Bankruptcy in the News

Having finally wrapped up this mess, it’s back to blogging on a more regular basis…

Yesterday, Fed Chairman Ben Bernanke commented at length for his fellow economists at the Federal Reserve Bank on how problems in the market for subprime mortgages may affect the housing markets and the economy generally.  As one of my favorite economist bloggers summed up in this post at the Calculated Risk blog, according to Chairman Bernanke, "everything will be fine."

That may be reassuring to stock market investors, who must be feeling a bit dizzy from the recent 15% run up since the subprime collapse took its toll on the market a few months back.  For those left holding the bag, however, there’s little solace to be drawn from Chairman Bernanke’s comments.  But, based on the benefits Chairman Bernanke noted the subprime shakeout is having on helping rein in loose lending practices generally, I think it’s fair to say here that one man’s noose is another man’s whip.

For those purchasers of securitized subprime mortgage-backed securities left holding the bag, however, there is one prayer that may provide much needed relief … and that’s the "prayer for relief" that accompanies a complaint filed in the US district court.  As this 8-count complaint proves, there’s no shortage of prayers for relief available to the disgruntled investor left holding the bag.   Bankers Life Insurance Co. v. Credit Suisse First Boston Corp., et. al., No. 07-690 (M.D. Fla. 4/23/07) (hat tip: Calculated Risk). 

Through its complaint, Bankers Life seeks to recover the 95% of its $1.4 million investment that it lost when it purchased in 2004 certain securitized mortgage-backed loans that were originally issued in 2001 in an offering underwritten by Credit Suisse First Boston and DLJ Mortgage Capital.  The packaged loans were subsequently serviced by Select Portfolio Servicing (SPS) of Salt Lake City. 

Cutting to the chase, Bankers Life alleges that CFSB, DLJ, and SPS misled the agencies whose ratings determined the market price of the securitiies by misrepresenting key indicators relating to the portfolio’s performance.  As a result, the complaint alleges, Bankers Life was left holding the bag since it paid about $1.3 million more than the securities were inherently worth.

As every litigator knows, alleging something is one thing, but proving and recovering on it is a "horse of a different color," as the old saying goes.  Here are a few "off the cuff" thoughts as to why I think this complaint will have difficulty surviving a motion to dismiss….

Continue Reading The Subprime Lending Shakeout: A Litigation Perspective

As reported in my prior post last January, Judge Shira A. Scheindlin of the United States District Court for the Southern District of New York issued a ruling on January 24, 2007 that she called "one of the most difficult tasks this Court has yet confronted."  In it, by entering a stay of confirmation

Bankruptcy lawyers often analogize the plan confirmation process to the running of trains, whereby once the so-called "confirmation train leaves the station," it’s very hard — if not impossible — to stop the plan from being confirmed.  When does the confirmation train "leave the station"?  Typically, when a consensus is reached among the debtor and its major creditor constituents (or classes) over the terms of a reorganization plan.  It’s commonly assumed that once that consensus is reached, not even Superman can stop that locomotive from reaching its destination.  As the famed late Bankruptcy Judge James E. Yacos of New Hampshire noted when he terminated plan exclusivity in New Hampshire’s largest bankruptcy case ever (In re Public Service of New Hampshire, 99 B.R. 155, 176 (Bankr. D.N.H. 1989)):

Opening up the process to alternative plans in my judgment will serve to quantify and make concrete various ways of resolving those circular questions. I believe it will force the parties to use all of their considerable skills to negotiate resolutions on a fact basis (rather than and ideological basis dealing with unanswered and unanswerable interesting legal questions) under the gun of having the "reorganization train leave the station" before they are aboard.

Adelphia Communications Corporation’s reorganization case has been proceeding for over 4-1/2 years.  It was called by Bankruptcy Judge Robert E. Gerber, the presiding judge in the case, "among the most challenging — and contentious — in bankruptcy history."  The case involved 230 separate jointly administered entities, generated over 13,000 docket entries in the main bankruptcy case and spawned about 130 separate adversary proceedings (not to mention scores of additional complex and high-profile related securities and criminal proceedings).

