New Bill Would End “Two Stages of Texas” and Eliminate Chapter 11 Non-Debtors Discharges | Dechert srl

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Strong points

  • The Nondebtor Release Prohibition Act was submitted to the House for a full vote on November 3, 2021.
  • The bill seeks to end the discharge of debts of bankrupt non-debtors and to end the use of “mergers that divide” as a means of ceding massive responsibilities.
  • If passed, the bill would ban plans containing non-consensual third-party release of non-debtors and prevent companies from resorting to bankruptcy in concert with the devolution of massive responsibilities to newly formed subsidiaries.

introduction

Last week, the House Judiciary Committee voted to send the 2021 ban on the release of non-debtors law to the House prosecution for a vote. If passed, the bill would introduce two major changes to the Bankruptcy Code. As the title suggests, the bill seeks to end the ability of non-debtor parties to obtain discharge in a Chapter 11 case of their affiliated entity. The bill would also end the use of “mergers that divide” in Chapter 11, a corporate reorganization tool made available by Texas and Delaware that allows companies to cede responsibilities to a subsidiary that can. then apply for the protective auspices of bankruptcy.

Third-party version

Third-party versions, and particularly non-consensual third-party versions in Chapter 11 plans, have been a sticking point for at least a decade. In almost all significant (and even less significant) cases, debtors include a version of a third-party discharge provision that catches objections from affected creditors and the U.S. trustee’s office. The US trustee has consistently opposed these provisions in cases across the country, arguing that they violate the Bankruptcy Code (and the Constitution). Nevertheless, the majority of lower courts approve them, as do the majority of circuit courts.

The bill would introduce section 113 to Chapter 1, Title 11 of the United States Code. The new section brings three major changes to the Bankruptcy Code. First, section 113 (a) would prevent a court from approving any provision of a “reorganization plan or otherwise” that releases or modifies the liability of a non-debtor entity. Second, Article 113 (b) (5) would include an exception to paragraph (a), under which the court reserves the power to approve the “settlement of a claim or cause of action” d ” a non-debtor to the to the extent each non-debtor affected by a proposed waiver consents in writing to the waiver and the consent or lack of consent does not affect their treatment under the plan.

Finally, § 113 (c) limits the effect of any order or decree under Chapter 11 temporarily suspending the initiation or continuation of proceedings against a non-debtor to 90 days, except with the consent of the creditors concerned. .

Texas in two steps

Over the past year or so, several companies have established newly formed subsidiaries to absorb mass litigation liabilities and have filed for bankruptcy. The internal restructuring called “Texas Two Step” takes its name from the Texas law on the merger which divides which allows an entity to split into one or more entities and to attribute certain assets and liabilities to one of these entities newly. created. A separative merger is similar to a traditional merger in that the merger agreement and plan must clearly identify the assets and liabilities allocated to each entity involved and no actual transfer document is required. Subsequently, the entity holding those liabilities files Chapter 11 with the aim of achieving a comprehensive resolution of the claims, including a stay of litigation and a non-consensual third party release of all claims against its non-debtor affiliates. .

Under the proposed amendment to 11 USC § 1112, a court would have to dismiss a Chapter 11 case if the debtor or his “predecessor” were subject to, “formed[,] or organized as part of a divisional merger or equivalent transaction “which” had the intended or foreseeable effect of separating material assets from material liabilities “and” the disposal or allotment of all or ‘a substantial portion of those liabilities to the debtor’ during the ten-year period prior to the filing date of the claim.

Conclusion

While there is a lot of timber to be cut before the bill or any of its provisions becomes law, it should be noted that Congress is aware of changing bankruptcy practice and changes in bankruptcy. tools used by the bankruptcy process to successfully reorganize financially troubled businesses. . As Congress focuses on practices that some of its members find unacceptable, Congress will be well advised to proceed with caution. Struggling businesses, including those with massive tort liabilities and other claims giving rise to crushing litigation costs and a seemingly endless attack on the judiciary’s time and resources, should be able to avail themselves of the flexible tools. necessary to complete a successful reorganization, with the bankruptcy court serving as the gatekeeper protecting all interests at stake. Congress must be careful not to throw the baby out with the bathwater.

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