United States: The Year In Bankruptcy: 2007 - Part 1

In a tumultuous year that is likely to be remembered for its extreme market volatility, skyrocketing commodity prices (e.g., crude oil hovering at $100 per barrel), a slumping housing market, the weakest U.S. dollar in decades versus major currencies, a ballooning trade deficit with significant overseas trading partners such as China, Japan, and the EU, and an unprecedented proliferation of giant private equity deals that quickly fizzled when the subprime mortgage meltdown made inexpensive corporate credit nearly impossible to come by, 2007 was anything but mundane. It was, however, far from a record-breaking year in terms of the volume of business bankruptcies and restructurings. A report released on November 19, 2007, by the Administrative Office of the U.S. Courts indicates that 5,888 chapter 11 cases were filed in fiscal year 2007 (October 2006 to September 2007), representing a 2 percent drop from the previous year's total of 6,003. Business bankruptcy filings (chapter 7 and chapter 11) in fiscal year 2007 totaled 25,925, down 5 percent from 27,333 in fiscal year 2006. Year-end statistics showed that business bankruptcy filings increased 24 percent last year from 2006. Chapter 11 filings reached 6,236 in 2007, up from 5,010 in 2006, according to a report compiled by Jupiter eSources LLC using its service AACER (Automated Access to Court Electronic Records). In all, 78 publicly traded companies filed for bankruptcy protection in 2007, compared to the 66 public cases filed in 2006. Six names were added to the billion-dollar bankruptcy club in 2007 (double the number for 2006), one of which edged into ninth position on the all-time Top 10 list.

Top 10 Bankruptcies of 2007

A survey of the Top 10 list of business bankruptcy filings in 2007 indicates that nearly half of the biggest companies that filed for bankruptcy protection—four (and arguably all) of the top five―were direct casualties of the subprime mortgage meltdown, which, by some estimates, has already caused 50 subprime lenders to fold, file for bankruptcy, or "close their doors" by liquidating their mortgage inventory. Laurels for the largest public bankruptcy filing in 2007 (and the ninth-biggest public bankruptcy filing of all time) went to subprime lender New Century Financial Corp., once the second-largest provider of home loans to high-risk borrowers in the U.S., which filed for chapter 11 protection in Delaware on April 2, 2007, listing more than $26 billion in assets. New Century wrote nearly $51.6 billion in mortgages in 2006 and once employed more than 7,200 people.

Coming in at No. 2 on the Top 10 list for 2007 was Melville, N.Y.-based American Home Mortgage Investment Corp., another major player in the subprime mortgage lending business. Unable to originate new loans after plummeting real estate values and snowballing mortgage defaults perpetuated a liquidity crisis, American Home filed for chapter 11 protection on August 6, 2007, in Delaware with nearly $19 billion in assets and unknown liabilities that have been estimated to aggregate in excess of $20 billion. A mass default-driven liquidity crisis also led subprime mortgage lender HomeBanc Corp. to seek chapter 11 protection on August 9, 2007, in Delaware, three days after the company announced that it was exiting the retail mortgage loan-origination business to concentrate on its mortgage-servicing operations. The third-largest public company to file for bankruptcy in 2007, HomeBanc indicated in its most recent public financial statements that it held more than $6.8 billion in assets when it filed for chapter 11 protection.

The fourth-largest public bankruptcy case of 2007 was filed by Delta Financial Corp., the Woodbury, N.Y.-based subprime lender that filed for chapter 11 protection in Delaware on December 17, 2007, after a financing deal with alternative asset management firm Angelo, Gordon & Co. collapsed because the derivatives market rejected Delta Financial's efforts to securitize $500 million in nonconforming loans. The company listed more than $6.5 billion in assets in its chapter 11 filing.

Rounding out the top five public company bankruptcy filings in 2007 was Alpharetta, Georgia-based NetBank Inc., an internet-only savings and loan that filed for chapter 11 protection on September 28, 2007, in Florida, hours after federal regulators shut down its online financial subsidiary due to problems associated with its home mortgage loans. Plagued by a business model that was widely criticized as being inefficient due to its irrational growth strategy, the company listed approximately $4.8 billion in assets at the time of its bankruptcy filing. NetBank announced shortly after filing for chapter 11 that it planned to liquidate its assets.

