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    Archive for May, 2009

    The Stanford Saga – Chapter 3: Antiguans 1, Receiver 0

    Monday, May 25th, 2009

    Last week’s¬†blog post (here)¬†covered early skirmishing between SEC receiver Ralph Janvey and Antiguan liqudators Nigel Hamilton-Smith and Peter Wastell over control of the assets and business entities once operated by Sir Allen Stanford – and which the Securities and Exchange Commission (SEC) alleges¬†furthered an elaborate international Ponzi scheme.¬†¬†Court pleadings describing the Stanford entities, the alleged Ponzi scheme, and the federal receivership instituted at the¬†SEC’s behest¬†are available here.

    Readers of last week’s post may recall that¬†the primary bone of contention between Janvey and his Antiguan counterparts was whether or not the Antiguans – Messr’s. Nigel Hamilton-Smith and Wastell – should be permitted to¬†seek American recognition of their liquidation of Stanford International Bank, Ltd. (SIB) while a US receivership of Stanford assets (including SIB, and superintended by Janvey) remains pending in Dallas’s¬†U.S. District Court.¬† The Antiguan liquidators requested that District Court Judge David Godbey permit them to seek recognition.¬† The receiver, supported by the SEC (and joined by the IRS), objected.

    Judge Godbey’s response was immediately forthcoming.¬† In a short, 5-page Order issued late last Friday, he authorized the liquidators’ request and modified his prior receivership Order to permit the liquidators to commence a Chapter 15 proceeding and¬†seek recognition of their Antiguan liquidation.

    Two things are worth noting about¬†Judge Godbey’s¬†Order.¬† First, the mere authorization to seek recognition is no guarantee recognition will be granted.¬† While recognizing the Congressional intent behind¬†Chapter 15 (i.e., greater international cooperation, greater certainty for trade and investment, fair and efficient administration, etc.), Judge Godbey nevertheless directed the parties to confer regarding a process by which to determine whether the Antiguan liquidation should be recognized.¬† The Court no doubt anticipates what the Examiner has already identified: a looming fight over¬†SIB’s eligibility for Chapter 15 relief.¬† More specifically, the parties will provide evidence on the question of whether SIB is a “foreign bank” with a “branch” or “agency” in the US – and, therefore, ineligible for Chapter 15 recognition under Section 1501(c)(1) (which incorporates Section 109(b) by reference).¬†

    Second, where recognition is appropriate, a prior post asked whether¬†Judge Godbey might not use his broad discretion under Chatper 15 to fashion and direct the mutual cooperation that Congress envisioned – but that to date, has apparently slipped from the parties’ view.¬† Judge Godbey’s Order¬†suggests that where SIB’s liquidation can be recognized,¬†he may do so: In a brief acknowledgement his own broad discretion, Judge Godbey’s Order notes that “[a]s a practical matter, the mechanism of Chapter 15 is precisely designed to effect coordination between entities like the Antiguan Liquidators and the Receiver.”

    Meanwhile, the Antiguan liquidators and the receiver have until May 29 to confer, jointly prepare, and submit a status report outlining a proposed procedure for moving forward with the request for recognition.

    The devil, as they say, is in the details.

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    The Stanford Saga – Chapter 2: Too Many Cooks In the Kitchen?

    Saturday, May 16th, 2009

    A prior post on this blog mapped out the field of combat in the brewing battle between SEC receiver Ralph Janvey and Antiguan liqudators Nigel Hamilton-Smith and Peter Wastell for control of the now-defunct financial empire of Sir Allen Stanford, the native Texan who acceded to Antiguan knighthood but who now stands accused of running an alleged world-wide Ponzi scheme.

    That battle has now commenced.

    To review, the Securities and Exchange Commission obtained appointment of a receiver for Stanford’s assets and the Antiguan government appointed liquidators for Stanford International Bank, Ltd. (SIB) within 3 days of one another.¬† The Receiver’s and the liquidators’ initial attempts to cooperate¬†degenerated into a battle for control over global efforts to marshal assets and make distributions to creditors.