As widely reported, on January 3, 2007, Judge Gerber rang in the new year with a 267 page "Bench Decision on Confirmation" that laid the groundwork for entry of an order confirming Adelphia’s "First Modified Fifth Amended Joint Chapter 11 Plan."  The opinion, with its comprehensive explanation of key events in Adelphia’s reorganization (including the background to the filing, the restatements of Adelphia’s financials and bankruptcy schedules, the proposed sale of Adelphia’s cable operations to Time Warner/Comcast and the genesis of that deal, the various iterations of the reorganization plans previously proposed, the increasingly complex and hostile negotiations leading to the current plan, asset valuations, and the key points of contention at the confirmation hearing), is a veritable masterpiece (not to mention the lengthiest opinion of record confirming a plan of reorganization).  The supporting Confirmation Order, entered two days later, is itself 47 another pages, and incorporates the Bench Decision (and the "Rigas Pay-over Bench Decision") by reference as containing the Court’s findings of fact and conclusions of law.

The primary objector to plan confirmation was the so-called "ACC Bondholder Group," comprised mainly of activist hedge funds, which on the day before Thanksgiving, filed this opening 34 page objection summarizing the group’s primary confirmation objections.  The focus of the Bankruptcy Court’s Bench Decision, at its core, is on explaining why the ACC Bondholder Group’s objections should not stop confirmation.

The ACC Bondholder Group appealed the order of confirmation (submitting this "Statement of Issues and Designation of Record on Appeal"), and the case was assigned to Judge Shira A. Scheindlin, whose previous involvement in various prior unrelated appeals gave her significant familiarity with the procedural preconfirmation dynamics of the case.  From the ACC Bondholder Group’s perspective, the selection of Judge Scheindlin to hear the appeal must have been welcome news given her history of supporting the underdog, even at the risk of being reversed by the Second Circuit (as happened in her February 2004 ruling that Maurice Clarett could participate in the 2004 NFL Draft and her April 2002 ruling dismissing perjury charges against an acquaintance of two of the 9/11 hijackers, who she then ordered released from prison after finding his detention legally unjustifiable–and who later, by the way, was acquitted by a unanimous jury, thereby silencing Judge Scheindlin’s fierce critics).  

On January 24, 2007, Judge Scheindlin stepped in front of Adelphia’s speeding confirmation train and, in this opinion, single-handedly derailed it by granting the ACC Bondholder Group’s motion to stay the effectiveness of the confirmation order (though the victory must have seemed a pyrrhic one to the victors given the $1.3 billion bond that Judge Scheindlin ordered be posted as a condition to maintenance of the stay).

In granting the stay, Judge Scheindlin said that deciding what to do was "one of the most difficult tasks this Court has yet confronted."  What swayed Judge Scheindlin?  At root, three things:Continue Reading Don’t Touch that Dial! Adelphia’s Reorganization Plan Temporarily Put on Hold to Give Dissenting Bondholders Their Day in Court

Practitioners before the Seventh Circuit Court of Appeals know that oral arguments in that Court can sometimes go well (e.g., by following the guidelines set forth in Question 4 here), and sometimes not so well (see here), and that one’s success, failure, and/or embarrassment at oral argument may well hinge upon the panel drawn.

Counsel to the United Airlines Retired Pilots’ Benefit Protection Association in preparing to argue the Retirees’ appeal of United Airline’s plan confirmation order surely had to be concerned upon learning that he had drawn a panel consisting of Judges Posner, Easterbrook, and Bauer.  As suggested here, one planning to argue a weak case before this group of heavyweights may as well throw away the script and pray to the Almighty for forgiveness because failure and embarrassment are the likely outcomes of such a test.

The Retirees’ appeal presented the Court with two primary issues: 

First, whether the UAL’s plan unfairly classified and treated active pilots differently from retired pilots in respect of their respective claims resulting from termination of pension benefits.

Second, whether the reorganization plan appropriately included exculpatory releases that shielded the union for the active pilots from claims that the retirees may desire to assert against the union.

In yesterday’s oral argument (accessible here), Judge Posner took the lead in peppering the retirees’ counsel with questions.  Judge Posner provides litigators a lesson in the importance of answering the precise question asked, regardless of how damaging the answer may be to one’s case.  Here, while pressing the retirees’ counsel to answer his question as to how this appeal is not a direct attack on Judge Posner’s ruling last March (holding that the bankruptcy court could approve UAL’s agreement with the active pilots’ union providing for differential treatment that favored the active pilots interests over those of the retired pilots), Judge Posner had this to say in response to counsel’s failure to respond directly to the question asked:Continue Reading Seventh Circuit Appears Ready to Ground Retired Pilots’ Challenge to United Airline’s Confirmation Order

Though its origins are murky, the slang phrase "duck soup" is typically understood to mean "a piece of cake" or "something that is easily done." 

The Marx Brothers made the phrase famous in their movie Duck Soup, which Roger Ebert calls "probably the best" of the Marx Brothers’ movies (though contemporary audiences apparently didn’t think so).  

