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Internet Service a Utility in Bankruptcy? It Might Be Now.

HTTP on a Computer Monitor

Editor’s Note:  One of the many fascinating things about restructuring work is its willingness to evolve by borrowing from other areas of the law.  Just as business practices change, new financing techniques evolve, and transactions become more complex, the bankruptcy world must adapt as well, to allow for a well functioning insolvency system and not a stilted, out of date process.  To that end, we at The Bankruptcy Cave love finding curious decisions in tangential fields of the law, and thinking about how they may change bankruptcy practice, or how bankruptcy practice may change them (for instance, click here for a neat post last year about “Obamacare” and bankruptcy, or here for the most recent edition of The Guarantor Chronicles).  Anyway, here is our latest curious find – “net neutrality” and its effect on Section 366 “utility providers.”

On June 14, 2016, the Court of Appeals for the District of Columbia Circuit affirmed the legality of the Federal Communications Commission’s new “net neutrality” rules.[1]  In part, the rules determined that broadband Internet service is a telecommunications service under the Telecommunications Act of 1996 (the “Act”).[2]  The determination reclassified broadband Internet service providers as telecommunications carriers, which are common carriers under the Act.[3]

The reclassification imposed new obligations on broadband providers under Title II of the Act, though the FCC forbore from enforcing some requirements.[4]  “Among other things, Title II requires that carriers ‘furnish . . . communication service upon reasonable request,’ 47 U.S.C. § 201(a), engage in no ‘unjust or unreasonable discrimination in charges, practices, classifications, regulations, facilities, or services,’ id. § 202(a), and charge ‘just and reasonable’ rates, id. § 201(b).”[5]

However, the reclassification could affect broadband providers’ Bankruptcy Code duties as well.  The Bankruptcy Code forbids utility providers from discontinuing service to customers who file for bankruptcy.[6]  Previously, courts did not treat cable television and Internet services as utilities, essentially concluding that they were “luxuries.”[7]  (Despite that one study shows that 34% of Americans think broadband internet is a necessity, and 23% think cable TV is a necessity as well.)  Oppositely, telephone services are utilities.[8]  Courts base this distinction partly on the “special governmental regulation[s]” that apply to telephone companies,[9] including Title II common carrier requirements.[10]

The Bankruptcy Code does not define “utility.”  Accordingly, judges will likely continue employing the same standards used when classifying telephone services as utilities.  As the FCC increasingly treats broadband like basic telephone services, bankruptcy judges may eventually do the same.  If the FCC’s net neutrality rules stand, broadband providers should anticipate the possibility that their Title II obligations may trigger Bankruptcy Code obligations as well.

[1] U.S. Telecom Ass’n v. Fed. Commc’ns Comm’n, No. 15-1063, slip op. at 8 (D.C. Cir. June 14, 2016).

[2] Id. at 24.

[3] 47 U.S.C. § 153(51) (“The term “telecommunications carrier” means any provider of telecommunications services, except that such term does not include aggregators of telecommunications services (as defined in section 226 ).  A telecommunications carrier shall be treated as a common carrier under this Act only to the extent that it is engaged in providing telecommunications services . . . .”).

[4] Id. at 21 (citing 2015 Open Internet order, 30 FCC Rcd. At 5804–05 ¶ 434, 5849–51 ¶ 513).

[5] U.S. Telecom Ass’n, slip op. at 11.

[6] 11 U.S.C. § 366(a) (“[A] utility may not alter, refuse, or discontinue service to, or discriminate against, the trustee or the debtor solely on the basis of the commencement of a case under this title or that a debt owed by the debtor to such utility for service rendered before the order for relief was not paid when due.”).

[7] Carlson v. U.S. Bank Home Mortg., 2012 WL 6861333, at *11 (D. Minn. 2012) (quotations omitted) (cable television and internet services are not utilities within the meaning of 11 U.S.C. § 366); In re Moorefield, 218 B.R. 795, 796 (Bankr. M.D.N.C. 1997) (“[C]able television does not rise to the level of other utilizes listed under legislative history . . . . Cable television is not a necessity as millions of Americans continue to exist without such service.”)

[8] One Stop Realtour Place, Inc. v. Allegiance Telecom, Inc., 268 B.R. 430, 436 (Bankr. E.D. Penn. 2001) (“[A telephone company] is a “utility” within the ordinary meaning of that term, since it provides telephone service to the public and is subject to regulation by the FCC and the Pennsylvania PUC.”).

