Commentary: Subchapter V’s $7.5 Million Debt Limit Expired: A Return to Congress’s Bias Against Formerly Successful Entrepreneurs?*​​​

The continuing effort in Congress to extend subchapter V’s $7.5 million debt limit recently hit a snag. The result: The $7.5 million debt limit for subchapter V eligibility expired on June 21, 2024, and the subchapter V debt limit has now been reduced to an inflation-adjusted $3,024,725, according to a recent blog post by Donald L. Swanson of Koley Jessen P.C. (Omaha, Neb.). The snag exists despite near-unanimity within both houses of Congress that the $7.5 million debt limit should be extended. Rumor has it that the snag comes from a single U.S. Senator for reasons that are unknown or uncertain. Swanson offers four different answers that combine to create the snag:

- First answer: Bankruptcy has no political constituency. There is, for example, no lobbying organization called the National Association of Bankruptcy Debtors or the Future Bankruptcy Debtors of America. There are, however, contrary interests with substantial lobbying capacity and effectiveness.

- Second answer: There is no financial catastrophe in existence right now. The $7.5 million debt limit for subchapter V eligibility is, in itself, a prime example of the during-a-catastrophe phenomenon: (1) Subchapter V was enacted by Congress on Aug. 23, 2019, with a $2.75 million debt limit for eligibility; (2) subchapter V became effective on Feb. 19, 2020; (3) the COVID-19 pandemic hit the public consciousness hard in January and February of 2020; and (4) Congress increased the debt limit for subchapter V to $7.5 million on March 27, 2020. The increased debt limit to $7.5 million has been a much-needed lifeline for many family businesses.

- Third answer: The old political bias against formerly successful entrepreneurs has reemerged. Congress allowing the $7.5 million debt limit to sunset, and returning subchapter V to a $3 million debt limit, feels like a return to the old congressional bias against formerly successful entrepreneurs — and the continuing delay in extending that $7.5 million debt limit feels like a confirmation of that bias’s return.

- Fourth answer: Negative societal perceptions of bankruptcy still exist. Our society generally has a negative view of the very idea of bankruptcy, and it is from such a view that our politicians start with a general hesitance about providing any type of bankruptcy relief. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.
 

Inflation Cooled Further in June​​​

The Consumer Price Index climbed at a moderate pace in June compared with a year earlier and fell on a monthly basis, welcome news for Federal Reserve officials who are watching for further evidence that they have wrestled rapid inflation under control, the New York Times reported. Overall inflation was 3 percent in June on a yearly basis, down from 3.3 percent in May and softer than the 3.1 percent that economists had forecast in a Bloomberg survey. It was markedly cooler than inflation’s 2022 peak of 9.1 percent. After stripping out food and fuel prices, the “core” price index climbed 3.3 percent compared to a year earlier, down from the previous report. Overall, prices dropped 0.1 percent from May. The core index ticked up only slightly. The Fed has held borrowing costs at a relatively high 5.3 percent for the past year to cool the economy by weighing down demand for big, debt-funded purchases. Read more.

Commentary: Purdue Pharma Bankruptcy Ruling Sidesteps Chapter 15 Implications*​​​

The U.S. Supreme Court’s ruling striking down nonconsensual third-party releases in Harrington v. Purdue Pharma will have a meaningful impact on large chapter 11 cases, as these releases have become common, if not essential, to larger restructurings. The ruling also will likely encourage more multinational companies to file bankruptcy outside the U.S., as a number of foreign bankruptcy regimes permit nonconsensual third-party releases, according to a commentary by Michelle McGreal, Douglas Deutsch and Robert Johnson of Clifford Chance that appeared in Bloomberg Law. This circuitous route to obtaining relief that Purdue now prohibits under chapter 11 is possible because the Purdue ruling focuses on the statutory text of chapter 11, sidestepping other constitutional and due-process issues that might otherwise have implicated chapter 15’s public-policy exception. In Purdue, the objectors raised constitutional arguments, namely that nonconsensual third-party releases violate the Due Process Clause and the Takings Clause. If the Supreme Court were to prohibit such releases on these grounds, it could have provided the basis for a “public policy” objection to chapter 15 recognition of a foreign plan that included such a release. Read more.

*The views expressed in this commentary are from the author/publication cited, are meant for informative purposes only, and are not an official position of ABI.

