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    Archive for June, 2009

    The Stanford Saga – Chapter 5: The Liquidators Strike Back

    Saturday, June 27th, 2009

    Nearly two weeks ago, this blog highlighted further scuffling in the ongoing contest for administrative control between Ralph Janvey – a federal receiver appointed at the SEC’s behest to seize and administer financial assets once controlled by Sir Allen Stanford, and Peter Wastell and Nigel Hamilton-Smith – English liquidators charged with liquidating Stanford International Bank, Ltd. (SIB), an Antiguan entity through which Stanford did significant amounts of business.

    To summarize prior posts – available by linking here – Wastell and Hamilton-Smith have sought recognition of SIB’s Antiguan liquidation through a Chapter 15 case commenced before U.S. District Judge David Godbey in Dallas.  Janvey, along with the SEC and the Internal Revenue Service, vehemently oppose recognition of the Antiguan liquidation as the “main proceeding” in the Stanford entities’ administration.

    In an extensive brief filed earlier in the month, Mr. Janvey – joined by the SEC in separate briefing – detailed his reasons for doing so.  In essence, Mr. Janvey and the SEC claim that the “center of main interests” (COMI) of an investment fraud – which the SEC alleges Stanford perpetrated – is headquartered where the fraud is . . . and not from the presumptive location where the victims were led to believe a legitimate business was run.  They also appear to place heavy reliance on the fact that, though SIB was physically located in Antigua, it was not authorized to do regular business with local residents – and its liquidation therefore resembles numerous hedge fund liquidations that, to date, have experienced difficulty obtaining recognition as foreign “main proceedings” in other US Bankruptcy Courts.

    This week, Mess’rs. Wastell and Hamilton-Smith answered Janvey’s argument.

    In a 25-page reply brief, supported by extensive Appendices, Wastell and Hamilton-Smith explain that Janvey’s “fraud-based” argument is beside the point – as is the fact that SIB was maintained primarily for “offshore” operations in the US, South America, and Europe.

    Instead, the liquidators claim that the extent of SIB’s physical operations in Antigua make its liquidation far different from the “letter-box” entities in Caribbean tax havens that US Bankruptcy Courts have, to date, been reluctant to recognize.  Wastell and Hamilton-Smith rely heavily on a California decision – In re Tri-Continental Exch. Ltd., 349 B.R. 627 (Bankr. E.D. Cal. 2006) – which involved alleged “sham” insurance entities that sold fraudulent insurance policies to US citizens through a network of domestic brokers and agents, but whose 20 employees and only office were operated in St. Vincent and the Grenadines.  Over the objection of a US judgment creditor, the U.S. Bankruptcy Court in Tri-Continental recognized as the foreign “main proceeding” a liquidation commenced through the Eastern Caribbean Supreme Court, holding that even through the fraud was perpetrated primarily in the US and Canada, the debtors’ COMI was in St. Vincent and Grenadines because the debtors “conducted regular business operations” there.  349 B.R. at 629.

    Using this analysis, Wastell and Hamilton-Smith argue that SIB’s Antiguan liquidation should likewise be recognized as a foreign “main proceeding” since, as even Mr. Janvey acknowledges, a debtor’s COMI is tantamount to its “principal place of business” under US law.  According to the liquidators, a debtor’s “principal place of business” is essentially the location of its “business operations,” and their brief refers repeatedly to SIB’s extensive physical and administrative operations in Antigua.  Wastell and Hamilton-Smith appear to tiptoe around Mr. Janvey’s argument that the Court should look to the debtor’s “nerve center” (in this case, the location of executive decisions) where a business’s operations are “far-flung,” using a brief (and conclusory) footnote to draw a distinction between the Stanford entities’ admittedly “far-flung” sales, on the one hand, and its operations on the other – which, according to the liquidators, were concentrated exclusively in Antigua.

    Judge Godbey’s appointed examiner is due to weigh in on these issues shortly after the US July 4 holiday.

    Stay tuned.

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    2009: Year of the Mega-Case?

    Monday, June 22nd, 2009

    Last Monday’s “Credit Slips” blog features a brief piece by Seton Hall’s Steve Lubben, who cites bankruptcydata.com for what by any measure is a remarkable statistic: Year-to-date, US Bankruptcy Courts have seen no less than 35 Chapter 11 cases involving debtors with assets of $1B or more.

    That’s nearly six billion-dollar filings per month.

    According to Lubben, it’s also more than all of 2008’s “mega-cases” combined.  Just as interesting, however, is Lubben’s comment on the “ripple effect” created by these cases:

    I think we can expect that the collective, collateral effect of these cases on trade creditors, landlords, and employees will equal, if not exceed, the effects of the better-known cases.  This will in turn create a ripple of small business bankruptcy cases . . . .

    Here at South Bay Law Firm, we couldn’t agree more.

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    The Stanford Saga – Chapter 4: Where Is a Ponzi Scheme “Headquartered,” Anyway?

