Chapter 11 Commission Hearings

1. Chapter 11 Commission Hearings Protecting Governmental Regulatory Powers in Bankruptcy

2. Claims – Rethinking the Basics • After 35 years, the definition remains unchanged • Yet, it remains stubbornly subject to disputes and divided case law: • Only 71 words and only 2 basic propositions – • Right to payment • Right to equitable remedy for breach of performance if such breach gives rise to a right to payment • All the rest is just descriptive adjectives that enlarge the scope of those two elements

3. So What’s the Problem? • Definition has two axes: • Chronological – when are facts sufficiently developed that one has a “right” of any sort against the debtor; when is that right sufficiently choate that if not asserted, it is discharged. • Remedial – what forms or relief or remedy does a party have? Which are monetary “rights to payment,” subject to discharge; and which are non-monetary injunctive rights whose exercise cannot be precluded by that discharge. • Reading the claim definition literally sweeps most scenarios under its coverage – but raises serious Fifth Amendmentissues.

4. I. Claims and the Calendar • The Bridge of San Luis Rey “It tells the story of several interrelated people who die in the collapse of an Inca rope bridge in Peru, and the events that lead up to their being on the bridge.A friar who witnessed the tragic accident inquiries into the lives of the victims, seeking a cosmic answer to the question of why each had to die.” • In re Chateaugay Corp., 944 F.2d 997, 1003 (2nd Cir. 1991) “Consider . . . a company that builds bridges . . . . It can estimate that of 10,000 bridges it builds, one will fail, causing 10 deaths. . . . [It files ] a petition in bankruptcy. Is there a "claim" on behalf of the 10 people who will be killed when they drive across the one bridge that will fail someday in the future? If the only test is whether the ultimate right to payment will arise out of the debtor's pre-petition conduct, the future victims have a "claim." Yet it must be obvious that enormous practical and perhaps constitutional problems would arise from recognition of such a claim. . . . Sheer fortuity will determine who will be on that one bridge when it crashes.”

5. Claims and the Calendar II • The friar at San Luis Rey could not identify a reason for the five victims to be on the bridge; so too it may often be impossible to identify the persons who may ultimately suffer consequences from the debtor’s actions at the arbitrary moment when a bar date is imposed. • The basic issues here are not how to read the words of the Code, but whether those words can pass Constitutional muster; i.e., at what point does discharging a “claim” in the broadest sense deprive creditors of their Fifth Amendmentdue process? • These are not new issues, but a number of recent cases have revived the issue, albeit sometimes without the necessary historical grounding in prior case law.

6. Future Claims – Three Paradigms for Post Bar Date Injury • Defective Product – External to the body; product failure or bodily injury only occurs after bar date. (bridges, planes, boilers, and forklifts that cause personal injury, building materials that fail) • Defective Product – Internal to the body (asbestos and other toxins, Dalkon Shield, etc.) – injurious element has been introduced but harm has not actually occurred or is not manifest so person does not know of (or cannot prove potential claim) • Environmental Contamination – Much like case II, but it’s Mother Earth who has been affected rather than someone’s mother; but the same problems of lack of manifest injury or knowledge.

7. Future Claims – Basic Issues • Giving Meaningful Notice • Identifying the victims – can you do it? What kind of notice is due? • Is it possible to give meaningful notice to persons who have no current injury? • Georgine v. Amchem Prods., 83 F.3d 610, 617, 620 (3rd Cir. 1996) • AnchemProds. v. Windsor, 521 U.S. 591 (1997) • Ortiz v. Fibreboard Corp., 527 U.S. 815 (1997). • “[W]e recognize the gravity of the question whether class action notice sufficient under the Constitution and Rule 23 could ever be given to legions so unselfconscious and amorphous.” Anchem, 521 U.S. at 628 • If Claims Are Filed, what Are the Courts to Do With Them? • Assume one gave notice to every purchaser of a defective product so they could theoretically file claims? What is the court do so with these wholly inchoate matters? How can they be evaluated, valued, allowed?

