Fri 01/14/2022 07:00 AM
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Reorg’s Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to comment on and discuss emerging trends in the bankruptcy world; our opinions are not necessarily those of Reorg as a whole. Today we consider recent nondebtor release rulings in Purdue and Ascena and the LTL Management dismissal dispute - and their implications for chapter 11 more broadly. Plus, brief items on professional fee escrow accounts and a puzzling ruling in Puerto Rico.

This Is The End - Part 1

Happy 2022! Our resolution: to continue believing that the Next Wave of big chapter 11 filings is right around the corner, ready to ruin our nights and weekends. Notwithstanding our boundless optimism, though, we have concerns about the coming year, thanks to some pushback on what has become an essential feature in mega-case plans: the nondebtor release. If bankruptcy practitioners continue enjoying early departures from the (home) office and wide-open Saturdays this year, you can blame the Sacklers, the Boy Scouts and Johnson & Johnson.

(Note: For a review of what can only be described as a disappointing year of filings in 2021, please see the newly published First Day Year in Review.)

Bankruptcy is no longer a desperate debtor’s game. Generally, large companies file not because they need to put a halt to looming collection efforts, but to take advantage of the unique features of the Bankruptcy Code. Retail debtors and airlines file to renegotiate real property and aircraft leases, industrials file to sell assets free and clear, and companies embroiled in litigation file to protect management, consolidate claims and secure third-party releases.

Very few mega-debtors actually enter bankruptcy to take advantage of the headline benefit of chapter 11: the automatic stay. How many large companies file in order to halt collection efforts by creditors? Sure, CBL & Associates launched an emergency case, but they were planning on filing anyway, and even the CBL debtors expressed “shock” that their lenders actually tried to exercise state law creditor remedies. Companies generally time their filing to avoid coupon payments or maturity on loans they have already decided to restructure in chapter 11. And regardless, paying for forbearance or an extension is probably cheaper than chapter 11 in many instances.

The really important stay is the one at the end of the case - the nondebtor releases contained in the chapter 11 plan. Most marginal debtors - the vast majority of filings, judging by the CBL debtors’ surprise at their lenders’ “unprecedented” collection efforts - file to wipe the slate clean for management, nondebtor affiliates, professionals and, (from our cynical eyes) most importantly, private equity sponsors. Most plans now embody a “global settlement” of fights among creditors, shareholders and management. For mass tort debtors such as the Boy Scouts of America, Purdue, Mallinckrodt and LTL Management, Johnson & Johnson’s two-step talc stepchild, the point is to settle claims against the debtors, nondebtor affiliates and management, but the principle is the same.

We discussed the mystery of modern bankruptcy filings before in the context of the Intelsat case: Why in the world did that company file? The stated reason: to secure funding for an expensive migration of satellite services from the C-band in order to secure billions in accelerated relocation payments from the U.S. government. But as we pointed out then, there was no apparent reason the company couldn’t have gotten that funding outside of chapter 11. In fact, since our original discussion the company has now refinanced its original chapter 11 DIP loan, which it could also have done outside bankruptcy.

As the Intelsat case proceeded, the real reason for the filing became clear: The whole thing was meant to settle threatened litigation among the various debtors and their creditor constituencies over entitlement to the accelerated relocation payments and other assets (and management’s agreement to an allocation of those assets that seemed to favor one group of creditors). The Intelsat case was about settlement and releases, no less than the Purdue case.

Nothing inherently wrong with that, of course - other than the U.S. Constitution and the Bankruptcy Code making no mention of non-Article III bankruptcy “courts” approving settlements that eliminate nonbankruptcy claims against nondebtors. Us bankruptcy practitioners just sort of ignored that, and went ahead and made the nondebtor release a key selling point (or at least tipping point) for customers. The nondebtor release, like anti-lock brakes, went from an exotic option to standard equipment to an absolutely essential safety feature. Bankruptcy judges in mega-case jurisdictions went along for reasons. The appellate courts obliged by using equitable mootness to avoid even thinking about the legal merits of the practice, which is helpful because the legal merits are dubious at best.

