Stephen Selbst

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Stephen Selbst is the co-chair of Herrick's Restructuring & Finance Litigation Group. He has more than 30 years of experience representing debtors, creditors, official committees, distressed investors and asset purchasers in bankruptcies and out-of-court restructurings. Stephen advises clients from a wide range of industries, including financial services, telecommunications, government agencies and real estate. A skilled commercial litigator, Stephen also has significant experience in district and state courts, where he regularly represents clients in separate litigation arising out of bankruptcy.  He also advises clients on structured finance and derivative transactions.

He is a frequent lecturer on bankruptcy and restructuring topics and has published articles and book chapters on bankruptcy-related topics. He has been frequently quoted in newspaper articles on insolvency related topics and has appeared on CNBC.

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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 September 23, 2021, United States Senators Elizabeth Warren (D-Mass.) and John Cornyn (R-Texas) introduced the Bankruptcy Venue Reform Act of 2021 (the “Venue Reform Act”), which would tighten the Bankruptcy Code’s venue rules for corporate debtors. A corporate filer would be limited to the district containing its principal place of business or the district where its principal assets have been located for the preceding 180 days. For a public company, the location listed in its SEC filings would be its presumptive principal place of business. The Venue Reform Act is intended to eliminate forum shopping by corporate debtors seeking to file their chapter 11 cases in traditionally debtor-friendly courts.  

This blog post describes some of the main changes that would go into effect if the Venue Reform Act were approved. The full text of the proposed Venue Reform Act may be found here: https://www.warren.senate.gov/imo/media/doc/SIL21A87.pdf.  …
Continue Reading What the Bankruptcy Venue Reform Act of 2021 Could Mean for Corporate Debtors

Federal district court judge Paul Gardephe recently spared Keleil Isaza Tuzman from additional jail time, despite Tuzman’s December 2017 convictions for securities and mail fraud, the latest twist in the long, strange saga of KIT Digital. Tuzman was the founder and former CEO of KIT Digital Inc., a publicly traded software startup that offered video management products, but which ended up bankrupt and is now called Piksel Inc. The US Attorney sought a prison term of 17.5-22 years for Tuzman.

Tuzman, and co-defendant Omar Amanat, who was sentenced to five years in jail and fined $175,000, were convicted on multiple counts of manipulating the stock price for KIT Digital and for defrauding investors in a hedge fund known as Maiden Capital.
Continue Reading Judge Spares Ex-CEO of Bankrupt KIT Digital from Additional Jail Time

On May 22, 2020, amidst the deepest possible gloom about COVID-19’s impact on travel, the car rental giant, Hertz Global, filed for Chapter 11. According to reporting by Barrons,[1] during the reorganization, Hertz drastically cut the size of its fleet and closed locations. Like most shareholders of bankrupt companies, Hertz owners were likely to…

On June 3, 2021, U.S. Magistrate Judge Nathanael M. Cousins ruled that ex-Theranos CEO Elizabeth Holmes could not assert attorney-client privilege to block disclosure of her communications with Theranos’s former counsel, Boies Schiller Flexner LLP, in connection with her upcoming criminal trial. Judge Cousins found that Holmes had not made it clear to Boies Schiller’s attorneys that she was seeking legal advice in her personal capacity, and as an executive of Theranos. As a result, her communications with Boies Schiller are protected only by Theranos’s corporate privilege, which the company had waived, and therefore could be used at trial against Holmes.
Continue Reading Lessons from US v. Holmes: Limits of the Attorney-Client Privilege in Communications with Corporate Clients and their Executives

In re Concepts America, Inc., 625 B.R. 881 (Bankr. N.D. Ill. 2021), weighs in on a murky question: Can a creditor make an administrative expense priority claim because it made a substantial contribution in a case under chapter 7? The court answered no.

In Concepts America, creditor Galleria Mall Investors LP moved the bankruptcy court for allowance and payment of an administrative expense claim pursuant to sections 503(b)(3)(A), (b)(3)(D), and (b)(4) of the Bankruptcy Code.

Around May 2011, the Galleria entered into a lease with a restaurant affiliated with Concepts America, which guaranteed the lease. The restaurant eventually breached the lease, and a Texas state court entered judgment against the restaurant and Concepts America.

The Galleria tried to collect its judgment for nearly a year. Eventually, on September 19, 2014, it joined two other creditors in filing an involuntary chapter 7 petition against Concepts America. About two months later, Concepts America consented to the entry of an order for relief under chapter 7.
Continue Reading Illinois Bankruptcy Court Weighs In on Chapter 7 Substantial Contribution Claims

Brooks Brothers’ minority shareholders and unsecured creditors, TAL Apparel Ltd. (“TAL Apparel”) and its subsidiary Castle Apparel Ltd. (“Castle”), recently brought an action against the men’s retailer’s former owners, the Del Vecchio family. TAL Apparel and Castle allege bad faith and more than $100 million in damages for losses arising from…

On May 11, 2021, Judge Harlin D. Hale dismissed the chapter 11 case filed by the National Rifle Association after finding that it was not filed in good faith. Judge Hale ruled that the case was “filed to gain an unfair litigation advantage” and to “avoid a state regulatory scheme,” which the Court found was “not for a purpose intended or sanctioned by the Bankruptcy Code.”…
Continue Reading Texas Bankruptcy Court Dismisses NRA Bankruptcy Cases, Finding They Were Not Filed in Good Faith

In an anomalous decision by the Bankruptcy Court in the District of Kansas, the court declined to enforce the voting provisions in subordination agreements that allowed the senior creditor to vote on behalf of a group of subordinated creditors. Reversing a trend of enforcing express voting restrictions in intercreditor agreements, the court invalidated the voting provision at issue, yet ultimately barred the subordinated creditors from participating in the confirmation process entirely. The decision bucks the trend of enforcing intercreditor agreements that limit the voting rights of junior creditors, but nevertheless, holds that such creditors can be precluded from exercising other rights to participate in a chapter 11 case.

The Debtor—Fencepost Productions Inc., a designer and distributor of outdoor clothing, together with its related debtors—filed for chapter 11 in late 2019. In 2018, the Debtors’ principal creditor, Associated Bank, N.A. (“Associated”), made a $14 million secured loan. At the same time, a group of unsecured creditors, BMS Management, Inc. and related individuals (collectively the “BMS Group”), entered into subordination agreements with Associated, under which Associated had the right to vote the claims of the BMS Group.
Continue Reading Voting Rights Provisions in Intercreditor Agreements May Not Be Enforceable As Expected