Coming in at No. 6 on the Top 10 list for 2007 was Dothan, Alabama-based Movie Gallery, Inc. The second-largest movie rental company in the U.S. after Blockbuster, the company filed for chapter 11 protection on October 16, 2007, in Richmond, Virginia, after sustaining two years of losses and accumulating $1 billion in debt in connection with its 2005 acquisition of Hollywood Video. Listing nearly $1.4 billion in assets, Movie Gallery was the only nonlender in the billion-dollar bankruptcy club of 2007.

Cash-starved Anderson, Indiana-based auto supplier Remy International Inc. garnered the dubious honor of being the third major U.S. auto supplier to file for bankruptcy in 2007 when it sought chapter 11 protection on October 8, 2007, in Delaware, listing approximately $871 million in assets. Unlike many others in the beleaguered industry, however, Remy's stay in chapter 11 was brief. Its long-awaited chapter 11 filing capped months of restructuring negotiations with bondholders collectively owed $460 million, a majority of whom voted to support a prepackaged plan of reorganization and agreed to "backstop" Remy's sale of $85 million worth of new preferred shares as part of its anticipated exit funding. The bankruptcy court confirmed Remy's prepackaged chapter 11 plan on November 20, 2007, and the company announced its emergence from chapter 11 on December 6, 59 days after filing its bankruptcy petition and prepackaged plan. Remy's bankruptcy was the seventh-largest public bankruptcy filing of 2007.

Logging in at No. 8 on the Top 10 list of 2007 was Oregon-based Pope & Talbot, Inc., the 158-year-old lumber company with 2,500 employees and extensive operations in Canada. Citing low lumber prices, high-priced pulp chips and sawdust, and the strong Canadian dollar, the company filed for chapter 11 protection in Delaware on November 19, 2007, after filing for protection under Canada's Companies' Creditors Arrangement Act in the Ontario Superior Court of Justice on October 29, 2007, because a majority of its operations are based in British Columbia. Pope & Talbot listed assets of more than $660 million at the time of the filings.

Spot No. 9 on the Top 10 list of 2007 belonged to InSight Health Services Holdings Corp., which, together with its wholly owned subsidiary InSight Health Services Corp., filed for chapter 11 protection on May 29, 2007, in Delaware, listing more than $408 million in assets. The Lake Forest, California-based provider of diagnostic imaging services at managed-care entities, hospitals, and other contractual customers in more than 30 states filed for bankruptcy after securing approval of the terms of a prepackaged chapter 11 plan from holders of more than two-thirds of its outstanding senior subordinated notes and 100 percent of its common stockholders. The bankruptcy court confirmed InSight's joint prepackaged chapter 11 plan on July 10, 2007.

Chicago-based gym operator Bally Total Fitness Holding Corporation filed the 10th-largest public bankruptcy case in 2007, listing just under $400 million in assets and more than $800 million in debt. The company, which operates more than 390 fitness clubs in 29 states, as well as in Canada, the Caribbean, China, Mexico, and South Korea, filed for chapter 11 protection on July 31, 2007, in New York. Bally originally submitted a prepackaged plan of reorganization that would have wiped out the stakes of existing shareholders and taken the company private. It later modified the plan to give significant value to creditors and shareholders, which was made possible by $234 million provided by Bally's new owners. The bankruptcy court confirmed Bally's chapter 11 plan on September 17, 2007, and Bally emerged from bankruptcy as a private company after a stay of less than two months.