8. Future Claims – Some Examples • JeldWen, Inc. v. Van Brunt (In re Grossman’s), 607 F.3d 114 (3rd Cir. 2010) (en banc) (mesothelioma developed 30 years after purchase of asbestos materials and 20 years after plan confirmed; Court held claim existed but did not decide if it was discharged • Wright v. Owens Corning, 450 B.R. 541 (W.D. Penn. 2011) (case filed to deal with asbestos liabilities; customer warranties made optional at confirmation; buyers bought shingles prior to confirmation that did not fail until 2 years later; held bound by discharge) • In re Placid Oil Company (Placid Oil Company v. Williams), 450 B.R. 606 (Bankr. N.D. Tex. 2011) (employee’s wife died of mesothelioma 15 years after confirmation of plan at company that filed bankruptcy for financial reasons, no provision made for future asbestos claims because they were too speculative for company to foresee – but employee should have foreseen need to file claim by bar date for wife’s death 15 years later)

9. Future Claims – How to Remedy The Problem? • Narrowing claim definition • Must be prepetition (or preconfirmation) relationship between debtor and claimant. Is that enough if no manifest injury? Is ,ere ownership of potentially defective product enough? • Fair contemplation test -- In re National Gypsum Co., 139 B.R. 397 (N.D. Tex. 1992). Is it what the debtor contemplates? Or creditor? Or both? • In re Chicago, Milwaukee, St. Paul & Pac. R.R. Co., 974 F.2d 775, 786 (7th Cir. 1992) (environmental claim arises when "a potential . . . claimant can tie the bankruptcy debtor to a known release of a hazardous substance.“) • Narrowing discharge definition • Claim exists but constitutional dimensions limit discharge (Jeld-Wen) • Discharge allowed only if claims recognized and dealt with; In re Fairchild Aircraft Corporation, 184 B.R. 910 (Bankr. W.D. Tex. 1995) • No discharge prior to actual injury (external product cases; Fogel v. Zell, 221 F.3d 955 (7th Cir. 2000)

10. Future Claims – What Should Be Done • Awareness – too often decisions have a “head down, nose to the words of the Code” approach that ignore Constitutional issues • Narrowing definitions – can approach from either end, may be simpler to deal with discharge side (because it can be treated as akin to S/L “discovery” provisions that courts recognize). • The concept of “tying the debtor to a known release of a hazardous substance” might be a good starting point for all claims. Key factors: actual injury, knowledge of the injury, and knowledge of the debtor’s relationship thereto. As adapted to the three cases above, this may be the best way to approach . • Distinguish reorganization from liquidation case.

11. What Else? • Particularly problematic cases • “Single issue” bankruptcies – bankruptcy to deal with one issue, but gets broad discharge regardless. Owens Corning (asbestos cases but discharge could be applied to standard product defects); In re Texaco, Inc. (Texaco, Inc. v. Sharp), 182 B.R. 937 (Bankr. S.D. N.Y. 1995) (Texaco filed to forestall execution on single judgment and quickly settled, confirmed plan that paid all known creditors, but years later discharge was applied to bar private environmental suit; why shouldn’t its case have just been dismissed)? • These cases often are done quickly and with minimum publicity since the debtor wants to keep operating in normal course– but if care is not taken with respect to future claims, those parties can be severely prejudiced. If case never really needed bankruptcy to begin with, why give the filer the benefit of a discharge?

12. What Else II? • Courts, trustees, and creditors’ committee should take a proactive approach to plan terms – debtors should be required to identify potential future claims and indicate how they will be dealt with: • Insurance • Warranties • Future Claims representative and reserves • Float through of particular types of claims; dismissal of case when “single issue” is resolved without discharge • Give claim-specific notice to persons who will not know they have an issue otherwise • Because again, the court has to figure out - what does it do with these if they ARE filed?

13. II. Claims and Remedies • “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment” • That language continues to bedevil the courts. • Although “breach of performance” might suggest limiting it to contractual violations, courts do not construe so narrowly • By its terms, the definition appears to require that a single breach (or statutory violation) must both give rise to a right to payment and a right to an equitable remedy. • What is the relationship between the two remedies?

