Avoidance and Recovery
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Avoidance and Recovery
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Avoidance and Recovery
Avoidance and Recovery
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Proofs of Claim
Avoidance and Recovery
Executory Contracts, IP, and Licensing
Avoidance and Recovery Actions
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Conversion and Dismissal
Second Circuit Holds That a Sale by a Chapter 15 Debtor in a Foreign Main Proceeding of a Claim Against an Obligor Located in the U.S. Must Be Reviewed by the U.S. Bankruptcy Court Under Section 363 of the Bankruptcy Code
One of the fundamental functions of any bankruptcy proceeding is the establishment of an amount and priority for each creditor’s claim against the debtor. A short, 5-page decision issued late last month by the Nebraska Bankruptcy Court in two related Chapter 11 cases (Biovance and Julien) serves as a reminder that although creditors are not permitted a “double recovery” on their claims, they are nevertheless permitted to assert the full value of their claims until those claims are paid in full.
In the confirmation of a Chapter 11 plan – as in life – it is often the little things that count.
Late last month, a Houston Bankruptcy Court provided helpful guidance on a very seldom-discussed, and often-overlooked, confirmation issue: Whether the reorganized debtor’s management make-up and structure is consistent with “public policy.” A copy of that decision is available here.
Barring an outright sale of assets, the confirmation of a plan of reorganization is typically the centerpiece of any Chapter 11 case. Chapter 11’s confirmation provisions – set forth in section 1129 – impose a broad variety of requirements on the debtor, all of which must be met or legitimately excused under recognized exceptions. Though many of these requirements have been extensively litigated and discussed by Bankruptcy Courts, several – including those pertaining to the governance and ownership structure of the reorganized debtor – have not enjoyed nearly as much review or discussion. Before the Bankruptcy Court in In re Digerati Technologies, Inc. was the issue of whether the debtor’s proposed management structure was appropriate in light of the Code’s requirement that post-confirmation management be appointed on terms “consistent . . . with public policy” under § 1129(a)(5)(A)(ii).
Digerati Technologies filed a Chapter 11 bankruptcy petition in May 2013. The plan submitted by Digerati proposed that the CEO and CFO of the company, who were also stockholders and creditors of Digerati, continue as the officers and directors of the reorganized debtor entity, positions which they had occupied within the two years prior to Digerati’s Chapter 11. Digerati was a publicly-traded holding company for an operational subsidiary. Thus, the plan’s proposed ongoing “officer and director” capacity also left Digerati’s CEO and CFO effectively in control of Digerati’s subsidiary.
Two Digerati stockholders objected to the plan on the grounds that Digerati’s pre-petition self-dealing established that continuation of Digerati’s pre-petition management was “not in the best interest of the estate, the creditors, the equity security holders and fail[ed] to satisfy public policy.” On the basis of the evidence adduced at the confirmation hearing, the Bankruptcy Court denied confirmation of Digerati’s plan for its inability to satisfy the requirements of section 1129(a)(5)(A)(ii). In the process, the Court formulated a nine-point checklist of essential factors relevant to determining whether appointment of an individual to serve as an officer of a reorganized debtor is consistent with public policy:
(1) Does the proposed plan, if confirmed, keep the debtor in existence as an ongoing company, or is the debtor extinguished?
(2) Is the debtor a publicly- or privately-held company?
(3) Does continued service of the individual(s) proposed for officers and directors perpetuate incompetence, lack of direction, inexperience, or affiliations with groups inimical to the best interests of the debtor?
(4) Does the continued service of the proposed individual(s) provide adequate representation of all creditors and equity security owners?
(5) Does the retention of the proposed individual(s) violate state law in any respect?
(6) Is each proposed individual a “disinterested person”?
(7) Is each proposed individual capable and competent to serve in the proposed capacity assigned to him or her?
(8) Are the salaries and benefits that the proposed individual(s) will receive reasonable based upon the size of the debtor’s operations, the complexity of these operations, and the revenues to be generated?
(9) Are there any new independent outside directors being appointed under the proposed plan?
Digerati Technologies‘ review of applicable case law further highlights the following:
- Such little case law as exists on section 1129(a)(5)(A)(ii) suggests that a consistent focus is on whether management and the board of directors is “disinterested.” Here, Digerati’s management was not.