Largest Public Company Bankruptcies in 2007*

Company Filing Date Assets Industry

New Century Financial Corporation 4/2/07 $26.1 billion Lending

Amer. Home Mortgage Investment Corp. 8/6/07 $18.8 billion Lending

HomeBanc Corp. 8/9/07 $6.8 billion Lending

Delta Financial Corp. 12/17/07 $6.6 billion Lending

NetBank, Inc. 9/28/07 $4.8 billion Lending

Movie Gallery, Inc. 10/16/07 $1.38 billion Retail

Remy International, Inc. 10/08/07 $871.2 million Automotive

Pope & Talbot, Inc. 11/19/07 $662 million Lumber

InSight Health Services Holdings Corp. 5/29/07 $408.2 million Health Care

Bally Total Fitness Holding Corporation 7/31/07 $396.8 million Fitness

Pacific Lumber Company 1/18/07 $302.2 million Lumber

Tweeter Home Entertainment Group 6/11/07 $258.6 million Retail

*Assets taken from the most recent 10-K filed prior to bankruptcy.

The general malaise that has gripped the U.S. automotive and airline industries in recent years continued in 2007, with some notable exceptions (discussed below). High fuel prices, spiraling labor costs, increased competition, overleveraging, and general inefficiencies continue to plague major players in these industries, which are experiencing what appear to be endless cycles of restructuring and consolidation. The tightened credit market caused by the subprime mortgage fallout only added to the challenges faced by companies such as Dura Automotive Systems Inc., Delphi Corp., and Calpine Corp., all of which were forced to postpone their emergence from chapter 11 due to the difficulty in lining up exit financing in the current hostile credit environment.

Notable Exits from Bankruptcy in 2007

Bucking a dismal trend in recent memory and perhaps portending better days ahead as restructurings and consolidation in the industry continue, no fewer than six major automotive suppliers either confirmed a chapter 11 plan or emerged from bankruptcy in 2007. Auto-parts manufacturer Dana Corporation was able to secure $2 billion in exit financing en route to confirmation of its chapter 11 plan on December 26, 2007. Dana emerged from bankruptcy on February 1, 2008. As noted, Indiana-based auto supplier Remy International's prepackaged chapter 11 plan was confirmed by the bankruptcy court on November 20, 2007, and the company announced its emergence from chapter 11 on December 6, 59 days after filing its bankruptcy petition and prepackaged plan.

Foamex International Inc., a major supplier of cushioning supplies to the auto industry and other sectors, obtained confirmation of a chapter 11 plan on February 1, 2007, that paid all creditors in full in cash and allowed existing shareholders to retain their stock, subject to dilution. Although the company had originally submitted a prenegotiated plan that would have swapped secured debt for stock and wiped out old equity, a drastic uptick in performance during the case led to the formulation of a new plan, which incorporated a $150 million stock offering and $790 million in exit financing.

Southfield, Michigan-based auto-parts supplier Federal Mogul Corp. ended a six-year stint in bankruptcy on November 8, 2007, when it obtained confirmation of a chapter 11 plan. The plan became effective on December 27, 2007. Tower Automotive Inc., a global designer and producer of components and assemblies used by every major original equipment manufacturer, obtained confirmation of a chapter 11 plan on July 11, 2007, involving the sale of substantially all of its assets to an affiliate of private equity giant Cerberus Capital Management, L.P. Tower filed for bankruptcy on February 2, 2005, citing lower production volumes, rising steel prices, and a complex and unsustainable debt load. Finally, Smithfield, Michigan-based automotive supplier Collins & Aikman Corp., which filed for chapter 11 protection on May 17, 2005, obtained confirmation of a liquidating chapter 11 plan on July 12, 2007, completing a 22-month divestiture program that involved the sale of 26 plants and the closure of another 31 manufacturing facilities.

Two major air carriers managed to exit from bankruptcy in 2007. Seventy-nine-year-old Delta Air Lines, Inc., the third-largest airline in the U.S., ended its 19-month restructuring when it obtained confirmation of a chapter 11 plan on April 25, 2007, that incorporated $2.5 billion in exit financing. Delta filed for chapter 11 protection in September of 2005, following a spike in jet fuel prices caused by the Gulf hurricanes. Delta emerged from bankruptcy on April 30, 2007. Northwest Airlines Corp. also ended its 20-month stay in bankruptcy when it obtained confirmation of a plan of reorganization on May 18, 2007. The 81-year-old airline is among the largest in the world, with hubs at Detroit, Minnesota/St. Paul, Memphis, Tokyo, and Amsterdam. Northwest emerged from bankruptcy on May 31, 2007.

