In re Compute North Holdings, Inc., No. 22-90273 (Bankr. S.D. Tex.)

  • The bankruptcy court approved a portion of proposed bid procedures for the sale of Compute North.
  • Debtors sought an expedited sale timeline, with bids due by October 27, 2022, but the Compute North UCC objected. The parties agreed the sale timeline would be addressed at an October 21 hearing. 
  • Compute North contractual counterparties objected, seeking favorable carveouts and clarifications in the approved sale procedure, which were also pushed to the October 21 hearing. 
  • Other provisions of the sale procedure were approved including bid protections for a stalking horse and contract assumption notice procedures. 

Continue Reading Sale Procedures for 363 Sale of Compute North Partially Approved With Timing of Sale to Be Addressed at Supplemental Hearing

In re Compute North Holdings, Inc., No. 22-90273 (Bankr. S.D. Tex.)

  • Compute North Holdings, Inc., a large data center with a focus on cryptocurrency mining, files for Chapter 11 protection amidst an atrocious business environment for all things crypto.
  • Compute North was pushed into bankruptcy after its relationship with one of its primary lenders broke down.
  • Debtors’ plan to sell all its assets quickly may be a challenge for unsecured creditors.

Continue Reading Cryptocurrency Mining Data Center Files for Chapter 11 Amid Crypto-Recession

Bankrupt cryptocurrency lender Celsius Network LLC recently sought permission to sell some of its “stablecoin” for U.S. dollars to continue operations through its Chapter 11. Celsius requires court approval for the sale pursuant to an earlier order requiring court authorization to convert its cryptocurrency to cash. According to Celsius, the sale of its stablecoins would pose no risk to creditors due to the relative stability provided by stablecoins versus traditional cryptocurrencies. Stablecoins are fiat-pegged cryptocurrency meant to track government issued currencies, usually the U.S. dollar. By pegging its value, stablecoins seek to reduce volatility and offer a stable crypto option not subject to market fluctuation. This allows investors to trade digital assets potentially free of the big swings inherent in assets like Bitcoin and Ethereum which are both down over 70% since last November. Continue Reading Bankrupt Cryptocurrency Debtor Seeks Sale of Stablecoins

On September 8, 2022, the Second Circuit held that lenders to Revlon, Inc., a global cosmetics company, must return approximately $500 million to Citibank N.A., which Citibank had inadvertently paid on Revlon’s behalf. The decision vacated a lower court’s ruling from 2021 that the lenders could retain the funds.

On August 11, 2020, Citibank, as agent under a term loan agreement, intended to process a $7.8 million interest payment by Revlon to its lenders. Instead, Citibank mistakenly wired the entire principal loan balance of nearly $1 billion from Citibank’s own account, giving the lenders a “huge windfall,” per the Second Circuit’s decision.

The next day, after realizing its error, Citibank began sending recall notices to the lenders notifying them of the mistake. Some lenders returned funds, but the defendants did not. Continue Reading Revlon Lenders Must Return $500 Million Mistaken Wire Transfer to Citibank, N.A.

In a recent Delaware Supreme Court decision, the Court held that there is no “insolvency exception” to the requirement in Section 271 of the DGCL that a transfer of all or substantially all of a corporation’s assets foreclosure transfer be approved by the corporation’s shareholders.

The Delaware Supreme Court overruled a decision by the Delaware Chancery Court that used Section 271—which requires a shareholder vote when a corporation sells all or substantially all of its assets—to interpret a Class Vote Provision in Stream TV Networks, Inc.’s charter. The Chancery Court also read a Delaware common law board-only insolvency exception into Section 271 while doing so. Continue Reading There’s No Insolvency Exception to a Shareholder Vote Requirement to Transfer a Corporation’s Assets in Delaware

