The environmental practice of Bracewell & Giuliani LLP offers seamless, front-rank representation in local, state, national, and cross-border regulatory, enforcement, and litigation matters, as well as experienced counsel on the environmental aspects of transactions and operations across the country and around the world. We are dedicated to helping clients successfully navigate complex and costly environmental issues and to building longstanding client relationships founded on superior advice, integrity, and value. We are pleased to provide you with this issue of Bracewell & Giuliani's Texas Environmental Update, offering the latest news about permitting, enforcement, regulatory developments, and other matters of interest to the regulated community in Texas.

TEXAS COMMISSION ON ENVIRONMENTAL QUALITY - AGENDAS AND WORK SESSIONS

Commissioners' September 15, 2010 Meeting Agenda
(Adobe Acrobat Required)
TCEQ Web Site

Commissioners' August 25, 2010 Agenda Meeting Webcast
(Real Player Required)
TexasAdmin.com

Back to top

TEXAS COMMISSION ON ENVIRONMENTAL QUALITY - NEWS REPORTS

Air
 

Barnett Shale Activities Continue, Interactive Map Unveiled
TCEQ Web Site, August 27, 2010
"The TCEQ today announced the official launch of a new interactive website that contains air monitoring data from the Barnett Shale region in North Central Texas."

Editorial: Where's the Money for More Air Quality Testing in Fort Worth?
Fort Worth Star-Telegram, August 26, 2010

"I am sucking in air right now, and I'm going to hold my breath until this happens: The Texas Commission on Environmental Quality will more than double the number of air quality monitoring sites around Barnett Shale natural gas facilities by December, or so two legislative committee chairmen and the chairman of the TCEQ have said."

Texas Commission on Environmental Quality to Use New Equipment to Monitor Air Around Barnett Shale
Fort Worth Star-Telegram, August 23, 2010
"FORT WORTH - State environmental regulators, under heavy prodding from the Legislature, announced Monday that they're installing new equipment to check for air pollution from gas drilling in the Barnett Shale."

Texas City Residents Unaware of Release at BP Refinery
Houston Chronicle, August 18, 2010
"For 40 days, flares burned 500,000 pounds of toxic chemicals over BP's Texas City refinery."
 

Back to top

Enforcement

TCEQ Approves Fines Totaling $1,798,745
TCEQ Web Site, August 25, 2010
"The Texas Commission on Environmental Quality today approved penalties totaling $1,552,145 against 85 regulated entities for violations of state environmental regulations."

Back to top

Permitting

Environmental Groups Support U.S. EPA in Texas Air Permit Case
Environment News Service, August 30, 2010
"NEW ORLEANS, Louisiana - Two environmental groups Friday filed a motion to intervene in the lawsuit brought by Texas Attorney General Greg Abbott and the State of Texas against the U.S. Environmental Protection Agency regarding the EPA's June 2010 disapproval of part of Texas' air permitting program."

TCEQ to Hold Public Meeting on Proposed Oil and Gas Rules
TCEQ Web Site, August 25, 2010
"An informational public meeting on the TCEQ’s proposed new rules for oil and gas production facilities will be held in Austin on Aug. 31, from 9:30 a.m. to 3 p.m."

Opinion: Texas Businesses Want an Answer on Air Quality
Austin American-Statesman, August 21, 2010
"At a discussion on the scuffle between Texas and federal environmental regulators over the state's air pollution control program during a conference of environmental lawyers this month at the Four Seasons hotel in Austin, Lawrence Starfield, deputy regional administrator of the U.S. Environmental Protection Agency, acknowledged that some companies had grown anxious about floating in regulatory limbo."

Back to top
 

Regulatory Developments

What's New in TCEQ Rules
TCEQ Web Site, August 27, 2010

Back to top

Waste

Radioactive Waste Agreement Reached for Andrews Co. Facility
KCBD.com, August 28, 2010
"ANDREWS COUNTY, TX - A new agreement allows Waste Control Specialists to store low-level radioactive waste at their facility near Andrews for up to three years."

Comprehensive Tests Planned for Nueces County Contamination Site
Corpus Christi Caller-Times, August 20, 2010
"CORPUS CHRISTI - State environmental officials are planning a comprehensive test of the nearly 300-acre Ballard Sand Pits site to determine if there are more hazardous waste pits than the three already identified."
 

Back to top
 

Water

City Could Pay Millions to Meet TCEQ Requirements for Wastewater Plant
Corpus Christi Caller-Times, August 24, 2010
"CORPUS CHRISTI - The city may spend $54 million to $64 million to upgrade a wastewater treatment plant so it meets new federal and state environmental standards."

SARA Resisting Revisions
San Antonio Express-News, August 21, 2010
"The board of the San Antonio River Authority has come out against the state lowering water quality standards for any of the creeks and rivers it oversees."
 

Back to top

EPA

Notice of Public Hearing, Action to Ensure Authority to Issue Permits Under the Prevention of Significant Deterioration Program to Sources of Greenhouse Gas Emissions: Federal Implementation Plan
(Adobe Acrobat Required)
75 Federal Register 52916, August 30, 2010

Extension of Comment Period, Supplemental Proposal to the Proposed Confidentiality Determinations for Data Required Under the Mandatory Greenhouse Gas Reporting Rule
(Adobe Acrobat Required)
75 Federal Register 52691, August 27, 2010

U.S. Takes Action to Stop Illegal Acid Waste From Texas Chemical Plant
EPA Web Site, August 26, 2010
"WASHINGTON - The U.S. Environmental Protection Agency (EPA) and the U.S. Justice Department today announced that Air Products LLC has agreed to pay nearly $1.5 million in civil penalties to resolve hazardous waste mismanagement violations at its Pasadena, Texas chemical manufacturing facility."

Proposed Rule to Implement the 1997 8-Hour Ozone National Ambient Air Quality Standard: New Source Review Anti-Backsliding Provisions for Former 1-Hour Ozone Standard
(Adobe Acrobat Required)
75 Federal Register 51960, August 24, 2010

Notice of Public Comment Period, Climate Change Vulnerability Assessment: Four Case Studies of Water Utility Practices
(Adobe Acrobat Required)
75 Federal Register 51806, August 23, 2010

Final Rule, National Emission Standards for Hazardous Air Pollutants for Reciprocating Internal Combustion Engines
(Adobe Acrobat Required)
75 Federal Register 51570, August 20, 2010

Proposed Rule, Hazardous and Solid Waste Management System; Identification and Listing of Special Wastes; Disposal of Coal Combustion Residuals From Electric Utilities
(Adobe Acrobat Required)
75 Federal Register 51434, August 20, 2010

EPA Releases Draft Strategy for Clean Water
EPA Web Site, August 20, 2010
"WASHINGTON – The U.S. Environmental Protection Agency (EPA) is inviting the public to comment on the agency’s draft strategy to protect and restore our nation’s lakes, streams and coastal waters."
 

