In one Law360 article, business restructuring partner Ryan Dahl and collaborator Jerami Webb analyzed the decision of the US Court of Appeals for the Third Circuit in In re: LTL Management LLC.
In LTL, the Third Circuit affirmatively rejected the so-called Texas two-step, whereby a liquidating corporation had attempted to cover potentially billions of dollars in mass liabilities through an internal corporate restructuring. In that decision, the Third Circuit held that a corporate bankruptcy requires the debtor to be in some financial distress, and a financing agreement whereby the putative debtor’s parent corporation agreed to, in effect, finance the debtor’s liquidated liability eliminated the possibility of any such financial concern.
The authors noted that the decision breaks the recent practice of separating the productive business of a legacy company from its historical liabilities and then subjecting only the entity that houses those liabilities to bankruptcy, with the help of a financing agreement. At least in the Third Circuit, this structure will face significant challenges.