That brings us to the sum of all our fears. On Dec. 16, 2021, U.S. District Judge Colleen MacMahon issued her bone-chilling opinion vacating the Purdue confirmation order, which exhaustively details all the statutory and constitutional problems with nondebtor releases. Although the result surprised many, none of Judge MacMahon’s legal points could have possibly surprised any bankruptcy practitioner - we’ve been seeing all of them in futile objections from dissenting creditors and the U.S. Trustee for years, and looking the other way in the name of necessity. By the confirmation hearing, the restructuring had been agreed and the case was a rousing success; denying releases would endanger all that hard-fought negotiation. Judge MacMahon concluded that the doctrine of necessity upon which much of chapter 11 practice is based simply doesn’t go that far.

(A side note on the “doctrine of necessity”: As much as it pervades everything we bankruptcy practitioners do, it is our version of “the love that dare not speak its name,” by our count appearing in only 12 Reorg stories since we started our reporting.)

The Purdue decision forces us to confront the dangerous game of chicken at the heart of this approach. Debtors’ counsel have been telling judges for years that successful reorganizations would not be happening if nondebtor releases were not approved. If nondebtor releases now cannot be approved, does this mean successful reorganizations are no longer possible?

Perhaps the Purdue case is an outlier, the result of intense public scrutiny due to the company’s role in the opioid crisis and the luminously baroque greed and eccentricity of some Sacklers. Unfortunately, the reasoning followed by Judge MacMahon applies equally to releases for less garish wrongdoers, including, say, the private equity sponsor accused of looting a portfolio company and their management appointees who approved everything.

If you really want a shiver up your spine on a cold January night, check out the Dec. 20 oral argument in the Ascena Group confirmation appeal in Richmond. On Feb. 21, 2021, Judge Kevin Huennekens confirmed a plan for the former owner of the Ann Taylor brands that included typical nondebtor releases and exculpation provisions for management and other nondebtors, including shareholder securities fraud claims. The U.S. Trustee, the SEC and court-appointed lead plaintiffs in a district court securities fraud class action objected to the releases.

(The securities fraud claimants objected in order to preserve non-opt-out claims for a post-emergence class action. Judge Huennekens denied the claimants the right to opt out on behalf of the class; the Chamber of Commerce hates class actions less than bankruptcy judges, unless of course the class is voting to accept a plan.)

As expected, Judge Huennekens brushed the objections aside, concluding that the opt-out process rendered the releases “consensual.” More importantly, Judge Huennekens found that the releases were a crucial, nonseverable element of a “terribly successful” and “absolutely phenomenal” restructuring. Each component of the plan, the judge concluded, is “very, very important,” and he lacked the discretion to “redline” the releases as requested by the objectors.

The class plaintiffs and UST duly appealed, and the UST sought a stay pending appeal to prevent the debtors from arguing equitable mootness to the district court. Unsurprisingly, Judge Huennekens denied that motion, finding that it was moot because the debtors had already rushed the effective date. Essentially, the judge found that the motion to stay was itself equitably moot.

Then, on June 28, U.S. District Judge David Novak denied the UST’s motion to stay on the basis that the UST had not made a sufficiently “strong showing” it would succeed on appeal. Judge Novak’s opinion denying the stay motion reads like a pleading pulled straight from the form bank of debtors’ counsel. There is “persuasive caselaw allowing consensual third-party releases,” Judge Novak says, and the bankruptcy court had confirmed plans with “similar releases on at least eleven other occasions.” The bankruptcy court conducted an “exhaustive” analysis of the third-party releases and the notice sent to parties before concluding that all parties in interest had received notice and an opportunity to opt out, Judge Novak says.

Judge Novak also agreed with Judge Huennekens that the releases are “integral” to Ascena’s plan, and found that denying the requested stay serves the public interest because severance could disrupt the implementation of the plan. There’s the stuff.

The folks at Kirkland & Ellis must have felt pretty confident going into oral argument on Dec. 20 with these findings in their pocket. But something must have triggered Judge Novak’s spidey sense after that stay opinion - maybe Judge MacMahon’s Purdue ruling two weeks earlier? - because he unloaded on debtors’ counsel. The district judge straight up told counsel that “it's pretty clear the releases are going to be invalid. That's where that's headed.”

Debtors’ counsel attempted to defend the releases as consensual thanks to the opt-out process, but Judge Novak was having none of it, asserting that “you’re not even in the universe of consensual.” The judge asked counsel to explain “how it is that silence can be used for folks that consent to release of their claims,” “[b]ecause basic contract principles say the opposite.” “Unless you're in a unique position, silence is never consent,” Judge Novak emphasized. According to Judge Novak, Ascena’s opt-out notices merely communicated that “if you don't respond, you release your claims. Have a nice life.”

