NEW YORK: An Introduction to Bankruptcy/Restructuring

An Introduction to New York 

The Southern District of New York (SDNY) Bankruptcy Court is trusted as a preferred jurisdiction for large, complex, and often innovative bankruptcy cases. Even where Texas and, more recently, New Jersey, have seen filings increase, the SDNY Bankruptcy Court remains the gold standard and is consistently busy, particularly with industries such as banking, crypto, and airlines (see more below). With a distinguished bench of sophisticated and experienced judges and a robust procedural framework, the SDNY Bankruptcy Court manages a significant volume of filings, frequently addressing novel issues and setting new precedents that shape bankruptcy law nationwide.

An International Bankruptcy Hub 

As the world continues to go digital, New York City has maintained its status as the economic capital of the world and a nexus for many of the world’s largest international companies. It is no surprise, then, that business leaders, foreign and domestic, seek relief in the SDNY when companies are experiencing financing distress.

The COVID-19 pandemic destabilized many industries, none more than airlines. Many foreign operators, particularly those based in Latin America, chose to reorganize in the SDNY, including: LATAM Airlines, Avianca, Aeroméxico, S.A.S., Philippine Airlines, and, most recently, GOL. While these companies are headquartered and operate primarily outside of the U.S., they can obtain the same rights and protections offered to U.S. debtors under the Bankruptcy Code, including a worldwide automatic stay.

The openness of U.S. bankruptcy courts to foreign debtors was reaffirmed in the SDNY Chapter 11 cases of JPA No. 111 Co. The JPA debtors were special purpose entities incorporated in Japan and operated out of Ireland, each owning aircraft assets flown exclusively in southeast Asia pursuant to lease agreements with Vietnam Airlines. Notwithstanding that the debtors only connection to the U.S. was an attorney retainer deposit at a New York bank, the cases were allowed to proceed over the secured creditor’s objections, leading to a court-supervised sale that provided payment in full to all creditors and a surplus returned to the JPA’s equity.

Bankruptcy Trends – The Rising Costs of Chapter 11 

Chapter 11 filings are on the rise year-over-year, registering double digit increases in the first quarter of 2024, compared with the same period last year. The increased filings can be attributed to many factors, including changing consumer preferences, expiration of short- and medium-term “amend and extend” credit arrangements obtained during the pandemic, and rising interest rates.

While Chapter 11 proceedings can provide immense benefits to debtors and their creditors, there are also significant costs. It may take months or even years to confirm a plan, during which time the debtor will incur professional fees and administrative expenses on behalf of itself and any statutorily-appointed committee. In large cases, lead counsel may engage co-counsel or efficiency counsel to help mitigate costs, especially for routine administrative matters.

Professionals have used various tools to streamline Chapter 11 cases and reduce costs. For example, cases are increasingly structured around a quick sale of the debtor’s assets followed by a liquidating chapter 11 plan, rather than a prolonged restructuring culminating in a plan of reorganization. Among recent SDNY cases, Vice Media (filed in May 2023) obtained approval for a section 363 sale of all its assets just 39 days after filing, and Pareteum Corporation (filed in May 2022) obtained approval for a sale of all its assets in just 46 days.

Subchapter V Proceedings 

Congress added Subchapter V of Chapter 11 through the Small Business Reorganization Act of 2019. Subchapter V is intended to make Chapter 11 more streamlined and affordable for certain “small business” debtors. Subchapter V reduces costs for debtors by removing some of the procedural and disclosure requirements of a traditional Chapter 11 case and other costly elements like a creditors’ committee.

Subchapter V applies to debtors with USD7.5 million or less of “noncontingent and liquidated” debt, which threshold was extended twice by Congress (up from USD2,725,625). Since its introduction, Subchapter V filings have risen dramatically. As a restructuring option, it reflects a Congressional desire for cost-effective alternatives to traditional Chapter 11 cases for small and middle-market companies, which simply cannot afford a Chapter 11 case, and may otherwise be forced to purse Chapter 7 liquidation. Small businesses and bankruptcy professionals are awaiting Congress’s decision to extend or make permanent the USD7.5 million debt cap, which given the popularity of Subchapter V is highly likely.

New Amendments to SDNY Prepack Guidelines 

In contrast to a traditional Chapter 11 case, where votes on a plan are solicited after case commencement, a prepackaged case involves the negotiation and solicitation of creditors’ votes prior to filing. Utilizing a streamlined timeline, debtors can emerge from Chapter 11 within one to two months after filing, reducing administrative costs and professional fees.

The SDNY Bankruptcy Court has long been at the forefront of prepackaged Chapter 11 bankruptcy cases, having first established guidelines for prepackaged cases in 1999. In 2017, the SDNY Bankruptcy Court confirmed a plan in the Roust cases just seven days after filing—one of the fastest prepackaged cases ever at the time! Following that milestone, subsequent prepackaged cases continue to set new records for brevity, such as the Sungard cases (confirmed 19 hours after filing in the SDNY in 2019) and Belk Inc. (confirmed 12 hours after filing in Texas in 2021).

Recently, on January 22, 2024, the SDNY Bankruptcy Court adopted amended guidelines for prepackaged cases. These new SDNY guidelines provide, among other things: in all prepackaged Chapter 11 cases, hearings to approve the disclosure statement and confirm the plan will typically be combined; an official creditors committee typically will not be appointed; and the debtor is permitted to not to set a bar date and can be conditionally excused from filing schedules and statements of financial affairs. Additionally, the new guidelines recognize the concept of “rapid” prepackaged cases, which seek confirmation of a plan within two weeks of filing.

By establishing comprehensive procedures for prepackaged cases and formally recognizing the use of rapid prepacks, the amended guidelines reinforce the SDNY’s position as a choice venue for achieving expedited and efficient Chapter 11 cases.

Hot Topics 

One of the most important and controversial topics in bankruptcy – the non-consensual release of claims against third party non-debtors – is currently on appeal in the Supreme Court, following a ruling from the SDNY Bankruptcy Court in the Purdue Pharma cases allowing such releases. The Supreme Court's ruling will provide important guidance regarding what has become one of the most powerful tools in bankruptcy, particularly as it relates to mass tort cases. Mass tort bankruptcy filings have continued to increase in recent years across industries such as pharmaceuticals (Purdue Pharma, Endo International, Mallinckrodt) and consumer and industrial products (Aearo Technologies, Bestwall, Aldrich Pump / Murray Boiler, DBMP, Cyprus, Imerys, and LTL / LLT). Bankruptcy judges and practitioners eagerly await the Supreme Court’s decision on these issues.