Other notable exits from bankruptcy or chapter 11 plan confirmations in 2007 included Adelphia Communications Corp., once the fifth-largest cable company in the U.S., which emerged from bankruptcy on February 13, 2007, after obtaining confirmation of a chapter 11 plan on January 5, 2007, that distributed $17 billion in cash and stock to creditors. Adelphia's operations were purchased in 2006 by Time Warner, Inc.'s cable unit and Comcast Corp. Energy company Calpine Corp., which supplies electricity to 27 million U.S. households, obtained confirmation of a chapter 11 plan on December 20, 2007, providing for a debt-for-stock swap. Chemical manufacturer Solutia Inc. came close to ending its four-year stay in bankruptcy when it obtained confirmation of a chapter 11 plan on November 29, 2007. The company has been repositioned as a producer of high-performance specialty materials that command premium prices and can pass through the rising costs of energy and petroleum-based raw materials.

Decatur, Georgia-based Allied Holdings Inc., the nation's largest vehicle transporter, emerged from bankruptcy protection on June 1, 2007, after it obtained confirmation of a chapter 11 plan implementing a debt-for-equity swap with unsecured creditors funded by $315 million in exit financing. Allied filed for chapter 11 protection on July 31, 2005. Finally, bringing an end to the initial chapter in the continuing saga of bankruptcies among Catholic churches spurred by widespread incidence of clergy sexual abuse, the Catholic Diocese of Spokane, Washington, ended its 28-month stay in bankruptcy when it obtained confirmation of a chapter 11 plan on April 13, 2007, that incorporates a $48 million settlement with 160 alleged victims of abuse. The 93,000-member diocese with 82 parishes is among five nationwide that have sought bankruptcy protection against claims of abuse.

Where Do We Go From Here?

The ramifications of the subprime disaster are likely to manifest themselves well into 2008 and perhaps beyond. 2007 marked only the beginning of the problem, as default rates on subprime loans began to soar and financial institutions started to call in their loans. Subprime lenders began collapsing like dominos, and it was not long before even the mightiest institutions were forced to take a hard look at how much they stood to lose in portfolios that contained significant subprime investments that flooded the derivatives markets in 2006. Citicorp, for example, announced on January 15, 2008, that it would write down $18 billion due to the subprime meltdown. On January 17, 2008, Merrill Lynch, the nation's largest brokerage firm, posted a $9.8 billion fourth-quarter loss, reflecting $16.7 billion of write-downs on mortgage-related investments and leveraged loans. State Street Corp., which manages $2 trillion for pension funds and other institutions, announced on January 3, 2008, that it would set aside $618 million to cover legal claims stemming from investments tied to mortgage-related derivatives. Finally, in a move calculated to salvage a $2 billion investment jeopardized by the slumping housing market and subprime woes, Bank of America agreed on January 11, 2008, to acquire mortgage lender Countrywide Financial for $4 billion in stock. At the end of 2007, payments on more than 7 percent of Countrywide's $1.5 trillion servicing portfolio were more than 60 days overdue and the company was considering a bankruptcy filing due to its liquidity crisis.

According to some estimates, companies involved in the subprime disaster have already wiped more than $170 billion from their books—an already staggering number that may be more than doubled by the middle of 2008, when defaults peak and home foreclosures mount as interest rates on subprime mortgages reset. With the specter of recession looming on the horizon, the homebuilding and building-products industries are obvious candidates "most likely to be hardest hit" by these developments, but other industries will almost surely suffer from the fallout, including the retail and consumer-product sectors as well as the music and entertainment and restaurant industries.

Legislative Developments

October 17, 2007, marked the second anniversary of the effectiveness of the most sweeping reforms in U.S. bankruptcy law in more than a quarter century, which were implemented as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). In addition to the hotly contested and widely reported controversies regarding changes made by BAPCPA to various consumer bankruptcy provisions (such as the "means test" that acts as a gatekeeper to chapter 7 filings), some of BAPCPA's business bankruptcy provisions have also proved to be controversial, inadequate, or ill-advised. Among these are the new 18-month limitation on a chapter 11 debtor's exclusive right to propose a chapter 11 plan, restrictions on a chapter 11 debtor's ability to implement key employee retention programs, the new administrative priority given to claims asserted by suppliers of goods to debtors in the 20-day period prior to a bankruptcy filing, and the strict limitations on extensions of time to assume or reject leases of nonresidential real property. All of these are likely to remain "hot button" issues in 2008.

