 Twice a year, we're going to be bringing you updates on the latest trends and changes in bankruptcy practitioners in this dynamic field. With us, Judge William Yus Tensei, Professor David Epstein from the University of Alistair Bruce Markell, from the University of Nevada Las Vegas School of Law, Judge Lisbeth Parris from the West, from the District of Oregon, of course last, but certainly not least, Judge Eugene Wiedoff from the Northern District. We've already taken a look earlier at some important business and commercial issues. And we're going to start by asking Professor Markell about one of the more controversial Supreme Court cases in the bankruptcy area in a long time. You know, Bruce, the Supreme Court teased us for a long time about when it was going to get, if ever, to the new value exception. And of course, in 203 North LaSalle, the court finally did address the issue of whether a new value exception has a survive codification of absolute priority. And of course, you filed an amicus brief in that case. And now that we have a decision, I find it ironic that I have to start out by asking you, is there a new value exception or not? Bruce, you're going to have to get away with calling it the new value exception. Is that what the new value claim of your brief? Well, David, the question, either question, whether or not there's an exception or corollary or what your words, the opinion by just a suitor that came out in May, the case but explicitly leaves open the issue as to whether or not. Which is really what the value principles because, as David will know, that's an exception. But what is it? What we're really talking about is the ability of a debtor's equity and under particular circumstances. I don't think anyone has any objection if in fact the entity is solvent. But if in fact, severships, when it was very common for syndicates out of New York to be put together of existing shareholders, it continued into the 30s when we had first chapter 77, 77B and chapter X, the court that basically said, well plans have to be fair and equitable. Because of that, at least in 1939 when Justice Douglas decided Cates versus Los Angeles Lumber, he left open the possibility that a lot of the old jurisprudence from before the depression survived. That is, the equity holders could continue to participate in full and when there was a dissent about the continue. That because of the way chapter X which replaced 77B in 1938 was drafted. There wasn't a lot of incentive for the equity holder in chapter XI which was the, if you will, a practitioner's preferred vehicle. There was no fair and equitable rule just like in chapter 13 today. So this really wasn't that much of an issue until we fused the old chapter XI concept of a debtor in possession and the fair and equitable rule of old chapter X in the 1978 code. Now this issue first came up when the new value exception made its way to there and Ehlers. The Solicitor General suggested that because the bankruptcy code in 1978 did not anywhere talk about new value exception, new value corollary, new value. That just wasn't, in fact, the court treated it as a statutory creditor can receive or retain interest, any property as long as there's a dissenting senior class. Now, those who proposed new value said there's a simpler way to write that if you just want to write out your interest and that's the sort of, they can't receive or retain any property, period. But because we have the words on account of, the question is, is there some kind of causal connection between the interest-retained post confirmation and the interest that they held pre-confirmation on the text of the facts of 203 North and South, which is another single asset debtor case. Sometimes I call SADS, which, with good reason, because I think that SADS are single-handedly responsible for screen up a law in chapter 11. I think 203 North and South have been proven to be no exception to that. There, you had an alacentenary partnership that had 15 floors of a Chicago. They also had a lender who'd lend over $90 million bank of America with respect to their acquisition and improvement of that Chicago real estate slump. So the biggest slump that the property as valued in the bankruptcy proceeding was only worth about $56 million. The plan was pretty simple. Pay every unsecured creditor in full, accept the claims, they had to separately classify that and they paid a little bit different. They were then going to A and say, we'll treat this as a, but what we'll do is we'll pay it out of some proceeds of salary financing down the road. And the estimate was that that wasn't gonna be worth about 16%. America said, however, you know, paid in full. My claim was 90 plus million. They said, listen, all this history is on our side. And what we're going to do by the Supreme Court is they had tax recapture. If in fact, we're through some type of bankruptcy proceeding, they're part of the plan itself. They set up an exclusive provision that only equity holders, current equity holders, could buy in. This goes up to the seventh circuit, which a special reorganization serves two goals. One goal is the reorganization, real abillitation of the debtor. The second goal is the maximum return to creditors. So it's pretty easy in this case. We just have to meet both goals with respect to the new value plan. So what we have to do is we have to assure that the equity holders continue, which is one of the goals of reorganization. We're not gonna say that they can't recoup. That in fact, there has to be somebody other than the debtor or debtor's equity holders proposing and the judge either saying yes or no. But we've got to somehow test this against in which this market test might be gone. It said, well, exclusivity, of course, the debtor's exclusivity is in such a fact, a driving fact, behind the Supreme Court's decision. In our case, a case that is going to come up in the context of exclusivity hearings. It isn't just going to affect what judges do with respect to exclusivity. I could foresee or anticipate, for example, a