Counsel then tried to explain that the releasing parties received consideration in the form of a mutual release of claims against them, even though they received nothing else of value under the plan. Again, Judge Novak was skeptical, pointing out that the debtors had failed to identify any actual claims the released parties could assert against the releasing parties. The “mutual releases,” the judge suggested, are “illusory,” and designed solely to “make up some consideration.”

Finally, debtors’ counsel got down to the real justification for the releases in the case: The plan support parties wanted them as a condition of supporting the plan. The purpose of the “comprehensive releases” is to “get the stakeholders to the table” to facilitate a consensual restructuring, counsel explained. The implication: Without those releases, the restructuring would not have happened.

Judge Novak asked debtors’ counsel if the releases could be severed from the rest of the plan and, consistent with the debtors’ counsel party line (and, perhaps, inconsistent with the interests of these debtors in particular), counsel responded in the negative. Judge Novak seemed incredulous: “So what you're saying is if I find the releases and/or the exculpation clause to be invalid, I have to necessarily throw the whole plan out. That's what you're telling me?”

Counsel responded that “to look at it ex-post and to strike something because you think it's no longer necessary” would be problematic for “the next time one of these comes about and the parties are trying to figure out … what are we going to do to get the parties to the table to agree on how we're going to bring about another one of these successful restructurings.”

In other words: Without these releases, many “successful” restructurings - and chapter 11 filings - might never happen. Straight from the horse’s mouth. “The answer is easy,” Judge Novak countered. “It is to ensure that the bankruptcy court makes detailed findings about what the releases are, the nature of the releases, who's being released, and why they are integral to the deal.” But, the judge continued, “the absence of judicial findings here has allowed everybody to have a giant guessing game as to what the impact is.”

This suggests that Judge Novak sees some wiggle room for nondebtor releases so long as the bankruptcy judge shows his work - but the judge also seemed contemptuous of the entire release approval process. Judge Novak took shots at Judge Huennekens and Judge Keith Phillips, who have built Richmond into an up-and-coming mega-case venue (especially for retail cases, but see also Intelsat). Nondebtor releases should be granted “cautiously and infrequently,” Judge Novak said, and if this “nonsense” is “going on in our bankruptcy court all the time,” then “it needs to end.”

Judge Huennekens’ findings, Judge Novak said, looked like “boilerplate,” or “just accepting whatever was put in front of” him. “To me,” the district judge continued, “there's a complete abdication of what are supposed to be judicial findings. Just rubber-stamped it.”

Debtors’ counsel pushed back, asserting that it is not “fully accurate” to say the bankruptcy court “just breezed through it.” According to counsel, Judge Huennekens made numerous findings from the bench, in the confirmation order and in a “very lengthy opinion” supporting confirmation. “You and I have vastly different views of what our bankruptcy judge did here,” Judge Novak tartly responded.

Judge Novak also said he believes the Ascena confirmation order violated the Supreme Court’s 2011 Stern v. Marshall decision and, by extension, the U.S. Constitution’s limits on bankruptcy judges’ authority: “I think there's a Stern v. Marshall violation here,” the judge said, echoing Judge MacMahon.

As to equitable mootness, Judge Novak added that “there's no way in the world I'm applying equitable mootness here. That's just not going to happen here.” “I think if these releases were proper, we should say it,” the judge added. “If they were not proper, we should say it. That's what judges do, and I think that's what my job is now.”

Finally, Judge Novak took a parting shot at the fees charged by the professionals in the case - and, implicitly, the idea of the Richmond judges trying to attract national mega-case filings by approving those fees. “[W]hen you choose the venue, the case law says you choose the rates of the locale,” Judge Novak said, but “the rates that have been used here are not Richmond rates.” “It's clear I can't claw it back,” the judge continued, “but I want to make it clear for any of the bankruptcy folks that are here, we're using Richmond rates going forward because I am very troubled about the fee rates here.”

On Thursday, Jan. 13, Judge Novak issued a blistering 87-page written opinion consistent with his statements at oral argument. The decision lacks the clinical, measured tone of Judge MacMahon’s ruling, but makes up for it with sweeping rhetorical flourish. “The Third-Party Releases at issue in this case represent the worst of this all-too-common practice, as they have no bounds,” Judge Novak says. “The sheer breadth of the releases can only be described as shocking.”

