Below is our initial take on recent bankruptcy-related developments:
Talen Energy Supply has filed for Chapter 11 bankruptcy and aims to reduce its $4.5 billion debt caused, in part, by rising natural gas prices. The company will look to bring in $1.65 billion in new equity according to the bankruptcy documents.
Armstrong Flooring Inc, the Lancaster, Pennsylvania public company, filed for Chapter 11 bankruptcy with $317.8 million in debt, seeking approval of a $30 million loan to fund operations during the bankruptcy.
S&K Take: Big week for new bankruptcies, with Talen and Armstrong filing. Talen is one of the few billion-dollar cases that we have seen this year, while Armstrong is a bit smaller, but still a significant filing. Anecdotally, it feels like there is more restructuring activity, although it remains to be seen if the spike in larger cases will be sustained in the current volatile economic climate.
Coinbase CEO Brian Armstrong claimed that a disclosure in the crypto exchange’s latest quarterly report did not indicate a bankruptcy risk, despite previous comments detailing that assets held by Coinbase could be considered property and customers as unsecured creditors in the event of bankruptcy proceedings.
S&K Take: This one is really interesting, and it sent a shockwave through the crypto community. Bankruptcy practitioners will be familiar with the question of course. True custodial clients of Coinbase, with agreements in place and segregated accounts or wallets shouldn’t be concerned. Retail holders though, who hold some amount of crypto held by Coinbase and commingled with other crypto assets attributable to other customers, could face a shortfall in a bankruptcy scenario. The situation looks to be analogous to a SIPA proceeding (or a chapter 7 proceeding) involving a broker. Customer claims are satisfied from one big pot where customers share pro rata based on their holdings. They have a priority over general unsecured creditors (landlords, e.g.) but there is a good chance that the broker will be holding securities valued at some amount less than the aggregate customer obligations of that broker. Coinbase suggests that their customer terms may provide some protection, so it is worthwhile to keep an eye on this.
The Third U.S. Circuit Court of Appeals granted requests to review Johnson & Johnson’s use of a bankruptcy strategy which has allowed J&J to pause tens of thousands of talc injury lawsuits.
S&K Take: Judge Kaplan’s decision that the Texas Two-Step is a legitimate bankruptcy maneuver will be tested by the Third Circuit. Given the public outcry, this will be closely watched. Could a Circuit Court decision prompt Congress to move forward on dormant legislation? Who knows (although I doubt it). Lots of possibilities in how this one plays out.