The South Bay Law Firm Law Blog highlights developing trends in bankruptcy law and practice. Our aim is to provide general commentary on this evolving practice specialty.
 





 
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    Archive for January, 2009

    Will California Municipalities Have to Obtain State Clearance Before Filing Chapter 9?

    Friday, January 30th, 2009

    One of the most deeply rooted concepts in American bankruptcy jurisprudence is the idea that, with few exceptions, virtually any private debtor may seek relief under the US Bankruptcy Code.

    Where the debtor is a public entity, however, such relief is not guaranteed.  Instead, municipalities seeking readjustment of their debt must be authorized to do so.  Such authorization is typically provided by state statute.

    In California, Government Code section 53760 gives “local public entities” the power to “file a petition and exercise powers pursuant to applicable federal bankruptcy law.”  To do so, however, these “local public entities” must meet the Bankruptcy Code’s tests for entry into Chapter 9 – the Code Chapter designed to afford “debt readjustment” relief for municipalities.  Specifically, such “local public entities” must be insolvent (i.e., not paying or unable to pay their debts when due) – a status which may be contested before the debtor enters Chapter 9.  They must also propose a debt readjustment plan (as opposed to a plan of liquidation).  Finally, to obtain Chapter 9 relief, they must:

    - have obtained the agreement of creditors holding at least a majority in amount of the claims of each class; or

    – have negotiated in good faith with such creditors and failed to reach agreement with a majority in amount of the claims of each class; or

    – be unable to negotiate with creditors because such negotiation is impracticable; or

    – reasonably believe that a creditor may attempt to obtain a preferential transfer, to the detriment of other creditors.

    It may sound like an awful lot.  But the fiscal impact of the global economic crisis – and of Sacramento’s fiscal crisis – on municipal budgets throughout California has sent local governments scrambling to review these provisions in earnest.

    This week, the California legislature was introduced to what may yet become another barrier to Chapter 9 entry.  The Solano County Times-Herald reported yestereday that State Sen. Pat Wiggins and Democratic Assemblyman Tony Mendoza (whose district includes Los Angeles and Orange counties) have co-authored new legislation that would make it harder for California municipalities to obtain Chapter 9 bankruptcy protection.  According to staff writer Jessica York, the proposed legislation – Assembly Bill 155 – would require a municipality to receive filing approval from a 3-person state panel prior to commencing a Chapter 9 proceeding.

    The bill is borne of concerns over the effects a Chapter 9 filing can have on local taxpayers and on a bankrupt municipality’s credit-worthiness in the bond markets.  It is further prompted by a perceived need for state legislators to involve themselves with local deficits.

    But not everyone welcomes that involvement.  As Ms. York reports:

    League of California Cities leaders have some concerns with the bill, including who is sponsoring the legislation and motives behind the bill, said spokeswoman Megan Taylor.  She added that state leaders could do more good by resolving the state budget standoff, thereby providing economic certainty for cities and avoiding a bankruptcy avalanche.  “If the state is concerned with having local agencies getting to the point of bankruptcy, the most important thing that they can do is balance the state budget,” Taylor said.  Marc Levinson, [City of] Vallejo’s [Chapter 9] bankruptcy attorney, said he believed the bill was a bad idea at first glance. The state-appointed committee would likely have partisan political pressures weighing into their decisions, he said. “They’re going to have to spend a lot of time just getting up to speed . . . .”

    Will “local public entities” in California now have to get the state’s permission to commence a Chapter 9?

    Perhaps more importantly, should they?

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    Hong Kong Government Mulls Changes to Region’s Insolvency Law

    Saturday, January 24th, 2009

    Last week’s post (below) covered a recent Chapter 15 petition commenced by Armada (Singapore) Pte. Ltd. in aid of the company’s efforts to effect a scheme of arrangement with its creditors and asked whether – had Armada’s “home jurisdiction” been Hong Kong rather than Singapore – the company’s efforts to protect US-based assets might have warranted a different approach in US courts.

    This week brings fresh news from Hong Kong – this time about a possible change in that region’s insolvency law.  As reported by Bonnie Chen and Patsy Moy in the Hong Kong Standard:

    The government is considering reintroducing a corporate rescue bill – shot down by the Legislative Council eight years ago – to help companies with short-term financial difficulties but viable long-term prospects ride out the financial tsunami . . . .  The measure, first proposed in 2001, is similar to the United States’ Chapter 11 bankruptcy code that is intended to save companies from going bust . . . . [Hong Kong Chief Executive Donald Tsang Yam-kuen] said the rescue procedure would resemble those in place in the United States and Britain that give firms with serious liquidity problems time to restructure their business, secure new funds and find new investors. He said that under current legislation, companies with liquidity problems had no choice but to go into bankruptcy and dispose of their assets. A similar proposal failed to find consensus in 2001 mainly because of some business people, Tsang said, but the time is now ripe for renewing efforts. “The financial tsunami presents an opportunity for all parties concerned to strike a compromise, and resume the necessary legislative work, so as to minimize business closures and job losses,” he said.