14. Claims and Remedies II • If the only remedy available under a statute or contract is equitable, then there should be no claim • But, if both may be available, then what? • Must one be a substitute for the other? • What if both are available to remedy different aspects of the breach? • How does state law determining whether one or the other remedy is available play into the analysis? • Who decides which alternative remedy is provided? If state law allows the plaintiff to elect a desired remedy, does bankruptcy automatically give that right to the debtor? Is the issue different for contract versus statutory violations?

15. Claims and Remedies III • What if one statute does not contain a monetary remedy, but there is an alternative way to proceed that would allow such a right? • Statute A (RCRA) only uses equitable remedies, but overlapping statute (CERCLA) has both monetary and equitable remedies. Does state decide whether to proceed under RCRA or CERCLA? • What if there is no statute but common law gives monetary remedy? • Statute only has injunctive remedies but state could do clean-up itself to remove imminent hazard and seek payment under nuisance, or unjust enrichment theories. Does that make injunctive remedy a claim? • What if law clearly allows plaintiff to obtain equitable relief but plaintiff could still accept payment in lieu? • I can use specific performance to force conveyance of Blackacre, but I choose to accept money damages. Does that mean that, in bankruptcy, my rights to conveyance of Blackacre are always a claim?

16. Claims/Remedies – Some Case Law • In re Chateaugay Corp., 944 F.2d 997 (2d Cir. 1991) (order to end further pollution is not a claim because state “has no option to accept payment in lieu of [barring] continued pollution”) • Sheerin v. Davis (In re Davis), 3 F.3d 113 (5th Cir. 1993) (“While section 101(5)(B) encourages creditors to select money damages from among alternative remedies, it does not require creditors entitled to an equitable remedy to select a suboptimal remedy of money damages.”) • In re Udell, 18 F.3d 403 (7th Cir. 1994) (does Carpetland's right to an injunction ‘give rise’ to an alternative or other corollary right to payment of liquidated damages?”; where rights are cumulative, injunctive relief is not alternative to payment • United States v. Apex Oil Company, 579 F.3d 734 (7th Cir. 2009) (suggests a general understanding that discharge must indeed be limited to cases in which the claim gives rise to a right to payment because the equitable decree cannot be executed.)

17. More Case Law • Mark IV Indus. v. N.M. Env't Dep't 459 B.R. 173 (S.D. N.Y. 2011) (looked at statutory authority actually used even though agency is remediator of last resort, so it could always have a claim since it could do work and seek payment; "Second-guessing an agency's choice of which authority to proceed under could often force an agency to accept a ‘suboptimal remedy’" ) • In Re Ben Franklin Hotel Assocs., 186 F.3d 301, 305 (3d Cir. 1999) (claim for reinstatement into a partnership agreement is not a claim when the partnership was comprised of a unique business opportunity, not capable of valuation). • In re Stone Res., Inc., 458 B.R. 823(E.D. Penn. 2011) (violation of non-compete agreement; similar to Chateaugay; can’t pay money and demand right to continue to violate agreement)

18. But, there are the other cases … • In re Goodwin, 163 B.R. 825 (Bankr. D. Idaho 1993) (suit by state to force cleanup from UST held to be claim where suit also asked for reimbursement as alternative remedy; state’s decision to seek injunction over reimbursement was for its own pecuniary interest and possibly not P&R; state’s decision to use injunctive relief was not controlling; since debtor no longer owned property, effort to force it to pay costs was effort to collect claim under 362(a)(6) (which was not then included in P&R exception); disagreed with Chateaugay) Treated as overruled in part by changes to P&R exception (see In re Basinger, 2002 Bankr. LEXIS 1925 (Bankr. D. Idaho. 2002)), but not as to bar on seeking injunctive relief with respect to non-owned property.

19. Forcing Non-Monetary Remedies Into Monetary Equivalents -- I • In re TWA, 322 F.3d 283 (3rd Cir. 2003) (flight attendants received standby flight vouchers as compensation for sex discrimination; treated as “claims” when TWA was sold in a 363 free and clear sale even though buyer would spend no money to honor them; clearly a monetary remedy (even if one could value such an amorphous right) would be far less valuable to the employee than the actual plane ticket; usually discussed in the context of whether a “claim” can be treated as an “interest” in Sec. 363 – but the real question is why this was even treated as a claim at all? Court said that because it could be reduced to a monetary value (althought that was not the settlement), the plaintiffs would be forced to accept money even in a reorganization context, not a liquidation.

