Below is our initial take on recent bankruptcy-related developments:
Bankruptcy Judge Michael Kaplan said this week that he intends to dismiss the bankruptcy case filed by Johnson & Johnson's subsidiary, LTL Management, which took on its talc-related lawsuits. The panel ruled that the subsidiary did not face financial distress and therefore had no legitimate claim to Chapter 11.
S&K Take: The immediate aftermath of the monumental Third Circuit decision in the LTL case is starting to unfold. LTL has requested a rehearing en banc; if that rehearing isn’t granted Judge Kaplan has said that he would dismiss LTL’s case. The other option for LTL is to seek certiorari and take the case to the Supreme Court. If LTL loses out on the bankruptcy strategy, it will once again find itself facing thousands of individual cases asserting liability for asbestos-related injury. Judge Kaplan already allowed an individual plaintiff relief from the stay to continue litigation in California, which is similar to relief he had denied previously. Judge Kaplan said that the “pendulum has swung.” For the time being, it certainly seems it has, although we will see what the full Third Circuit or Supreme Court has to say about that.
Cloud communications company Avaya has filed for Chapter 11 bankruptcy and has secured a financing of $780 million as it continues the restructuring process. The company says the restructuring will reduce its total debt from $3.4 billion to an estimated $800 million.
S&K Take: Another significant 2023 bankruptcy. This one is long anticipated and seemingly largely consensual. Solicitation began prepetition, and the plan would see the first lien lenders take all of the equity subject to dilution. Interestingly, a group of converts had the choice to sign onto the deal or not (and were provided a deathtrap of sorts) and opted to sign on. So not much to see here outside of a $2.6 billion reduction in debt for the company.
In a February 15 filing, bankrupt crypto lender Celsius has confirmed its decision to have NovaWulf Digital Management as the sponsor for its proposed Chapter 11 restructuring plan. NovaWulf, an investment advisory firm, will lead operations and put a plan in place where most customers to recover up to an estimated 70% of their funds.
S&K Take: Hitting the crypto portion of today’s agenda, Celsius put forth terms of a conceptual plan to exit bankruptcy. The plan, at least according to this author’s scientific evaluation based on Twitter reaction, is in line with what most Earn customers have wanted for a long time. Earn customer ownership of Newco, through tokens, with the ability to ride out the “crypto winter” and potentially realize value over an extended period of time. Claimants with claims over $5,000 will see a return of coins (unclear how much), equity in the new business (which includes the mining business), and a board nominated (4/5 directors) by the unsecured creditors’ committee. Litigation will also be pursued against former management. Seems like a nice win (although borrow and other customers still need to be folded into the plan) for customers, although some would have liked this outcome several months ago.
A former FTX customer has filed a class action lawsuit against three investment funds (Sequoia, Thoma Bravo and Paradigm), claiming that they were not victims of FTX’s alleged fraud but actually were involved in the scheme.
S&K Take: The latest in FTX-related litigation, customers are now going after some of the investment funds that invested in FTX, alleging that they knew or should have known of the fraud, and that their public commentary in support of FTX helped promote investment in the company. It is a subtle variation on previous litigation, including what the SEC previously advanced. One of the interesting aspects discussed in the article relates to the jurisdiction in which all of this litigation will be consolidated, with some notable plaintiffs’ firms jockeying for position to lead that charge.