The judge finds that the releases were not in fact essential to the plan and thus can be severed from it in order to preserve the reorganization. The record, Judge Novak finds, “contains no evidence as to why the Court could not excise the Third-Party Releases without seriously threatening Debtors’ ability to re-emerge successfully from bankruptcy.”

Ominously, Judge Novak suggests that - perish the thought! - debtors have been filing in Richmond solely to take advantage of the local bankruptcy judges’ fondness for nondebtor releases. “This recurrent practice contributes to major companies like Mahwah (a New Jersey company) using the permissive venue provisions of the Bankruptcy Code to file for bankruptcy here,” the judge suggests. “The ubiquity of third-party releases in the Richmond Division demands even greater scrutiny of the propriety of such releases.”

In a (to us) unprecedented move, Judge Novak concludes that a bankruptcy judge outside of Richmond should handle the case on remand. The “interests of justice,” the judge holds, “warrant reassigning this case to another Bankruptcy Judge in this district outside of the Richmond Division.” Although Judge Novak says he holds Judge Huennekens in “high regard,” the opinion notes that “the practice of regularly approving third-party releases and the related concerns about forum shopping call into question public confidence in the manner that these cases are being handled by the Bankruptcy Court in the Richmond Division.”

The dramatic change in Judge Novak’s tone between the order denying stay pending appeal and oral argument logically seems to stem from the Purdue decision, and perhaps the negative publicity and congressional pressure triggered by the Purdue case, the LTL case and other mass-tort filings - including the notorious Boys Scouts of America and USA Gymnastics release-fests. We can’t help but feel like the mass-tort gang, with their byzantine opt-outs, litigated proof of claim forms and (now) Texas two-steps, may have poisoned the well for the rest of us. If the nondebtor release goes the way of the dodo, either through congressional enactment (stop laughing) or strict construction of the Code, we could see a lot of marginal bankruptcies disappear.

The next shoe to drop potentially may be Mallinckrodt’s plan confirmation, which is now in the hands of Judge John Dorsey in Delaware. During the confirmation hearing, Purdue came up several times. At a hearing on Jan. 6, Judge Dorsey asked debtors’ counsel if “any of my colleagues on this court” has “ever approved nonconsensual third party release without some financial contribution passing to the releasing parties?” Judge Dorsey noted that there was a “massive financial contribution” proposed by the Sackler family in the Purdue case and remarked that “it’s not just an issue of necessity, it’s an issue of fairness.”

Earlier in the proceedings, however, Judge Dorsey distinguished the Purdue release from Mallinckrodt in that the release before him had an “out” for fraud and gross negligence. That could be a pretty debtor-friendly offramp from the cliff Judge McMahon has put us on.

The Takeaway: Our view has always been that debtors don’t really mean it when they say particular deals wouldn’t happen without everyone getting extremely broad nondebtor releases and exculpation. Judges MacMahon and Novak have now called that bluff, and perhaps we’ll see if debtors’ firms can convince management to go the expensive and distracting chapter 11 route even if they might still be sued after the plan is confirmed. Of course, they could always just tell debtors’ counsel to file somewhere other than New York or Richmond, but - see below.

The Fine Print: That wailing you hear is bankruptcy lawyers in Richmond bemoaning the end of their lucrative chapter 11 local counsel business. Even if the releases hold up, that “Richmond rates” comment from Judge Novak has put the Old Dominion on the blacklist. Where to go, particularly for mass tort cases? Relevant here is the Fifth Circuit (read Texas) decision in Pacific Lumber. We know the judges in the Southern District of Texas have skirted the “bad” circuit law on releases that they face, but they also have not been (and likely won’t be) asked to handle mass tort cases. If Purdue holds and Ascena goes the way it seems to be going, we think it might be very good news indeed for the Hotel Du Pont in Wilmington and Zaro’s Family Bakery in Penn Station.

This Is The End - Part 2

Yes, for now the Purdue decision and the anticipated Ascena decision can be minimized as local concerns - albeit in two very important jurisdictions. But surely another bankruptcy court will arise and advertise its willingness to grant those releases and protect nondebtor defendants while a case winds its way toward confirmation, in a circuit with a friendly attitude toward these maneuvers?

How about Charlotte! Well, the plight of LTL Management in the Queen City illustrates the difficulty of characterizing troublesome decisions as local problems. As we discussed back in November 2021, Judge Craig Whitley transferred the Johnson & Johnson talc release vehicle’s chapter 11 filing from Charlotte to New Jersey after concluding that “all the connections” are in the Garden State, where J&J is headquartered.

