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 the dispute over who will resolve the Yellow
pension claims, objections to an unusual retainer arrangement in Terraform
and some dry wit from a U.K. judge in McDermott International
.
Oh, Well, Whatever, Never Mind
For us ’90s kids, no protest speaks louder than
apathy or its superficially principled cousin,
withdrawal in disgust. For those of you eager for the weary nostalgia of throwing back a lukewarm can of
OK soda in your
beater Saturn while listening to the most
dynamically compressed Britpop crap available at the CD Warehouse (still the
future of music, apparently), have we got a case for you.
On March 6, Judge Craig Goldblatt heard argument on whether the bankruptcy court or an arbitrator will decide the Yellow Corp. debtors’ objections to more than $7 billion in pension withdrawal and contribution claims filed by the Central States Pension Fund, or CSPF, and 10 other multiemployer pension funds left hanging when the company’s management decided to
shut down and liquidate the possibly solvent trucking company after a
Kansas judge refused to
stop a Teamsters strike.
About that “possibly solvent”: The pension claims are crucial because, according to the debtors, they add up to more than 90% of the total general unsecured claims pool. Simply put, if the pension claims are allowed at anywhere near their asserted amounts, other general unsecured creditors would recover little, and
shareholders would be out of the money. If the claims are dramatically reduced or eliminated, then equity could be looking at a real recovery.
Since before the filing, the debtors have spent much of their time
attacking the Teamsters with increasingly over-the-top invective (and
vice versa), and the whole “
don’t put in the newspaper that we’re mad” vibe has spilled over into their very
unchill attacks on the pension funds and their government ally, the Pension Benefit Guaranty Corp., or PBGC.
According to the debtors’ December 2023
objection to CSPF’s $6 billion-plus in withdrawal and contribution claims, CSPF was for many years “poorly managed and highly troubled, struggling to manage its assets responsibly and maintain sufficient funding to cover benefits for participants.” From 1955 until recently, the debtors say, “CSPF never exceeded a 75% funding level, and since 1984, paid benefits have consistently exceeded contributions.”
CSPF was “in critical and declining status” in 2015, when it asked the U.S. Treasury to reduce benefits, the debtors recount, and when that request was denied, the fund said that it would become insolvent in 2025.
Of course, pension funds are supposed to cover future benefits by investing contributions wisely, not stuffing them in a mattress. A U.S.
Government Accountability Office report in June 2018 - which the debtors cite for the 75% maximum funding figure and the 2025 insolvency assertion - found that “CSPF's investment returns and expenses were generally in line with similarly sized institutional investors and with demographically similar multiemployer pension plans.”
According to the GAO report, CSPF was largely threatened with insolvency because of employers withdrawing from the plan, kinda like Yellow did, and declining union membership, which I’m sure employers have not played any part in causing and is totally the result of workers’ rational economic decisions. Well, at least the debtors held their powder on the whole “
CSPF was an investment bank for the mob until 1982” thing.
Anyway, after trashing CSPF’s management, the debtors got down to the real issue: In December 2022, the Treasury approved about $35.8 billion in Special Financial Assistance, or SFA, for the fund under the 2021 American Rescue Plan Act, or ARPA. To the debtors, this is game over for CSPF’s withdrawal and contribution liability claims.
Thanks to the SFA funding, the debtors assert, CSPF (and the other funds that accepted SFA)
didn’t actually suffer any losses from the debtors’ withdrawal or failure to make future contributions, so they are not entitled to any allowed claims against the estate for such losses.
“CSPF’s withdrawal liability Proofs of Claim (which collectively seek nearly $5 billion) are naked attempts to make the Debtors cover” a shortfall in unfunded vested benefits, or UVBs, “that no longer exists,” the debtors explain. “This shortfall, supposedly representing the difference between CSPF’s assets and vested benefits, was the subject of CSPF’s application for SFA benefits - an application that PBGC approved in December 2022, and which precipitated CSPF’s receipt of $35.8 billion in taxpayer-subsidized funding.”