Make sure to pick up your copy of ABI’s The Purdue Papers: Amicus Briefs and Commentaries Related to Purdue Pharma L.P., et al. featuring briefs filed in the case along with exclusive commentary from ABI Editor-at-Large Bill Rochelle and a transcript from an ABI webinar that discussed the implications of the Supreme Court's decision. This ebook is an invaluable resource for anyone working in the area of third-party releases, whether as a practitioner, an academic or just an interested party.
 

Distressed Property Buyers Seek Out ‘Exceptional Bargains’​​​

Distressed investors are seeing some of the best opportunities in a generation to buy troubled U.S. real estate assets as the commercial property crash continues to roil the market, Bloomberg News reported. Private-equity firms are already positioning themselves to take advantage. About 64% of the $400 billion of dry powder that the industry has set aside for property investment is targeted at North America, the highest share in two decades, according to data compiled by Preqin. The fear elsewhere is that a strong U.S. bias will mean other parts of the world won’t draw the same demand, delaying the workouts of troubled loans and properties there. PE firms want to take advantage of deep American discounts after office values fell by almost a quarter last year, more than in Europe, following the pandemic work-from-home shift. Almost $1 trillion of debt linked to commercial real estate will mature this year in the U.S., according to the Mortgage Bankers Association, and rising defaults as borrowers fail to repay will create more options for buyers of distressed assets. Read more.

Analysis: SBA Disaster Loans Propped Up Carriers, Prolonged Great Freight Recession​​​

The extraordinary length of the trucking downturn is best explained by a government program that flooded small carriers with tens of billions of dollars of cheap, long-dated credit, according to a Freight Waves analysis. The persistence of the post-COVID trucking capacity overhand has perplexed industry observers for more than a year now. After the pandemic demand boom faded, there were too many trucks and not enough freight, and rates fell through the floor, bottoming out at around $1.49 per mile, exclusive of fuel, in May 2023. Trucking carrier executives expected the rest of the cycle to play out according to a familiar script: As rates fell below carriers’ operating costs and stayed there, small fleets and owner-operators would be forced out of the market. The overall amount of trucking capacity would contract, the balance between supply and demand would be restored, and rates would rise once more. Instead, carriers hung around for far longer than anyone anticipated, keeping rates lower for longer. A full year after the market’s bottoming out in May 2023, rates had only increased by about a dime, to $1.60 per mile. The Small Business Administration (SBA) had launched the COVID-19 Economic Injury Disaster Loan (EIDL) program in the early days of the pandemic. The program was intended to alleviate the economic injury to small businesses caused by the pandemic and offered long-dated business loans at very low interest rates. Beginning in March 2020, small businesses could get loans of up to $500,000 on 30-year terms at a fixed interest rate of 3.75%. Given that the current yield on 20-year Treasury bonds is 4.57%, these loans were effectively free money, at least in the short term. In September 2021, the ceiling was raised to $2 million, and by Jan. 1, 2022, the program had run its course and stopped accepting new loan applications. In just under two years, the SBA injected approximately $390 billion of inexpensive credit into the economy, bolstering small businesses’ balance sheets and allowing them to survive the pandemic. Read more.

U.S. Weekly Jobless Claims Fall More than Expected​​​

The number of Americans filing new applications for unemployment benefits dropped more than expected last week, but volatility around this time of the year as automobile manufacturers idle plants for retooling makes it harder to get a clean read on the labor market, Reuters reported. Initial claims for state unemployment benefits fell 17,000 to a seasonally adjusted 222,000 for the week ended July 6, the lowest level since late May, the Labor Department said on Thursday. Economists polled by Reuters had forecast 236,000 claims in the latest week. The number of people receiving benefits after an initial week of aid, a proxy for hiring, slipped 4,000 to a seasonally adjusted 1.852 million during the week ending June 29, the claims report showed. Read more.