[9] Id. at 435 (quoting Public Utility, Merriam-Webster’s Collegiate Dictionary (10th ed.)).

[10] Nat’l Cable & Telecomms. Ass’n v. Brand X Internet Servs., 545 U.S. 967, 976 (2005) (noting that the FCC treats telephone services as a “basic service,” subjecting it to Title II common carrier regulation).

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Some Much Needed Transparency Required on Liquidating Trustees, Liquidating Trusts, Plan Documents, and Other Post-Confirmation Matters

We at The Bankruptcy Cave applaud the recent ruling by Judge Whipple of the Bankruptcy Court for the Northern District of Ohio, seeking to make the post-confirmation parties, processes, and procedures far more transparent. In In re Affordable Med Scrubs, LLC,[1] Judge Whipple declined to approve a disclosure statement for a secured creditor’s liquidating plan.  The key deficiencies were as follows:


  1. Disclosure Must be Provided about the Liquidating Trustee: While the secured creditor’s disclosure statement did state who the liquidating trustee would be, it provided no disclosures about the putative trustee’s connections to key creditors and other parties in interest. We applaud this effort to require disclosures about a proposed liquidating trustee or plan administrator. The selection of a liquidating trustee or plan administrator is a murky process – at best, it is based on some vague (and undisclosed) considerations of pricing and experience of the individual or company that will serve in this role.  At worst, selection of a liquidating trustee or plan administrator may reek of “payola,” favors being returned, or other completely inappropriate (and also undisclosed) factors.  It is not much to ask, at all, for any proposed post-confirmation parties to make a full disclosure under Bankruptcy Rules 2014 and 2016.


  1. The Same Disclosure Must be Made About any “Plan Oversight Committee”: See above – the same rules apply to Oversight Committees or other parties involved in supervising post-confirmation actions.


  1. Better Disclosure of Litigation Claims Against Key Parties: The Affordable Med Scrubs disclosure statement also did not clearly deal with potential claims against the largest creditor (which is not very surprising, as the largest creditor was the party submitting the disclosure statement).  References, cross-references, and unclear descriptions of claims don’t help anyone – plan proponents should carefully and plainly describe in one place in the disclosure statement what they know about various claims, and whether they plan on pursuing them or recommending that the liquidating trustee pursue them (or not pursue them).  No one should be surprised later that a claim is brought, or that a claim against a key party is not brought by the Liquidating Trustee (see above, in relation to the risk that side-deals may be involved in selection of Liquidating Trustees or Oversight Committees).[2]


  1. The Liquidating Trust Agreement and Other Key Documents Should be Filed with the Disclosure Statement: We at The Bankruptcy Cave are increasingly annoyed with the massive dump of “plan documents” being filed 5-10 days before confirmation.  The Affordable Med Scrubs court was not pleased with the failure of the parties to file the proposed Liquidating Trust agreement with the disclosure statement.  This is particularly important as such agreement often has key terms on the authority of the liquidating trustee, fees paid to the liquidating trustee and his or her professionals, and other items about which creditors should be aware (some or all of which, such as post-confirmation professional fees, may be shielded from future court or creditor scrutiny altogether).


This is an important case on issues that are not typically addressed. We look forward to a raising of the bar in our collective practices to require more disclosure of post-confirmation parties, how they came to be chosen and their connections with creditors and other parties in interest, and expected post-confirmation events and claims.

[1]           Case No. 15-33448, Bankr. N.D. Ohio, Order Disapproving Disclosure Statement, Docket No. 267 (July 5, 2016).


[2]           We don’t intend to imply, at all, that anything improper was going on among the parties in the Affordable Med Scrubs case – many of the deficiencies the court notes with the disclosure statement could simply be oversight, or a desire for expediency.  The Affordable Med Scrubs court does not even hint at any impropriety, and we didn’t see any in the facts at all – just a lack of disclosure.  But we have seen other cases in which substantial litigation claims are not brought, or settled for small amounts, as to creditors that had a major role in selecting the parties that will control those very same post-confirmation events.

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Bankruptcy Courts Closing In – Will An Agreement Requiring Unanimous Consent To File For Bankruptcy Be Effective?

Magnifying Glass and document close up

We’ve all seen it.  The business opportunity looks enticing but is laced with risk about a potential bankruptcy filing down the road.  As bankruptcy lawyers we are often asked how deals can be structured to prevent a potential bankruptcy filing.  One approach (really, about the only approach, and it has its own risks) has been to structure the deal requiring unanimous member/manager/director consent to place the entity into bankruptcy but meanwhile adding a member/manager/director who may vote against taking the entity into bankruptcy in the future, or who may have interests and motives other than those of insiders.