judge taking the viewpoint, well, in exclusivity, the cause, the only way that a plan is gonna be confirmed is going to be a tribution. And so let me just go ahead and end exclusivity now and figure out what is there in the market through the plan process. But I could also see a judge doing a take at an exclusivity hearing with respect to LaSalle in that, well, I don't have to worry about ending exclusivity because I know, see that coming up probably in a lot of cases earlier, or even earlier, maybe in relief from stake, which is actually the vehicle that many new value cases came up before. I think exclusivity is kind of a double-edged sword. I indicated in the outline for the program that if you take a look at Chapter 11s generally, well, last year was the first year, I think, since 1978 that the Chapter 11 filings fell below 10,000. And when we have a million for bankruptcy filings, generally only 10,000 Chapter 11s, you ask yourself, what's all the fuss about? Well, some of those are pretty big. And the answer to this is that it's not, well, the debt is coming in insane. Here's a plan, by the way, we terminated exclusivity. Any of you that requires these owners in order to operate them? Top, Tyler, what they're gonna do, but one view is that the Supreme Court has raised the bar decision is going to be to discourage old equity business cases is that old equity is gonna get the company cheaper. I'm gonna tell, and the judge is such as those on our panel that the debtor looks at it, he'll say, okay, we'll turn to exclusivity. Most lenders will bring out a liquidation plan. And then we go, say we have then two confirmable plans. Well, 1129C says that in such cases with two confirmable plans, one of the interests that you have to take into account is the interest of the debtor's equity owners. That almost puts it, so I think in that case you might get into it and it can play, but no one's gonna have the expensive proposition to do anything other than. The Supreme Court still has to determine the amount of that claim. That's a 506A secured claim. There's something else left over. That's the right of owners, potentially, or trying to somehow expose to the market is that value of ownership. When is their value tough that collateral is the entire asset base of the debtor? Only in the value of the underlying asset. They have the idiosyncratic, they easily want it to continue. Or make that business in that name. Or maybe it's an individual, the chapter 11, whose house is the asset. And the family lives in that house. They would like to stay there, even though they'll pay more than the market value of the home. Those are the reasons. That's gonna be a real problem too, because of those 10,000 chapter of legislation tends to push. This is gonna be an interesting, what does an individual have to contribute that's been supported? Exemption? It's gonna stand it when they first activated in 1978, and they've done nothing to make it. I mean, start David by asking you the mutation on the ability of the debtor to assign in section 365 C1. We should 365 today, those phrases where you get started and you feel like you can't stop. 365 has been kind of the same wife of Congress once it's gotten started. In the bankruptcy area, because it seems, well, there's plenty of blank to be shared here. In 365, really, it follows up on 70B, which was from a black line, but it seems to me that every time professors, Congress, commissions get involved in 365, it gets worse. Start with, what's the question of assumption and assignment in section 365 C1? Look, we all know that assumption and assignment were fundamentally different. That if I've got a contract, this goes into bankruptcy, and it's a very different kind of a deal where there's assumption, there's assignment, they're both dealt with by 365, but there's two as a problem created by the language that Congress chose to use at the very beginning of section 365. C1, section 365 C1, as you all know, begins with a phrase, may not assume there's a linkage of if under non, it would not be possible to transfer in bankruptcy, it's not gonna be possible to keep the case. It reminds us of that problem, and it reminds us of that problem in a context that I think we're gonna be seeing more and more. It's an intellectual property context, whether we're non-bankrupting limitations on transfers of intellectual property as Catapult discovered, when it was essential to continue to operation, didn't want to transfer the property, it wasn't Bruce saying, well, let Bill do the contract with you, it was Bruce in essence saying, I wanna keep doing the contract with you. What happened in the sense, can't be assumed, is given the policy concern, is there any conceivable way, given the statutory language, the bankruptcy judge can disregard the statutory language and rule another way in, and we're not necessarily talking about complicated intellectual property contracts. Bruce just alluded to the number of chapter 11 cases that are cases involving personal services contracts. Assuming a sign, if assumption is a prerequisite to a sign. What sort of a southern reading, you kind of swerve your words, people don't really notice what the statute says, but that's just a start of the sort of concern that one gets from looking at 365 of further congressional tinkering or further professor tinkering. Another example from 365 that people run the obligation during the gap period with a tremendous financial, it's out to be an albatross in the 13th when you're dealing with a chapter seven case, and so there's this issue of, okay, let's postpone or defer this issue of assumption or rejection as long as we possibly can, but let's take care of the non-deter party. And that's the essence of 365D that was, and as I look at the cases, first is the question of what kind, the statutory language is under any unexpired lease, and so it would seem to me that the critical is the statutory language that you've got to play with. But the thing first guys that get to play with the language, you're facing