    The parties recently brought their disputes before the US District Court in Dallas, where Judge David Godbey must now decide (i) whether his previously-issued receivership order (which prohibited the commencement of any bankruptcy proceeding during the pendency of the SEC receviership) should be modified to permit the liquidators’ commencement of a Chapter 15 case regarding SIB; and (ii) whether the Chapter 15 proceedings (if any) ought to be referred back to the Dallas bankruptcy court (itself a division of the District Court).

    A hearing on these disputes has yet to be scheduled.¬† However, the parties have put forth the following arguments (to see the parties’ respective briefs, click on¬†each applicable party’s name):

    - The US Government.  The federal government Рand more specifically, the SEC and the Internal Revenue Service - oppose the commencement of a Chapter 15.  

    The IRS complains that doing so will disrupt its efforts to litigate tax claims against Sir Allen.¬† In essence, the IRS trusts Judge Godbey’s ability to facilitate this litigation more than it does the Antiguan court system.¬† It also warns that the Antiguan liquidation scheme will not respect the IRS’s asserted tax liens against Stanford’s assets – including SIB assets – and will not sufficiently protect US taxpayers and investors.

    The SEC, in an argument that appears somewhat circular, reminds Judge Godbey that he originally imposed a stay on extraneous litigation in connection with the receivership; therefore, that stay ought not to be modified because . . . to do so would countenance extraneous litigation.

    In a footnote, the SEC signals its willingness to appeal an adverse ruling by noting that where the receivership order has already been appealed by other third parties, Judge Godbey is without jurisdiction to make any further amendments to it – but must instead preserve the status quo.¬† At a substantive level, the SEC intimates that the¬†pre-liquidation relationship between SIB and the Antiguan goverment was overly cozy and that because SIB lent over US$100 million to the Antiguan government (and holds approximately $84 million in receivables payable by the Antiguan government), the Antiguan court’s judgment (and, by extension, that of the liquidators) in handling the Antiguan liquidation is not to be trusted.¬† At an equitable level, the SEC argues that the Antiguan liquidators may not urge the Antiguan courts to ignore the SEC’s receivership, then request that Judge Godbey recognize their liquidation.

    - The Receiver.¬†¬†Mr.¬†Janvey¬†- himself acting as the arm of the District Court’s equitable jurisdiction¬†- argues that¬†the Court’s¬†exclusive control over the Stanford entities through his receivership is . . . well, equitable.¬†

    Janvey’s 24-page brief is generally consistent with that of the SEC and, in the end, reduces itself to the¬†old adage that “there are too many cooks in the kitchen”:¬†It accuses Messr’s. Wastell and Hamilton-Smith of grabbing for control of substantially all of the¬†Stanford entities’¬†assets through their administration of one Stanford entity, of attempting to “end run” the Texas receivership through a Canadian proceeding, of standing idly by while the Antiguan government seeks to appropriate Antiguan real estate otherwise available for general creditors’ benefit, and of generally hampering the Receiver’s job.

    Mr. Janvey further argues there is nothing to preclude the District Court from exercising its very broad equitable powers to enjoin a Chapter 15 proceeding.

    - The Examiner.¬† In¬†a thoughtful brief, John Little – an Examiner appointed by Judge Godbey to assist him in running the receivership – advises the Court that, in fact, it is a good idea to first permit the commencement of a Chapter 15 case, then to address the validity of the Antiguan liquidators’ requests for recogntion on their own legal and factual merits.

    Essentially, Mr. Little, while not disagreeing that a District Court sitting in equity has broad discretion, suggests that Judge Godbey utilize that discretion to grant the liquidators’ request, then¬†determine (i) whether¬†Messr’s. Hamilton-Smith’s and Wastell’s request for recognition is viable or otherwise impermissible on the grounds that¬†SIB is a “foreign bank,”¬†ineligible for Chapter 15¬†relief; and (ii) if recognition applies, whether SIB’s “center of main interests” is Antigua, or elsewhere.