In hearing of New York Bankruptcy Judge Burton Lifland’s ruling that denied Dana Corp.’s proposed incentive plan for its executives as a disguised retention plan prohibited by BAPCPA’s new Code section 503(c) — and his statement  in open court that "this compensation scheme walks like, talks like, and is a KERP" — I was reminded (speaking of "movies with corporate themes") of the opening segment in Duck Soup where Groucho Marx, as the newly inaugurated dictator/president of bankrupt Freedonia (or perhaps, more aptly, "Free-Dan-[i]-a"), outlined his own bonus incentive plan in the movie’s opening sequence:

I will not stand for anything that’s crooked or unfair
I’m strictly on the up and up
So everyone beware
If anyone’s caught taking graft
And I don’t get my share
We stand ’em up against the wall
And pop goes the weasel.

You’ll find some good early commentary on Judge Lifland’s decision here (WSJ Blog),  here (CFO.com), here (Boss & Workplace Blog), here (Bankr. & Restr. Blog), here (Credit Slips Blog), and here (Credit Slips Blog).  As noted here (in connection with his successful mediation of the dispute in the Enron bankruptcy over Stephen Cooper’s $25 million "success fee" request), Judge Lifland is no stranger to compensation fights.  Indeed, his legendary experience on the bench makes his decision all that much more signficant.

Given the ease with which Calpine Corporation’s proposed incentive plan sailed through Judge Lifland’s court only four months earlier, Dana’s advisers (as reported here) "had been confident they would prevail, in large part because … the Dana pay package was modeled on one adopted [in] Calpine."  In approving the Calpine plan, Judge Lifland commented from the bench:

Well, based upon this record, and it’s certainly clear to the court that these plans and agreements are proposed in good faith and based upon appropriate business judgment. Further, the record before me validates that the focus of the plans and agreement is to maximize value for all the estates; the plans are apparently designed as incentive plans as opposed to retention or KERP’s.

I do find, based upon this record, that the prohibitions of Section 503 have, if not been avoided, are not applicable based upon the structure of these plans and the agreements. To the one area where there might be potentially an argument to be made that 503(c) would be applicable, that would be in the supplemental plan, but that does not involve insiders, and I think 503(c)(3) is appropriately analyzed to agree with that.  In short, I do agree that these are incentive plans to bring enhanced value into the estate. They are not retention plans, although anyone can always make an argument that if people are made happier than they were before, then they are excited enough to stay with the company, but that’s not the focus of these plans. And this would be clearly, based upon this record, not KERP’s and they are not in violation of 503(c). And I will approve the appropriate orders submitted.  (See Transcript at pp. 84-85.)

Here’s a copy of the order entered by Judge Lifland in the Calpine bankruptcy case, to which the approved Calpine incentive plan is attached as Exhibit A.  For the sake of completeness.  Here also you’ll find the Debtor’s motion to approve the incentive plan, the sole objection filed by a small, outgunned Calpine shareholder, and the Debtor’s reply in support.  At the near "rubber-stamp" hearing approving the plan, Judge Lifland heard offers of proof from Scott Davido, Calpine’s CFO/CRO, and Nick Bubnovich, a senior consultant from Watson Wyatt (who also provided some benchmarking testimony), as well as statements in support of the incentive plan from Akin Gump’s Mike Stamer on behalf of Calpine’s Official Unsecured Creditors’ Committee.

Approving Dana Corp.’s proposed incentive plan, however, proved to be anything but "duck soup" for veteran bankruptcy lawyer Corinne Ball and her legions at Jones Day in this hotly contested proceeding.  Instead, Judge Lifland wrote in striking down Dana’s proposed compensation arrangements, "if it walks like a duck (KERP), and quacks like a duck (KERP), it’s a duck (KERP)."  In re Dana Corp., 2006 WL 2563458 (Bankr. S.D.N.Y. 9/5/06) (pdf).  He continued:

The Completion Bonus includes an amount payable to the Executives upon the Debtors’ emergence from chapter 11, regardless of the outcome of these cases. Without tying this portion of the bonus to anything other than staying with the company until the Effective Date, this Court cannot categorize a bonus of this size and form as an incentive bonus. Using a familiar fowl analogy [see "duck" quote above], this compensation scheme walks, talks and is a retention bonus. Contrary to the contentions of several objectors, however, the language of section 503(c)(3) does not prevent this Court considering a Compensation Motion using the business judgment rule….