In response, the
PBGC and
CSPF seize on that “taxpayer-subsidized.” Taxpayers funded the SFA to ensure CSPF can pay out promised benefits, the plan says,
not to ensure that holders of Yellow shares - including DIP lender MFN Partners (which hoovered up more than 40% at a discount in the weeks before the filing) and the Treasury (which, man, this goes all the way around twice) - would receive a “lottery” windfall from the company’s liquidation.
According to PBGC, its regulations require CSPF to “phase in” the SFA funds over time - meaning that the fund cannot actually withdraw that $35.8 billion balance on the ATM receipt
right now to cover Yellow’s withdrawal liability. CSPF says that the phasing in regulations are consistent with Congress’ instructions in ARPA that SFA would not be used “to subsidize an employer’s contribution or withdrawal liability payment requirements.”
If Yellow can file bankruptcy and automatically evade withdrawal liability by citing the SFA funds, there may be a “stampede” of companies doing the same, CSPF warns. That could lead to further funding shortfalls - see the GAO report on the effect of employer withdrawals on UVBs - necessitating even more government support. According to CSPF, PBGC’s regulations ensure SFA funding is used “to make benefit payments and pay plan expenses” rather than to fund “indirect transfers of SFA to withdrawing employers from plans by reducing their withdrawal liability.”
The debtors’
reply brief calls this position “absurd,” pointing out yet again that “six months before the Petition Date,” CSPF “received $35.8 billion in taxpayer funds it does not have to repay, specifically to ensure CSPF could pay all benefits owed to participants.” A classic invocation of the
come on, man, doctrine. The debtors also play the Federalist Society’s Greatest Hits to attack the PBGC phase-in regulation, including the ubiquitous “
Major Questions”
doctrine.
Which brings us to the issue for the March 6 hearing: The
pension funds’ motions to send the dispute to specialized arbitration under the Multiemployer Pension Plan Amendments Act, or MPPAA, which generally requires arbitration of withdrawal liability disputes between employers and pension funds. Also on the docket: PBGC’s
motion to force the debtors to bring a challenge to its phase-in regulation in a district court.
The debtors
opposed the arbitration motion with exquisitely tailored restraint, suggesting that the funds were attempting to “dodge” the bankruptcy court and calling their argument that arbitration could actually benefit the estates “myopic and frankly absurd.” The debtors also
called the PBGC’s arguments in support of district court jurisdiction “absurd,” “bizarre,” an example of “extreme administrative overreach” and evidence of the agency’s “paranoia.” Someone needs to switch to decaf.
At the hearing, the funds took a practical approach, focusing on how fast an arbitration could resolve the dispute. The funds agreed that a litigation schedule imposed by Judge Goldblatt on the claim objection proceeding (featuring a final hearing in August) would apply equally to an arbitration, meaning that arbitration would not slow down the bankruptcy case (which as a liquidation isn’t going anywhere anyway).
The funds also agreed to a single arbitrator resolving the claims instead of insisting on 11 separate arbitrations. According to the funds, with timing being equal, the fight should go to arbitration in recognition of the funds’ statutory entitlement under the MPPAA.
The debtors responded by graciously accepting the funds’ scheduling offer while politely disagreeing that an arbitrator should resolve complex claim issues so central to the case.
Just kidding - the debtors threatened to
demand 11 separate arbitrators and said that they would refuse to agree to any arbitrators proposed by the funds if they didn’t get their way.
Whew. Fascinating issues, no? Exciting stuff. Unless you are the UCC, that is. Counsel for the UCC greeted the venue fight with a shrug, saying the committee is “agnostic” on whether the claims objection should be heard in arbitration or the bankruptcy court. Either way, counsel said, the outcome would be appealed by the loser and a district court would review the decision under the same standard:
de novo review of legal conclusions (namely, the validity of the PBGC regulation).