Each side in the LTL case accused the other of stumping for a venue whose governing case law favored their position on dismissal of the case as a “bad faith” filing. The debtors suggested that the pro-transfer group was running scared from the Fourth Circuit’s difficult standard for dismissal, which places the burden on the movant to demonstrate both “objective futility” - that no plan for the debtor could ever be confirmed - and “subjective bad faith.”

The pro-transfer group in turn accused the debtors of choosing Charlotte in order to take advantage of that Fourth Circuit standard and to avoid the less-stringent dismissal standard in the Third Circuit (which includes Delaware and New Jersey). In the Third Circuit, the burden is on the debtor to avoid dismissal by establishing “that the filing was in good faith.” In other words, the debtor must prove it has a legitimate restructuring purpose and did not file solely as a litigation tactic.

As expected, shortly after the case landed in New Jersey, the talc claimants filed their motion to dismiss, making much of the different standards in the two circuits in order to distinguish a prior Charlotte ruling declining to dismiss another Texas two-step asbestos case.

The talc claimants’ motion focuses on a crucial issue, especially considering the release discussion above: whether the filing solely to take advantage of specific relief only available in chapter 11 constitutes “bad faith” sufficient for dismissal. According to the talc claimants, a debtor’s “desire to use a particular provision in the Bankruptcy Code” - specifically, the asbestos channeling injunction provisions of section 524(g), which could protect nondebtor J&J from talc liability - “is insufficient by itself to establish good faith to survive dismissal.”

LTL’s case should be dismissed, the talc claimants argue, because the debtor has no “valid reorganizational purpose” but “is a dummy entity with facially inadequate capitalization created only to purge all of J&J’s and Old JJCI’s massive talc-related tort liability” and “hinder and delay injured talc creditors” by keeping them “from accessing J&J’s assets” using a section 524(g) channeling injunction “and a section 105 stay against present and future talc claims.”

It is not “appropriate,” the talc claimants maintain, for a company to file for chapter 11 because it “no longer likes its chances with American juries” and wishes to substitute a bankruptcy judge “to sit in lieu of factfinders across the country.”

At first glance, this whole theory seems absurd: Don’t all debtors file chapter 11 because it gives them the ability to do things they can’t do outside of bankruptcy? If filing to take advantage of chapter 11 is an abuse of chapter 11, then what cases wouldn’t be dismissed as “bad faith” filings? Don’t all debtors seek to substitute a bankruptcy judge for the hypothetical state court judge or jury that would otherwise decide whether they have to pay back their term loan or notes or surrender their assets to foreclosure?

This thinking of course reflects the increasing importance of litigation settlements in chapter 11 and the extent to which practitioners have internalized the concept of nondebtor releases. As noted above, debtors used to file in order to save their business from collection efforts and force creditors to negotiate rather than foreclose; now, they often file to get court approval on an otherwise out-of-court restructuring, blow past dissenters and secure releases for key parties.

The debtor’s Dec. 22, 2021, response to the motion to dismiss evidences that debtors’ counsel have also fully incorporated the new “global settlement” chapter 11 model into their DNA. The debtor characterizes the filing “the only feasible option” for J&J - a nondebtor - in the face of an “unrelenting and enterprise-threatening deluge of litigation.”

This argument, of course, begs the question of another “feasible option” to protect J&J from the “deluge of litigation” - filing its own chapter 11. The debtor argues that a J&J filing would be a “complex, value-destructive, and exponentially more costly bankruptcy harmful to thousands” of stakeholders “and beneficial to no one, including talc claimants.” To which we answer: So what? Nondebtors are not entitled to use bankruptcy as a cheaper and less time-consuming substitute for class action or multidistrict litigation. We seem to have forgotten that this was not the way things used to be. Companies used to defend and settle enterprise-threatening litigation outside of chapter 11 all the time.

“[A]n otherwise healthy business began operating at a substantial loss, as litigation expenses attributable to the legacy Johnson’s Baby Powder product had completely eroded the margin earned on Old JJCI’s entire business,” the debtor says. This was in addition to “the reputational harm caused by unrelenting attacks on the brand; the crush of ancillary litigation and governmental investigations (including the potential liability associated with such investigations); and billions of dollars in alleged indemnification claims from suppliers, retailers, and others,” the objection continues. Again, these are all reasons for J&J to file chapter 11, and if it did, there would be little doubt that the case would not be dismissed. But that’s not what J&J actually did.