Back to top

TEXAS RAILROAD COMMISSION
 

Atmos to Replace Riskiest Steel Natural Gas Lines in Next 2 Years
Dallas Morning News, August 24, 2010
"Atmos Energy Corp. has agreed to replace 100,000 aging steel service lines over the next two years to prevent natural gas explosions."

Texas Railroad Commission Hopeful Touts Anderson County Roots
Palestine Herald-Press, August 19, 2010
"PALESTINE - Touting his Anderson County connections and family history in the oil and gas industry, Texas Railroad Commission candidate Jeff Weems stopped in Palestine Monday afternoon to discuss his candidacy."

The Railroad Commission of Texas Regulatory Expo - November 4 & 5, 2010
Railroad Commission Web Site
"This seminar will provide you with a better overall understanding of the forms, procedures, and filing requirements necessary to achieve compliance with these rules."
 

Back to top
 

OTHER TEXAS ENVIRONMENTAL NEWS

Group Seeks to Head Off Power Line
Denton Record-Chronicle, August 31, 2010
"A group of residents has asked the Denton County Commissioners Court to support a resolution opposing Oncor’s proposed route for a new power line through the Greenbelt Corridor."

Wind Transmission Lines Across Hill Country Face Holdup at Public Utility Commission
Austin American-Statesman, August 30, 2010
"The decision had been a clear one: A transmission line would cut through the Hill Country as part of a statewide network to carry West Texas wind power to the population centers of Central Texas, the Public Utility Commission said in an order in May 2009."

Suit Could Endanger 281/1604 Interchange
San Antonio Express-News, August 25, 2010
"A new, $130 million interchange between Loop 1604 and U.S. 281 could be delayed by a lawsuit that claims the project violates the Endangered Species Act and threatens the Edwards Aquifer."

Federal Judge Lifts Ban on Galveston Development
Houston Chronicle, August 25, 2010
"GALVESTON - A federal judge Wednesday lifted an injunction that had effectively stalled development on the west end of Galveston Island for 17 months, dealing a setback to environmentalists who believe construction imperils wetlands and vanishing coastal prairie."

How Fast Will Natural Gas Drilling Come to Dallas?
Dallas Morning News, August 22, 2010
"A bit of nearly abandoned industrial land holds a different future for Dallas."

Editorial: Raising Bar for Deepwater Drilling
Houston Chronicle, August 22, 2010
"For the past two decades, the deep waters of the world’s oceans have been the so-called 'final frontier' for the oil and gas industry as they raced to drill deeper, faster and farther out for resources and profits."

Asarco's Costly Aftermath: Cleanup First, Then Long-Term Planning
El Paso Times, August 22, 2010
"Creative uses suggested for the old Asarco smelter include trendy marketplaces and solar farms."

Pollution Police Proposed for County
Houston Chronicle, August 17, 2010
"Harris County needs a new environmental police force, the county attorney and at least one county commissioner say."

Back to top

REPORTS

]]> Tue, 31 Aug 2010 12:00:00 -0500 http://www.bracewellgiuliani.com/index.cfm/fa/news.advisory/item/09fc9e9b-93b0-4c25-8c25-589cc95c8e62/from_rss.cfm CFTC Fines ConAgra $12 Million, Two Commissioners Dissent

On August 16, 2010, the Commodity Futures Trading Commission issued an order approving a settlement resolving allegations that ConAgra Trade Group, Inc. caused a non-bona fide price to be reported for the NYMEX spot month crude oil futures contract in violation of the Commodity Exchange Act. ConAgra's violation stemmed from its traders wanting the distinction of being the first to trade crude oil at $100 per barrel. The settlement is remarkable for two reasons: first, it involves the payment by ConAgra of a $12 million civil monetary penalty (significantly after the event occurred) when no fraud or other specific injury is alleged; and second, two of the five CFTC commissioners dissented from the majority's decision to accept the settlement.

The Settlement Order

In the Settlement Order, the CFTC found that on January 2, 2008, ConAgra caused NYMEX floor brokers to execute trades on its behalf that intentionally pushed the price of the NYMEX February crude oil futures contract to $100, which was then an all-time high for that contract. Transcripts of conversations between a ConAgra trader and the floor broker's clerk indicated to the CFTC that the ConAgra trader intended to push the price to $100 in order to be the first to ever have traded the contract at that price (crude oil was trading very near $100). When it became clear that offers to sell crude oil futures at a lower price remained outstanding on the floor, the ConAgra trader instructed the floor broker to buy all contracts selling at the lower price in order to preserve the $100 price. ConAgra then purchased a February crude oil contract at $100.

According to the Settlement Order, a ConAgra trader stated that ConAgra only bought the contracts trading at less than $100 in order to preserve its position as the first to trade the contract at $100. This is at the root of the CFTC's allegation that ConAgra caused a price to be reported that was not a true and bona fide price, in violation of the CEA. Based on evidence including the recorded conversations between ConAgra traders and NYMEX floor brokers, as well as evidence indicating that ConAgra traders "bragged" about having driven the crude oil spot month price to $100 for the first time, the CFTC concluded that ConAgra had caused a price that was not true and bona fide to be reported on NYMEX. However,  two of the five Commissioners were unconvinced that a $12 million penalty, assessed over two and one-half years after the offending conduct, was a proper exercise of the Commission's enforcement authority.

The Dissents

Commissioner Sommers' dissent focuses on her view that the $12 million penalty assessed to ConAgra is greater than that allowed under the Act and applicable Commission precedent.  Commissioner Sommers did not dispute that the facts gave rise to a finding that ConAgra caused a non-bona fide price to be reported on the February 2008 crude oil contract. However, she contended that the $12 million penalty far exceeded the penalty allowed by the relevant provisions of the CEA. Section 6(c) of the CEA, as it was in effect at the time of the alleged wrongful conduct, would limit the penalty to the higher of $130,000 per violation (adjusted for inflation) or triple the monetary gain for each violation. Commissioner Sommers found no evidence to indicate that ConAgra actually profited from any of the alleged violations. Thus, in order to support the $12 million penalty at $130,000 per violation, ConAgra would have had to commit at least ninety-three separate violations of the Act. Because her review of the record found no support for that proposition, Commissioner Sommers dissented, finding that the Commission was ignoring the limitations placed on monetary penalties by Section 6(c) of the CEA.

Commissioner O'Malia also dissented from the Settlement Order, but on different grounds. While alluding to the relatively large dollar amount of the penalty imposed as part of the settlement, Commissioner O'Malia's dissent focused on the regulatory purpose of civil monetary penalties and the need to use them to send the market clear signals about prohibited conduct and to deter future violations with appropriate penalties. Commissioner O'Malia characterized the penalty amount as "extremely high" in relation to other disruptive trading practice settlements, and contended that the majority had shoehorned the facts to fit that particular allegation. 

