The House of Delegates for the American Bar Association recently passed Resolution 512 urging Congress to amend the Bankruptcy Code to permit student loans to be discharged in bankruptcy without proving “undue hardship” as is currently required. The resolution was co-sponsored by the Young Lawyers Division, the Law Student Division and the Standing Committee on Paralegals. The Young Lawyers Division submitted a report in support of the resolution (the “YLD Report”) which discussed the history of student loans and borrowers’ ability to discharge them bankruptcy.

There is no question discharging student debt in bankruptcy is a hot political topic worthy of ABA attention. The Biden administration has forgiven over $9 billion in student debt and many congressional leaders call for complete student debt forgiveness. Since March 27, 2020, pursuant to the Coronavirus Aid, Relief and Economic Security Act, repayment of federal loans has been frozen. The freeze was extended several times and will not expire until at least January 31, 2022. We also wrote about the recent Second Circuit decision—Homaidan v. Sallie Mae, Inc.—which will make it easier for borrowers to discharge certain student debt in bankruptcy, even under existing law. The YLD Report explains how young lawyers are particularly affected: the average debt for law school graduates is around $145,000 (although the default rate for law school grads is traditionally better than the pre-freeze 11% figure for all student loan borrowers).
Continue Reading Discharging Student Loan Debt: The ABA Takes a Stand

Student loans are a big issue in the United States. According to the most recent data by the Federal Reserve Bank of New York, there is currently $1.57 trillion in outstanding student debt, up from just $0.26 trillion 17 years ago.[1] Before the CARES Act suspended payments and interest accruals from August 2020-January 2022, student debt holders were also the most likely borrowers to be 90+ days delinquent, hovering around 11% from 2012 – 2019. Current bankruptcy law makes the discharge of most student loans extremely difficult; the borrower has to establish “undue hardship,” a term not defined in the Bankruptcy Code, but which has been interpreted very strictly against student borrowers. The stratospheric rise in total student debt has many causes, but the exemption from discharge in bankruptcy for student debt is one of the more contentious. After a recent decision by the Court of Appeals for the Second Circuit, the extent of that exemption may be narrowing.
Continue Reading Discharging Student Loan Debt – Private Loans Are Not Always Exempt

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

The Great Atlantic and Pacific Tea Company, better known as A&P, recently moved for approval of a structured dismissal of its most recent chapter 11 case. Debtors seek structured dismissal of their chapter 11 cases when they cannot confirm a chapter 11 plan. In this case, the A&P estate is massively administratively insolvent, meaning that it can’t pay expenses that became due after the bankruptcy filing.

In theory, the bankruptcy judge, the United States trustee and the creditors committee monitor the case to prevent administrative insolvency; if a case becomes administratively insolvent, the case should be converted to chapter 7. But there is often an enormous reservoir of inertia among the case professionals to resist conversion, particularly in big cases, even where administrative insolvency is clear. The costs of that inertia are asymmetrical. Typically, the professionals receive all or most of their fees, while administrative creditors are involuntarily exposed to loss.
Continue Reading A&P Liquidation Will Pay Administrative Creditors Just $.20 on the Dollar: Is There a Better Way?

A decision in the Delaware District Court allowing nonconsensual third-party releases in plans of liquidation has a surprising origin – the Harvey Weinstein scandal.

In October of 2017, the Weinstein scandal exploded across the nation, bringing to light over 80 sexual assault allegations against Hollywood mogul Harvey Weinstein. Weinstein saw swift retribution: his businesses, The Weinstein Company Holdings and affiliates (the “Weinstein Debtors”), faced multiple lawsuits and filed for chapter 11 bankruptcy in March of 2018. Weinstein himself was arrested two months later. The scandal triggered the #MeToo social justice movement, empowering victims of sexual assault and harassment across the globe to voice their claims. Weinstein was ultimately convicted on two felony counts of sexual assault, and the chapter 11 proceeding involving The Weinstein Debtors is drawing to a close in the Delaware Bankruptcy Court.
Continue Reading Nonconsensual Third-Party Releases Not Limited to Plans of Reorganization