Two recent bankruptcy court decisions have called this practice into question, especially when this corporate structure is implemented when the company is in distress.  The Bankruptcy Court for the District of Delaware ruled in an opinion you can read here that a provision requiring unanimous consent of a company’s equityholders to seek bankruptcy protection was void as against public policy.  Meanwhile, the Bankruptcy Court for the Northern District of Illinois (here is that opinion) did not find that this that type of provision would be void against public policy but did rule that fiduciary duties owed to a company cannot be obviated.  These cases provide insight into (i) the enforceability of unanimous consent provisions in differing jurisdictions and (ii) how such provisions may be drafted (or not) to enhance the likelihood of enforceability if subsequently called into question. 

In re Intervention Energy Holdings, LLC

In re Intervention Energy Holdings, LLC filed its bankruptcy case in the Delaware Bankruptcy Court.  A creditor holding a single “common unit” of the LLC filed a motion to dismiss the case, stating that it did not consent to the bankruptcy filing.  The creditor claimed that the bankruptcy filing was unauthorized because a unanimous vote in favor of bankruptcy was required under the Debtor’s LLC agreement.  The court ruled that this unanimous consent provision was void as against well-established federal public policy because a debtor may not waive its right to seek bankruptcy protection.  The court extended this protection to business entities including LLCs.

Notably, the creditor in question, EIG Energy Fund XV-A, L.P. (“EIG”), had purchased a single common unit of Intervention Energy Holdings, LLC (“Intervention”) during negotiations of a forbearance agreement.  While EIG held one common unit, Intervention’s parent company owned the remaining 22 million common units.  EIG filed a motion to dismiss Intervention’s bankruptcy case.  EIG argued that Intervention needed EIG’s consent to seek bankruptcy protection because by owning its one common unit EIG was able to veto a bankruptcy filing, per the specific terms of Intervention’s corporate documents.

The court overruled EIG’s motion to dismiss.  The court held that a provision in Intervention’s prepetition operating agreement which allowed EIG to veto any voluntary bankruptcy filing by Intervention contravened public policy.  In reaching this decision the court relied on many prior rulings which found parties’ prepetition agreements to waive future bankruptcy protections to be unenforceable.

In re Lake Michigan Beach Pottawatamie Resort LLC

The Bankruptcy Court for the Northern District of Illinois took a more narrow approach in In re Lake Michigan Beach Pottawatamie Resort LLC.  There, the court considered the balance between unenforceable blanket bankruptcy prohibitions in agreements versus permissible “blocking director” provisions which allow directors to vote against putting the entity into bankruptcy but still require the blocking director to uphold its fiduciary duties to the entity.  (The latter are very common in structured finance matters.) The court found that public policy and fiduciary duty concerns involving “blocking director” provisions for corporations also extended to LLCs.

In the Lake Michigan case, before filing its bankruptcy case the debtor defaulted on its obligations to its lender, BCL-Bridge Funding LLC (“BCL”), which resulted in a forbearance agreement between the parties.  As part of the forbearance agreement, the debtor agreed to amend its operating agreement to add BCL as a “special member” of the debtor.  As a special member BCL had a right to approve or disapprove any “material action” by the debtor which included filing a bankruptcy case.  However, the amended operating agreement also provided that in acting as a special member BCL was only required to consider its own interests, rather than the interests of the debtor.

Ultimately, the debtor filed for bankruptcy protection.  All of the debtor’s members, except BCL, supported the bankruptcy filing.  BCL moved to dismiss the bankruptcy case asserting that the debtor did not have authority to file because BCL, as a special member, did not consent.  The debtor argued that the amended operating agreement requiring BCL’s consent to bankruptcy was void against public policy as a prohibition on a party’s right to seek bankruptcy protection.  The court did not find this provision void as against public policy.  Instead, the court held that the blocking member provision in the amended operating agreement contravened the fiduciary duties that BCL owed to the debtor under Michigan law.  Thus, the amended operating agreement provision which only required BCL to consider its own interests, not the debtor’s, was void.  This rendered the remaining directors’ votes in favor of the bankruptcy filing sufficient corporate authority.