Commissioner O'Malia did not agree that the facts found supported the allegations of causing a non-bona fide price to be reported. Instead, ConAgra would more properly have been accused of attempted manipulation, and Commissioner O'Malia implied that a different settlement amount would have been more appropriate to send the market the message that attempts to manipulate the market will not be tolerated.

Conclusion

The $12 million penalty on ConAgra for causing a non-bona fide price to be reported for the NYMEX crude oil futures contract may be indicative of an aggressive enforcement approach to be taken by the CFTC. However, the fact that two Commissioners took issue (albeit from different angles) with the appropriateness of that penalty in light of the conduct may also indicate a lack of unanimity with regard to enforcement policy. As the Commission engages in an unprecedented spate of rulemakings to implement the Dodd-Frank Act, it will be instructive to understand the varying perspectives of the Commissioners and how those perspectives influence policymaking.

The "Dodd-Frank Wall Street Reform and Consumer Protection Act" (Dodd-Frank)¹ is a game-changing piece of legislation that impacts your business. This unprecedented legislation requires employers, managers, and Human Resources representatives to take calculated steps to minimize the risk of whistleblower claims. Dodd-Frank will not only cause an increase in the number of whistleblower claims companies may face, but also an increase in the costs and risks associated with defending these claims. Any claim of retaliation that could have been brought by a whistleblower under Sarbanes-Oxley Act of 2002 (SOX)² can still be brought – under either SOX or Dodd-Frank. In addition, an employee who is required to report potential fraud under the banking and securities laws as part of the employee's job description will still receive whistleblower protection under Dodd-Frank if that individual provides "original information" to the SEC.

It is important to remember that "whistleblowers" who are still employees of a company could potentially act as the government's "eyes and ears" inside the company -- and will be compensated for doing so (if the information they provide is "original information" as defined in Dodd-Frank).

Amendments to the Sarbanes Oxley Act of 2002

Dodd-Frank, signed by President Obama on July 21, 2010, significantly expands whistleblower protection under SOX.  It also creates additional anti-retaliation requirements for employers. 

Now includes subsidiaries and affiliates

Dodd-Frank expands the coverage of SOX's whistleblower provisions to expressly cover both publicly-traded companies and "any subsidiary or affiliate whose financial information is included in the consolidated financials of the company." SOX also now covers any nationally-recognized statistical rating organization. 

What does this mean? The parent company of a foreign subsidiary should be aware that employees of the foreign subsidiary may be potential whistleblowers under SOX.

ACTION: Employers should keep all reports by employees confidential, and all reports should be fully investigated.

Abandons the "Reasonable Belief" Standard

Prior to Dodd-Frank, not only did an employee have to report a potential violation of the law, but that employee had to have reasonably believed that the activity constitutes securities, bank or wire fraud or a violation of an SEC rule or other federal law relating to fraud against shareholders. Dodd-Frank expands protection to any employee who complains to the SEC, regardless of the validity or reasonableness of the complaint. 

What does this mean? Any employee, from the cleaning staff to the CFO, receives protection as a "whistleblower" for reporting potential fraud to the SEC, regardless of the merits of the report. 

Statute of Limitations for SOX Claims Lengthened to 180 Days

The most common basis for dismissal of SOX claims has been employee's failure to file a complaint with the U.S. Department of Labor (DOL) within 90 days of the employer's retaliatory conduct. Dodd-Frank increases this 90-day period to 180 days.

What does this mean? Employees now have almost 6 months to file a complaint with OSHA and initiate a Sarbanes-Oxley Whistleblower complaint.

Invalidation of Arbitration Agreements

Reversing judicial precedent, Section 922 of Dodd-Frank prohibits pre-dispute arbitration agreements and any other "agreement, policy, form, or condition of employment" that requires a waiver of rights under SOX. 

What does this mean? SOX claims are not subject to mandatory arbitration agreements or policies.  Moreover, there is a question as to whether a separation and release agreement can still include a waiver of SOX claims; and, whether language in separation agreements created prior to Dodd-Frank is still enforceable.

The Dodd-Frank Act Creates Its Own Cause of Action

Dodd-Frank also creates its own causes of action – many of which mirror SOX, but others that go far beyond the limitations of SOX. Dodd-Frank's causes of action covers retaliation due to any disclosures "required or protected" under: (1) SOX; (2) the Securities Exchange Act of 1934 (Exchange Act); (3) 18 U.S.C. § 1513(e), which prohibits retaliation, including in connection with employment, against individuals for providing information to a law enforcement officer about possible commission of a federal offense; and (4) any other law, rule, or regulation subject to the SEC's jurisdiction.³ 

Whistleblower Bounty Program

Dodd-Frank creates an entirely new category of whistleblowers: those who provide the SEC with "original information" (as defined in Dodd-Frank) and qualify for a newly-enacted whistleblower bounty program.  Section 922 allows the SEC, in any action involving sanctions in excess of $1 million, to compensate the whistleblower with up to 30% but not less than 10% of the amount of the sanctions. The whistleblower bounty program has already proved lucrative for whistleblowers.  On July 27, 2010, the SEC reported that it awarded $1 million to Glen Kaiser and Karen Kaiser who blew the whistle on insider trading committed by Pequot Capital Management, Inc. The Kaisers provided the SEC with emails between a Microsoft employee and a Pequot employee. 

What does this mean? There is now an incentive for employees to "fish" for and disclose confidential and/or internal documents or information with the hope of becoming a millionaire.

Statute of Limitations: Up to 10 Years

Employees filing under Dodd-Frank have 6 years to file after the retaliatory conduct or 3 years after facts material to the right of action are known or reasonably should have been known by the employee. However, no action may be brought more than 10 years after the date of the violation.

What does this mean? Employees filing under Dodd-Frank (as opposed to SOX) will have up to 6 or more years to file their complaint.

Dodd-Frank Covers All Companies (Including Private Entities)

Dodd-Frank applies to all companies. This means, for example, that an employee of a small, non-public company who reports to the SEC that individuals at the company are engaging in wire fraud and suffers an adverse employment action after such report can bring a claim of whistleblower retaliation.

What does this mean? Private entities should be aware that their employees may be potential whistleblowers who receive protection under SOX. 

Action to take:  Employers should keep all reports by employees confidential, and all reports should be fully investigated.

Direct Access to Federal Court Under Dodd-Frank

Dodd-Frank provides whistleblowers a private right of action, which an employee may pursue directly in federal court. There is no preliminary OSHA adjudication of these complaints. 

What does this mean? Employees filing under Dodd-Frank (as opposed to SOX) will have immediate access to federal district courts. 

