The Justice Department’s bankruptcy watchdog is sounding the alarm over several recent “pre-packaged” Chapter 11 cases that take only days, or even hours, from start to finish.
Some recent bankruptcies in particular have wrapped up very quickly. Retailer Belk Inc.'s 16-hour case in February set a record, while shale oil driller HighPoint Resources Corp.'s case concluded in March within four days of filing.
These rapid-fire cases, which ostensibly are supposed to be reserved for extraordinary circumstances, are renewing concerns about fairness to creditors and transparency in the bankruptcy process.
“Pre-packaged plans offer a means of expediting the bankruptcy process by doing most of the work in advance of the filing,” the U.S. Trustee said in a filing in HighPoint’s case, citing an appeals court decision. “That efficiency however, must not be obtained at the price of diminishing the integrity of the process.”
Yet the U.S. could fall behind other countries if it doesn’t pick up the pace and lower the cost of Chapter 11 proceedings.
Lack of Notice
The DOJ’s U.S. Trustee’s Office says these ultra-rapid plan confirmations lack adequate notice to creditors and can block stakeholders from having any meaningful input.
According to the UST, federal bankruptcy rules require at least 28 days’ notice before a court can approve a disclosure statement, the document that details a company’s Chapter 11 plan.
To get around this rule, the debtor must show “irreparable and immediate harm” to the bankruptcy estate if the court doesn’t confirm the plan sooner, the UST says.
Belk’s “breakneck schedule precludes parties from meaningfully inquiring into the terms of the Plan, from examining the Debtors using the ordinary discovery tools available in contested matters, and from objecting to the Plan in a considered way,” the UST said in a court filing in the retailer’s Chapter 11 case.
It’s not enough to let creditors know about bankruptcy plans and other documents that a company may or may not actually file with the court, David Buchbinder, an attorney with the UST, said at a HighPoint hearing.
Without a case actually being filed, a party may not take the response date seriously, he said.
Moreover, a party that wasn’t a creditor on the day the debtor sent out the plan still could become one before the bankruptcy filing, the UST said in the Belk case. A rapid end to the case means there would be a creditor that didn’t receive notice of the plan and disclosure statement, in violation of bankruptcy law, the office said.
“Pre-packaged,” or “pre-pack” bankruptcy plans involve agreements a debtor works out with creditors and other stakeholders before filing a Chapter 11 case. Bankruptcy court confirmation of the plan usually follows four or more weeks later.
But Belk, HighPoint, and a handful of other cases have concluded much sooner.
Mood Media Corp. also won plan confirmation in one day in the U.S. Bankruptcy Court for the Southern District of Texas last year.
Fullbeauty Brands Inc.'s plan also received confirmation in the U.S. Bankruptcy Court for the Southern District of New York within a day in 2019.
And the same court that year handed Sungard Availability Services Capital Inc. what at the time was the record for the fastest Chapter 11 case, approving its plan 19 hours after filing.
Firms in Control
Speedy plan confirmations thwart bankruptcy rules to benefit large law firms, which attract more business by promising a quick resolution, according to UCLA School of Law professor Lynn LoPucki.
He rejected the idea that parties can have adequate notice of a court document before a bankruptcy case is even filed.
“This is Alice in Wonderland procedure, something that could only occur in a corrupt system,” he said.
LoPucki also expressed concern that the desire to confirm Chapter 11 plans quickly is further driving forum shopping, as companies and their law firms seek bankruptcy judges that won’t argue with the time line.
The system allows the firms to pick and choose judges it knows will rubber-stamp their agendas—and their large fee applications, he said.
“The bankruptcy system is no longer under public control,” but rather the control of big law firms, LoPucki said.
Keeping Up With Peers
Bankruptcy is “super expensive” and comes with significant administrative costs, Kirkland & Ellis attorney Joshua Sussberg told Bloomberg Law. The faster the process, the lower the expenses, he said.
Kirkland, which became the go-to firm for large bankruptcies in 2020, represented the bulk of companies that got speedy plan confirmations in recent years.
“The conventional wisdom is that lower costs lead to higher bankruptcy dividends” for creditors or other stakeholders, said Bruce Markell, a former bankruptcy judge who’s currently a bankruptcy law professor at Northwestern University’s Pritzker School of Law.
Beyond cost savings, faster bankruptcy cases also help the U.S. keep pace with insolvency proceedings in other countries, he said in an email to Bloomberg Law.
“Lower cost, faster forms of restructuring are being made available” to any entity with “substantial connections” to countries like the U.K., the Netherlands, Germany, and Singapore, Markell said.
It’s relatively easy to establish those “substantial connections,” so many companies have the option to pursue insolvency proceedings elsewhere, he said.
Judge Christopher S. Sontchi of the U.S. Bankruptcy Court for the District of Delaware agrees that the length and expense of bankruptcy proceedings puts the U.S. behind other nations.
The judge recently praised the benefits of HighPoint’s four-day case at a hearing.
Most insolvency judges and professionals in other countries look to the U.S. bankruptcy system with admiration, except when it comes to time and cost, he said.