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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      Bankruptcy and Insolvency News and Analysis Ė Week Ending October 21, 2016
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    Bankruptcy and Insolvency News and Analysis Ė Week Ending October 14, 2016

    Archive for April, 2009

    All Right . . . Who’s In Charge Here?!!

    Monday, April 27th, 2009

    When a foreign representative meets a federal receiver, who’s ultimately in charge?¬† And in charge of what?

    The US Bankruptcy Code’s cross-border provisions were enacted by Congress to foster “cooperation between (A) courts of the United States, United States trustees, trustees, examiners, debtors and debtors in possession; and (B) the courts and other competent authorities of foreign countries involved in cross-border insolvency cases.”¬† The same provisions were also intended to promote “greater legal certainty for [international] trade and investment.”

    To this end, Chapter 15 of the Bankruptcy Code sets forth relatively simple, straightforward requirements necessary for foreign representatives to obtain recognition of a “foreign proceeding,” and provides further that once such recognition is granted, US courts “shall grant comity or cooperation to the foreign representative.”¬† But the same chapter also provides that the recognizing US court may “modify or terminate” the relief otherwise available by statute to a foreign representative where the interests of creditors and the debtor “are sufficiently protected.”

    These policy objectives – along with the Code’s cross-border provisions – are about to undergo a Texas-sized test next month, where a federal receiver appointed in Dallas to marshal the assets of Sir Allan Stanford’s Stanford Financial Group and other, related companies is wrangling with liquidators appointed for Antiguan affiliate Stanford International Bank, Ltd. – the entity that issued¬†“certificates of deposit”¬†purchased by investors in an alleged $8 billion, world-wide¬†Ponzi scheme.

    The case is likely to offer important insight into how federal courts will reconcile¬†their equitable perogatives in other, non-bankruptcy insolvency proceedings (such as federal receiverships) with the Bankruptcy Code’s cross-border insolvency provisions.

    In late February, the Securities and Exchange Commission sought a Temporary Restraining Order and immediate appointment of a receiver for the US-based assets of Stanford Financial Group (SFG) and related companies to stop an alleged¬†“massive, ongoing fraud orchestrated . . . through . . . Antiguan-based Stanford International Bank, Ltd. and its affiliated Houston-based financial advisors . . . .”

    Upon US District Court Judge David Godbey’s grant of a TRO, Dallas attorney Ralph Janvey was appointed Receiver.¬† Very shortly thereafter, Antiguan regulators placed Stanford¬†International Bank,¬†Ltd.¬†(SIB) into liquidation and¬†appointed Nigel Hamilton-Smith and Peter Wastell as liquidators.

    All the parties acknowledge that there were at least initial efforts to reach cooperative arrangements regarding the administration of the concurrent liquidation proceedings.  Unfortunately, these efforts apparently went nowhwere.

    In mid-March, Janvey’s counsel requested an amendment of the District Court’s receivership order so as to provide Janvey with the exclusive power to commence any federal bankruptcy proceeding (including the prohibition of any petition for recogntion by any other party without prior Court order) and¬†to act as “foreign representative” in non-US courts on the companies’ behalf.¬† The proposed Order further left such arrangements in place for approximately 6 months.

    Judge Godbey granted the motion, which was unopposed – but struck provisions of the Order that would designate Janvey as a “foreign representative” in non-US proceedings.

    Last Monday, Hamilton-Smith and Wastell sought recognition under Chapter 15 before Judge Godbey and requested (i) a further amendment of Janvey’s already-amended receivership order so as to remove the prohibition against their commencement of a Chapter 15 case; and (ii) referral of the Chapter 15 case to the US Bankruptcy Court.

    In papers supporting their requests, the English liquidators essentially argue that the receivership order is unenforceable insofar as it purports to restrict the commencement of a Chapter 15 case – and that the District Court simply may not enjoin such a filing.¬† Hamilton-Smith and Wastell claim further that Janvey has attempted – improperly and, apparently, without success – to interpose himself into the Antiguan liquidation and to have himself appointed as liquidator in that proceeding as well as in the US receivership.¬†¬† Predictably, Hamilton-Smith and Wastell also devote significant attention to establishing Antigua as the “center of main interests” for SIB’s Antiguan liquidation.