Double Damages

Under SOX, prevailing plaintiffs are awarded reinstatement with equivalent seniority and back-pay with interest. Dodd-Frank, on the other hand, provides prevailing plaintiffs reinstatement with equivalent seniority and two-times back pay with interest.   

What does this mean? Employees have an incentive to file Dodd-Frank claims, because they may receive twice as much as they otherwise would under SOX.

The Bottom Line

• Given the breadth and scope of Dodd-Frank, employers are encouraged to consult with counsel before taking any adverse personnel actions against employees who may have engaged in activities protected by Dodd-Frank.
• Employers should assess which subsidiaries or affiliates are now covered by SOX.
• Employers should consider revising and strengthening their internal reporting procedures (of both the parent company and any subsidiaries or affiliates) to encourage employees to first raise any concerns directly with their employer prior to resorting to litigation.
• Employers that do not already do so, should encourage employees to report compliance concerns within the parent, subsidiary, or affiliate (such as a confidential 1-800 number or a confidential reporting procedure) to help ensure the opportunity to investigate concerns, take any necessary action, and hopefully reduce any potential liability.
• Employers should consider revising any applicable document-retention policies to retain any personnel files or other records pertinent in defending against retaliation claims for a 10 year period (the maximum statute of limitations period under Dodd-Frank).

___________________

¹ As mandated by the Dodd-Frank Act, the SEC will issue final regulations within 270 days of its passage, or April 2011. These final regulations will have a significant impact on the effects of Dodd-Frank.

² SOX, which was enacted in response to Enron-type corporate abuses, protects "whistleblowers" against retaliation because they openly oppose certain violations of law by their employers.  Examples of retaliation could be termination of employment, reduction in pay, a demotion, or similar negative employment action.

³ Dodd-Frank also contains provisions protecting whistleblowers from retaliation for, among other things, providing information to the Commodities Futures Trading Commission or the Bureau of Consumer Financial Protection. See Dodd-Frank Act §§ 748 and 1057.

Under the American Recovery and Reinvestment Act of 2009, private entities are authorized to finance capital expenditures at tax-exempt interest rates, if financed prior to January 1, 2011. This type of financing, normally reserved for governments and certain privately-owned facilities, provides a significant savings in the cost of financing a project. The location of capital projects financed must be in a designated "recovery zone." With much of the allocation unused and five months until it expires, many states are facilitating the redistribution of the unused allocation to additional areas and designation of recovery zones. Each state received at least $135 million in authorization and as much as $1.2 billion. A private entity can, with an allocation, finance capital expenditures with "recovery zone facility bonds" if:

• The property is constructed, reconstructed, renovated, or purchased by the private entity after the date of the designation of the recovery zone;
• The original use of the property in the recovery zone commences with the private entity;
• Substantially all of the use of the property is in the recovery zone and in the active conduct of the business of the private entity.

This type of financing may be used for any trade or business, except residential rental facilities, golf courses, country clubs, massage parlors, hot tub facilities, suntan facilities, racetracks or other gambling facilities, or liquor stores.

In Notice 2009-50, the Internal Revenue Service provides guidance for Recovery Zone Facility Bonds here. To determine the amount of allocation made to counties and large municipalities in each state, see the spreadsheet available here.

On July 13, 2010, the U.S. Court of Appeals for the Third Circuit held, in a landmark decision, that a plan sponsor which had the right to unilaterally terminate retiree benefits outside of bankruptcy could not exercise that same right during a bankruptcy proceeding. The case, IUE-CWA v. Visteon Corp. (In re Visteon Corp.), marks the first time that a Circuit Court of Appeals ruled against a bankrupt employer in its attempt to unilaterally terminate non-vested retiree welfare benefits. Notably, the decision is contrary to a Second Circuit Court of Appeals decision and the majority of Federal district court and bankruptcy court decisions on this issue.

Background

Visteon Corporation is one of the world's largest suppliers of automotive parts. Originally a division of Ford Motor Corporation, it spun off in 2000 to become its own corporate entity, taking control of two plants in Indiana previously run by Ford.

As a result of the precipitous decline of the U.S. automotive industry, Visteon Corporation (Visteon) filed for bankruptcy on May 28, 2009. Thereafter, as part of its restructuring, it moved the Bankruptcy Court for permission to terminate its U.S. retiree benefit plans which provided retiree welfare coverage to approximately 8,000 present and former Visteon employees, their spouses and dependents. Visteon had reserved the right to unilaterally terminate these plans outside of bankruptcy.

The IUE-CWA, a union representing approximately 21,000 retirees, objected to Visteon's termination of the retiree benefit plans, arguing that the plans could not be terminated during Visteon's chapter 11 proceedings without Visteon complying with the requirements of Section 1114 of the Bankruptcy Code. The Bankruptcy Court and District Court disagreed with the union and approved termination of the benefit plans. The two courts reasoned that ruling in favor of the union would be contrary to the intent of the Bankruptcy Code, which was not to improve the prepetition contractual rights of a third party as a result of the filing of a bankruptcy case. Thereafter, the IUE-CWA appealed the lower court decisions to the Third Circuit.

Section 1114

Section 1114 of the Bankruptcy Code provides certain procedural and substantive protections for "retiree benefits" during a chapter 11 proceeding. Section 1114(e)(1) mandates,
"[n]otwithstanding any other provision of this title, the [trustee] shall timely pay and shall not modify any retiree benefits," except through compliance with various procedures set forth in the statute. "Retiree benefits" are defined to include medical, surgical, sickness, accident, disability or death benefits under any plan, fund or program maintained or established by the debtor.

To terminate retiree benefits, Section 1114 requires a debtor to make a proposal to the retiree's authorized representative and establish that its requested modifications are necessary to its reorganization and treat affected parties fairly and equitably. The debtor must meet with the retiree's authorized representative and confer in good faith on mutually satisfactory modifications to the benefit plans. In the absence of an agreement among the parties, the court can grant the debtor's motion to modify the retiree benefits, but only after finding that the debtor satisfied the Section 1114 requirements, the authorized representative refused to accept the modifications without good cause and the modifications are necessary to the debtor's reorganization and clearly favored by the balance of the equities.

Up to this point, most courts had ruled that Section 1114 did not apply to unvested benefit plans in which the debtor had reserved the right to terminate or modify the plans unilaterally.

The Third Circuit's Decision

In ruling that Visteon could not terminate its retiree benefit plans, the Third Circuit relied on the express language of Section 1114, which refers to "any retiree benefits". Given the broad language, the Third Circuit found it clear that Congress intended Section 1114 to apply to all benefits under all plans, irrespective of whether the debtor had the right to unilaterally terminate them or not. Therefore, once Visteon had commenced its chapter 11 case, there was only one way for it to terminate or modify its retiree benefits – by complying with the Section 1114 procedures. In so ruling, however, the Court recognized that its decision was at odds with the decisions of a majority of bankruptcy and district courts that have addressed the same issue.