These cases emphasize that unanimous consent provisions will not always be enforceable.  The language and structure of such provisions are crucial, as is the timing of when the provision is added to any organic documents.  Agreements limiting the fiduciary duties of a member/manager/director or limiting the ability of an entity to seek bankruptcy protection should be scrutinized – or rejected outright, frankly – to avoid future enforceability concerns.

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Sabine Lives On (and On): Bankruptcy Court Rejects Immediate Appeal to Second Circuit and Motion for Stay

Editor’s Note:  On June 16, 2016, The Bankruptcy Cave gave you our summary of the controversial Sabine decision.  At that time, post-hearing motions were pending.  As luck would have it (we at The Bankruptcy Cave should start wagering on college football, or who will win JoJo’s heart, with this luck!), just a few days later the drama continued with some important rulings on the timing of any final resolution of these important issues.  Here’s the skinny:

On June 15, 2016, Bankruptcy Judge Shelley Chapman of the Southern District of New York issued a follow on decision concerning rejection of certain midstream contracts in Sabine Oil & Gas Corporation’s (“Sabine”) Chapter 11 case.[i]  In its decision, the Court rejected Nordheim Eagle Ford Gathering, LLC’s (“Nordheim”) request for an immediate appeal to the Second Circuit Court of Appeals.  The Court also refused to stay enforcement of either its decision to allow Sabine to reject Nordheim’s gathering agreements with the Debtor or its final adversary decision where it found that Nordheim did not have an “interest running with the land.”

The Court rejected Nordheim’s argument that an immediate appeal was warranted under 28 U.S.C. § 158(d)(2)(A) because “the Rejection Decision addressed legal issues of first impression under Texas law which neither the Second Circuit nor the United States Supreme Court has previously addressed.”[ii]  The Court also determined that its previous orders did not “involve a matter of public importance” under 28 U.S.C. § 158(d)(2)(A)(i).[iii]  In both instances, Judge Chapman took the position that her rulings on Nordheim’s gathering agreements were limited.  The Court viewed its previous decisions as based on the facts of the case and established bankruptcy law, not the novel issues of Texas property law.[iv]  Finally, Judge Chapman premised her decision not to stay the case pending appeal on the basis that Nordheim would not suffer “irreparable harm” were the case to proceed, but Sabine would be harmed by a stay.[v]

Judge Chapman’s June 15th decision means that her previous rulings will not be on appellate review any time soon. While the June 15th decision attempts to downplay the influential value of those decisions, they will no doubt be cited by other producers in their attempts to shed onerous midstream arrangements. Sabine lives on.

[i] In re Sabine Oil & Gas Corp., No. 15-11835 (SCC), Docket. No. 1276 (Bankr. S.D.N.Y. June 15, 2016).

[ii] Id. at *7-*9.

[iii] Id. at *11.

[iv] Id. at *7-*9.

[v] Id. at *13-*14.

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Sabine – A New York Bankruptcy Judge’s Interpretation of Texas Property Law Encourages Compromise and Leaves an Industry in Limbo

On March 9, 2016, Bankruptcy Judge Shelley Chapman of the Southern District of New York issued her decision on the Debtor’s motion to reject certain contracts in Sabine Oil & Gas Corporation’s Chapter 11 case.[i]  The decision, which allowed Sabine to reject “gathering agreements”[ii] between it and two “midstream operators,”[iii] Nordheim Eagle Ford Gathering, LLC and HPIP Gonzales Holdings, LLC, under Section 365(a) of the Bankruptcy Code, sent shockwaves through the midstream energy sector and leveled the playing field for bankrupt production companies.  Yet, the case leaves undecided the ultimate question – what midstream contracts are protected as real covenants running with the land?  That question may be months, or even years, away from any resolution.[iv]  In the interim, energy companies are left with Sabine, which implies producers can renegotiate midstream contracts in a slumping energy market, using the threat of bankruptcy and rejection as a powerful bargaining chip to bring midstream operators to the table.

The Decision

By its Motion, Sabine sought to reject four contracts under Section 365, two with Nordheim and two with HPIP. Under all four agreements, Sabine agreed to “dedicate” to the “performance” of the agreement certain leases owned by Sabine and the hydrocarbons from the wells located on the land subject to those leases.  For their part, Nordheim and HPIP agreed to construct, operate, and maintain gathering facilities for the respective leases.

When it addressed the Motion, the Court undertook a two part analysis to determine whether Sabine could reject the contracts. First, the Court deferred to Sabine’s business judgment and found “that the Debtors have properly and adequately considered the business and legal risks associated with rejection of the Nordheim Agreements and the HPIP Agreements.”[v]  There was little question that rejection would benefit the estate as Sabine indicated that rejection could save it up to $200,000 a month.