Odd stance for a committee, right? Usually the UCC supports keeping as much as possible in the bankruptcy court, if only because the UCC’s lawyers are
bankruptcy lawyers. Maybe, just maybe, the UCC’s hands-off approach here is attributable to another issue addressed by committee counsel at the hearing: a totally unprovoked attack from shareholder, DIP lender and debtor ally MFN in its
objection to the arbitration motion.
“The Creditors’ Committee has to date been silent in respect of the Arbitration Motions,” MFN noted in its objection. “This may be because certain MEPPs are Committee members, and a CSPF representative serves as co-chair.” Way to get the UCC on your side there, guys.
The UCC’s position that
really, none of this matters seemed to sway Judge Goldblatt, who agreed that the issue really boiled down to which forum would serve as the first “way station” on the way to a decision on appeal by a district court. The judge even quipped that maybe a district court in New York or D.C. could review an arbitration award quicker than the one “across the street” in Delaware could review a bankruptcy decision.
After hearing from the parties, the judge took the issue under advisement, although he made pretty clear that he will deny PBGC’s motion to compel the debtors to challenge the phase-in regulation in a district court. Judge Goldblatt called PBGC’s request “surprising,” which, not a good adjective for your legal arguments. On Monday, March 18, PBGC filed a
motion to withdraw the reference to the Delaware district court. Good luck with that.
On the off chance the judge catches hold of this column, we humbly ask that he consider an issue the parties declined to address in the briefs or at the hearing: Why is it such a big deal to the debtors that a bankruptcy court resolve a claim objection, however pivotal for recoveries? The debtors’ arguments assume that there is something
substantively meaningful about bankruptcy judges deciding claims objections.
According to the debtors’ brief in opposition to the arbitration motion, “the Code requires that this Court ‘
shall’ estimate ‘for purpose of allowance … any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case[.]’” That’s
estimation, not
allowance, but whatever. Let’s assume the pension claims would take 10 years to liquidate in state court. This sounds counterintuitive, but how would leaving those claims for resolution in the state court “unduly delay the administration of the case”?
“The administration of the case” is the debtors’ march toward confirmation,
which obviously does not require resolution of all claims objections. Claims allowance regularly gets pushed until after confirmation and is sometimes handled by other courts (or trustees) in many bankruptcy cases - even reorganizations.
This is exactly what happened in the opioid cases: Opioid creditors have asserted
trillions of dollars in claims against Purdue, Mallinckrodt and Endo.
Not a single one of these claims will be allowed or disallowed by the bankruptcy court during the case.
Sure, those cases did put a lid on potential recoveries for the opioid claimants as a class, but Endo and Mallinckrodt were also reorganizations. Yellow is
liquidating, which means that there is no need to put a lid on the total pension fund claim amounts before confirmation. The secured lenders have already been paid in full and walked away.
There is no reason why the debtors cannot just propose a liquidating plan that says whatever assets come into the estate go to creditors with allowed claims, and if there is any excess then that goes to equity. If the pension funds’ claims are allowed by an arbitrator and that ruling is confirmed by a district court, then, OK, equity gets nothing. If the pension claims are rejected, then equity recovers. Any delay in resolution of the pension claims would delay distributions to creditors,
not the administration of the estate.
The fact is that there is nothing about the allowance or disallowance of prepetition state law claims that is uniquely within the purview of a bankruptcy court. Conventional wisdom would say the debtors want Judge Goldblatt to decide whether the funds’ claims are valid (and whether
the Teamsters breached their collective bargaining agreement) because they believe Judge Goldblatt, as a bankruptcy judge, is more likely to rule in favor of a debtor.
(Yes, we know, presumably the funds prefer arbitration because they expect an arbitrator will be more likely to rule in their favor - but, at least outside of bankruptcy, Congress made arbitration mandatory in the MPPAA, suggesting the funds are
entitled to whatever benefit they think arbitration may provide.)