    - The Liquidators.¬† Messr’s. Hamilton-Smith and Wastell call the Receiver’s and the SEC’s mud-slinging exactly what it is . . . then waste precious little time in slinging their own.

    In a number of reprises, all of which¬†end in the same refrain – “The Pot is Calling the Kettle Black” – the Antiguan liquidators bristle with indignance at the misconduct alleged of them, accuse Mr. Janvey and his federal government allies of misstating both the facts and the law, and point out that many of the “parade of horribles” supposedly arising in Antiguan insolvency proceedings apply with equal force (or much worse) in US-based federal equitable receiverships.

    They note, for example, that Judge Godbey’s refusal to entertain a request for recognition will do nothing to prohibit courts with Stanford-related insolvency proceedings now pending in the UK, Switzerland, and Canada from refusing the same recogntion to Mr. Janvey – and will therefore fail to accomplish the global administration and control Mr. Janvey seeks.¬† Likewise, the IRS’s complaint that Antiguan insolvency proceedings do not embrace a priority scheme analogous to the US Bankruptcy Code strikes Messr’s. Hamilton-Smith and Wastell as ironic, since the distribution that arises under a federal receivership is entirely arbitrary, and effectively outside any statutory distribution scheme (including the US Bankruptcy Code’s).¬†

    Amidst the name-calling and the attempts to find precedent in a federal receivership which appears, by all accounts, to be one of first impression, it may be easy to miss the importance Рand the potential Рof the wide discretion provided to the US District Court in Chapter 15.

    This discretion appears in at least two ways.

    First, a US Court applying Chapter 15 is generally free to communicate and coordinate insolvency proceedings directly with courts of other jurisdictions.¬† Prior to Chapter 15′s enactment, it was common practice for separate courts administering a multi-national insolvency to confer directly by means of “protocols” specifically designed for the purpose of administering the case at hand.¬† These “protocols” – often individually negotiated for a specific case – facilitated adminsitration and helped coordinate the rulings of various courts for maximum efficiency and uniformity.¬† Much of this former practice lives on in Chapter 15: Section 1525 specifically codifies and authorizes it, while Section 1527 lists several, non-exclusive means of such cooperation.¬†¬†

    Second, US Courts applying Chapter 15 have broad discretion to grant, modify, or otherwise tailor relief for foreign representatives, thereby shaping the administration of a foreign case inside the US.¬† Though certain types of relief are “automatic” upon recognition of a foreign “main” case, Section 1522 permits a court to “modify or terminate” much of the relief available to foreign representatives on its own motion, and in a manner which protects all of the entities involved.

    How might a Chapter 15 proceeding alleviate some of the rancor that has developed between Mr. Janvey and his Antiguan counterparts?

    Perhaps some coordination and cooperation of the sort envisioned by the Bankruptcy Code – for example, web conferencing between judges in Antigua, the UK, the US, Canada, and Switzerland designed to develop a “Stanford protocol” within the context of Chapter 15′s provisions and foster unified worldwide administration of the Stanford cases¬†- would¬†go some distance toward¬†establishing the judicial “end game” that preserves the integrity of the federal receivership process and of the foreign insolvency proceedings.

    Along the way,¬†the same cooperation might further demonstrate the remarkable flexibility of Chapter 15.¬† And who knows?¬† It might prevent all of the cooks in the kitchen from hitting one another with blackened pots . . .¬†thereby preserving a little more for Stanford’s creditors and investors.