By creating and filing a special-purpose entity to secure nondebtor releases from a court whose jurisdiction and authority to grant them is questionable at best, J&J has once again pushed the envelope - and as Judge MacMahon and Judge Novak’s pronouncements on nondebtor releases suggest, the Article III courts’ appetite for such innovation may be diminishing.

It doesn’t help that like many debtors, LTL openly attacks the Article III judiciary, calling typical nonbankruptcy litigation - the process for resolving tort claims in common law jurisdictions for hundreds of years - a “lottery system” inferior to the “far more equitable treatment” available to claimants in chapter 11. We of course agree that the U.S. tort system is broken and cannot deal with modern mass tort situations, but you don’t say that out loud in court pleadings. Pride goeth before destruction, and an haughty spirit before a fall.

A hearing on the motion to dismiss is set for Feb. 15 at 10 a.m. ET.

The Takeaway: If the New Jersey court agrees with the talc claimants and boots the LTL case as a “bad faith” filing, this could be another novel mass tort case that ends up deterring future marginal filings. Again, we have repeatedly pointed out the failures of the U.S. litigation system in mass-tort situations, but that does not mean bankruptcy must always be available as an alternative.

The Fine Print: According to LTL, its case is “hardly the first mass tort defendant to enter into a corporate restructuring prior to a bankruptcy filing,” and “none of those prior bankruptcy filings has been dismissed as a bad faith filing.” The debtor does not mention that one of the prepetition restructuring cases, Tronox, resulted in a monstrous $15 billion judgment avoiding the prepetition restructuring as a fraudulent conveyance - and you can bet a similar action will be commenced if LTL’s case survives. That would of course be fun for us bankruptcy nerds, as it would squarely set up the question of whether the “Texas two-step” can end nearly 500 years of fraudulent conveyance law.

Other Matters:

  • Protecting Professional Fees: Hat tip to the inimitable Sean Daly, fellow Reorg legal analyst, for asking this question: Why do judges approve professional fee escrow accounts in chapter 11 plans? The point of these accounts is to ensure estate professionals get paid in the event a debtor ends up with insufficient funds to pay them after confirmation. But wait: If a debtor can’t pay priority claims, then it is administratively insolvent - and under section 1129(a)(9) of the Bankruptcy Code, courts should not confirm a plan for an administratively insolvent debtor. If administrative solvency is at all doubtful, shouldn’t the professionals advocating confirmation bear some of the risk the plan fails to generate sufficient funds to pay all priority claims?

    This gives us another chance to praise Kirkland & Ellis for putting their fees at risk in the ultimately unsuccessful “moonshot” Forever 21 confirmation process. Having professionals put their skin in the game might go a long way toward convincing those district judges that bankruptcy isn’t a fixed match. But if we are talking optics, it’s worth noting that the annual slew of new rate tables being filed across bankruptcy-land has an awful lot of rates creeping above $1,500 per hour.

  • Wait, What? Of the Month: On Dec. 14, U.S. District Judge Laura Taylor Swain issued an under-the-radar finding in the Puerto Rico case that had us scratching our chins. Section 314(b)(3) of PROMESA, the Puerto Rico “bankruptcy” law, provides that the Commonwealth’s restructuring plan cannot be confirmed unless “the debtor is not prohibited by law from taking any action necessary to carry out the plan.” This is analogous to section 1129(a)(3) of the Bankruptcy Code, which requires that a plan not be proposed by any means forbidden by law.

    In her ruling setting forth certain “problematic” aspects of the plan, Judge Swain found that the plan’s treatment of the unsecured portions of allowed eminent domain claims is “materially defective” under section 314(b)(3) because the plan does not provide for full payment of these claims “and the Takings Clause of the Constitution of the United States prohibits the Debtors from impairing and discharging any obligation to provide ‘just compensation’ for the physical taking of private property for public use.”

    Wait, did Judge Swain just rule that not paying certain unsecured creditors in full violates the Takings Clause? Sure, you could limit this particular ruling to eminent domain claims against a government, but the idea that treatment of unsecured claims is subject to Takings Clause analysis worries us ... just a little. Have at it, creditors’ counsel!

--Kevin Eckhardt
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