20. Forcing Non-Monetary Remedies Into Monetary Equivalents; Employment Cases • Rederfordv. US Airways, Inc., 589 F.3d 30 (1st Cir. 2009), availability of “front pay” as a “disfavored, yet nonetheless alternative, remedy to reinstatement in discrimination” cases meant employee could be denied right to seek reinstatement; allowing remedy would give her priority over creditors that had to accept money (even though her employment would free up estate assets for other creditors); ignores public policy statutory goals; prior cases has denied reinstatement only when it was not viable, not because ER or even EE wanted to waive it. • Dalvit v. United Airlines, Inc., 359 Fed. Appx. 904 (10th Cir. 2009) agreeing in dicta that reinstatement rights could be reduced to monetary claim and discharged, regardless of employee desires.

21. Finding a Limiting Principle • The “claims uberalles” approach to these issues provides no meaningful basis to determine where monetary “claims” end and non-claim injunctive relief begins • Treating a claim as anything where it is possible to conceive of a monetary payment therefor – or where a non-debtor party is willing to accept money compensation – means that anything is a claim. • If you promised to sell me the Grand Canyon, I can get specific performance under nonbankruptcy law, but I could choose to accept damages instead. Similarly, if you were dumping pollutants into the Colorado River as it entered the Canyon, the state could enjoin that, since no one can pay money for the right to pollute, but the state could decide it needed to act more quickly and then sue you for its costs. Should those choices change the basic nature of the debtor’s obligations so that it decides which remedy applies?

22. Limiting Principles II • This becomes particularly problematic when combined with something of a “dog in the manger” attitude – no one should be able to obtain full relief if some creditors only get partial payment even if the relief does not harm those persons (i.e., reinstatement and the standby seat vouchers) • Moreover, there are many values that a bankruptcy case must serve beyond just maximizing creditor recoveries and debtor fresh starts; neither exists in a statutory vacuum that ignores all other parties and public policies. Baker & Drake, Inc. v. Public Serv. Comm'n35 F.3d 1348 (9th Cir. 1994) (“Congress's purpose . . . was not to mandate that every company be reorganized at all costs, but rather to establish a preference for reorganizations, where they are legally feasible and economically practical. “)

23. What’s The Solution? • Our suggestion is both simple and creates greater continuity within the Code. It also recognizes the fundamental principle stated in Butner v. United States,440 U.S. 48, 55 (1979) that property interests are generally created by state law and that, absent good reason to override that, bankruptcy law should generally seek to leave them intact to “to prevent a party from receiving ‘a windfall merely by reason of the happenstance of bankruptcy’” • We suggest that 101(5)(B) should be revised to read “right of an entity to an equitable remedy for breach of performance if such entity could be compelled, in a legal or equitable proceeding under applicable nonbankruptcy law, to accept a monetary satisfaction of such interest.”

24. Solutions II • Why that language? Comes from Section 363(f)(5) with the one clarification that the compulsion must come under applicable nonbankruptcy law. (There is some split in the case law under this as to Section 363(f)(5) but that is the way most cases read the provision and we would suggest that Section 363(f)(5) be amended to read that way as well). • One value – since courts appear to be absolutely determined to write “claims” into the “free and clear” provisions of Section 363, it makes sense to define a claim in terms of what Section 363 allows so that the two provisions are complementary • Since the point of 363 is to have rights attach to a pot of money, its coverage and that of a “claim” should be the same. If you can’t be paid for it, how could it attach to sales proceeds?

25. Solutions III • Why does it work? • Makes rights under bankruptcy and nonbankruptcy law complementary • Recognizes that nonbankruptcy law has had hundreds of years to work out when specific performance is appropriate – which is not all that often. • Distinguishes public and private rights; government generally has broader rights to treat even monetary obligations such as collecting back pay as matters of public policy enforceable by contempt proceedings, rather than pure money judgments. This recognizes that. • Does not allow a party violating a statute to use bankruptcy to dictate to government how to proceed. • Does not allow parties’ right to force suboptimal right on a creditor merely because some party might once have chosen to accept damages.