Amendments to the Federal Rules of Bankruptcy Procedure (the "Rules") became effective on December 1, 2007. These amendments, which apply to cases already pending on or after December 1, 2007, made some significant changes that will directly impact debtors, creditors, and other stakeholders. Among the most important changes is an amendment to Rule 3007, which imposes formatting standards governing claims objections and restricts the use of omnibus objections to certain limited circumstances generally involving technical rather than substantive challenges to the claims in question.

Changes were also made to Rule 4001, which governs motions and stipulations for the use of cash collateral and to authorize DIP financing. Among other things, the amended rule requires more detail to be disclosed concerning the terms and conditions of cash collateral and DIP financing agreements in any motion seeking court approval.

New Rule 6003 provides that "[e]xcept to the extent that relief is necessary to avoid immediate and irreparable harm, the court shall not, within 20 days after the filing of the petition, grant relief" involving requests for authority to (i) employ professionals; (ii) pay the prebankruptcy claims of "critical vendors" or other creditors, or use, sell (i.e., section 363 sales), lease, or incur obligations regarding property of the bankruptcy estate, other than motions to use cash collateral or incur DIP financing; or (iii) assume or assign any executory contract or unexpired lease (including commercial real estate leases).

Rule 6006 was amended to impose restrictions on the use of omnibus motions dealing with executory contracts and unexpired leases. Under new Rule 6006(e), without special court authority, omnibus motions may be used for multiple executory contracts or leases only under narrowly defined circumstances. Under new Rule 6006(f), each omnibus motion permitted under Rule 6006(e) can list no more than 100 executory contracts or leases.

All-Time Largest Public Bankruptcy Filings

Company Filing Date Assets

WorldCom Inc. July 21, 2002 $103.9 billion

Enron Corp. Dec. 2, 2001 $63.4 billion

Conseco Inc. Dec. 18, 2002 $61.4 billion

Texaco Inc. April 12, 1987 $35.9 billion

Financial Corporation of America Sept. 9, 1988 $33.9 billion

Refco Inc. Oct. 17, 2005 $33.3 billion

Global Crossing Ltd. Jan. 28, 2002 $30.2 billion

Calpine Corp. Dec. 20, 2005 $27.2 billion

New Century Financial Corp. Apr. 2, 2007 $26.1 billion

UAL Corp. Dec. 9, 2002 $25.2 billion

Delta Air Lines, Inc. Sept. 14, 2005 $21.8 billion

Pacific Gas & Electric Apr. 6, 2001 $21.5 billion

Adelphia Communications June 25, 2002 $21.5 billion

MCorp. Mar. 31, 1989 $20.2 billion

Mirant Corp. July 14, 2003 $19.4 billion

Notable Business Bankruptcy Decisions of 2007

Equitable Subordination or Disallowance of Traded Claims

Featured prominently in business and financial headlines in late 2005 and early 2006 were a pair of highly controversial rulings handed down by the New York bankruptcy court overseeing the chapter 11 cases of embattled energy broker Enron Corporation and its affiliates. In the first, In re Enron Corp., 2005 WL 3873893 (Bankr. S.D.N.Y. Nov. 28, 2005), Bankruptcy Judge Arthur J. Gonzalez held that a claim is subject to equitable subordination under section 510(c) of the Bankruptcy Code even if it is assigned to a third-party transferee who was not involved in any misconduct committed by the original holder of the debt. In the second, In re Enron Corp., 340 B.R. 180 (Bankr. S.D.N.Y. Mar. 31, 2006), Judge Gonzalez broadened the scope of his cautionary tale, ruling that a transferred claim should be disallowed under section 502(d) of the Bankruptcy Code unless and until the transferor returns payments to the estate that are allegedly preferential.

