discovery."
— , an associate in Weil Gotshal & Manges LLP'sKatherine Doorley
business finance and restructuring practice, in a published Jan. 8, 2015blog
"There is no empirical or quantitative evidence that bankruptcy
sales fail to generate accurate, fair market value for the assets
being sold. In fact, quite the opposite is true. The market for
distressed assets is robust and well-developed. There is also no
evidence that additional time exploring other restructuring options
would lead to increases in value for out-of-the-money
constituents. Rather, the only certainty is that longer cases will be
more expensive."
— attorneys in a published Jan. 5, 2015Chapman and Cutler LLP note
TWITTER REACTIONS
David Bury
@dlburyjr
My 2 cents: Some of the @ch11comm
cost-saving ideas are alreadyission
(unofficially) part of local practice for
small Ch. 11s, by necessity.
Details
David Gustin
@Trade_Credit
Are ABI’s Bankruptcy
recommendations too debtor friendly?
– Part I spendmatters.com/tfmatters/r
efo…
Details
Brian H.
Meldrum
@MeldrumLaw
And the folks at @ch11commission
deserve a national standing ovation
for the thought and effort that went
into that report.
Details

12. Jan. 16, 2015 Bloomberg Brief Bankruptcy Special Report 12
Bloomberg Brief: Bankruptcy & Restructuring
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