The second part of the Court’s analysis was more involved. There the Court was forced to determine whether any of the contracts were real covenants or equitable servitudes that ran with the land.  Both Nordheim and HPIP argued that Sabine could not reject the contracts because they were real property interests that cannot be rejected under Section 365.  While Judge Chapman acknowledged her inability to decide substantive legal issues under Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures Corp.), and In re The Great Atlantic & Pacific Tea Co.[vi] without an accompanying adversary proceeding, she dove into an analysis of what constituted a covenant running with the land under Texas law.

After applying Texas’ four-part test for determining whether a covenant runs with the land, the Court rejected HPIP and Nordheim’s contention that their contracts were real property interests. The Court found that the covenants in Nordheim’s and HPIP’s contracts did not satisfy the “touch and concern” prong of Texas’ test for a covenant running with the land.  Instead, the interest in the extracted minerals was a personal property interest.  The Court also determined that the covenants “do not readily fit into the traditional paradigm for horizontal privity of estate.”[vii]  Consequently, the Court made a “preliminary” determination that the contracts between Sabine and the two gathering companies could be rejected.

The Fallout

Despite Judge Chapman’s later statement that “this was not a broad sweeping pronouncement,”[viii] the ruling may significantly impact the energy industry. Moreover, the case and its progeny could shape jurisprudence on the rejection of similar contracts in several energy sector bankruptcy cases while an appeal works its way up the chain.  Until Sabine, agreements between producers and midstream companies were generally treated as constants, not subject to renegotiation upon insolvency.  That paradigm may now be realigned.

Upstream producers, many of whom are suffering under today’s low energy prices, can now seek concessions from their midstream partners. This places the parties on more equal footing and could actually be a catalyst for negotiated resolution.  In fact, courts dealing with the issue may actually prefer the parties resolve the issue through compromise. Sabine has already had an impact in this respect.  In In re Magnum Hunter Resources Corp., Bankruptcy Judge Kevin Gross encouraged the parties to resolve a similar dispute before the Court had to weigh in on the motion to reject.[ix]  Likewise, in In re Quicksilver Resources Inc., the purchaser of the debtor’s assets was able to reach a compromise with its midstream operator before the Court had to rule on a Section 365 motion.[x]  Both cases are examples of how producers have greater power to negotiate terms with midstream companies in the wake of Sabine.

Finally, Sabine is not over.  Nordheim’s and HPIP’s adversary case was decided on May 3, 2016.[xi]  Once again, in a decision located here, Judge Chapman found “that the covenants at issue in the Nordheim Agreements and the HPIP Agreements do not run with the land either as real covenants or as equitable servitudes.”[xii]  On June 1, 2016, Nordheim and HPIP sought Judge Chapman’s consent to appeal that decision.  The midstream operators argued that an appeal to the Second Circuit and a subsequent reference to the Texas Supreme Court to decide the state property law issues were appropriate.  The Court has not yet ruled on the request, but no one believes that this will be the end of the debate.  Upstream producers will continue to pursue rejection of midstream contracts that are overly burdensome and midstream operators will continue to argue that rejection is improper until more concrete guidance is issued by District and Circuit Courts.

[i]            In re Sabine Oil & Gas Corp., 547 B.R. 66, 69 (Bankr. S.D.N.Y. 2016).

[ii]           Gathering Agreement means an agreement by which one party agrees to collect oil, gas or other hydrocarbons at the wellhead and transport such oil, gas or other hydrocarbons through a network of pipelines to a central point, often a processing system or an inlet to a larger transportation pipeline.

[iii]           Midstream Operator means a company that gathers, transports and processes oil, gas or other hydrocarbons by pipeline, rail, trucks or otherwise.

[iv]          On June 1, 2016, Judge Chapman declined to rule on Nordheim’s request for an immediate appeal her decision to the Second Circuit Court of Appeals.  While the Court determined that the contracts at issue in the case do not run with the land, in both its preliminary decision and in a later adversary opinion, it left open the question of what type of midstream contract would run with the land such that it constituted a real property interest.

[v]           Sabine Oil, 547 B.R. at 74.

[vi]          4 F.3d 1095, 1098 (2d Cir. 1993) and 544 B.R. 43 (Bankr. S.D.N.Y. 2016).

[vii]          Sabine Oil, 547 B.R. at 79.