Although immediately appealed, the rulings had players in the distressed-securities market scrambling to devise better ways to limit their exposure by building stronger indemnification clauses into claims-transfer agreements. The rulings' "buyer beware" approach, moreover, was greeted by a storm of criticism from lenders and traders alike, including the Loan Syndications and Trading Association; the Securities Industry Association; the International Swaps and Derivatives Association, Inc.; and the Bond Market Association. According to these groups, if caveat emptor is the prevailing rule of law, claims held by a bona fide purchaser can be equitably subordinated even though it may be impossible for the acquiror to know, even after conducting rigorous due diligence, that it was buying loans from a "bad actor."

An enormous amount of attention was focused on the appeals, with industry groups, legal commentators, Enron creditors, distressed investors, academics, and other interested parties seeking the appellate court's leave to register their views on the issues involved and the impact of the rulings on the multibillion-dollar market for distressed claims and securities. The vigil ended on August 27, 2007. In In re Enron Corp., 379 B.R. 425 (S.D.N.Y. 2007), District Judge Shira A. Scheindlin vacated both of Judge Gonzalez's rulings, holding that "equitable subordination under section 510(c) and disallowance under section 502(d) are personal disabilities that are not fixed as of the petition date and do not inhere in the claim." The key determination, she explained, is whether the claim transfer is in the form of an outright sale or merely an assignment. Judge Scheindlin remanded the case to the bankruptcy court for consideration of this issue, denying on September 24, 2007, a request for leave to appeal her ruling to the Second Circuit.

Fraudulent Transfer Litigation

In a decision with potential far-reaching effects on Wall Street firms servicing hedge funds as prime brokers, a New York bankruptcy court ordered Bear Stearns in Gredd v. Bear, Stearns Securities Corp. (In re Manhattan Investment Fund Ltd.), 2007 WL 534547 (Bankr. S.D.N.Y. Feb. 15, 2007), to disgorge nearly $160 million that it received in the form of margin payments, position closeouts, and fees from a hedge fund that had engaged in a Ponzi scheme because, among other things, the broker failed to adequately monitor the activities of the fund before it collapsed in 2000. The decision sent shock waves through the brokerage industry, raising the possibility that broker-dealers might be obligated to oversee the activities of their lucrative clients more diligently.

Bear Stearns obtained a reprieve from its repayment obligation on December 17, 2007, when the district court, in In re Manhattan Investment Fund Ltd., 2007 WL 4440360 (S.D.N.Y. Dec. 17, 2007), reversed the bankruptcy court's ruling to the extent that it granted summary judgment against Bear Stearns on the issue of whether the broker could rely on the "good faith" defense contained in section 548(c) of the Bankruptcy Code. Although the district court affirmed the bankruptcy court's entry of summary judgment against Bear Stearns on the issue of whether the broker was a transferee for purposes of section 548(a)(1) liability as the recipient of a fraudulent transfer, it ruled that a trial must be held to determine whether the steps taken by the broker to inquire into the acts of the debtor transferor were sufficient to support a good-faith defense.

In In re Iridium Operating LLC, 373 B.R. 283 (Bankr. S.D.N.Y. 2007), the bankruptcy court addressed the issue of proving insolvency in fraudulent-conveyance litigation. In litigation commenced by an unsecured creditors' committee on behalf of the estate seeking to avoid $3.7 billion in payments made during the four years prior to the debtor's chapter 11 filings for development of a satellite system, the court ruled that the committee had not borne its burden of proving that the debtor was insolvent or had unreasonably small capital at the time of the transfers. According to the court, a company's subsequent failure alone is not sufficient evidence to prove the insolvency of the business in the months and years prior to its demise. The court also emphasized that the public trading markets constitute an impartial gauge of investor confidence and remain the best and most unbiased measure of fair market value and, when available to a bankruptcy court, are the preferred standards of valuation.