really a basic question of sell this business to bill. You're gonna make periodic payment, that's it, it's just an obligation about payment, it's essentially a debt instrument, not treated as a 365 transaction. But I also own a building, I sell the business, I wanna keep the building. And so I set up the documents in such a way so that the payment for chapter 11 continue and comply with 365 very significant impact of the deal. It's just part of that's written, part of it's something else. But it seems to me that puts Jane in Liz and Billy in an awkward situation of having to try to decide to what extent are the parties. The forge expect that could be done in this situation. That's the point where we're gonna need not only let's another example, let's assume I'm leasing a building to build substantial improvements, do this separately. What we really have here is an obligation, an obligation that arose before a result. That's not a 365D. But what if all that you're presented with, we presented with a lease that says this is the monthly rental raise. You're going to nail that way. You then, they just file and reject the whole lease. They reject that the lease is trouble saying with respect to assumption, for example, on cure. But that's in terms of interpreting what people are. And one says we're gonna have a platonic ideal of what a lease is, right? Listen, from the academy, I can say that kind of stuff, right? Walk us through it. I thought the lease of the cave. Not every library has that. Well, it's the lease of the cave. It's that metaphor. So I'll agree. It's a section. That's the section they gotta read in the guide. Set up ahead of time. But I think you... I don't think that's what I'm suggesting, Bruce. I think that I'm suggesting nothing more than the questions under 365D present a problem of having to balance or reconcile the economic realities of a deal. In which, in essence, have two different phrases under 365D that the courts got to wrestle with. And I've talked about one of the phrases and that's the phrase under any. And it may well be that my example, with respect to the improvements in particular, more one that's governed by the other critical phrase in 365D, and that's the phrase arising from an after the sort of situation in which the petition is filed in the middle of the tax year and you're trying to figure out how to deal with the lease provision that requires that the cases are divided and we only have a single circuit that's addressed that, the seventh circuit in handy-andy, but to further sort of make this point about the difficult balance in the language used by the parties as a follow-up case that hadn't gotten nearly the attention that handy-andy has, but I think it's potentially significant. There's a bankruptcy court decision out of Indiana, a seventh circuit bankruptcy court. The consolidated industries case that suggests that the real key is the language that's employed in the lease with respect to the obligation to pay taxes and indeed consolidate in industries can be read as suggesting that a different language had been used in the lease, but I think the sort of best example of sort of the important document, the sort of the final example that I would like to raise about what Congress and others have done every time we try to fix a 365D problem, and that's the problem of 365D, the situation in which you have, for example, a business of 72 hours, and of course we know we've got this one circuit court today that's interpreted that- For 365, and of course we barely scratch the surface. David, thank you very much. That's it for this part of the presentation of the Genone Capital Hill, and talking to somebody who has been working on that issue for a number of years, you all certainly know, of course, it already passed similar, but not identical legislation, H.R. 833, last fall. As we take with the single compromise bill, they can vote that legislation is Joseph Rubin, legislative director for Congressman George Geek. Mr. Geek is, of course, the chief sponsor of the bankruptcy bill in the House. Mr. Rubin has been working on this legislation for a number of years, unfortunately. Mr. Rubin, thanks for coming, we appreciate it. I know the panel has lots of questions for you. I'll ask you just very quickly to outline for us what you see as the process and timing for the conference. I appreciate it, and I appreciate all your expertise in helping us work through some of these difficult issues. The timing is a little bit up in the air at this point. It passed a tax provision included in their bill, which is constitutionally not permissible. So, but we think that timing, conference, should be underway at the latest point. We think the bills are close enough together, at least on the bankruptcy of the homestead exemption. Not only are the amounts different, but the House bill, the Senate bill, does from senators in limited homestead jurisdictions. We've worked very hard in the House to ensure that there is an opt-out provision in the bill. On both sides, senators and congressmen on both sides who strongly support a cap. Senator Sessions was a conferee last year, and we anticipate it will be a conferee this year. He's a very strong supporter of maintaining a straight direct appeal to judges and academics to come up with a sort of hybrid provision. Very closely, for example, with the ABA, they strongly support our provision, and we're pretty good will receive us and allow us to reform with our direct appeal. Things that happen in the legislation that look, and so what happens, and why is there to be paid ahead of, which is to allow the support of obligations to be paid at all. Is there any chance that the conference will be able to address their problem? Well, that was not a mistake. That was done intentionally. One of the criticisms that we've received about the bill unjustified, in our view, was about the child support provisions, that the bill is harsh towards child support. All of the, almost all of the major child support collection agencies in the country. And