As we have pointed out many times,
debtors have come to expect favorable treatment from bankruptcy judges - especially bankruptcy judges in certain jurisdictions - and that may be a real problem. Here, that may be a real problem for the debtors, because, on the basis of Judge Goldblatt’s
decisions so far, we think that the Yellow debtors definitely
should not assume they will have an easier time in
his bankruptcy court. Eh, whatever, the district court can sort it out on appeal.
Terraforming Delaware
Speaking of Delaware: Please check out the fascinating fight over retention of Dentons as special counsel in the
Terraform Labs case. The company that brought you the
Crypto Winter filed on Jan. 31 after a district court
denied its motion to dismiss an SEC enforcement proceeding alleging securities fraud. The debtors asked Judge Brendan Linehan Shannon for permission to retain Dentons as special counsel to continue defending the SEC action, which is set for trial on Monday, March 25.
Seems simple enough: The standard for retention of special counsel under section 327(e) of the Bankruptcy Code is even more lenient than the fairly low hurdle for retention of bankruptcy counsel under section 327(a). Just one little wrinkle, though: Prior to the filing, the debtors paid Dentons a retainer of about
$166 million ($120 million within 90 days before the petition date), with about $80 million left on the petition date.
Turns out, this wasn’t
exactly your standard retainer: Prior to filing, the debtors essentially used Dentons as their cash management system to fund “operations,” with their “operations” being “defense of the SEC litigation.”
On Feb. 27, the SEC
objected to the proposed retention, calling the retainer “staggering.” They might have actually meant it this time. The SEC suggested that the sheer size of the prepetition payments to the firm - including more than $84 million for litigation expenses, approximately $38 million for fees and more than $47 million transferred to “Vendors on behalf of the Debtor” - effectively created a presumption that the retainer was being used to loot the company and thwart the SEC’s collection efforts.
The U.S. Trustee
joined the SEC on March 1, repeating many of the same concerns and adding that the “bet the company” nature of the SEC proceeding required the debtors to retain Dentons under section 327(a) rather than section 327(e). The debtors wanted Dentons to “manage and support the Litigations,” including supervision of five other law firms and several litigation-related vendors, and according to the UST, this “level of involvement” adds up to “conducting the case,” which is beyond the limited scope of section 327(e).
The Terraform UCC declined to adopt the refreshingly passive role the Yellow committee embraced, lodging its own “preliminary”
objection to the Dentons retention on March 5. Basically:
We have oh so many questions.
In
response, the debtors pulled a Yellow and called the SEC’s objection a “troubling example of government overreach.” Debtors’ counsel have
really internalized the Fed Soc stuff. The big, bad securities regulator was trying to interfere with how the debtor spent its “own funds” to pay its lawyers, the debtors said, and its “true motive” was to “disadvantage” and “distract” Terraform on the “eve of trial” in a bid to “torpedo” the debtors’ defense.
Basically, the debtors asserted a Seventh Amendment right to pay a Big Law firm a $160 million-plus retainer to defend against SEC fraud charges, which if recognized,
man, we’re in the wrong business.
As for the UCC, at the
second day hearing on March 5, counsel for the debtors came out strong, calling three members of the committee “illegitimate” because they were not on the debtors’ list of creditors. Reminds us of MFN in
Yellow: Again, great way to make friends and influence people. Can debtors control the composition of a committee simply by leaving potentially troublesome creditors off their initial, totally nonbinding list of creditors? That would be pretty cool, we guess.
The debtors’ gambit not only alienated the UCC, but the UST, whose counsel said she was “flabbergasted” by the suggestion that the committee was not properly appointed. UST counsel said she thought the UST office had built up “goodwill” with the debtor. Welcome to the Jungle.
