by Hon. Kevin J. Carey, Beverly Weiss Manne
(TMA International Headquarters)
The Hon. Kevin J. Carey discussed issues facing bankruptcy courts nationally and in the District of Delaware, in particular, with Beverly Weiss Manne, an attorney with Tucker Arensberg, P.C., and member of the Editorial Advisory Board.
Q: What do you think the hot-button Chapter 11 issues will be nationally as well as in your district over the next year?
A: Courts will continue to face Chapter 11 filings in which the debtor is administratively insolvent — or close to it — from inception, creating significant pressure, usually from the prepetition secured lender(s), for a quick Section 363 sale process. Enterprise value will likely remain the subject of dispute in many cases. Failed LBO-related claims, Chapter 5 avoidance actions, and attacks against pre-bankruptcy decisions by a debtor’s management and board and/or the company’s pre-petition lender are continuing. Looking to particular industries, we are seeing energy-related, retail, and media companies.
Q: In Chapter 11 matters, there are many professionals who are brought into a case. Medium- to large-sized accounting, turnaround, and law firms often represent a broad spectrum of clients. What types of issues are you seeing concerning conflicts and disinterestedness in the retention of professionals?
A: Very few issues for retention actually reach me for resolution. I’ll observe that we operate in an environment full of connections between and among professionals and entities that consult and employ them. Indeed, one important underlying dynamic present throughout the business community is that of making connections and using them to professional and financial benefit. Often, the same players see each other in deal after deal, bankruptcy after bankruptcy.
So, while connections continue to expand, professionals who wish to be engaged in a bankruptcy proceeding must be increasingly sensitive and aware of what must be disclosed to the court and others. I’ll add that Judge Walrath’s decision in Universal Building Materials is helpful to me and a good reminder to bankruptcy practitioners of what is required of them.
Q: What are your thoughts on Section 363 sales that dispose of a substantial portion of a debtor’s assets at the beginning of a case?
A: I wonder whether the drafters of the Bankruptcy Code ever contemplated that the use of Section 363 would develop the way it has: Lionel, Abbott Dairies, Chrysler. I see Section 363 sale cases continuing, and, in part, creating tensions with the absolute priority rule, as parties, by agreement or otherwise, propose to allocate and distribute sale proceeds outside of a confirmed Chapter 11 plan, augmented by use of Bankruptcy Rule 9019 settlements and “structured dismissals.”
Q: What should turnaround professionals be doing when orchestrating sale and bid procedures, and equally important, what should they avoid generally as well as in your court?
A: I look for cooperation among the case constituents: the debtor, official or ad hoc committees, secured parties, and the United States Trustee to develop a fair and open sale process. I understand the tensions that exist between and among these constituents but also believe that the parties know what is objectively “fair.”
Once approved, the bidding procedures should be followed. Appropriate separation should be maintained between creditors who intend to bid and “consultation rights.” If an auction is contested, I often find the auction transcript useful.
Q: Given the challenging economy, what issues do you see facing professionals with nominal experience in complicated restructurings who wish to become involved in such matters?
A: I rarely see professionals with “nominal experience” in the cases that are filed in Delaware. When encountered, it is usually in a smaller case. We address this by reminding counsel to learn our local rules, chambers procedures, and other requirements — all provided on the court’s Web site. I find that if there is an issue with a professional’s experience, the United States Trustee sometimes takes a more active role.
For non-attorney professionals, I advise that they make themselves familiar with all that is required for approval of their engagement, including necessary disclosures, and for approval of their compensation, including timekeeping and expense detail requirements.
Q: What are your thoughts on credit bidding?
A: My present thoughts are guided by the 3d U.S. Circuit Court of Appeals (See Philadelphia Newspapers). I will reserve further thought on credit bidding until the United States Supreme Court advises me what else I should think. See RadLAX Gateway Hotel v. Amalgamated Bank (River Road).
Q: Financial consultants play pivotal roles in large Chapter 11 cases regarding the plan formation and feasibility. Do you think that is true in a midsized or smaller matter? What role do you think financial consultants can and should play in those cases?
A: In smaller cases, debtors seem to rely more heavily on their accounting firms for financial advice and on their attorneys for plan formulation. This may give the secured lender, an official creditors’ committee — or a large unsecured creditor — a more influential role in plan formulation.
One challenge financial advisors who are employed in midsized and smaller cases may face is dealing with management that may be not as deep or as sophisticated as that found in larger companies.
Q: Do you think it is ever appropriate for a court to appoint a CRO versus a trustee or examiner in a Chapter 11 case?
Who, if anyone, should be appointed to undertake an investigation or manage the business is entirely based on the particular circumstances of the case. It may be that, under some circumstances, appointment of a CRO is an appropriate solution to whatever problem has been identified. One aspect that I like about an examiner, when appointment of an examiner is appropriate, is that the examiner reports and is directly responsible to the court.