26. Solutions IV • Some other values: • Greater predictability and reduction of litigation costs – defy anyone to truly be able to reconcile all of the cases. • Ensures that public policy concerns underlying statutes imposing injunctive relief are nor simply sacrificed to desire to assist a single company. • Ensures that parties retain rights that often will not adversely affect monetary side of the estate at all – some injunctive remedies cost money but some do not, but there is almost a reflexive unwillingness to allow anyone to obtain full relief, even if it is not at the expense of other creditors. • And, as noted, it will promote a uniform analysis across the Code. • Also allows one to eliminate Section 501(c)(2) – fully subsumed in (c)(1).

27. III. Can/Should Plans Be Able to Preempt Non-Bankruptcy Law? • Until recently, looking at cases like Baker & Drake, governments would have fairly confidently said no, or at least not absent specific provisions in the Code providing a different rule of decision. Claims allowance, for instance, or barring ipso facto clauses. • Davis Industries, 2000 – manufacturer of “Saturday Night Specials” proposed plan that would implement certain reform practices and bar government from requiring any others, Judge Jury says to debtor’s counsel, “Mr. [Smith,] what on earth makes you think I have the authority to do that?” And the only answer was, “well, that’s what we need to survive.” He didn’t get his plan confirmed.

28. III. Preemption II • As originally enacted, Code clearly did not have any general preemption provision. • Section 1142(a) had a statement that “Notwithstanding any otherwise applicable non-bankruptcy law, rule, or regulation relating to financial condition, the debtor . . . shall carry out the plan and comply with any orders of the court.” • But it only came into play in terms of implementing a confirmed plan • Section 1129(a)(3) – a plan must be “proposed in good faith and not by any means forbidden by law.” Most would feel comfortable arguing that a plan that proposed to violate the law was not in good faith and was a means “forbidden by law.”

29. Preemption III – Section 1123(a) • Cases construing the “financial condition” aspect of Section 1142 can be counted on the fingers of one hand. Most cases have mentioned it only in passing as part of a discussion of Section 1123 and its preemptive language in the context of recent asbestos plans proposing to assign insurance coverage to trusts for future claims. • What changed? In 1984, Section 1123 was amended. It seems to be an innocuous section delineating things a plan must do such as designating classes, not discriminating between them, and, in subsection (5) “provide adequate means for the plan’s implementation” such as a laundry list of possible actions including retaining or transferring property, satisfying liens and the like.

30. Preemption – Section 1123(a) -- II • The Code already provides numerous specific provisions allowing those actions such as Section 363 providing for transfers of property and sales free and clear; Section 1129(b)(2) dealing with treatment of secured creditors and their liens, Section 1124 dealing with claim impairment, etc., so this could be viewed as simply generally cataloging those types of provisions. • In 1978, nothing more was apparently thought necessary, but in 1984, the words “Notwithstanding any otherwise applicable nonbankruptcy law,” were added at the beginning.

31. Preemption 1123(a) - IV • No one disputes that the language was enacted as part of a package to correct “technical errors,” to make “technical stylistic change;” there was no report suggesting any substantive change was intended and no controversy about its passage. • Yet, read literally, it arguably a change in what a plan can do. Unlike Section 1142, it is not limited to “financial condition.s” On its face, it could allow any provision “adequate’” for implementing a plan, even if blatantly illegal under otherwise applicable state law. Indeed, since it says a plan shall have adequate means for implementation, one could argue that a debtor must put anything in a plan that is necessary and useful or “adequate” to help it reorganize!

32. Did This Catch On? Not for a while • In re Public Svc Co. of N.H. (Public Svc. Co. of N.H. v. State of N.H.), 108 B.R. 854 (Bankr. D. N.H. 1989). Gave declaratory judgment that addition of language allowed utility to seek sale that would remove it from regulatory jurisdiction of state and put it under FERC for rate setting purposes. • The parties later agreed to rates and the actual plan did not have preemptive provisions. In re PSC of NH, 114 B.R. 813 (Bankr. D.N.H. 1990). Perhaps for that reason, and perhaps because it relied heavily on the scope of the automatic stay P&R exception (which was broadened in 1998) and on the lower court’s opinion in the MCorp case which the Supreme Court overturned, few if any cases tried to follow suit.