    Mr. Janvey has yet to respond.¬† But he provided some indication of what that response will be in a 58-page Interim Report filed last Thursday.¬† In it, Janvey claims that SIB is an asset of the Receivership estate, since it was owned by¬†Sir Allan¬†Stanford on the date the receivership was instituted.¬† According to Mr. Janvey, his efforts to intervene in the Antiguan liquidation were rebuffed by the Antiguan court on the grounds that the receivership had no effect in Antigua, and that Janvey was therefore not an interested party to the liquidation.¬† Janvey further accuses Hamilton-Smith and Wastell of obtaining a Canadian registrar’s order recognizing them as the “foreign representatives” for SIB within the contemplation of Canadian insolvency law . . . all with no prior notice to him.

    Not surprisingly, Janvey believes the US¬†– and not Antigua – constitutes the “center of main interests” for these cases, and that his receivership, rather than the Antiguan liquidation,¬†ought to be deemed the “main” or primary insolvency proceeding.

    Can a federal court, acting within a federal receivership,¬†interpose its own additional barriers upon the Bankruptcy Code’s relatively minimal requirements for obtaining recognition of a foreign insolvency?¬† Can foreign representatives, once they have obtained recogntion for a foreign proceeding, demand and expect “comity” from any US court in aid of their own insolvency objectives, regardless of that court’s ongoing efforts to administer an insolvent estate?¬† Or can¬†that court modifiy the relief otherwise available to suit its own pre-existing administrative scheme for the same estate?¬† Can a federal court utilize its equitable powers to institute a receivership that will administer world-wide assets, claims, and recovery actions?¬† Or can the Court instead use similarly broad¬†discretion to fashion and direct the mutual cooperation that, to date, has eluded Messr’s. Janvey, Hamilton-Smith, and Wastell?

    This is a matter well worth watching.

    Judge Godbey has scheduled briefing¬†on the Antiguan liquidators’ requests into early May.¬† Copies of the SEC’s¬†papers in support of the TRO, the District Court’s¬†amended receivership order, the liquidators’ notice of Chapter 15 case, motion to amend the receivership order, and papers in support of the motion to refer matters to the Bankruptcy Court¬†. . . and the receiver’s interim report¬†. . . are all available here.

    Happy reading.

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    Avoidance Actions and Chapter 15 – The Little Things Can Make The Difference

    Monday, April 20th, 2009

    Chapter 15 of the U.S. Bankruptcy Code is designed to assist foreign representatives appointed in non-U.S. bankruptcy proceedings.  Upon recognition of a foreign proceeding, section 1521 provides bankruptcy courts with the discretion to grant any appropriate relief necessary to effectuate the purpose of Chapter 15 and to protect the assets of the debtor or the interests of the creditors in the United States.

    But judicial discretion with respect to Chapter 15 relief is not unlimited: Sections 1521(a)(7) and 1523 prohibit a foreign representative from pursuing aviodance claims under Bankruptcy Code sections 544, 548 (i.e., fraudulent transfers), and 547 (i.e., preferences) outside a Chapter 7 or a Chapter 11 case.

    Is there a “work-around” for this restriction?¬† Can a foreign representative avoid the expense and risk of a Chapter 11 or Chapter 7 case by commencing an avoidance action under non-U.S. law in a Chapter 15 proceeding?

    This question – apparently, one of first impression under Chapter 15¬†– was addressed in February, when the appointed liquidators of Nevis-based Condor insurance obtained recognition for that company’s winding-up proceeding in the U.S. and immediately sought to avoid over $300 million in allegedly fraudulently transfers on the creditors’ behalf.¬† The defendants sought to dismiss the avoidance actions for lack of subject matter jurisdiction, and the bankruptcy court agreed.¬† In an unpublished slip opinion – In re Condor Insurance Limited (In Official Liquidation), 2009 WL 321627 (S.D.Miss.) – the U.S. District Court affirmed the bankruptcy court’s ruling that the legislative history of Sections 1521 and 1523 indicated Congress’ intent to restrict all avoidance actions, foreign and domestic, to litigation within a Chapter 7 or 11 case.¬† In a footnote, however, the District Court suggested an alternative remedy for Condor’s liquidators: Even though U.S.-based Chapter 7 or 11 relief was unavailable to foreign insurance companies not doing business in the U.S., Condor’s liquidators could seek avoidance of the transfers in the Nevis courts and then seek recognition of any Nevis judgment in the United States.¬† See generally In re Ephedra Prods. Liab. Litig., 349 B.R. 333 (S.D.N.Y .2006).