    How long would such a compromise take?  According to the Standard, “[a] bill will be drafted for consultation and the legislative process could take at least a year.”

    Even in Hong Kong, and even in current economic conditions, some compromises just take time.

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    Armada (Singapore) Pte. Ltd. Seeks Chapter 15 Recognition

    Friday, January 16th, 2009

    Citing a collapse of the global dry bulk markets as the precursor of an anticipated $395 million loss for FY 2008, Singapore-based bulk shipper Armada (Singapore) Pte. Ltd. sought recogniition and ancillary protection last week in the US in furtherance of a proposed scheme of arrangement commenced under Section 210 of the Singapore Companies Act.

    The company’s petition for recognition under Chapter 15 of the US Bankruptcy Code highlights the destruction visited upon certain portions of the shipping industry late last year as a result of the global economic crisis.  According to filings made by the company concurrent with its January 7, 2009 petition filed in the Southern District of New York:

    Since Summer 2008, the charter industry has faced a[n] historic drop in freight rates, particularly with respect to the very large . . . vessels that Armada Singapore charters.  In June, a typical charter for a Cape size vessel was $233,988 per day.  In early December of 2008, the market rate hit a bottom of $2,316 a day, representing a 99% drop in the market value of Armada Singapore’s contracts.

    That’s quite a drop.

    In larger terms, the company’s filing also offers a glimpse into some of the contrasts between the insolvency schemes and corporate rescue provisions currently prevalent in Pacific Rim jurisdictions.

    Here, Armada faced significant financial difficulties in Singapore and litigation in the US.  In response, it petitioned for a scheme of arrangement – a procedure roughly equivalent to that of a voluntary US Chapter 11 proceeding – in Singapore.  Importantly for Armada, such schemes permit the Singapore court overseeing the proposed arrangment  to impose a moratorium on litigation against the debtor.  The language of the Singapore statute suggests that such relief is universal in nature (“the Court may, . . . on [summary] application . . . restrain further proceedings in any action or proceeding against the company except by leave of the Court and subject to such terms as the Court imposes.”).  Following its arrangement petition in Singapore and in furtherance of that relief, Armada sought corresponding protection in the US under Chapter 15.

    By contrast, the insolvency scheme of Hong Kong – which, like Singapore, was a former British colony and which likewise retains the basic framework of English insolvency law – offers no moratorium on litigation during schemes of arrangement.  Such protection is available only in connection with a “winding up” – i.e., a dissolution proceeding.  Cf. Hong Kong Companies Act Sections 166 (governing arrangements); 180 (powers of court in winding up).  In fact, as described in a 2006 INSOL Journal article, relatively recent jurisprudence in Hong Kong has foreclosed a locally developed “work-around” for the lack of such protection.  According to local practitioners, these decisions effectively leave troubled companies in Hong Kong with no respite from litigation during an attempted corporate rescue.

    Had Armada’s “home” jurisdiction been Hong Kong, rather than Singapore, might its efforts to protect US-based assets during its attempted reorganization require a different approach within the US (not to mention Hong Kong)?  Would the company’s efforts to enjoin further litigation in the US under Chapter 15 ultimately be successful if no such injunction was available in its “foreign main proceeding?”

    Armada’s proceeding highlights an important reality of US Chapter 15 practice: Although Chapter 15 makes certain relief “automatic” upon recognition of a foreign proceeding and further provides for interim relief while a petition for such recognition remains pending, it is frequently the law of the anticipated “foreign main proceeding” that drives tactical decisions as to whether, and how, to deploy the cross-border recognition and relief afforded by US law.

    To anticipate and and offer effective cross-border guidance in such circumstances, US insolvency counsel do well to familiarize themselves with the insolvency law of the debtor’s “home” jurisdiction.

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    Mexican Insolvency and Restructuring Law – Landmark Articles

    Friday, January 9th, 2009

    With the New Year, International Corporate Rescue has published a new Special Issue: “Mexican Insolvency and Restructing Law – Landmark Articles.”  Featuring collaborative work between Lic. Eduardo M. Martinez, Sr. Ernesto Ernesto A. Linares, and yours truly, the issue includes:

  • Cross-Border Bankruptcy Reform in NAFTA Jurisdictions: Has Seizing Control of Troubled, Closely-Held Corporations Gotten Easier?
  • Advance Planning for US-Mexican Cross-Border Reorganisations.
  • More, Better, Faster: Gauging the Effectiveness of Mexican Insolvency Reform.
  • Pre-packaged Reorganisations under Mexico’s Ley de Concurso Mercantiles:New Amendments Offer New Possibilities for Cross-Border Insolvencies.
  • Hold ’Em? Or Fold ’Em? Labour Claims, Secured Claims, Tax Liabilities and Their Potential Impact on the Outcome of Mexican Concurso Proceedings.
  • To order a copy, go to ChaseCambria Publishing, Ltd’s. website here.

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