[viii]         See Judge Skeptical of Quick Appeal in Sabine Midstream Dispute located at

[ix]          In re: Magnum Hunter Resources Corp. et al., No. 15-12533, in the U.S. Bankruptcy Court for the District of Delaware.

[x]           See Jones Day’s advisory, Quicksilver Drops Motion to Reject Midstream Agreements in Connection with Closing of Sale to Bluestone Natural Resourcesfor a more in depth discussion.

[xi]          Following the Court’s decision to grant Sabine’s Motion to Reject, Nordheim and HPIP filed an adversary proceeding in which they sought a declaration that the their respective leases were “covenants running with the land.”  The Court, once again, rejected the midstream operators’ argument and issued a final ruling that the leases did not convey a real property interest to the midstream operators.

[xii]          In re Sabine Oil & Gas Corp., No. 15-11835 (SCC), 2016 WL 2603203, at *8 (Bankr. S.D.N.Y. May 3, 2016).

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When Going “All In” Pays Off: The Third Circuit Upholds The Decision of the Bankruptcy Court in In re Trump Entertainment Resorts, Inc.

In an appeal certified directly from the Bankruptcy Court for the District of Delaware (the “Bankruptcy Court”) to the Court of Appeals, the Third Circuit issued a ruling upholding Judge Kevin Gross’s decision that a chapter 11 debtor-employer may reject the continuing terms and conditions of a collective bargaining agreement (“CBA”) under 11 U.S.C. § 1113, despite that the CBA expired post-petition.

The Bankruptcy Court’s Decision

In December 2014, the Bankruptcy Cave first reported on the Bankruptcy Court’s decision in In re Trump Entertainment Resorts, Inc. (the “Bankruptcy Opinion”).  The controversy centered around whether provisions of the National Labor Relations Act (“NLRA”) that maintain the status quo of an expired CBA during negotiations for a new CBA mean that the expired CBA still exists as a contract that can be “rejected” under section 1113 of the Bankruptcy Code.  The Bankruptcy Opinion held in the affirmative – the Debtors could reject the expired CBA because section 1113 failed to distinguish between expired and unexpired CBAs.  The Bankruptcy Opinion was largely driven by practical factual considerations – the Union had engaged in “stiff-arm” negotiation tactics that left the Debtors with few choices, and absent the rejection of the expired CBA, the Debtors faced a complete shut-down, the loss of thousands of jobs, and the shuttering of the business.  The Debtors went “all in” on this poker hand, it was rejection or bust; the Bankruptcy Court agreed with the Debtors.

The Appeal

On appeal, In re Trump Entertainment Resorts, Case No. 14-4807 (3d Cir. Jan. 15, 2016), the Union centered its argument on a parallel to section 365, arguing that because a debtor may not assume or reject an expired executory contract under section 365, it also may not reject an expired CBA under section 1113.  However, the Third Circuit noted that due to the NLRA, the obligations of the expired CBA continue to burden the debtor (unlike that of a traditional executory contract).  In addition, Congress failed to include in section 1113 a distinction between expired or unexpired CBAs, and otherwise failed to address the continuing effect such agreements may have upon a debtor.  To that end, the court opined that Congress must have considered the overlapping impact of these federal statutory regimes.  The interpretation that permits a debtor to reject an expired CBA, held the Third Circuit, best balances a debtor’s ability to proceed through the protracted NLRA process with some speed, while still protecting workers by obligating the estate to honor the CBA’s provisions until there is a rejection.

The Third Circuit also noted the “exigencies” the Trump Debtors faced, which were significant factors in the Bankruptcy Opinion.  The Third Circuit noted that as a policy matter, it is preferable to preserve jobs through rejection rather than face the permanent loss of positions, and an entire business, by requiring debtors to continue to abide by the terms of an onerous CBA.

Analysis and Conclusion

Following the appeal, our initial analysis of the implications of this case appears to hold true.  The Third Circuit’s interpretation of section 1113 may be a boon to a would-be debtor that is laden with burdensome labor obligations, and is nearing the expiration of a CBA.  While outside bankruptcy a company would normally be required to bargain to impasse (a very time consuming endeavor), in bankruptcy court a company may be able to short-circuit this process and obtain rejection of the CBA, even where it expired post-petition.  As explained by the Bankruptcy Court and the Third Circuit, the ability of debtors to reorganize and emerge as operating companies, which is arguably the primary purpose of chapter 11, supports this interpretation of section 1113.