    The only other decision to address avoidance actions in a Chapter 15 case – In re Loy, 2008 WL 906503 (Bkrtcy.E.D.Va.) – held that a post-petition avoidance action brought under Section 549 and English insolvency law could be brought within a Chapter 15 case, but required a separate adversary proceeding and could not be heard in the context of a motion to approve a Section 363 sale.

    These decisions illustrate the strategic importance of the choice of substantive law, litigation forum, and procedure for specific actions commenced in a cross-border insolvency.  These initial tactical choices can have significant substantive impact.

    The Condor decision, the Loy decision, and an article by Jones Day’s Pedro Jimenez briefly summarizing the two, are available – respectively –¬†here, here, and here.

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    Distressed M&A: Two Perspectives, One Conculsion

    Sunday, April 12th, 2009

    A recent MONDAQ article¬†by Bryan S. Gadol and Wendy R. Kottmeier of Dorsey & Whitney’s Irvine, California office discusses financially distressed acquisitions and covers some of the high points attendant to an out-of-court “bargain basement” purchase:

    Fraudulent Transfer Claims: “[I]t is imperative for a buyer acquiring assets at a discount from a seller that is insolvent, or may become insolvent, to evaluate whether the purchase price is of a reasonably equivalent value based on a variety of factors, including the marketability of the assets at the time of the sale and the level of interest, if any, from other potential buyers.”¬† Without such a determination, the acquisition is subject to attack from disgruntled creditors and the purchaser may be required to return the acquired assets (or their fair market value).

    Successor Liability Claims:¬† “[U]nder certain legal theories purchasers of assets can sometimes be held liable as a successor for certain environmental, products liability, tax, employee benefits and labor and employment claims. Creditors of the insolvent seller have a greater incentive to look elsewhere to satisfy the seller ‘s unpaid debts, and consequently may choose to pursue successor liability claims against a purchaser.”

    Fiduciary Duty Claims: Until very recently, the boards of distressed corporations were routinely advised of their fiduciary duties to creditors, which arise when the corporation is in the “zone of insolvency.”¬† This means that the boards of distressed companies are obligated to act in the best interests of the corporation’s creditors – an obligation which extends to management’s decision to sell distressed assets “on the cheap.”¬† As discussed by Gadol and Kottmeier, recent¬†Delaware case law has narrowed this liability by suggesting such fiduciary duties do not arise until the precise moment when the corporation becomes insolvent.¬† However, such¬†“precision” may do nothing more than afford corporate boards a false sense of security, since the concept of “insolvency” is itself subject to multiple definitions – and the question of specifically when a corporation becomes “insolvent” is, at best, often a subjective one.

    Though somewhat cursory, the overview from Dorsey’s transactional lawyers is timely: Financial distress arising from the present economic downturn promises a wide range of opportunities for those companies poised to make strategic acquisitions.¬† As noted by a more extensive piece appearing in late February in The Deal Magazine, journalist Suzanne Stevens and prominent Los Angeles practitioner (and UCLA Law School professor) Kenneth Klee note:

    For companies that stay financially healthy, the wave of corporate distress now building promises plenty of targets.  S&P predicts a record default rate of 13.9% by issuers of high-yield bonds this year, for example.  Among other factors, the late, great buyout wave is expected to produce many opportunities for corporate dealmakers, sometimes for assets that they earlier battled private equity buyers to win.

    Who are the strategic buyers best positioned to take advantage of these buying opportunities?  Klee and Stevens identify at least two types:

    – Purchasers who find their key suppliers in trouble.

    – Foreign buyers looking to improve their positions in the U.S.

    There are undoubtedly more.  Klee and Stevens also touch on some of the various types of deals likely to result, including:

    – Acquisition of the target company’s debt and the offer of a much-needed capital infusion.

    – Bidding for the assets, either out of court or in connection with a “Section 363” sale inside a Chapter 11 case as a “stalking horse” or as a third-party participant.¬† Though the “stalking horse” bidder typically takes on the risk of being “cherry-picked” by a late-comer to the bidding process, most prospective “stalking horse” purchasers are able to protect both their due diligence investments and their positions through the imposition of “break-up fees” as a part of the sale price to a third party.