    Tuesday, June 16th, 2009

    This blog has intermittently followed the Texas-sized contest for control over now-defunct financial and investment entities once operated by Sir Allen Stanford.  That contest has pitted Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith against federal receiver Ralph Janvey.  Prior posts are located here, here, and here.

    Approximately one month ago, US District Judge David Godbey permitted Messr’s. Wastell and Hamilton-Smith to commence a Chapter 15 case on behalf of Stanford International Bank (SIB), headquartered in Antigua.  A hearing regarding the liquidators’ request for US recognition of SIB’s liquidation is tentatively calendared for mid-July.  The parties have submitted a joint status report and have also filed further briefing on the question of the Stanford entities’ “Center of Main Interests” (COMI) – which the parties believe will determine the location of a “main proceeding” for the Stanford entities, and will further determine what (if any) recognition US courts will give that proceeding.

    Briefing and evidence submitted to date provides a preview of the parties’ positions, as well as on the issues that the Judge Janvey will need to address:

    COMI.  A supplemental affidavit submitted by Mr. Hamilton-Smith in support of recognition appears to stress both (i) SIB’s corporate separation from other Stanford entities; and (ii) its function as the effective “nerve center” of global Stanford investment operations.  In a 50-page response to the Liquidators’ petition for recognition, Mr. Janvey argues that (i) the Stanford entities’ principal interests, assets, and management are not in Antigua; (ii) SIB was a mere “shell” for a fraudulent scheme headquarted in, and implemented from, the US; and (iii) COMI is the location from which the fraud emanates, and not from the location where investors have been duped into believing a legitimate business was run.  And lest we forget matters of policy, the Receiver offers the somewhat conclusory arguments that because a receivership (rather than a bank liquidation) is the appropriate means of investigating a fraud, because the Antiguan government is somehow too close to this liquidation, and because the liquidators have allegedly attempted to “end run” the Receivership by obtaining a recognition order in Canada (an allegation bitterly contested by the Antiguan Liquidators), recognition of a Chapter 15 would be against public policy.  A concurrent response filed by the SEC largely concurs in these arguments.  The SEC appears to rely heavily on the US citizenship of Mr. Stanford and most members of his board of directors (in fact, “Sir Allen” holds joint US-Antiguan citizenship), the purported location of management decisions (according to the SEC, within the US), and the comparative dollar volume of SIB investment sales in the US as the primary basis for opposing the request to recognize SIB’s Antiguan liquidation as the “main proceeding.”

    Substantive Consolidation?  The parties’ briefs to date raise the issue of substantive consolidation (or “aggregation”).  The Liquidators advise Judge Godbey that they expect the Receiver to argue in support of substantive consolidation of the Stanford entities.  Mr. Janvey never directly addresses his position on substantive consolidation, calling it a “bankruptcy question” which is appropriate only in the event that multiple Stanford entities find themselves in bankruptcy in the US (a possibility triggered by filings briefly mentioned below).  However, Janvey goes on to reiterate his position that the Stanford entities must be treated as part of a single, integrated receivership, since the Stanford entities operated as a single “integrated network.”

    Involuntary Proceedings?  The parties’ joint status report mentions a request by certain investors for permission to file involuntary bankruptcies in the US against one or more of the Stanford entities.  That request has been opposed by the Receiver, who argues that rather than bankruptcy, a federal receivership (i) is really the best way to adminsiter an alleged Ponzi scheme; (ii) protects creditors’ and investors’ due process (and bankruptcy doesn’t?!); and (iii) provides the maximum degree of flexibility, essential to the equitable relief and redress this case requires.  The Examiner disagrees with the Receiver, suggesting that Judge Godbey can – and, indeed, should – evaluate the relative merits of a bankruptcy (rather than a receivership) for the Stanford entities, but cautions that the investors must demonstrate the relative benefits of such a proceeding vis á vis a receivership.

    Cooperation?  In a now-familiar refrain, the Receiver and the Antiguan Liquidators blame each other for failing to cooperate, all the while holding out their own respective proposed cooperation schemes.  Mr. Hamilton-Smith’s affidavit (mentioned above) proposes a general framework of cooperation in the event that a request for recognition of SIB’s liquidation is approved.  The same investors seeking permission to commence an involuntary proceeding (also mentioned above) argue that, in fact, Chapter 15 provides the best vehicle for cross-border coordination no matter where the “center of main interests” is ultimately determined.

    Further briefing – and some decisions – are due later in the month.

    Overall, it’s shaping up to be a hot summer in Texas.

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    California’s Ongoing Efforts to Limit Municipal Bankruptcies

    Tuesday, June 9th, 2009

    Since late January, California’s state assembly has considered legislation designed to impose additional hurdles on cities, services districts, and other California municipalities that need to rehabilitate themselves under Chapter 9.

