Damian Schaible and Eli Vonnegut of the Davis Polk Insolvency and Restructuring Group recently published an article, "Can Selfish Be Substantial? Motivation in Substantial Contribution Claim Standards" discussing the Tropicana decision and substantial contribution claim standards generally.

While the ruling is consistent with the seminal case Chevron Products Co. v. SemCrude, L.P. (In re SemCrude, L.P.), 428 B.R. 590 (D. Del. 2010) and earlier decisions in the Lehman case that have stressed the requirement of strict “mutuality” for setoff in bankruptcy as well as a narrow reading of the safe harbors (such as Swedbank AB v. Lehman Brothers Holdings Inc. (In re Lehman Brothers Holdings Inc.), 445 B.R. 130 (S.D.N.Y. 2011)), this decision is significant in that it addresses the interplay between the safe harbors and the enforceability of cross-affiliate setoff or netting provisions.

Generally, the FDIC and the Federal Reserve have agreed on an integrated single plan approach to the resolution plans, and the two resolution plan rules are intended to work in tandem. Though the earliest resolution plans will be due by July 1, 2012, the FDIC and the Federal Reserve have adopted an approach of staggered initial submissions to allow some firms to submit their resolution plans later than others based on a test linked to the size of nonbank assets. Moreover, resolution plans will be built on an iterative, tailored approach, recognizing that plans will develop over time and in successive submissions, and that plans will vary depending on the size and complexity of the covered company or covered insured depository institution. 

This memo describes key themes in both rulemakings, as well as key differences between the resolution plan rules as previously proposed and the rules as approved by the FDIC.

The Seventh Circuit’s opinion stands in direct contrast to two fairly recent opinions of the Third and Fifth Circuits, both of which held that sales of collateral pursuant to plans of reorganization do not need to provide secured creditors the right to credit bid if the secured creditors are provided the “indubitable equivalent of their secured claims. In In re Pacific Lumber Co., the Fifth Circuit confirmed a plan of reorganization that denied a group of secured noteholders their asserted right to credit bid at a private judicial sale of certain timberland that was subject to the secured creditors’ liens. Consistent with the Fifth Circuit’s reasoning in Pacific Lumber, in In re Philadelphia Newspapers, LLC, a split panel of the Third Circuit approved the debtors’ bid procedures that did not permit secured creditors to credit bid at an auction of substantially all of the company’s assets conducted pursuant to the debtors’ plan of reorganization. Circuit Judge Thomas L. Ambro (a noted former bankruptcy practitioner) issued a lengthy dissenting opinion in that case, which was heavily cited with approval in River Road, rejecting the majority’s conclusions that the plain meaning of the Bankruptcy Code required the result reached, and concluding that the Bankruptcy Code mandates that secured creditors have the right to credit bid in chapter 11 plan sales. In River Road, Judge Ambro’s reasoning carried the day.

On March 29, 2011, the FDIC released a joint notice of proposed rulemaking that would implement the resolution plan requirements in Section 165(d) of the Dodd-Frank Act. The NPR provides comprehensive guidance on what the FDIC and the Federal Reserve expect to be contained in resolution plans submitted under Section 165(d), who must submit them, when they must be submitted and how the credibility of such plans are to be judged. But it also raises a number of very serious legal and policy issues and leaves a number of fundamental issues unanswered.