In addition, the Court acknowledged that its reading of Section 1114 actually improved the rights of retirees in bankruptcy over those they had outside of it. However, relying on legislative history, the Court found that such a result was intended by Congress which wanted to make retirees a unique group of creditors with special protection in a chapter 11 case, because they were particularly vulnerable. Nevertheless, while Section 1114 was intended to be a "microphone" by which retirees could be heard in the chapter 11 process, it did not prohibit the termination or modification of benefit plans. It just made it a little more of a challenge for the debtor to do so.

Moreover, although this decision is a blow to employers providing non-vested retiree welfare coverage, the Third Circuit also provided some positive dicta in favor of employers. First, the Court stated that the fact that a debtor had reserved the right to unilaterally terminate its benefit plans outside of bankruptcy would remain an important factor to be considered by courts in ruling on plan terminations and modifications. Additionally, the Court made clear that Section 1114 does not dictate the duration that an employer must provide retiree benefits. Therefore, if the Section 1114 process does not yield an agreement on durational obligations, the duration is determined by the underlying contractual agreements between the debtor and its retirees. If the debtor has no obligation under its agreements to continue to provide retiree benefits (i.e., the retiree benefits are not vested), nothing in the Bankruptcy Code requires their continuation after the debtor's emergence from bankruptcy. As a result, so long as the debtor does not take on new durational obligations during the Section 1114 process, the debtor emerges from Chapter 11 as free to terminate benefits as it would have been had it never entered Chapter 11.

 
Take-Aways for Employers with Legacy Retiree Benefits

The Third Circuit's decision in Visteon is an important decision which increases the leverage of unions and the retirees they represent, in negotiations with debtors. While the Third Circuit's decision does not prevent retiree welfare plans from being terminated or modified in bankruptcy, it clearly gives retirees increased bargaining power to protest such termination or modifications. Therefore, employers who want to shed legacy retiree benefits should consider taking steps to terminate such benefits well before any bankruptcy filing. This is especially true due to the recent requirement that reinstates retiree benefits terminated or modified within 180 days prior to the filing of a bankruptcy petition. Terminations or reductions of group health coverage within a year of a bankruptcy filing also have significant COBRA implications.

Take-Aways for Creditors of Borrowers/Debtors with Legacy Retiree Benefits

The inability of a borrower to shed legacy retiree benefits can have a dramatic impact on recoveries for the borrower's lenders. In light of the Visteon decision, lenders should be careful to discuss termination options with borrowers early in a workout process to avoid options becoming foreclosed or impaired in the days leading up to and during a bankruptcy proceeding. In addition and in light of the circuit split on this issue, appropriate venue for a bankruptcy filing should also be carefully considered.

On Wednesday, July 21, 2010, the Securities and Exchange Commission (SEC) adopted long overdue amendments to Part II of Form ADV (also commonly known as the "brochure"). The amendments, which were originally proposed in March 2000 and subsequently re-proposed in March 2008, require SEC-registered investment advisers to provide clients with narrative brochures containing plain-English descriptions of their advisory businesses, services and conflicts of interest. The amendments also require SEC-registered investment advisers to electronically file Part II of Form ADV with the SEC, which would then be available to the public through the SEC’s website. The amendments were unanimously adopted by the Commissioners in the form recommended by the Division of Investment Management and as modified in response to the 81 comment letters to the proposal.

New Format

Although the final text of the amendments to Part II of Form ADV has not yet been published, the SEC staff described the main features of the amendments during the open meeting held to consider their adoption. The amendments change the format of the brochure from the previous "check-the-box/fill in the blank" format to a narrative written in plain English designed to improve the overall character and quality of disclosure. The amendments are intended to transform the brochure into a uniform format to allow clients and prospective clients to readily and more easily compare the brochures of multiple investment advisers. The brochure will contain eighteen separate items, each covering a different disclosure topic related to an investment advisor’s business and potential conflicts of interest. Such disclosure items include, among others, an investment adviser's business practices, advisory fees, disciplinary information, methods of analysis of investment strategies, participations in client transactions, brokerage practices, and custody arrangements. Chairman Shapiro anticipates that these greater disclosure requirements will result in investment advisors modifying their business practices and compensation schemes to resolve conflicts in ways that better serve clients.

In addition, the amendments include a new "brochure supplement", which requires disclosure of information regarding the specific individuals providing investment advice to, or having direct contact with, the client. The supplement is expected to be less than one page long and will look similar to a resume. The types of information required in the supplement include the employee's educational background, business experience, disciplinary history, compensation, other business activities and contact information.

Filing, Delivery and Compliance

Investment advisers must file the brochure and any amendments with the SEC electronically via the Investment Adviser Registration Depository (IARD) system, making them publicly available. Note, however, the brochure supplement will not be required to be filed with the SEC, but rather must be maintained by the adviser and available for SEC examination. During the open meeting, Commissioner Walter recommended that the SEC consider including a requirement that the brochure supplement also be filed with the SEC, though this was raised as an issue to be addressed in the future.

The brochure and brochure supplements must be delivered by an adviser before or at the time it enters into an advisory contract with a client or, in the case of a brochure supplement, before or at the time the specific employee begins to provide investment advisory services to that client. Further, advisers must deliver a summary of material changes to its brochure or brochure supplement on an annual basis, and provide, or offer to provide clients with a revised brochure reflecting those changes. Advisers must also deliver interim updates upon material changes to a disciplinary event or the occurrence of a new disciplinary event. During the open meeting Commissioner Paredes noted that, in light of the comment letters, different means of delivering annual updated brochures should also be considered in the future.

Investment Advisers already registered with the SEC whose fiscal year ends on or after December 31, 2010, must comply with the new requirements when filing their next annual updating amendment to Form ADV. Those SEC-registered investment advisers also have an additional sixty days to deliver their updated brochures to existing clients. Investment advisers applying for SEC registration after January 1, 2011, must comply with the new requirements when initially filing Form ADV with the SEC.

Applications of Amendments to State Registrants

Upon the request of the Division of Investment Management, the SEC will not publish its adopting release setting forth these amendments to Part II of Form ADV for five business days from the date of their adoption so that it has time to work with the states on their technical amendments to accommodate various state-specific items and instructions. If they are successful in doing so, the SEC will publish the release in a uniform form. Otherwise, the form will be published as being applicable to SEC-registered investment advisors only.

Additional Changes to Form ADV

These brochure amendments are not the only changes to Form ADV adopted by the SEC this year. As more fully discussed in our January 5, 2010 Client Alert, the SEC adopted changes to require more detailed disclosure of advisers' custody practices to reflect amendments to Investment Advisers Act Rule 206(4)-2, including disclosure of whether client assets are subject to a surprise examination. In March 2010, the SEC adopted changes to require more detailed disclosure of advisers' custody practices to reflect amendments to Investment Advisers Act Rule 206(4)-2, including disclosure of whether client assets are subject to a surprise examination. All of the changes should be considered when updating or filing Form ADV to ensure compliance with the SEC rules and Form ADV.