33. Other Cases? • In re FCX, Inc., 853 F.2d 1149 (4th Cir. 1988) (court let debtor override bylaws violation (enforceable under state law) and release collateral to satisfy secured claim. Purely contractual.) • A few cases may have relied upon it but in generally not overly controversial propositions; perhaps overriding corporate governance provisions or stockholder voting rights or the like. • The issue came to prominence in the PG&E bankruptcy, following the energy crisis in California. In re Pac. Gas & Elec. Co., 273 B.R. 795 (Bankr. N.D. Cal. 2002) (debtor proposed to break up operations and transfer major portions of its operation to FERC regulation in ways not allowed by state law).

34. PG&E – Options for Interpretation • Bankruptcy Court held that “Proponents' across-the-board, take-no-prisoners preemption strategy” was invalid; Section 1123 is just descriptive; “notwithstanding” language had limited scope consistent with “technical change” nature of amendment; implied preemption analysis used. • Pac. Gas & Elec. Co, 283 B.R. 41 (N.D. Cal. 2003), district court agreed with debtor’s “big bang” theory – broad express preemption – but only for measures taken at time of reorganization; after that the debtor has to obey the law. • PG&E Co. v. Cal. ex rel. Cal. Dept of Toxic Substances Control, 350 F.3d 932 (9th Cir. 2003) (Sections 1123 and 1142 to be read together as covering same ground – only “financial conditions” covered but are expressly preempted)

35. Do These Approaches Work? • Bankruptcy Court or Ninth Circuit – • Reading in the limitations bothers the “plain meaning” crowd, yet it’s clear that are problems with a broad reading • District Court – “big bang” • Too clever by half and still allows for a great deal of mischief. • Should a debtor be able to write itself an exemption from any and all laws that might make its reorganization more difficult? • Is it conceivable that Congress would have done so as a “technical correction?” • Would it allow enforcement of laws during the case via the P&R exception but then let the debtor override them at confirmation?

36. Is Limiting to “Financial Condition” the Answer? • Used several places in the Code with no definition or uniformity • Ipso Facto Clause-- bar actions “conditioned on the insolvency [financial condition such that debts are greater than assets] or financial condition of the debtor” 363(l)(1); 365(b)(2); 365(3)(1); 541(c)(1)(B) if insolvency is a subset of financial condition, what else is a FC? • Statutory Liens -- avoid fixing of lien when financial condition fails to meet a specified standard; 545(1)(E); becoming “insolvent” is a separate ground. (545(1)(D)) • Kittrell, 115 B.R. 873, (Bankr. M.D. N.C. 1990) (being “past due” on bills is a FC); D.R. Goris Plumbing, Inc., 49 B.R. 146 (Bankr. MD Fla 1985) (lien allowed if contractor abandons job or doesn’t use materials bought, not FC); Howard, 43 B.R. 135 (Bankr. D. MD. 1983) (lien for unpaid hospital charges is not FC since not tied to specific financial standard); Motley v. IRS (In re Motley), 1996 Bankr. LEXIS 504, *12-13 (Bankr. W.D. Va. 1996) (lien for failure to pay tax debts when due is not based on FC)

37. Financial Condition II – What Else • Adequate Assurance – requires “financial condition and operating performance” of new tenant are similar to those of debtor when it became lessee, Section 363(b)(3) • What aspects of the tenant’s operations does this cover? • Discharge of Debt • 523(a)(2)(B) – money obtained by use of a statement in writing . . . respecting the debtor’s or an insiders’ financial condition • § 727. Discharge (a) The court shall grant the debtor a discharge, unless— (3) the debtor has [failed to keep records] from which the debtor’s financial condition or business transactions might be ascertained,. • Query: are these two financial conditions the same?

38. Problem Solved or Not? • Powers of Chapter 11 Committee • 1103(c)(2) -- road authority to investigate assets and liabilities and financial condition of the debtor; Query: is that different from the other uses? What’s covered? • Implementation of Plan • Section 1142(a) Notwithstanding any otherwise applicable nonbankruptcy law, rule, or regulation relating to financial condition, debtor shall comply with plan . . .. Again, what’s covered and what’s not? Read as broadly as in Section 1103, it could cover a lot of laws; read as narrowly as in Section 523(a)(2)(B), not so much. • Probably not; the term is so undefined as to be meaningless – and not necessarily suited to setting out the types of provisions that might logically be preempted under the implicit waiver theory used by the bankruptcy court.