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I Want to Use My Licensed Intellectual Property in My Company’s Chapter 11 Case by Assuming My Already Existing License, but My Lawyer Tells Me We Are in the Wrong State to Do It. Really?

Editor’s Note: Our good colleagues at Willamette Management Associates were kind enough to feature a Bryan Cave Article in its Spring 2016 issue of Insights.  If you are a bankruptcy attorney, then no doubt at some point you have had to deal with the mind-numbing exercise of determining when IP contracts or licenses (or government contracts, remember West Electronics, folks?) can be assumed, or assumed and assigned, or neither.  This analysis can, in some circuits, result in a potentially huge loss of value to debtors and creditors, a la Sunterra.  Your editorial team at the Bankruptcy Cave is annoyed that this problem, and this circuit split, has existed for over 30 years; but we are relieved to have an up-to-date Bryan Cave article on this.  The article also includes a discussion of how the ABI Commission is planning to solve this problem.  The Insights article by can be found by clicking here

Thanks again to Willamette for the opportunity, and the permission to cross post at the Bankruptcy Cave.




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It Ain’t Over ‘Til It’s Over: Circuits are Limiting the Use of Equitable Mootness

Open book100-105 dumps

Over the summer, four appellate court decisions addressed the doctrine of equitable mootness: In re Tribune Media Co., 799 F.3d 272 (3d Cir. 2015); In re One2One Commc’ns, LLC, No. 13-3410, 2015 WL 4430302 (3d Cir. July 21, 2015); In re Sagamore Partners, Ltd., No. 14-11106, 2015 WL 5091909 (11th Cir. Aug. 31, 2015); and In re Transwest Resort Props., Inc., 801 F.3d 1161 (9th Cir. 2015). These decisions indicate a trend away from the doctrine’s application, or at least the presumption that it should be determinative.

“‘Equitable mootness’ is a narrow doctrine by which an appellate court deems it prudent for practical reasons to forbear deciding an appeal when to grant the relief requested will undermine the finality and reliability of consummated plans of reorganization.” Tribune, 799 F.3d at 277–78.

Courts analyzing a claim of equitable mootness weigh two considerations: whether a confirmed plan has been substantially consummated and, if so, whether granting the relief requested in the appeal would fatally scramble the plan and/or significantly harm third parties who have justifiably relied on plan confirmation. Id.210-260 pdf

Equitable mootness encouraged debtors to hurry to consummate a plan when they knew an appeal was likely—if the plan was substantially consummated, the appeal of the confirmation order was presumed equitably moot. The scaling back of equitable mootness in these Circuits acknowledges that appellate courts have a “virtually unflagging obligation” to exercise the jurisdiction conferred upon them. One2One Commc’ns, 2015 WL 4430302, at *3 (internal citations omitted). It is important to note that while its application has been curtailed, the Third Circuit has made clear that it is not at this time willing to abandon the doctrine entirely (see concurring opinion of Judge Ambro in Tribune).

The take-away for creditors is this: appellate courts are more likely than ever to consider an appeal on its merits, even when the plan has been substantially consummated and third parties have relied thereupon. A claim of equitable mootness, on its own, may no longer be a death knell for aggrieved parties under the plan.

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Rolling the Dice on Collective Bargaining Agreements in Bankruptcy: A Lesson From In re Trump Entertainment Resorts, Inc.

In In re Trump Entertainment Resorts, Inc., a bankruptcy case currently pending before the United States Bankruptcy Court for the District of Delaware at Case No. 14-12103, the union at a famous Atlantic City casino made a bet on its ability to “hold up” the casino’s bankruptcy process and force hard line negotiations on an expired collective bargaining agreement. Ultimately, this gamble did not pay off, as the Honorable Judge Kevin Gross held that the casino was permitted to reject the expired collective bargaining agreement as an “executory contract” under the Bankruptcy Code. Put succinctly, the union’s negotiation tactics resulted in the loss of all benefits under the collective bargaining agreement for union members

While the holding in Trump is predicated on extreme factual circumstances, it serves as a reminder that parties seeking to “stiff-arm” negotiations may face serious repercussions, particularly in the context of bankruptcy.