The Commodity Futures Trading Commission (CFTC) issued two orders on July 9, 2010, designating four monthly electricity contracts as Significant Price Discovery Contracts (SPDC) pursuant to section 2(h)(7) of the Commodity Exchange Act (CEA). The four contracts at issue were:  the SP-15 Financial Day-Ahead LMP Peak (SPM) contract, the SP-15 Financial Day-Ahead LMP Off-Peak (OFP) contract, the PJM Western Hub Real Time Peak (PJM) contract, and the PJM Western Hub Real Time Off-Peak (OPJ) contract.  Each of the contracts are listed for trading on the IntercontinentalExchange Inc. (ICE), an exempt commercial market (ECM) under the CEA. Following their designation as SPDCs, these four contracts will be subject to heightened regulatory oversight and reporting requirements. At the same time, the CFTC issued two other orders finding that two daily SP-15 and two daily PJM contracts were not SPDCs. 

The CFTC's orders follow on the heels of two June 25, 2010 orders designating two monthly electricity contracts at the Mid-Columbia (Mid-C) trading hub as SPDCs and finding that two Mid-C daily contracts were not SPDCs. But the CFTC's July 9 orders mark the first time the agency has found electricity contracts based on transactions in organized markets (in which the Federal Energy Regulatory Commission (FERC) closely oversees a structured price setting process) to be SPDCs; the SP-15 trading hub is located in the California Independent System Operato (CAISO), while the PJM Western Hub is located in the PJM Interconnection (PJM).

The CFTC's authority to regulate SPDCs was broadened significantly in the CFTC Reauthorization Act of 2008, which created the new regulatory category of ECMs on which SPDCs are traded, and treating ECMs in that category as registered entities under the CEA. This closed the so-called "Enron loophole" that had exempted products traded on ECMs from most substantive CFTC regulation. In determining whether a contract performs a significant price discovery function, the CFTC is to consider the extent to which contracts: (1) are linked to existing exchange-traded contracts; (2) permit arbitrage between ECMs and other markets; (3) are used as a direct, material price reference for bids; and (4) are traded in a volume that provides material liquidity.  Under the statute, ECMs on which SPDCs are traded must assume additional responsibilities and obligations with respect to those contracts, including increased regulatory reporting requirements.  In the past several months, the CFTC has determined that a number of contracts traded on ICE qualify as SPDCs, including the determination in June that two Mid-C contracts serve as SPDCs and the determination in April that seven ICE natural gas contracts serve as SPDCs.

The CFTC found that the four monthly contracts at issue were SPDCs under the material price reference and material liquidity criteria, similar to its recent finding on the two monthly Mid-C contracts. Specifically:

• With respect to the material price reference criteria, the CFTC highlighted both direct and indirect evidence that the four contracts were material price references. The CFTC cited as direct evidence the fact that SP-15 and PJM Western Hub are both major pricing centers, and that traders often consult prices at these points when entering into cash market transactions. The CFTC found indirect evidence that these four contracts were material price references in the fact that ICE sells packages of electricity price data to market participants, which include the SP-15 and PJM Western Hub contract prices, and that market participants consult these prices on a frequent and recurring basis in pricing electricity cash market transactions. The CFTC's primary focus appeared to be not on a determination that the SP-15 and PJM Western Hub contract prices were direct price references for other transactions, but rather, on its findings that market participants purchase ICE's data packages that include these contract prices because that information has particular value to them and that these contract prices are consulted "on a frequent and recurring basis by industry participants in pricing cash market transactions."
• With respect to the material liquidity criteria, the CFTC found each of the four contracts experienced greater trading activity than that of minor futures markets. Because of this significant volume, the CFTC found it is reasonable to infer that these four contracts could have a material effect on other contracts listed on the ECM or on Designated Contract Markets (DCM). For example, the CFTC staff's statistical analysis found that a one percent rise in the SPM contract price elicited a 0.7 percent increase in the ICE OFP contract price, while a one percent rise in the OFP contract price elicited a 1.4 percent increase in the ICE SPM contract price.

In each of the CFTC's orders to date designating electricity contracts as SPDCs, it has focused exclusively on the material price reference and material liquidity criteria. Paramount to the CFTC's concern appears to be the extent to which electricity traders consult the relevant contract prices in pricing cash market transactions, and the fact that the ECM (ICE, in this instance) sells information to market participants that contain pricing information on the relevant contract. The CFTC has also focused on the longer time frames over which the monthly contracts allow traders to lock in prices and the fact that the trading hubs involved are major electricity trading hubs.

Office of Federal Contract Compliance Programs is notifying TRICARE network providers of reviews to determine their compliance with affirmative action requirements imposed on federal subcontractors.

The U.S. Department of Labor, Office of Federal Contract Compliance Programs (OFCCP), the federal agency tasked with enforcing the affirmative action requirements of Executive Order 11246 and related federal statutes, is issuing notices across the country to conduct compliance reviews of health care providers that are part of the TRICARE provider network.  TRICARE is the government program under which active duty and retired military service members and their dependents receive health care. 

In some instances, the OFCCP compliance review notices are the first received by the hospitals; in other cases, an initial notice was issued months or even years earlier and the hospital or other TRICARE network provider protested the OFCCP's jurisdiction, without further action by the OFCCP.  The OFCCP is now aggressively reasserting its position with new and dormant cases that TRICARE network providers are federal subcontractors subject to the affirmative action requirements of Executive Order 11246 and related statutes.

Are TRICARE network providers "federal subcontractors?" 

The Status of TRICARE network providers as federal subcontractors is still not settled.

So, why is the OFCCP redirecting its focus on the 500,000 + TRICARE network providers across the nation? 

Until now, with the exception of the test case filed by the Solicitor's Office in the Atlanta Region of the OFCCP before the Administrative Law Judge, the OFCCP has left dormant the pending investigations of TRICARE network providers protesting jurisdiction.  The OFCCP and TRICARE network providers are awaiting the decision from the Administrative Law Judge on the issue of whether a hospital, by entering into a "Hospital Agreement" with one of TRICARE's three regional contractors to provide medical services to TRICARE beneficiaries, is a federal subcontractor subject to the affirmative action requirements of Executive Order 11246 and related affirmative action statutes. 

Of the handful of cases involving the OFCCP's jurisdiction over subcontractors, only two subcontractor cases have involved hospitals: OFCCP v. Bridgeport Hospital, ARB No. 00-034, 2003 WL 244810 (Jan. 31, 2003) and OFCCP v UPMC Braddock, UPMC McKeesport & UPMC Southside, ARB Case No. 08-048, 2009 WL 1542298 (May 29, 2009).  Significantly, the Administrative Review Board found jurisdiction in Braddock but not in Bridgeport.