Unofficial Committee Disclosure Requirements

Bankruptcy headlines in February and March of 2007 were awash with tidings of controversial developments in the chapter 11 cases of Northwest Airlines and its affiliates that set off alarms in the "distressed" investment community. A New York bankruptcy court ruled in In re Northwest Airlines Corp., 363 B.R. 701 (Bankr. S.D.N.Y. 2007), that an unofficial, or "ad hoc," committee consisting of hedge funds and other distressed investment entities holding Northwest stock and claims was obligated under Rule 2019(a) of the Federal Rules of Bankruptcy Procedure to disclose the details of its members' trading positions, including the acquisition prices.

The ruling was particularly rankling to distressed investors, whose role in major chapter 11 cases is growing in prominence, principally by virtue of collective participation in the form of ad hoc creditor groups. These entities have traditionally closely guarded information concerning their trading positions to maximize both profit potential and negotiating leverage. Compelling disclosure of this information could discourage hedge funds and other distressed investors from sitting on informal committees, resulting in a significant shift in what has increasingly become the standard negotiating infrastructure in chapter 11 mega-cases.

Close on the heels of the rulings in Northwest Airlines, however, the Texas bankruptcy court presiding over the chapter 11 cases of Scotia Pacific Company LLC and its affiliates directed in In re Scotia Development LLC, Case No. 07-20027-C-11 (Bankr. S.D. Tex. Apr. 18, 2007), that a group of noteholders need not disclose the details of its members' trading positions, ruling that an informal creditor group jointly represented by a single law firm is not the kind of "committee" covered by Rule 2019. The holding in Northwest Airlines was appealed, while the ruling in Scotia Development was not. Developments concerning this issue are being monitored closely by the distressed-investment community, including trading-industry watchdogs, such as the Loan Syndications and Trading Association and the Securities Industry and Financial Markets Association.

Tax-Free Asset Transfers in Chapter 11

The ability to sell assets during the course of a chapter 11 case without incurring the transfer taxes customarily levied on such transactions outside of bankruptcy often figures prominently in a potential debtor's strategic bankruptcy planning. However, the circumstances under which a sale and related transactions (e.g., recording of mortgages) qualify for the tax exemption have been a focal point of dispute for many courts, including no fewer than four circuit courts of appeal. Unfortunately, these appellate rulings have done little to clarify exactly what types of asset dispositions made during the course of a chapter 11 case are exempt from tax. Adding to the confusion is a widening rift in the circuit courts of appeal concerning the tax exemption's application to asset sales occurring prior to confirmation of a chapter 11 plan.

In 2007, the Eleventh Circuit had a second opportunity to examine the scope of section 1146. In State of Florida Dept. of Rev. v. Piccadilly Cafeterias, Inc. (In re Piccadilly Cafeterias, Inc.), 484 F.3d 1299 (11th Cir. 2007), the court of appeals considered whether the tax exemption applies to a sale transaction under section 363(b) of the Bankruptcy Code. Rejecting the restrictive approach taken by certain other circuit courts, the Eleventh Circuit held that the section 1146 tax exemption "may apply to those pre-confirmation transfers that are necessary to the consummation of a confirmed plan of reorganization, which, at the very least, requires that there be some nexus between the pre-confirmation sale and the confirmed plan." On December 7, 2007, the U.S. Supreme Court granted certiorari in this case.

Cross-Border Bankruptcy Cases

October 17, 2007, marked the second anniversary of the effective date of chapter 15 of the Bankruptcy Code, enacted as part of the comprehensive bankruptcy reforms implemented under BAPCPA. Governing cross-border bankruptcy and insolvency cases, chapter 15 is patterned after the Model Law on Cross-Border Insolvency, a framework of legal principles formulated by the United Nations Commission on International Trade Law in 1997 to deal with the rapidly expanding volume of international insolvency cases. It replaced section 304 of the Bankruptcy Code, which allowed an accredited representative of a debtor in a foreign insolvency proceeding to commence a limited "ancillary" bankruptcy case in the U.S. for the purpose of enjoining actions against the foreign debtor or its assets located in the U.S. The policy behind section 304 was to provide any assistance necessary to ensure the economic and expeditious administration of foreign insolvency proceedings. Chapter 15 continues that practice but establishes new rules and procedures applicable to transnational bankruptcy cases that will have a markedly broader impact than section 304.

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