Analysis: The Risky-Loan Trade Is Back​​​

A corner of Wall Street long shunned by investors is suddenly in demand. Higher rates over the past two years were expected to slam risky corporate borrowers that rely heavily on floating-rate debt. That hasn’t happened, according to a Wall Street Journal analysis. Instead, low-rated corporate loans have steadily outperformed investment-grade bonds and are drawing inflows for the first time since 2021. So far this year, everyday investors have poured $12.2 billion into mutual and exchange-traded funds focused on such loans. That is after a combined $27 billion in outflows for 2022 and 2023, according to LSEG data. The attraction for investors: Yields of about 9%, and defaults that have remained low as the U.S. economy cools with little sign of an impending recession. That is despite the risky reputation of low-rated corporate loans, which are also known as leveraged loans for their role in funding private-equity firms’ buyouts of companies. Since the start of this year, the Morningstar LSTA U.S. Leveraged Loan Index, which includes loans to companies including Uber Technologies and American Airlines, has delivered a return of 4.6%, including price changes and interest payments. Meanwhile, investment-grade bonds have edged up 0.4%, while junk-rated bonds gained 3.1%. Over time, analysts say higher interest rates could hurt the profitability of risky corporate borrowers, leading to falling loan prices and rising default rates. For now, investors’ confidence in leveraged loans is reflected in the shrinking premium they are demanding above the benchmark overnight rate. (Subscription required.) Read more.

Latest “Unordinary Course” Podcast Focuses on the Current State of Retail and the Industry’s Future ​​​

Host Lee Pacchia of ICR talks with James Doak, the head of Miller Buckfire, a Stifel company, to discuss current trends in the retail industry and what to expect going forward. Click here to listen.

Donate to the Kevin J. Carey Memorial Scholarship ​​​

Hon. Kevin J. Carey (ret.), who served as ABI’s President from 2022-23 after previously having served as ABI’s Vice President-Membership, among other leadership roles, died on April 11 at his home in Devon, Pa., at the age of 69. An ABI member since 1997, he had served as a U.S. Bankruptcy Judge for the District of Delaware from 2001-19, then as senior counsel at Hogan Lovells in Philadelphia from 2019 until his death. The Carey family is grateful for the continued prayers and support they have received since Judge Carey’s passing, and have since formed a scholarship in his name at Villanova University School of Law, which will be awarded to academically talented students enrolled in the Charles Widger School of Law with demonstrated financial need. To donate in support of the Kevin J. Carey Memorial Scholarship, please send a check to Villanova University at 299 North Spring Mill Road, Villanova, PA 19085, with “The Kevin J. Carey Memorial Scholarship” in the memo. Donations also can be made online at givecampus.com/campaigns/36916/donations/new. From there, select “Other/Your Choice” to write in “The Kevin J. Carey Memorial Scholarship.”  

Get Your Copy of The Purdue Papers — Now Updated with the Supreme Court’s Ruling!​​​

The Purdue Pharma L.P. case, overturned at the end of June by the U.S. Supreme Court, generated a mountain of commentary in the form of amicus briefs, petitions and other related background material. Guided by editor David R. Kuney (who represented one group of amicus filers), ABI has gathered together all of this material in a fully searchable form — more than 3,500 pages worth! This digital book includes the final Supreme Court decision, a commentary by ABI Editor-at-Large Bill Rochelle, and a transcript of ABI’s July 2 webinar discussing the implications of the decision. It’s an invaluable resource for anyone working in the area of third-party releases, whether as a practitioner, an academic or just an interested party. Get your digital copy for only $25!

Pick Up Your Copy of Driving the Recovery Bus​​​

Make sure to pick up your copy of Driving the Recovery Bus: Augmenting Creditor Recoveries Through Claims Brought by a Litigation Trustee. Written by Gordon Z. Novod, this book is not only for litigation trustees, but also for creditors who serve on official committees of unsecured creditors, attorneys and other professionals who frequently represent official committees of unsecured creditors, and others with a general interest in the pursuit of causes of action by litigation trustees. Get your copy of Driving the Recovery Bus. 
 

Have an Idea for a Topic for an ABI Conference Session? Submit Your Proposal via ABI’s “Call for Abstracts” Page!​​​

ABI has launched an online portal for professionals to submit proposals for educational sessions at future ABI conferences. Submitters can describe their proposed topic, outline the session’s focus and learning goals, suggest speakers, and provide contact information via the portal’s detailed form. The portal can be accessed here.

All submissions will be reviewed by an internal Education Committee, which will contact the submitter to ask questions as needed and to discuss the status of the proposal. Submissions will be reviewed on a rolling basis.

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