What are the options? 

TRICARE network providers that receive OFCCP compliance review notices have the option to protest OFCCP jurisdiction, assuming they have no direct federal contracts.

Whether the OFCCP is first notifying the hospital or is reasserting its claim of jurisdiction, TRICARE network providers have options to consider before consenting to the jurisdiction of the OFCCP, and with that jurisdiction the potential for significant monetary penalties in the form of back wages, reinstatement and other remedies. 

Despite the OFCCP’s current practice of aggressively issuing notice of compliance reviews to TRICARE network providers, the issue of jurisdiction is not settled and hospitals may in good faith choose to protest jurisdiction.  Before agreeing to OFCCP jurisdiction, TRICARE network providers should carefully evaluate all the potential options and consequences.  To the extent a hospital has other direct federal contracts of $50,000 or more (e.g., with the Veterans Administration, Department of Federal Prisons), those hospitals have no basis to challenge OFCCP jurisdiction.

Advice?

Four words: carefully consider your options.

In a decision released last week, the Second Circuit Court of Appeals struck a blow to Connecticut's campaign financing system, as well as to third-party candidates seeking access to public campaign funds. In Green Party of Connecticut v. Garfield (09-3760-cv)
("Green Party I"), the court found unconstitutional the "trigger provisions" in the Citizen's Election Program ("CEP") section of Connecticut's Campaign Finance Reform Act ("CEFRA"), which automatically provide additional funds to candidates who participate in the state's public funds program when the expenditures of privately-funded opponents or independent third parties exceed a certain threshold.¹ Alternatively, the court ruled that CEP's qualification criteria and distribution formulae, which determine what candidates qualify to receive matching funds and in what amounts, were not unconstitutional as they did not discriminate against minor party candidates.

CEFRA was first enacted in 2006 in response to various corruption scandals involving Connecticut politicians. The Second Circuit acknowledged that, pursuant to the seminal Supreme Court case of Buckley v. Valeo, the public financing of candidates is constitutional. However, the court sided with the plaintiffs, which included the Green Party of Connecticut and the Libertarian Party of Connecticut, who argued that the trigger provisions were tantamount to unconstitutional penalties.

In reaching this conclusion, the court analogized the trigger provisions to the "Millionaire's Amendment" to the McCain-Feingold law at issue in Davis v. Federal Election Commission,
128 S. Ct. 2759 (2008). The Supreme Court found the Millionaire's Amendment a substantial burden on the exercise of free speech because it raised contribution limits only for publicly-financed candidates while imposing lower limits on candidates not participating in the program. Such a distinction, the Court explained, amounted to a penalty on self-financed candidates. 

Similarly, the Second Circuit, here, found that the trigger provisions would force non-participating candidates, who chose to exercise their First Amendment right to spend personal funds on the campaign, to "shoulder a special and potentially significant burden" as they were forced to spend more and more money while the public-financed candidate received more and more public funds.  This substantial burden, the court decided, was not justified by the state's interest in promoting participation in CEP, an interest the court found uncompelling. The court further suggested that, to the extent the provisions were intended to level the playing field, they were unconstitutional under Davis.

The Second Circuit's decision stands in stark contrast to the Ninth Circuit's ruling in McComish v. Bennett, decided a little over a month ago. There, faced with a similar provision in Arizona campaign finance law, the Ninth Circuit decided that it was constitutional to provide additional public funds to participating candidates who faced self-financed opponents that crossed the triggering threshold. Still, the Supreme Court has stayed implementation of the Arizona campaign finance law, and with similar trigger provisions currently before the courts in Wisconsin and Florida, the Court appears poised to take up the issue.

Connecticut's trigger provisions are also strikingly similar to ones found in New York City's public finance plan. The City automatically awards $1,050 for every qualified $175 donation received by candidates participating in the public financing program. However, when a non-participating opponent raises or spends more than limits imposed on participating candidates, the City awards the participating candidate an additional bonus of up $450, representing an almost 43% increase in public funding. Additionally, when that threshold is breached, the City may also raise or waive the spending limits that are otherwise imposed on publicly-financed campaigns. Moreover, the City program contains other options that provide participating candidates with additional funding based upon the opposing candidate's conduct, such as when the candidate has high name recognition due to recent media exposure or holding some other public office. The Green Party I decision calls into question the constitutionality of these triggering events.

Also in Green Party I, the Second Circuit found constitutional CEP's higher thresholds for third-party candidates attempting to qualify for public funds. The court, applying the Buckley standard found, first, that the CEP's goal of eliminating improper influence on elected officials was a sufficiently important government interest, and, second, that the burden on minor party candidates was not unfair or unnecessary, especially where the limited data from the 2006 and 2008 election evidenced that a substantial number of minor party candidates would be eligible for public funding.

In a companion case issued the same day, also captioned Green Party of Connecticut v. Garfield (09-0599-cv) ("Green Party II"), the Second Circuit upheld the CFRA "pay-to-play" ban on political contributions from state contractors and their immediate family, explaining that the ban was narrowly drawn to further the sufficiently important government interest of quelling the actuality and appearance of corruption involving state contractors. However, the court found a similar ban on contributions from lobbyists to violate the First Amendment where the recent corruption scandals in Connecticut did not involve lobbyists and, thus, there was insufficient evidence that lobbyist contributions gave rise to an appearance of influence. The court opined that a constitutional alternative would be a limit on lobbyist contributions. Finally, the Second Circuit struck down the CFRA ban on contractors and lobbyists collecting or advocating contributions made by others – known as "bundling" – because the ban, as drawn, would prohibit constitutionally-protected speech and associational activity, such as a contractor advising her mother about contributions. The court suggested that a less restrictive ban, such as a ban on state contractors organizing fundraising events of a certain size, would be permissible.

The Green Party II decision appears to support New York City's limits on allowable contributions from certain classes of donors such as lobbyists and city contractors, as well as their lack of eligibility for matching funds. In addition, the decision does not call into question the viability of reporting requirements imposed on bundled lobbyist contributions: Federal election rules require various committees, including candidate committees, party committees, and PACs, to report bundled contributions received from lobbyists while New York City requires the lobbyists to report such bundled contributions.

________________________

¹ On the same day, a Connecticut Superior Court denied a request by self-financed Republican gubernatorial candidate Tom Foley to stop public-financed opponent Michael Fedele from receiving more than $2 million in public funds. Foley has appealed that decision to Connecticut Supreme Court, which is slated to hear arguments on July 20, 2010. Certainly, the Green Party I decision will impact the decision.

