As noted in these previous posts, I think that the Bankruptcy Reform Act of 2005 (nicknamed “BAPCPA”) is a misguided piece of legislation, a thought that Bankruptcy Judge Frank Monroe of Austin shares. Now, as the decisions on BAPCPA start rolling in, it appears that the legislation has significantly altered one of the cornerstones of American bankruptcy law — the automatic stay.
As most everyone knows, the automatic stay is the powerful injunction that goes into effect immediately upon the filing of a bankruptcy case. The stay enjoins most creditor actions against the debtor and the debtor’s assets to give the debtor some breathing room before a reorganization or liquidation ensues. In so going, the stay stops the “grab law” syndrome of creditors dismembering a debtor’s assets pursuant to state law collection remedies, and facilitates the dual policies of equitably distributing a debtor’s assets to all creditors while attempting to generate the highest value for such assets through either an orderly liquidation or reorganization.
Houston Bankruptcy Judge Marvin Isgur — who is at the forefront of early interpretation of the new bankruptcy legislation — points out in this new decision that the force of the automatic stay has been significantly altered under BAPCPA. In this particular case, Judge Isgur had previously dismissed the debtor’s bankruptcy case because the debtor had failed to obtain credit counseling in advance of the filing of the petition (another new BAPCPA-imposed requirement). Then, Judge Isgur took up the question of whether the automatic stay even went into effect at all during the period between the time of the filing of the defective bankruptcy case and the time that he declared the debtor ineligible to be a debtor under section 109(h) of BAPCPA. Judge Isgur makes a persuasive case that it does not:

[I]t is implausible to believe that Congress specifically identified people to exclude from the bankruptcy process, yet permitted those same people to benefit from bankruptcy’s most powerful protection: the automatic stay. Both logic and the statute dictate that no automatic stay arises on the filing of a petition by an ineligible person . . . [T]he relevant statutory language leaves no room for discretion.

Steve Jakubowski of the excellent Bankruptcy Litigation Blog provides more thorough analysis of the decision, which Judge Isgur certified for an immediate appeal to the Fifth Circuit Court of Appeals because of the policy implications of the decision. However, Judge Isgur’s interpretation of the language of the relevant BAPCPA-modified Code sections is straightforward and logical, so a reversal appears to be a longshot.
The bottom line — particularly in consumer bankruptcy cases, the automatic stay is simply not what it used to be.

Larry Ribstein, who was prescient in predicting the outcome of the corporate case of the decade, thinks in this post that the Delaware Supreme Court may be preparing to reverse Chancellor Chandler’s decision in the Disney-Ovitz case:

The supreme court might say [that Ovitz’s healthy Eisner-arranged severance from Disney] was important enough to require the same level of attention [as the board in Van Gorkum should have given to the transaction in that key case].
This would fit in with all the public agitation on executive compensation and the performance of executives and the need for active board supervision of these matters. But such a holding would be problematic because it seems to deny the need for perspective and judgment ñ just what the feds have lost with the obsession with trivia in the SOX internal controls rule.
Another possible basis for reversal is that the chancellor held that Eisner had the power to terminate Ovitz on his own, and therefore that the board had no duty to act. The supreme court might hold that this was wrong — the ceo’s technical power does not limit the board’s duty. This holding would satisfy the need to tell the board to do more, yet on a sufficiently narrow ground that the court can distinguish it in the future. So by taking this tack, the court will have satisfied its need to preserve VG without too great an expansion of the board’s duties. [ . . .]
The above analysis leads to the seemingly weird result that Eisner gets off while the board members go down for not controlling him. Of course good faith would ultimately fix that by letting everybody off. Apart from that, I’m not sure how Eisner goes down without questioning his substantive business judgment or finding a breach of a duty of loyalty, and both are stretches here.

Professor Bainbridge doesn’t think so because he doesn’t “see any basis in [Chancellor] Chandler’s decision for the requisite finding of ‘a genuine question about a directorís independence or personal interest in the outcome.'” Besides, Professor Bainbridge notes, all this talk about disclosure of executive compensation really misses the point, anyway.
Before the blawgosphere, discussion and analysis of such corporate governance issues — which are key factors in the success or failure of virtually all businesses — were buried in law reviews and an occasional op-ed on the editorial pages. As a result, these key issues were largely unappreciated by the public, many businesspersons and a large segment of the legal profession. Now, through the leadership of corporate law blawg pioneers Bainbridge and Ribstein, analysis of these important and interesting issues are instantly available for the world to review as a virtual cornucopia of corporate law blawgers has emerged to provide commentary and insight. That’s a wonderful legacy for these two fine educators, and one for which we should all be appreciative.

The WSJ’s Kimberly Strassel pens this devastating op-ed in today’s edition in which she chronicles one of the chapter 11 cases prompted by contingent liability for asbestos claims that has resulted in the Third Circuit Court of Appeals issuing a series of decisions over the past several years highly critical of the asbestos plaintiffs bar’s conduct in connection with those reorganization cases. Previous posts on a several of those cases are here.
The particular case that Strassel addresses is the In re: Congoleum Corp case, a New Jersey reorganization in which the Third Circuit concluded that the Bankruptcy Court had improperly approved the debtor company’s retention of one of the asbestos claimants’ law firms (Gilbert, Heintz & Randolph or “GHR”) as special counsel for the debtor:

Under the Congoleum plan, the lawyers would shift their asbestos claims into a special trust that had first dibs on any money. Congoleum and its parent, ABI, would contribute $250,000 in cash and a $2.7 million promissory note — payable 10 years down the line. Congoleum would then breeze in and out of bankruptcy in record time, its shareholders emerging with all of their equity and the company with a clean bill of health.
As for who’d pay for the trust, that was the beauty of the deal: The lawyers would arrange it so that the trust bill would land with insurers. And elegantly, the size of the trust they engineered was almost precisely what insurers owed under Congoleum’s maximum policy limits: a staggering $1 billion. Much of this booty would go instantly to the lawyers (via contingency fees) and their plaintiffs. Anyone who really did get sick from a Congoleum product down the line would be ushered into a second, unsecured trust that could pay pennies on the dollar.

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