Restructuring and Finance Litigation partner Steven B. Smith recently met with Phil Neuffer, the Managing Editor of ABF Journal, to discuss the recent United States Supreme Court decision Siegel v. Fitzgerald, No. 21-441, in which the Court unanimously held that a significant quarterly  fee increase applicable to debtors in the United States Trustee judicial districts and not to debtors in the Bankruptcy Administrator judicial districts located in North Carolina and Alabama violated the uniformity requirement of the Constitution’s Bankruptcy Clause. The ABF Journal interview will be featured in a series of podcast episodes and will focus on the history of the dual United States Trustee and Bankruptcy Administrator programs which led to North Carolina’s and Alabama’s different, non-uniform, treatment, enactment of the Bankruptcy Judgeship Act of 2017 and the Bankruptcy Administration Improvement Act of 2020, and various court decisions over the years addressing the constitutionality of having two different funding sources to operate the program. Steven also discusses the parties’ arguments to the Supreme Court and their differing interpretations of the Bankruptcy Clause’s grant of power to Congress to establish “uniform laws on the subject of Bankruptcies throughout the United States.”

The first (episode 66) and second (episode 67) of the three-part series can be found here:  The ABF Journal Podcast.

Last November, Judge John Dorsey of the Delaware Bankruptcy Court held in the Mallinckrodt chapter 11 case that the debtors did not have to pay a $94 million “make-whole” premium that was provided for in an indenture governing first lien notes. The indenture provides for automatic acceleration following an Event of Default, which includes a bankruptcy filing. Acceleration makes “the principal of, premium, if any, and interest on all the Notes . . . immediately due and payable . . . .”

A “make-whole” premium is a loan provision to compensate a lender if a borrower repays the debt before maturity for the loss of the lender’s anticipated yield, and can also be called “yield maintenance,” or a “redemption” or “prepayment” premium. The make-whole amount is typically the net present value of the interest payments that the lender would have received if the debt was paid at maturity. While make-whole premiums are generally enforceable under state law outside of bankruptcy, courts have rendered conflicting decisions on their enforceability in chapter 11. Economics drives the continuing bankruptcy court litigation over make-whole payments. For large bond issues, the make-whole amounts can often exceed nine figures. Continue Reading Landmark Delaware Bankruptcy Court Ruling that Debtors Did Not Have to Pay Make-Whole Premium Was in Error, First Lien Lenders’ Argue on Appeal

The introduction in 2020 of subchapter V for small business chapter 11 cases was the biggest structural reform in business bankruptcies since the enactment of the Bankruptcy Code in 1978. Subchapter V was enacted in 2019 as part of the Small Business Reorganization Act and became effective in February 2020.  It was originally limited to cases with $2,725,625 or less in debt, but when Congress passed the CARES Act in 2020 in response to the COVID pandemic, it increased the subchapter V debt limit to $7.5 million. While that increase was originally scheduled to expire on March 27, 2021, it was extended through March 27, 2022.

Now there appears to be bipartisan support in Washington for making the $7.5 million debt limit permanent. Senator Charles Grassley, a ranking member of the Senate Judiciary Committee, who has had a long interest in reforms of the Bankruptcy Code, has said that he supports a permanent revision in the debt limit. Continue Reading Congress May Consider Making $7.5 Million Debt Limit for Subchapter V Permanent: Should the Limit Be Increased?

On November 22, 2021, the United States Bankruptcy Court for the Southern District of New York announced a modification to its judge-assignment scheme for “mega chapter 11 cases.” Under the new Local Bankruptcy Rule 1073-1(f), which took effect on December 1, 2021, mega chapter 11 cases will be randomly assigned among each of the district’s nine Bankruptcy judges irrespective of the courthouse in which the case is filed. A case will be considered a “mega” case if either the assets or liabilities of the debtor are at least $100 million (or in a multi-debtor case if the cumulative assets or liabilities meet the $100 million threshold). Under the old assignment rule, the case was randomly assigned among the judges sitting in a particular courthouse. The Southern District of New York has courthouses in New York City, White Plains, and Poughkeepsie.  