Intercreditor agreements between first and second lien lenders are created all the time and are therefore not usually glitzy topics for client updates. But the recent intercreditor dispute between Donald Trump and corporate raider Carl Icahn over control of Trump's Atlantic City casinos had all the drama and glamour of the gambling dens and billionaires involved, including two competing but confirmable plans and senior and junior creditors vying for ownership of a gaming empire and its attendant upside. In the end, the parties got an important precedent on the enforceability of intercreditor agreements in chapter 11 cases.

Introduction

As a result of the recent filings by companies with second lien debt, issues about the enforceability of intercreditor agreements between senior and junior lenders have become more commonplace in chapter 11 cases. Until recently, these issues have revolved around the ability of a junior lender to waive fundamental bankruptcy rights in an intercreditor agreement. Precedents relating to what can and can't be waived have been mixed, with restrictions on voting on a bankruptcy plan the most likely to be struck down by courts as going too far. With each decision, intercreditor agreements continued to evolve as first lien lenders searched for their holy grail – the "silent second."

Recently, the bankruptcy court in New Jersey in In re TCI 2 Holdings, LLC, 428 B.R. 117 (Bankr. D.N.J. 2010), issued a ruling on intercreditor agreements with significant implications for first and second-lien lenders. In the TCI 2 case, the bankruptcy court was asked to determine whether a "cram down" plan could be confirmed if it violated an intercreditor agreement between the first and second lien lenders. At stake was ownership of the Trump Atlantic City casinos––Carl Icahn and the first lien lenders against Donald Trump and the out-of-the money second-lien lenders. Also at stake was whether the second lien lenders would get any recovery on their investment or have $1.25 billion of junior debt simply wiped out.

Intercreditor Agreements Generally

Typically, second lien or "tranche B" loans have security interests in the same collateral as the first lien or "tranche A" loans. Since most senior loan documents have a prohibition on the borrower granting security interests or liens on collateral to any other lenders, first lien lenders typically dictate (to the borrower and its second lien lenders) the terms upon which they will consent to the creation of second liens. The understanding of the lenders on their respective rights to the collateral is then memorialized in an intercreditor agreement between the parties.  Secondary purchasers of the "tranche A" and "tranche B" debt are bound by the intercreditor agreement when they buy the debt.

The terms of an intercreditor agreement are greatly dictated by the parties' respective bargaining positions. Senior lenders push for junior lenders to be as silent as possible, with little to no rights to object to actions taken by the senior lenders upon an event of default or a bankruptcy. Junior lenders, in turn, try to retain as many rights as they can to protect their own interests, including the full panoply of rights available to unsecured creditors in a bankruptcy case. The end result often comes out somewhere in-between. Restrictions on junior lenders' ability to foreclose on collateral, propose DIP financing or offer an alternative chapter 11 plan that is not supported by the senior lenders, are common. Also common are payment subordination provisions, which prevent junior lenders from receiving any payments until the senior lenders are paid in full (or require them to turn over any recoveries they do get). 

Intercreditor agreements (and subordination provisions) are routinely upheld by bankruptcy courts under section 510(a) of the Bankruptcy Code, which provides in relevant part, that a "subordination agreement is enforceable in a case under [title 11] to the same extent that such agreement is enforceable under applicable nonbankruptcy law." However, courts have split on the enforceability of waivers of creditors' rights in the bankruptcy context, such as the junior lenders' right to vote on a chapter 11 plan. 

The Trump Decision

In February 2009, TCI 2 Holdings and its affiliates filed for chapter 11 protection in the District of New Jersey. The debtors own or manage three Trump hotel casinos in Atlantic City – Trump Taj Mahal, Trump Plaza and Trump Marina. When they filed, the debtors had approximately $488 million in first lien debt, $1.25 billion in second lien notes and $39.3 million in general unsecured claims outstanding. It became evident immediately that the debtors needed to significantly delever to emerge from bankruptcy as viable entities. 

During the chapter 11 case, the bankruptcy court granted both the Icahn-led first lien lenders and the second-lien noteholders the ability to propose and solicit a chapter 11 plan. Both groups put forth confirmable chapter 11 plans. Under the Icahn/first lien plan, the first lien debt was to be equitized into 100% of the equity of the debtors after they emerged from bankruptcy. Junior creditors, including the second-lien noteholders and trade creditors, were to receive no recovery under the plan. The debtors, along with the second lien noteholders, proposed a competing plan that paid the first lien lenders deferred cash payments up to the value of their secured claims, including $125 million in cash on the effective date of the plan and a new secured loan in the amount of $335 million at a market rate of interest (asserted to be 11%). In return, the second lien noteholders received the right to participate in a backstopped rights offering for up to 70% of the equity in the post-emergence debtors. The rest of the equity was distributed to certain noteholders who agreed to backstop the rights offering and Donald Trump, who entered into a settlement agreement with the second lien lenders to retain a minority ownership in the Trump casinos.     

Icahn and the first lien lenders objected to the debtors' plan on various grounds, including the fact that the plan violated the intercreditor agreement between the first and second lien lenders.  Among other things, Icahn and his group asserted that under the intercreditor agreement, the second lien lenders did not have the right to propose their own chapter 11 plan and, under the payment subordination provisions of the intercreditor agreement, the first lien debt had to be paid in full in cash before any proceeds of shared collateral could be paid to holders of the second lien debt. Icahn argued that since the first lien lenders were being paid over time and not in full on the effective date, the second lien lenders could not recover any cash, rights or other property under their chapter 11 plan. 

The bankruptcy court overruled Icahn's objection that the intercreditor agreement barred approval of the debtors' plan. In siding with the second lien lenders, the court found that on its face, section 1129(b)(1) of the Bankruptcy Code, which governs confirmation of nonconsensual plans, removes section 510(a) from the scope of section 1129. Specifically, section 1129(b)(1) provides that, "[n]otwithstanding section 510(a) of [the Bankruptcy Code]", the court shall confirm a plan over dissenting classes if the plan meets the "cram down" requirements of section 1129, does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired and has not accepted the plan. Having found that the debtors' plan met the "cram down" requirements of section 1129, the bankruptcy court confirmed the debtors' plan and determined that the intercreditor terms between the first and second lien lenders did not need to be respected. 

Take Aways

The decision of the New Jersey bankruptcy court has been appealed by the Icahn group.  If, however, the decision is upheld on appeal, it will be a significant precedent on the limits of the enforceability of intercreditor agreements in the bankruptcy context. Much like the decisions in which courts have held that voting rights cannot be waived by junior lenders, this decision makes clear that intercreditor terms prohibiting junior lenders from proposing a chapter 11 plan or "cramming up" senior lenders will not be enforceable to prevent confirmation of an otherwise confirmable plan. So once again, the "silent second" will not be so silent.

Notably, the bankruptcy court left undecided whether the second-lien lenders breached the intercreditor agreement, which could give rise to a contractual claim against them by the first lien lenders. The Court left that decision, and presumably more litigation between Carl Icahn and The Donald, to another court and another day.