we wanted to demonstrate that we are being very careful to ensure that child support is first, and we wanted to demonstrate that in the bill, but admitted to trying to move it to second priority. It was a political decision to move it to first priority. Obviously, we think that it will have to move to second priority. The Senate has it as first priority as well, so that's something to be worked on. We're curious what your vision is, would that suggest that the trustee just abandons the property, or would the expectation be that US trustees serve in those cases as case trustees so the property could be administered? Well, again, I think that's something that does have to be worked out. And we would like to see it move down to second priority, but we don't know where the Senate is gonna come down on that, and we don't know where the Democrats are gonna come down on it. If the Democrats insist that child support and maintain its first priority, that's something that we'll probably have to have to look at very closely. Joe, when we're in conferences, by no means, obviously listening to comments about all of the, I think that as we move forward, we'll of course continue to solicit advice. For example, I've talked to your trustees about some of the provisions that affect them directly, and we're always listening to additional comments, and this I think is the issue, because Mr. Geekus would like to see this move through very expeditiously. 300 votes in the House and 80-some votes in the Senate, both veto-proof majorities, we can move this very quickly and we'd like to move it through as quickly as possible. So the timing is a concern. So I assume it's a little late, for example, for people to write you letters saying I'm opposed to specific. Concerns that I've had about the way this has moved forward is a lot of folks have instead of offering, have instead decided, okay, I'm gonna oppose this bill, and basically taking themselves out of real consideration of this is a problem, we need to address it, instead say, well, the bill is bad. Anybody particular in mind, do we have that? No, let me ask you another technical question. The Senate bill is much more reflected state's trustee system to... Well, the House, Mr. Geekus feels very strongly that we do need to incorporate general accountants' audits, but as you've said, the Senate has different principles. Again, I don't know where this is gonna come out. I feel very strongly about it, and we would like to see the gas reticence, something that will be addressed, I would assume, in conference. Most of the cases to which they'd be applied would be no asset, chapter seven cases, so is there a likelihood that there'll be a provision in the bill for the payment? I'm assuming there will be, I mean, maybe it'll be the US trustee. As soon as these provisions, which are fairly, in effect, existing cases, or most of these just gonna affect cases on a going forward basis. For many days, as the, all the bill, although there may be some smaller provisions that would affect, I believe so, yeah. He's just filed within 180 days after this. It's the case that's filed. Right. Would be the first case that's affected this existing cases by Mars, would be granted, file them in, and there'd be this huge wood filings. For decades, right? To discharge the professional responsibility of these people, they're gonna have to assess very quickly what that is. This is, although some people have been advertising, there are a lot of people who are very concerned about how they can discharge their professional responsibility for someone who might have done better. How do you see those getting resolved? That's the big question. The bill has introduced 5,000 or 25% requirement. If you, $6,000, the Senate, it's 15,000 or 25%. And there are other provisions and exceptions and differences in the means test that test also. I wish I knew, you know, we're between the two bills, presumably, but, you know, that's, it's obviously gonna have to be worked out. Is it the biggest obstacle you see, Joe, to come out? We're extraordinarily different. This time, they're very much closer. They started from the same premise of last session's Confluence Report. So, you know, we're, I think actually, the biggest stumbling point are some of the extraneous issues, like abortion and the minimum wage and that sort of thing. It's funny, the House and Senate provisions have sort of flip-flopped. House bill originally passed it had, I think, 90 days, no cram downs for 90 days. The Senate bill had no cram downs at all with the five-year compromise, and the House introduced the Confluence Report from last year as this year's bill that five years has been retained. The Senate, on the other hand, now has six months except five years for auto loans. I don't know where that's gonna come out. We're gonna be somewhere in the middle. The House and Senate bills have a number of additional judges. I think the Senate bill has more temporary judges than the House bill. And a lot of that is centered aggressively. Has long been very concerned about the number of judges, and as the principal author of the bill in the Senate, he has, he will expand the number of judges, whether or not they're permanent or temporary, as yet to be worked out, and the numbers have yet to be worked out. But Mr. Geek has held a hearing sometime in the last year on the number. That's it for the second part of our bankruptcy law update program. We hope you enjoyed both parts of the program and found them useful and interesting. I would end and send us the evaluation form for the program that is on the JNAT, particularly if you have something good to say. You also find, remember, the written materials for the course on the JNAT as well. I want to very much thank our panel again for coming in to help us explore all these subjects. I know we barely scratched the surface on some, but please join us for our next program in September. Until then, for the Federal Judicial Television Network, I'm Lawrence Ponderhoff saying thanks for watching.