The Debtors have failed here to meet their burden of demonstrating that the payments in exchange for signing a non-compete agreement and other payments do not constitute “severance” for purposes of section 503(c)(2) of the Bankruptcy Code, or that the evidentiary requirements contained in section 503(c)(2) have been satisfied.

In explaining why he approved a comparable plan in Calpine’s bankruptcy case, but would not do the same in Dana’s, Judge Lifland remarked:

The Debtors also compare the compensation programs brought before other courts, in other cases, including the plan brought before this Court in In re Calpine. If this Court is to analyze the Compensation Motion pursuant to section 503(c), the Court must look to the specific circumstances of these cases, and these Debtors. A significant aspect of these cases, in the context of the Compensation Motion, are the issues raised in the strong objections filed by several parties in interest, including the Creditors’ Committee, Equity Committee and United States Trustee and therefore, the Compensation Motion cannot fairly be compared to other compensation motions brought before this Court or other courts. Finding support in this Court’s bench ruling in In re Calpine is misplaced as in that case there was a prima facie case and record to support the application for an "incentive” that was largely unrebutted, therefore not raising the issues currently before this Court.

Or, put another way, "fool me once, shame on you; fool me twice, shame on me."

For those interested, below you’ll find links to all the pleadings (with exhibits) filed by Dana and the objecting parties in connection with the matter.  Taken as a whole, they make for some fascinating and enlightening reading:Continue Reading Duck Soup: NY’s Judge Burton Lifland Nixes Dana Corp.’s “Incentive” Plan for Its Top Six Executives

A bankruptcy examiner is appointed by the court in a bankruptcy case pursuant to Code section 1104(c) to "conduct such an investigation of the debtor as is appropriate, including an investigation of any allegations of fraud, dishonesty, incompetence, misconduct, mismanagement, or irregularity in the management of the affairs of the debtor." 

This simple grant of authority has

With eyes glued to the daily happenings in Houston’s trial of the century, surprisingly little attention has been given to the $12.5 million success fee recently granted to Stephen Forbes Cooper, LLC, by Judge Arthur Gonzalez (former 13 year veteran schoolteacher in New York’s public schools who won the equivalent of the “Bankruptcy Judge Lottery” by having been randomly selected to be the presiding judge — at the same time — over the two largest bankruptcies of all time: Enron and Worldcom). In re Enron Corp., 2006 WL 1030421 (Bankr. S.D.N.Y. 4/12/06) (pdf).
Back in September 2004 when Mr. Cooper first requested (motion here) a $25 million success fee for his firm (Stephen Forbes Cooper, LLC), the W$J and others suggested that Enron’s “feed trough” had become a “fee bonanza” for those, like Cooper’s firm, who could get the work.
Fourteen months later, on the eve of an 11/15/05 hearing on the fee request, Mr. Cooper submitted a reply brief (parts 1 and 2) and affidavit (with exhibits A-1 [retention order], A-2 [engagement agreement], A-3 [conflicts affidavit], B-1 [revised engagement agreement], B-2 [duty of loyalty agreement], C [retention order], and D [fascinating comparative analysis of success fees awards in 22 mega-cases]) in support of his firm’s success fee request.
The Department of Justice, through the Office of the US Trustee, jumped into the fray with both feet, advising the Court at the November 15, 2005 hearing (313 page transcript here) that it had “undert[aken] an investigation that uncovered billing practices and billing irregularities unacceptable to the U.S. Trustee, which the U.S. Trustee maintains were not disclosed to the bankruptcy court.” (pdf)
After much legal wrangling, the parties resolved their differences with the help of Bankruptcy Judge Burton R. Lifland (the famed judge of the Johns-Manville, Calpine, and Dana bankruptcies and upcoming recipient of the NY Inst. of Credit’s 1st Annual Conrad B. Duberstein Memorial Award For Excellence and Compassion in the Bankruptcy Judiciary). As reflected in this stipulated settlement with the U.S. Trustee, Cooper’s firm agreed to slice its requested success fee request in half, to $12.5 million.
For its part, the Court had this to say about how to define — and price — “success” in bankruptcy:Continue Reading The Price of Success: Enron’s Bankruptcy Court Approves $12.5 Million Success Fee for Stephen Forbes Cooper, LLC

The Wall Street Journal’s James Haggerty wrote thi$ 3/11/06 article entitled “Millions Are Facing Monthly Squeeze On House Payments.” In it, he provides some disturbing data regarding the subprime lending industry, including a graph showing subprime lending originations increasing from $150 billion in 2000 to $650 billion in 2005. Haggerty writes:

In the