Reviewing Restructuring: A Look Back at 2023 & a Look Ahead at 2024

Bankruptcy

2023, according to Epiq AACER, saw the number (6,516) of commercial Chapter 11 filings rise by 72% as compared to 2022 (when there were only 3,819). This surge is obviously attributable, at least in part, to all the usual suspects:

• The overhang of COVID-19 (minus the money the government pumped into the economy)
• Supply chain issues, inflation (because of the money the government previously pumped into the economy)
• The continuing struggles of old-line businesses (whether we’re talking about buggy manufacturers or brick-and-mortar retailers) in the face of competitors with game-changing technology (whether we’re talking about automobile manufacturers or online retailers) (Creative destruction’s a bitch depending on where you stand).

But one factor not as commonly cited is the advent of Subchapter V.  Subchapter V elections within chapter 11 were up 45% in 2023 as compared to 2022, according to Epiq AACER. But the more telling statistic is that the total number of Subchapter V elections in 2023 was 1,939, which means that nearly 1/3 of all commercial Chapter 11 filings were done under Subchapter V.

This increased activity was accompanied by some significant case law developments that will impact bankruptcy practice in 2024 and beyond.

Some of these developments were necessitated by the need to adapt to the rapidly changing technology of the 21st century. Cryptocurrency is a case in point. New legal issues arising from the Chapter 11 of FTX, a major cryptocurrency exchange, quickly followed by BlockFi (and preceded by several other major chapter 11 filings by cryptocurrency-industry players, including Celsius Network, Three Arrows Capital, and Voyager Digital) required bankruptcy courts to consider issues such as:

• Concerns for customer and investor privacy in the cryptocurrency industry being at odds with the Bankruptcy Code’s underlying policy of transparency
• The nature of what it means to own digital assets
• Authority-to-file bankruptcy issues in the context of decentralized cryptocurrency systems
• Using cryptocurrencies in DIP financing transactions

In a decision likely to have an impact on venue selection for larger Chapter 11 cases in which a sale is contemplated, SCOUTS held that Bankruptcy Code § 363(m) is not jurisdictional. Prior to the decision, the Second and Fifth Circuits held it was, whereas the Third, Sixth, Seventh, Ninth, Tenth and Eleventh Circuits had held that it was not. MOAC Mall Holdings LLC v. Transform Holdco LLC, 143 S. Ct. 927 (2023) resolved this split, thus making clear an appellate court’s authority to hear an appeal of a lower court order approving a sale or lease of the debtor’s property.

Speaking of circuit splits, perhaps the biggest news for Chapter 11 law geeks is that SCOTUS granted certiorari in late 2023 on the U.S. DOJ’s appeal of the approval of a Chapter 11 Plan that approved non-consensual third-party releases in the Purdue Pharma chapter 11 case. The Second Circuit, in In re Purdue Pharma L.P., 69 F.4th 45, 78 (2d Cir. 2023), affirmed the bankruptcy court, holding that bankruptcy courts have the authority to approve plans with non-consensual releases of direct third-party claims against a non-debtor. The Third, Fourth, Sixth, Seventh, and Eleventh Circuits agree with the Second Circuit; the Fifth, Ninth, and Tenth circuits do not. SCOTUS held oral argument on 12/4/23 and a decision is expected in June.

Beyond Bankruptcy

While the advent of Subchapter V has certainly expanded the range of situations in which Chapter 11 can be the best medicine for a troubled company, it still has its limitations. Thus, strategic alternatives to bankruptcy continue to be of significant importance and their landscape is evolving quickly.

Assignments for the Benefit of Creditors

ABCs have been around for a very long time, as those familiar with the process know. While similarities have always existed among the states regarding their respective ABC law, most states’ laws evolved independently, with the assignees in one state typically working as such within the geographic boundaries of their state.

Perhaps the most significant development in this area in recent years is the increasing use of the Delaware ABC statute and the frequent case law coming out of the Delaware Court of Chancery. Of particular significance in 2023 was a letter Vice Chancellor Paul A. Fioravanti, Jr. wrote on May 22nd to counsel representing an assignee for the benefit of creditors, and its accompanying order.

In them, Vice Chancellor Fioravanti explains the “growing concern” of the court regarding the need for “greater transparency and consistency” in ABC proceedings and, in furtherance of that goal, ordered the assignee to file an “Initial Affidavit” that resembles a typical first-day declaration customarily filed in chapter 11 cases, and indicated his intention to order require such an affidavit in all future ABC cases assigned to him. It will be interesting to see the extent to which other states’ courts (in those states where ABCs are under court supervision, that is) will follow suit. See also Assignee Unknown: The Curious Cases of SmartLabs, Shine Bathroom Technologies, Liftopia, GlassPoint, SolarReserve, Maker Media, & Toymail.

Another significant development in 2023 is that the Uniform Law Commission’s Study Committee on Assignments for the Benefit of Creditors recommended that a drafting committee be formed to draft a uniform law or model act on the subject. What happens there has the ability to have a profound impact on the practice throughout the United States.

State Court Receiverships

About 17 states revamped their receivership statutes over the past decade to provide for more comprehensive guidance in the area of state court receivership administration. More recently (in 2021), the Commercial Receivership Association (“CRA”) was founded to be a central information and support resource for state court receivers and the professionals who work with them. 2023 was a year of incredible growth for CRA. As a result of both developments, I think it would be a smart bet that state court receiverships will continue to increase in both their frequency and utility.

I say this because CRA seems to be following, in some measure, the playbook followed by the National Association of Federal Equity Receivers (“NAFER”) and, before it, the American Bankruptcy Institute (“ABI”). For more about all three organizations, read Dealing with Corporate Distress 03: Welcome to the Jungle: The Animals of the Corporate Restructuring Industry.

We think you’ll also like:

1. Getting Over the Scariness of Filing an Involuntary Bankruptcy Petition
2. Selling Distressed Assets: The Assignment for the Benefit of Creditors Alternative
3. Dealing with Corporate Distress 10: All About “Claims” Outside Bankruptcy

[Editors’ Note: To learn more about this and related topics, you may want to attend the following on-demand webinars (which you can watch at your leisure, and each includes a comprehensive customer PowerPoint about the topic):

1. Representing Asset Purchasers in Bankruptcy
2. Federal Equity Receiverships: An Introduction- Why Investors, Lenders, Creditors, and Lawyers Should Care
3. The Intersection of Bankruptcy and the UCC]

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