The announcement explains that the rule change “will result in a more balanced utilization of resources,” but it may also solve a perception problem. Under the old rule, large debtors could effectively hand-pick their judge by bringing the case in Poughkeepsie or White Plains, each of which has only one judge assigned: Robert D. Drain in White Plains and Chief Judge Cecelia G. Morris in Poughkeepsie.1 There is no doubt forum shopping in bankruptcy cases is a hot topic. We recently wrote about the Bankruptcy Venue Reform Act of 2021 introduced by Senators Elizabeth Warren (D-MA) and John Cornyn (R-TX) that would curb perceived venue shopping nationwide. This rule also brings SDNY in line with two other districts handling large volumes of corporate chapter 11’s, the District of Delaware (which only has one courthouse in Wilmington DE) and the Southern District of Texas (where pursuant to General Order 2018-1, complex chapter 11 cases are assigned randomly between two judges). 

The announcement by the United States Bankruptcy Court for the Southern District of New York can be found here: Modification in Assignment of Mega Chapter 11 Cases.

Some recent high profile restructuring debtors made multi-million dollar retention bonuses on the eve of bankruptcy filings. The U.S. Government Accountability Office (GAO) took notice of these pre-petition payments and, in September 2021, published a report with data showing that debtors may be “working around the [Bankruptcy] Code’s restrictions” by paying bonuses prior to filing bankruptcy. The GAO Report recommends that Congress amend the Bankruptcy Code to “bring pre-bankruptcy bonuses under court oversight” and “specify factors the court should consider before approving them.” And Congress listened and acted.

Historically, chapter 11 debtors routinely sought Bankruptcy Court approval to pay significant retention bonuses to key members of senior management pursuant to Key Employee Retention Plans or KERPs. Such “pay to stay” plans were essential, debtors argued, to retain key personnel to guide them through the restructuring. While KERPs were mainstream in large chapter 11 cases, creditor committees and other parties objected to these payments on the grounds that such payments (i) were unnecessary considering management’s ongoing fiduciary duties to creditors and shareholders, (ii) were inequitable considering the workforce reductions and wage and benefit sacrifices affecting the rank-and-file employees and (iii) enriched the very executives who drove the company towards chapter 11. Congress took notice and, in 2005, passed the Bankruptcy Abuse Prevention and Consumer Protection Act (BAPCPA) to impose strict limitations on such payments and to narrow the circumstances under which such payments could be made. (See Bankruptcy Code Section 503(c).)

While Congress took steps to restrict post-petition executive compensation, it took no action to restrict pre-petition executive compensation, creating a perceived loophole many recent large debtors sought to exploit. Indeed, the GAO Report found that in fiscal year 2020, $165 million in bonuses were paid to 223 executives across 42 companies shortly before they filed for bankruptcy.

In October 2021, Rep. Cheri Bustos (D-IL-17), proposed the No Bonuses in Bankruptcy Act of 2021 (the “Act”) which, as the name suggests, proposes amendments to the Bankruptcy Code to prohibit certain bonus payments. The Act proposes two categories of changes: First, the Act would add a subsection (d) to section 503 prohibiting bonuses for (i) individuals whose annual salaries exceed $250,000, (ii) insiders of the debtor, or (iii) any individuals to the extent that a bonus would cause that individual’s annual salary to exceed $250,000. The Act defines bonus to include “retention, incentive, or reward related services” provided to a debtor, but excludes sales commissions and obligations under collective bargaining agreements. The Act specifies that the term “individual employed by the debtor” includes, but is not limited to, employees, consultants, and contractors of the debtor. Second, the Act directly targets companies who wish to award pre-filing bonuses by revising Bankruptcy Code Section 547 to allow avoidance of any transfer made within 180 days before the bankruptcy petition is filed “if such transfer is the payment of a bonus of the kind that would be disallowed under subsection (c) or (d) of section 503.”

Whether a practitioner believes Section 503 unduly restricts executive compensation or does not restrict executive compensation enough, the GAO Report and the Act indicate that significant changes may be forthcoming. As with the Bankruptcy Venue Reform Act of 2021, which also proposes robust changes to the Bankruptcy Code for corporate debtors, Herrick will continue to monitor this legislation.

The GAO’s report may be accessed here: September 30, 2021 GAO Report.

The text of the Act may be found here: No Bonuses in Bankruptcy Act of 2021.