39. Does Limiting to “Financial Condition” Help • Later cases tended to reject the Ninth Circuit approach as not following the “plain meaning” of the Code. • Most of those cases, in turn, didn’t have much trouble with the issue because they merely dealt with insurers arguing against allowing assignment of policies to asbestos beneficiary trusts. • The provisions probably didn’t violate state law anyway but courts relied on Section 1123 and gave it a broad preemptive scope so they didn’t have to resolve the state law issue. • In re Federal-Mogul Global, 684 F.3d 355 (3rd Cir. 2012) –language means what it says as to preemption.

40. And yet…. • “Nonetheless, we would find problematic attempts under § 1123(a) to disregard large swaths of state and federal regulatory schemes.” Federal Mogul citing BK opinion in PG&E. Section 1129(a)(3) “good faith” provision would bar such efforts. • Presumption against preemption may still; general history of protecting police and regulatory powers is enough to inherently limit scope of preemptive power of language used. • See also Montgomery County, MD v. Barwood, Inc. 422 B.R. 40 (D. Md. 2009); Irving Tanning Company (Irving Tanning Company v. Maine Supt. Of Insurance), 2013 Bankr. LEXIS 3350 (1st Cir. BAP 2013). – also reading in P&R exception

41. Does That Solve the Problem? • Not really – winning in spite of the Code’s language instead of because of the language is always problematic • “Good faith” is a weak reed to rely upon – numerous cases that say that “it can’t be bad faith to do what the Code allows you to do.” So if Debtor argues it’s explicitly allowed to preempt all state laws, how can it be bad faith to do that? • Also, need to consider connections to other provisions – should Section 1142 be changed as well? • Section 363 has no similar provision, Integrated Solutions, Inc. v. Service Support Specialties, Inc., 124 F.3d 487 (3rd Cir. 1997) – does not allow for sales in violation of state law restrictions; yet Section 363 is used to allow for plan sales. Coordinate them?

42. What Statutory Changes Should be Made? • Come up with a definition of financial condition that works for most of the cases listed – and use a new term for the others. • Do we mean just matters relating to formal financial statements? • Anything relating to any monetary matter agreed to between the parties? • Do we mean to allow debtor to bar enforcement of financial responsibility; net worth; escrow requirements as operating conditions? • Limit the preemptive scope of Section 1123(a) • at a minimum, exclude police and regulatory powers; • perhaps just limit it to financial conditions as redefined; or • in view of many provisions in Code, explicitly allowing things, to be done in ways that control nonbankruptcy law, tie preemptive scope to explicit statement elsewhere in the Code

43. What Else? • Section 1123(b)(6) – amend to say that provision must be consistent with Code and applicable nonbankrupcy law. This can’t be a backdoor way to further enlarge the ability of plans to override other laws. • Section 1129(a)(3) – unless provided otherwise in the Code, plan must comply with applicable nonbankruptcy law, not just be proposed in accordance with such law. Good faith is just not a sufficient standard. • Coordinate treatment of Section 1123(a)(5) and Section 363 as to right to sell; and as to Section 1142(a) in overriding nonbankruptcy law provisions.

44. Miscellaneous Changes • Revise Section 523(a)(19) AGAIN to make clear bankruptcy courts can decide the issues if necessary to allow claim or make discharge determination; reject idea that Congress wanted to encourage race to bankruptcy court • Section 554(e) – need to set standards for when abandonment will be allowed vis-à-vis environmental conditions. Another place where Supreme Court stepped in to say that P&R concerns had to be taken into account, but its language and contours of decision remain very murky. Long past time for issue to be addressed and given some predictability.

45. Presentation by: • Karen Cordry, Bankruptcy Counsel • National Assn of Attorneys General • 2030 M St., NW, 8th Floor • Washington, DC 20036 • 202 326-6025 • kcordry@naag.org