- At least one decision reviewed by the Bankruptcy Court suggests that, where present management will continue, management’s track record is relevant: Though Bankruptcy Courts are often reluctant to “second-guess” a debtor’s management, they will not reward or perpetuate incompetence and gross mismanagement where it clearly exists.
- Still another decision reviewed by the Bankruptcy Court focused on management’s level of compensation, relative to its experience and the demands of managing the debtor.
- Finally, the Bankruptcy Court’s helpful list of summarized factors, digested from all of the decisions, offers practitioners a useful “road map” to consider in drafting a Chapter 11 plan.
The Digerati decision serves as a reminder that all of Chapter 11’s requirements, no matter how seemingly arcane, must be met prior to a plan’s confirmation. In hotly-contested matters, these requirements can often be a source of contention and – on occasion – tactical advantage. In addition to this important reminder, Digerati offers both debtors’ and creditors’ counsel a helpful checklist for assessing their relative positions on the question of the debtor’s proposed corporate governance.
Bankruptcy and Insolvency News and Analysis – Week of June 16 – 20, 2014:
Secured Lending and Claims:
Executory Contracts and Intellectual Property:
Jurisdiction and Bellingham Analysis:
And Still More:
A very recent decision out of California’s Central District Bankruptcy Court highlights the boundaries of “commercial reason” and “diligence” where distressed asset sales are concerned.
In re 1617 Westcliff, LLC (Case No. 8:12-bk-19326-MW) involved the court-approved sale of the debtor’s real property under a purchase agreement in which the debtor and the purchaser agreed to use their “commercially reasonable and diligent efforts” to obtain the approval of the debtor’s mortgage lender for the assumption of the mortgage debt by the buyer. If the approval was not obtainable, the buyer had the right to terminate the transaction. The buyer also had the right to terminate the deal if the assumption required payment of more than a 1% assumption fee.
As is sometimes the case where due diligence remains while a deal is approved, things didn’t quite work out as planned. Unfortunately, the bank proved less cooperative than the parties had anticipated. More importantly, however, the buyer notified the debtor-seller 4 days prior to closing that it would not proceed with the transaction as structured, but might be willing to proceed if the transaction was framed as a tax deferred exchange.
The debtor was, understandably, somewhat less than receptive to restructuring the deal at the 11th hour. It insisted that the buyer proceed with the transaction as originally agreed and as approved by the court. In response, the buyer effectively walked away. The parties then made competing demands on the escrow company regarding the buyer’s $200,000 deposit, and filed cross-motions with Bankruptcy Judge Mark Wallace to enforce them.
In a brief, 11-page decision, Judge Wallace found that the buyer’s renunciation of the deal 4 days before closing was a material breach of the buyer’s obligation to use “commercially reasonable and diligent efforts” to obtain assumption consent:
The Purchase Agreement required [the buyer] to keep working in good faith for an assumption until the close of business on May 10, 2013, not to throw up its hands and to propose – at the eleventh hour – a wholesale restructuring of the purchase transaction in a manner completely foreign to the Purchase Agreement. On [the date of the proposal] there were still four days left to reach agreement with the Bank, but [the buyer] chose (five months into the deal) to abandon the assumption. It was not commercially reasonable nor was it diligent for [the buyer] to cease negotiations with the Bank relating to the assumption of the loan under these circumstances.
The 1617 Westcliff decision (the unpublished slip copy is available here) serves as a reminder to buyer’s counsel of the unique nature of distressed asset purchases. The Bankruptcy Court which originally approved the purchase remains available and prepared to resolve any issues which may arise prior to closing, often at a fraction of what it would cost to get a Superior Court involved in connection with an unraveled private sale. And conditions and contingencies to the sale must be carefully drafted and observed. This applies even to common asset-purchase “boilerplate” such as “commercial reasonableness” and “diligence.”
In a 23-page memorandum decision issued yesterday, New York Bankruptcy Judge Stewart Bernstein ruled that the debtor and a third party were parties to a master agreement that allowed the debtor to issue purchase orders that the counter-party was required to fill. Judge Bernstein held that the debtor could assume the master agreement but could reject individual purchase orders. The purchase orders were divisible from the master agreement.
The decision (available here) provides a thorough analysis of when – and under what circumstances – an executory agreement may be “divisible” into separate, individual agreements . . . which can then be selectively assumed or rejected by a debtor or trustee.