The circuits are split on the issue of whether a bankruptcy court retains jurisdiction to consider a motion to reject an expired collective bargaining agreement under 11 U.S.C. § 1113(c), or if a bankruptcy court lacks jurisdiction because the only duties following the expiration of a collective bargaining agreement are statutory (specifically, arising under the National Labor Relations Act (“NLRA”)), and thus, fall outside a bankruptcy court’s powers to accept or reject such agreements under section 1113. Weighing in on this issue, on October 20, 2014, Judge Gross entered an opinion (“Opinion”) in the Trump bankruptcy case finding that the Court retained jurisdiction to approve the rejection of an expired collective bargaining agreement under section 1113(c).


The Debtors, which include affiliates Trump Entertainment Resorts, Inc. and Trump Taj Mahal Associates, LLC (“Taj Mahal”) filed for bankruptcy protection on September 9, 2014, and shortly thereafter, on September 26, 2014, filed a motion (“Motion”) seeking to reject the collective bargaining agreement (“CBA”) between Taj Mahal and UNITE HERE Local 54 (“Union”) on the grounds that the affiliated Debtors would be forced to liquidate if the estates were not permitted to reject the CBA.

The Debtors operated two casinos, including the Taj Mahal Casino Hotel on the Atlantic City boardwalk. The Court characterized the Debtors’ financial situation as “desperate,” with EBITDA falling from $32 million to negative $6.1 million in 2013, and with the last twelve months EBITDA of negative $25.7 million as of June 30, 2014. Opinion, pp.2-3. At the time of the Motion, the Debtors only had enough cash to operate for two months and were unable to obtain debtor-in-possession financing.

Prior to bringing the Motion, the Debtors made various efforts to negotiate the terms of the CBA with the Union, which “stiff-armed” the Debtors and engaged in a “program of misinformation” designed to drive customers away from the Taj Mahal Casino. Opinion, p.7. The rejection of the CBA offered the Debtors a chance to save $14.6 million per year in payments thereunder, which, along with a handful of other concessions, would enable the Debtors to remain operational. Absent the rejection of the CBA, the Debtors would be forced to shut down by October 20, 2014, liquidate all assets, and lay off over 3,000 employees. Thus, the Debtors’ reorganization was “dependent on rejection of the CBA.” Opinion, p.8.


When a collective bargaining agreement expires, the NLRA provides that an employer must maintain the status quo of the prior agreement while negotiating the terms of a new collective bargaining agreement. Under the Bankruptcy Code, a debtor’s ability to accept or reject a collective bargaining agreement is governed by section 1113. Courts have split on the issue of whether section 1113 applies “in a situation where a collective bargaining agreement has expired but the terms of the agreement remain in effect by virtue of the employer’s status quo obligations under the NLRA.” Opinion, p.10 (collecting cases).

In Trump, the Union argued that since the CBA had expired and the Debtors’ only continuing liabilities thereunder were statutory (e.g., imposed by the NLRA) rather than contractual, the expired CBA was no longer an “executory contract” that the Debtors were able to accept or reject under section 1113. The Court rejected the Union’s reading of section 1113, and found that both the language and legislative history of the provision established that the Court may enter an order rejecting the obligations under a CBA that continue in effect due to the NLRA in the wake of an expired collective bargaining agreement. Opinion, p.11. The Court also noted that the Union’s reading of section 1113 made “little sense,” and created an “illogical result” in which the Debtors would be forced to liquidate and all employees (including Union members) would lose their jobs. As such, the CBA would be of no effect.

Finally, the Court stated that there is little reason to distinguish between an expired and unexpired collective bargaining agreement, as the distinction would merely give labor unions the “power to hold up a debtor’s bankruptcy case.” Opinion, p.18. This “hold-up power . . . wholly ignores the policy and bargaining power balances Congress struck in Section 1113 and exalts form over substance.” Id. Given these factors, the Court found that it had jurisdiction under section 1113(c) to consider the Motion, which it ultimately granted.

Practical Implications

While the ruling in the Trump case seems to be driven largely by extreme facts (e.g., the reality of a complete shut-down absent the rejection of the CBA, and a Union that was unwilling to negotiate), the Opinion eliminates any distinction between an expired and unexpired collective bargaining agreement in bankruptcy. This holding may operate to shift the balance of negotiating power to debtors. In jurisdictions following this holding, bankruptcy may prove a particularly attractive option for a company that is heavily laden with union obligations and is facing difficult negotiations, as it enables the employer to short-cut its negotiation obligations under the NLRA, which otherwise requires the parties to negotiate to an impasse. Thus, parties seeking to agree to the terms of a collective bargaining agreement that is near expiration would be wise to factor this bankruptcy-effect on NLRA regulations as a risk in pushing off or shirking negotiation responsibilities.

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