    What do strategic buyers have to contend with in consummating a successful acquisition?  In addition to the potential liability outlined by Gadol and Kottmeier, Klee and Stevens highlight the often-complex nature of such acquisitions:

    ‘Straightforward’ is not the first word these deals bring to mind.¬† In a field renowned as legalistic and technical, and with so many variables to consider – the target’s capital structure, creditor mix, supplier and customer relationships, among others – it’s easy for a dealmaker unfamiliar with distressed deals to put a foot wrong.

    Even so, with enterprise and asset valuations growing cheaper and the synergies available from a well-thought-out acquisition negotiated at bargain prices, the attraction of such a purchase makes putting a foot in worth the risk.

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    Credit Default Swaps and Bankruptcy

    Sunday, April 5th, 2009

    In a series of papers – the most recent a chapter in Greg N. Gregoriou’s and Paul U. Ali’s Credit Derivatives Handbook: Global Perspectives, Innovations, and Market Drivers (McGraw-Hill 2008) – Seton Hall Professor Stephen J. Lubben has argued over the past year or so that credit default swaps (CDS’s) will change the negotiation dynamic of large Chapter 11 cases.

    How so?

    An understanding of Lubben’s argument requires at least a rudimentary understanding of what CDS’s are and the purpose they serve.¬† As discussed by a brief article appearing in the March 5, 2009 edition of The Economist, “[a] CDS works like a fire-insurance policy: the holder pays a regular premium, but if the house burns down there is a big payoff. With CDSs, the payoff is triggered by a default – and filing for Chapter 11 [does] indeed trigger some CDSs.”

    Against this conceptual background, Lubben argues that where the holder of a CDS is better off with with a default on the debt underlying the swap than it is waiting for the debt to pay out, the dynamics of debtor-creditor negotiation before and during Chapter 11 will change.  In particular:

    – CDS’s could impede the negotiation of workouts, pre-arranged or pre-negotiated Chapter 11 plans, as creditors with a vested interest in¬†the debtor’s failure either refuse to negotiate or – worse yet – actively¬†seek the company’s demise.

    – CDS’s may shorten the timeframe for workout negotiations or promote the increased use of involuntary¬†bankruptcy filings.¬†

    In a helpful¬†post offered last month on the academically-oriented bankruptcy blog “Credit Slips,” John Marshall Law School Professor (and fellow “Credit Slips” blogger) Jason Kilborn points readers to the March 5 Economist article and suggests further that the CDS market may incentivize claims trading amongst speculators betting on the debtor’s failure:

    [W]hat if high-risk investors (speculators?) buy CDS[‘s], banking on a corporation’s default (akin to “naked short selling” of a company’s stock)¬†[?]¬† This explosive situation comes to a head if the borrower company attempts a reorganization.¬† Now you’ve got very dedicated and often aggressive investors hoping for your failure!¬† [With] enough riding on the CDS paying out, one can easily imagine a CDS holder offering to buy a blocking position (34%) of the unsecured debt of a company attempting reorganization – which the CDS holder can probably do for a song in light of the pending reorganization (and the payout on the CDS will almost inevitably be more than a plan promises to unsecureds).¬† I’ve heard lots of grousing among judges wanting to know how certain “creditors” voting unsecured claims came to own those claims – now I understand why these judges want that info and what scary info they might find if the question is answered.¬† I presume the “not in good faith” votes of CDS holders voting down a reasonable reorg plan could be equitably subordinated or classified (rejected).¬† What a nightmare for debtor’s counsel!¬† All that work to then have your plan fail because investors with no real skin in your game tank your deal so they can collect the equivalent of hazard insurance on your failure.

    Precisely how – and under just what circumstances – CDS’s will affect¬†the negotiation dynamics that for years have been a staple of reorganizations remains to be seen.¬† Lubben suggests that under some circumstances, the holders of CDSs may, in fact, still retain an interest in seeing the debtor succeed.¬† Kilborn himself points to recent developments in the case of LyondellBasell, the Dutch petrochemicals giant whose American unit, Lyondell Chemicals, commenced Chapter 11 proceedings in January: According to the March 7 Economist article, “some CDS holders want to force the debtor’s European parent to default, bringing in the complications of a cross-border reorganization.¬† That would so complicate the case that the chance of a total meltdown – and¬†a payout on the CDS – would¬†spike, so DIP lenders have ponied up just to avoid that eventuality.”

    Regardless of the ultimate outcome, this formerly esoteric and little-understood corner of the bond market appears to be having a very practical, real-world effect on larger Chapter 11 cases.

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