Judge Shannon asked the parties to chill and pushed the retention issue for a week. And lo, chill broke out. At the
continued hearing on March 12, the debtors announced that the objections had been resolved. Dentons agreed to return $48 million of the retainer and keep the remainder to cover prepetition invoices and the estimated amount of fees and costs to defend the SEC jury trial. The revised order includes a “broad” reservation of rights regarding prepetition payments and the advance fee retainer.
For now, the parties are “rowing in the same direction,” debtors’ counsel remarked. Perhaps this isn’t the most important reversal of an accusation of illegitimacy since the
Succession to the Crown Act of 1543, but it’s something.
We’re actually with the debtors on this one. It is their money, and if their chosen law firm demands a mega-massive retainer because, well, the firm doesn’t exactly trust a guy currently
sitting in a Montenegrin prison awaiting extradition, thems the breaks. As long as the payments are fully documented and the firm doesn’t try to hide them behind a veil of privilege, that is.
The Robbed That Smiles
And now for something completely different: We thought you would enjoy a rollicking good joke from our friends across the pond, delivered by a
be-coif’d master of dry sarcasm completely committed to the bit.
In a Feb. 27
ruling, English High Court Justice Michael Green approved McDermott International’s Part 26A restructuring plan after dissenting creditor Reficar accepted 20% of reorganized equity (or whatever they call it - “scripophilites” or something, probably) to drop its objections.
In the spirit of good fun (it was
George Herbert’s feast day, after all) the judge playfully jibed Reficar for negotiating with the company in real time during the six-day sanction trial, which the judge jokingly suggested was the longest in U.K. history - without his voice betraying a hint of the obvious absurdity of this claim! So absurd, we won’t even bother to look it up.
“At the start of the hearing, I had a lot of sympathy for Reficar and the position it was in,” the judge continued, no doubt with a stern glare at counsel for Reficar to really sell the act. But the judge soured on Reficar’s position because of its “extraordinary” pursuit of rolling settlement negotiations during the hearing, fatally undermining its position that the plan was improper.
Well,
of course, your honor (or whatever they call them, “serjeants at law” or something like that), a party negotiating
during trial cannot possibly have a legitimate objection,
wink wink. If they did, then surely they would stand on their case? Lovely, great stuff, such a
wag. Because of Reficar’s
Janus-like behavior, the judge went ahead and overruled its objections to the plan, as if the settlement did not exist. Bravo.
Lest you think Justice Green’s performance was a one-off, he delivered a similar tongue-in-cheek oration at a
hearing on Feb. 15, warning the parties against “real-time” negotiating in court. How droll. In his ruling, Justice Green called Reficar’s mention of a counteroffer to the company’s settlement proposal in open court on the last day of trial a “bizarre twist.” Indeed.
Of course, we know from U.S. bankruptcy proceedings that it is quite commonplace for creditors to spend day 12 of a confirmation hearing accusing the debtors of seeking to undermine the very foundations of our Constitution, the
very values on which America rests, while spending the evening in a hotel conference room sharing sandwiches (and absolutely no
tea) and haggling with the opposition. They might even do such horse-trading on the record, judge present, during breaks from calling the opposition
en folkefiende.
Surely our common law brothers in the United Kingdom do the same. But to see the practice lampooned so brilliantly surely must embarrass our U.S. bankruptcy judges, with their constant humorless haranguing for compromise and settlement and mediation. Top class.
In a final flourish, Justice Green in his ruling admonished the parties’ advisors for accruing a mere $150 million in professional fees. “That is an enormous sum of money, even taking account of the fact that it includes the costs of the supporting creditors as well,” the judge wrote, presumably without breaking character.
There seems to be “something wrong with the restructuring industry, particularly in the US, where the costs appear to be out of control,” the judge wrote. Surely, a fine jest.
Lest we pratfall our way into a tongue lashing from the Fleet Street side of Reorg, we
know Justice Green was deadly serious, we just can’t believe it.
Sweetness, we were only joking ourselves.