    Supporters of California Assembly Bill 155 (AB 155) – which requires California municipalities to to receive filing approval from a state panel prior to commencing a Chapter 9 proceeding – argue that the bill will preserve the credit-ratings of local municipalities and protect local taxpayers.  Opponents of the bill argue that it is merely an “end run” by public employees’ unions around a process that permits municipalities to reject union contracts and rehabilitate themselves.  Some additional background, and a copy of the bill as introduced, is available on an earlier post on this blog.

    On June 3, AB 155 took a step toward passage when it cleared the California State Assembly by a vote of 43-16, with no Republican support.  A copy of the bill, as amended, is available here.  Governor Schwarzenegger has reportedly not taken a position on the bill, according to an article in Thursday’s Sacramento Bee.

    The bill now goes to the California State Senate.

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    Chrysler and Successor Liability

    Monday, June 1st, 2009

    Readers of this blog will be familiar with Seton Hall Professor Stephen Lubben’s prior work on credit default swaps and their impact on business bankruptcies.  In a post on last week’s Credit Slips, Professor Lubben weighed in on another timely topic: Chrysler’s proposed asset sale to Fiat.

    Of interest is a recent objection to the pending sale order filed by the State of Connecticut – the relevant portions of which are quoted in Lubben’s post – where the State argues:

    Neither the Supremacy Clause of the United States Constitution nor the doctrine of preemption obligate state courts to enforce an otherwise valid order of any United States Bankruptcy Court where such order is challenged under the successor liability law of the states. See e.g. MPI Acquisition, LLC v. Northcutt, 2009 Ala. LEXIS 14 at * 10 (Ala. 2009); Lefever v. K.P. Hovnanian Enterprises, Inc., 160 N.J. 307 (1999) (bankruptcy sale order did not preclude application of product-line successor liability); Gross v. Trustees of Columbia Univ., 816 N.Y.S. 2d 695 (2006) (successor liability imposed against purchaser of assets free and clear of claims in bankruptcy proceeding); Simmons v. Mark Lift Industries, Inc., 366 S.C. 308, 313 (2005) (“a plaintiff may maintain a state-based product liability claim under a successor liability theory against a successor corporation which purchased the predecessor’s assets in a voluntary sale approved by the federal bankruptcy court”). 

     According to Lubben:

    the State agues that the [Chrysler] sale order can’t release Chrysler from successor liability. This is a key issue, especially since the sale order in Lehman Brothers[‘ bankruptcy case] expressly included just such a release. Obviously the market for distressed assets would become even more illiquid if bankruptcy courts were unable to “cleanse” the assets as part of the sale process.

    The professor points out a number of problems with Connecticut’s argument and the authorities supporting it, including (i) the State’s misstatement of the Alabama court’s holding; (ii) the absence of any mention by the South Carolina court of section 363; and (iii) the New Jersey court’s own misstatement of federal bankruptcy law.  Of greater interest, however, is the New York decision cited by the State of Connecticut, which – according to the analysis offered on Credit Slips – relies on the Piper Aircraft decisions to find that successor liability under state law cannot be entirely eliminated by a federal bankruptcy sale order.

    For Lubben, the New York trial court has a point about successor liability, though not for the reasons given by State of Connecticut.  Instead, the bankruptcy court’s inability to “cleanse” the sale of distressed assets through a “Section 363 sale” has more to do with due process: In essence, those future claimants who may hereafter be injured by defective Chrysler vehicles should not be bound by a present bankruptcy order of which they had no notice.  Lubben asks for comments on whether “[a] limited group of claimants might nonetheless be able to bring such [successor liability] claims, if they have good arguments that due process so requires.”

    Great question, Professor Lubben.  I have only one observation. 

    Successor liability to future claimants has long been a thorny issue where bankruptcy sales are concerned.  It has received serious academic attention for well over a decade.  However, such sales are not the only context in which bankruptcy courts have had to wrestle with successor liability.  The Owens-Corning cases, which concerned the ability of an operating company to address future claims arising from asbestos-related product liability, resolved this problem and effectuated a successful reorganization through the appointment of a “future claims representative” – i.e., a representative appointed by the court and charged specifically with representing the interests of future claimants whose asbestos-related injuries had not yet manifested themselves in the company’s present reorganization.  The Owens-Corning decision was of such creativity that its approach was implemented by Congress for all asbestos-related reorganizations in subsequent amendments to the Bankruptcy Code.  See 11 U.S.C. 524(g) and its legislative history, which – incredibly – actually make for some interesting reading.

    Where Chrysler’s asset sale will likely result in a liquidating plan, could the bankruptcy court follow a similar approach – i.e., appoint a claims representative to bargain with existing creditors on behalf of those future plaintiffs not yet injured by already-manufactured Chrysler vehicles for an appropriate share of the Chrysler sale proceeds, to be distributed through a claims trust and enforced by a channeling injunction similar to that prescribed for asbestos-related liabilities under Section 524(g)?

    Comments, Professor Lubben?  Anyone else?  I’d love to hear from you at mgood@southbaylawfirm.com.

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