On March 11, 2021, the Bankruptcy Court for the District of Delaware approved a plan of liquidation for Cred Inc. and debtor affiliates, a collection of cryptocurrency investment firms that filed for Chapter 11 protection on November 8, 2020. So how exactly did a cryptocurrency investment firm go bankrupt in Fall 2020? In November 2019, Bitcoin was trading between $7,000 and $9,500 per coin. By November 8, 2020, the price of BTC had doubled, hitting a high of $15,637. Just four months later, on March 13, 2021, BTC closed over $61,000. And it wasn’t just Bitcoin. Ethereum is up 970% since November 8, 2019; BinanceCoin is up 1,361%; and Cardano is up 2,814%. Even Dogecoin is up 2,111% since November 8, 2019. Anyone remotely involved in the cryptocurrency business should have had an historic year. So what was the problem for Cred Inc.?
Continue Reading Cryptocurrency Investment Firm’s Liquidation Plan Approved—Wait, What?

Because of the unprecedented winter storm that clobbered Texas in February 2021, Brazos Electric Power Cooperative, Inc., was forced to file for chapter 11 in response to staggering increases in energy prices around the time of the storm. According to the first day declaration, Brazos was financially stable and bankruptcy “was unfathomable.” But in response to rotating outages across Texas, the Public Utility Commission of Texas instructed the Electric Reliability Council of Texas (“ERCOT”) to raise rates far beyond expectations for more than four straight days. ERCOT also imposed tremendous fees on energy use. After seven days of swelled energy prices, Brazos was presented with a bill for around $2.1 billion—due in mere days.
Continue Reading Texas Deep Freeze Spurs Chapter 11 Filing for Waco Based Energy Company

Belk Inc., a national privately-owned department store chain, just completed a $450 million debt restructuring in less than 24 hours! U.S. Bankruptcy Judge Marvin Isgur confirmed the plan the morning of the First Day Hearing despite the U.S. Trustee’s concerns about adequate notice. The Debtors’ prepackaged plan became effective hours after it was confirmed by the Court.

Belk argued that the plan must be confirmed quickly because the company had no cash reserves and no committed DIP financing. The Court agreed with the need for a speedy plan to protect thousands of jobs and hundreds of stores from closing. The prepackaged restructuring plan was supported by nearly all the creditors. The U.S. Trustee objected to hasty plan confirmation because the interested parties would be rushed to evaluate, respond, or object to the plan.
Continue Reading In and Out of Bankruptcy in One Day: Record-Setting Prepackaged Restructuring Plan Confirmed Within Hours of Chapter 11 Filing

Earlier this month, three student loan borrowers filed an involuntary Chapter 11 petition under 11 U.S.C. § 303(b)(1) for Navient Solutions LLC, a student loan servicer. Three or more entities who each hold a claim against an involuntary debtor can file an involuntary bankruptcy petition on that debtor’s behalf if each claim is neither a contingent liability nor the subject of a bona fide dispute as to liability or amount. The borrowers alleged that Navient is insolvent and wrongfully collected about $45,000 in loan repayments from the petitioners after their loans were discharged in bankruptcy. On February 17, 2021, Navient filed an expedited motion to dismiss the petition, arguing that it was frivolous and filed in bad faith by petitioners’ counsel: for an advantage in other Navient suits and to harm Navient’s reputation. Navient asserted that the petitioners failed to allege specific facts or provide documentary evidence supporting the debtors’ right to file under section 303(b)(1).
Continue Reading Navient’s Expedited Motion to Dismiss Student Loan Borrowers’ Involuntary Chapter 11 Petition

When Congress passed the Small Business Reorganization Act (“SBRA”) in August 2019, we lived in a different world. The SBRA added a “Subchapter V” to the Bankruptcy Code for small business debtors, responding to longstanding criticism of the Bankruptcy Code’s costs and complexities on small businesses trying to reorganize. The SBRA became effective exactly one year ago, on February 19, 2020, and when many businesses in the United States shut their doors in March 2020, many thought that the timing of the SBRA was just right to serve the needs of the small business community. On the paper anniversary of the SBRA’s effective date (the first wedding anniversary is colloquially referred to as the paper anniversary), we have looked at how the SBRA has helped small business debtors and how Congress modified Subchapter V this year to further help struggling small businesses. We are also highlighting a few issues coming out of Subchapter V so far.
Continue Reading Subchapter V: The Paper Anniversary