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    Chapter 15 Round-Up: February – April 2009

    Sunday, May 10th, 2009

    The first four months of 2009 have been busy ones for Chapter 15 filings.¬† Though New York has, to date, been and remains the focal point for a significant amount of cross-border work, the Bankruptcy Code’s newest chapter was pressed into service in a variety of cross-border insolvencies around the country.¬† The following summary (culled from news reports and from the national dockets) highlights some of the more notable filings from February through April:

    - Brazilian beef exporter, leather manufacturer, and logistics operator Independencia SA sought recognition on Febriary 27 from New York’s judge Stuart Bernstein with respect to its Brazilian “recupera√ß√£o judicial” – the equivalent of a Chapter 11 reorganization – then pending in the Lower Civil Court of Cajamar in S√£o Paulo. At the time of the filing, approximately $525 million of the company’s $1.2 billion in debt was in outstanding bonds priced at 9.875%. The Chapter 15 proceeding was commenced to protect US-based assets (primarily bank accounts and accounts receivable) and to stay US-based litigation.

    - On February 10, PricewaterhouseCoopers AG, Zurich (“PwC”), in its role as the bankruptcy liquidator and putative foreign representative of Lehman Brothers Finance AG (also known as Lehman Brothers Finance SA) (“LBF”), filed a Chapter 15 proceeding and concurrently sought the dismissal of LBF’s Chapter 11 bankruptcy case on the grounds that, under Bankruptcy Code section 305, the wholly owned subsidiary of Lehman Brothers Holdings Inc. was to be liquidated – and, further, that “[g]iven LBF’s limited connections to the U.S. and the existence of¬†[LBF's] swiss bankruptcy, PwC believes that a chapter 15 case is the most efficient and appropriate vehicle to administer any assets LBF may have in the United States, and that dismissal of the Chapter 11 Case is in the best interests of LBF, its creditors and equity holders.”¬† According to the liquidators,¬†”PwC has access to the books and records of LBF and has already done an in-depth investigation into LBF’s assets and liabilities, and is already tasked with protecting the interests of LBF’s creditors world-wide. In addition, as most of LBF’s creditors and assets are outside the U.S., maintaining the Chapter 11 Case will require LBF to expend unnecessary time, money and effort to coordinate the Chapter 11 Case with the swiss bankruptcy, which will deplete the estate and reduce the recovery of all stakeholders.”¬† PwC’s motion was granted on March 13.¬† One pending adversary involving LBF was transferred to the Chapter 15 case, while a second remained pending under the jointly administered Chapter 11 cases of Lehman Brothers Holdings, Inc., et al.

    -¬†On March 11, South Korean bulk ocean carrier Samsun Logix Corp. sought recognition of its rehabilitation proceeding under Korea’s Act on Rehabilitation and Bankruptcy of Debtors, commenced approximately one month previously in in the 3rd Bankruptcy Division of the Seoul Central District Court.¬† The dry bulk shipping carrier sought recognition of its Korean case to protect its US-based assets during the pendency of the rehabilitation proceeding.

    -¬†Road Town, British Virgin Islands-based private investment holding company Grand Prix Associates Inc. and 10 affiliates filed Chapter 15 petitions on March 18 in Newark. The filings were commenced after the debtors sought protection in the High Court of Justice of the Eastern Caribbean Supreme Court, and were allegedly triggered by disputes over obligations with Credit Suisse Strategic Partners. The New Jersey filings were commenced to protect the companies’ US-based assests.

    - Brazilian Air cargo transporter Varig Logistica SA sought recognition in Miami for its São Paulo restructuring on March 31.  By the filing (and concurrent request for an injunction), the company sought relief from litigation in Florida and New York over aircraft leasing agreements while the reorganization proceeds.  Litigants Pegasus Aviation I Inc., Pegasus Aviation II Inc., Pegasus Aviation IV Inc. and Pegasus Aviation V Inc. have sought relief from the automatic stay.  A hearing is scheduled for May 11.

    - Bernard Madoff’s English business unit, Madoff Securities International Ltd., sought Chapter 15 protection in on April 14 before Bankruptcy Judge Paul Hyman Jr. in West Palm Beach, Florida. Its liquidators seek recover assets, including a vintage Aston Martin automobile, from Madoff’s brother, Peter.

    - Renton,¬†Washington-based¬†Washington Gaming Inc. and its corporate parent Evergreen Gaming Corp. sought recognition on April 15 in the Western District of Washington for their proposed reorganization under the Canadian Companies’ Creditors Arrangement Act (CCAA).¬† The sole need for the Evergreen group’s decision to seek protection under the CCAA stems from Evergreen’s default with respect to a $29 million obligation to the company’s primary secured creditor, New York-based Fortress Credit Corp.¬† The Chapter 15 case was initiated to protect the companies’ US assets while the CCAA proceeding is ongoing.

    - British offshore oil and gas exploration and production company¬†Oilexco North Sea Ltd. sought and obtained interim protection from Judge Robert Drain in New York on April 28 in advance of¬†recognition of¬†the company’s voluntary arrangement (CVA), then pending in London.¬† Its Canadian parent, Oilexco Inc. -¬†which sought separate protection under Canada’s Companies’ Creditors Arrangement Act on Feb. 5 – was not involved in the filing.¬† Oilexco North Sea’s CVA was approved on April 15 and will be implemented on May 13, if not challenged in the interim.¬† The company’s US filing was initiated to protect it from several domestic lawsuits.

    - Clico (Bahamas) Ltd.‘s liquidator sought recognition of its Bahamian winding-up proceeding from Bankruptcy Judge Jay Cristol in Miami on April 28.¬† The Caribbean insurer made more than $70 million in loans to various real estate developments in Florida.¬† Recognition in the US would protect these¬†assets, as well as others, from creditors and permit them be liquidated through the Bahamian proceedings.

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    Credit Default Swaps: The New “Bankruptcy Trigger”?

    Monday, May 4th, 2009

    An earlier post on this blog covered the potential impact of credit default swaps (CDS’s) on distressed debt and suggested that

    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.

    A spate of recent articles in April indicates this is exactly what appears to be happening in the troubled auto industry – and elsewhere.

    In a short April 17¬†piece, The Atlantic’s Megan McArdle cites to mall operator General Growth Partners (GGP) and newsprint maker AbitibiBowater as examples of recent Chapter 11 filers who – but for the¬†credit protection provided lenders and bondholders by¬†CDS’s – might have been able to negotiate¬†consensual restructurings without the need for a court proceeding.¬† Two other, more recent articles – one from the¬†Detroit Free Press and another from¬†The Deal – reference the same negotiation dynamic in talks surrounding proposed workouts for automakers General Motors and Chrysler.¬† Readers will undoubtedly be aware that Chrysler commenced Chapter 11 proceedings last Thursday in New York.¬† GM’s impending bankruptcy has been the subject of speculation for some time.

    When a troubled business attempts to restructure its debt, how should its management address the “CDS effect?”¬† Should CDS issuers be incorporated into the work-out discussion?¬† Where the issuer is a counter-party on a number of “at-risk” CDS’s involving multiple troubled companies, should the issuer be allowed to fail so that lenders are instead required to deal directly with their debtors?

    Ms. McArdle cites to earlier work – including a Financial Times¬†article, and a Business Insider¬†article tying the continued viability of some CDS protection to the AIG bailout (an earlier¬†Business Insider piece went further, directly linking AIG-issued CDS’s to GM’s inability to reach terms with its lenders).¬† She then goes on to argue that a bankruptcy system too creditor-friendly (i.e., one that permits lenders to rely upon third-party protection, rather than forcing them to the table with their debtors) discourages entrepreneurship, makes reorganization more difficult,¬†and in the end, proves a societal disadvantage.

    Now, wait a minute.

    Wasn’t the AIG bail-out (which, in turn, “propped up” the viability of the CDS’s on which many lenders rely) itself really an attempted government-sponsored¬†reorganization of sorts?¬† If so, McArdle’s argument (and the articles she cites) leads to the conclusion that government intervention for the purpose of¬†propping up the issuers of CDS’s ultimately¬†leads to more¬†corporate failure.

    Can it be that government efforts to shore up the economy (or at least, to shore up the issuers of CDS’s) are, in fact, making it harder for businesses across a broad range of industries to negotiate their own restructuring?

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