Archive for November, 2009
Monday, November 30th, 2009
The purchase of debt on the cheap and subsequent use of activist litigation to seize control of a troubled company, or obtain other economic concessions from the debtor, is a common tactic in Chapter 11 practice.¬† But it is not without risk – especially when the purchased debt comes with possible strings attached.
From New York’s Southern District last week, a cautionary tale of what can happen when an agressive distressed debt investor presses its luck¬†despite ambiguous lending documents:
ION Media Networks’ Pre-Petition Credit Arrangements and Pre-Arranged Chapter 11.
ION Media Networks Ltd. and its affiliates (“ION”) entered into a series of security agreements with its first- and second-priority lenders¬†during the “go-go” days of 2005.¬† The documents included an intercreditor agreement setting forth the respective parties’ rights to ION’s assets.
By early 2009, ION was involved in restructuring discussions with the first-priority lien holders.¬† Those discussions resulted in a Restructuring Support Agreement (“RSA”) by which ION conveyed 100% of ION’s reorganized stock to the first-priority lien holders upon confirmation of a Chapter 11 plan.¬† In furtherance of the RSA, the ION companies filed jointly administered Chapter 11 cases in May 2009.
Enter Stage Right: Cyrus.
In the meantime, Cyrus Select Opportunities Master Fund Ltd. (“Cyrus”) purchased some of ION’s second-lien debt for pennies on the dollar.¬† Using its newly acquired stake, Cyrus systematically attempted to interpose itself into ION’s pre-arranged reorganzation:¬† It objected to DIP financing proposed by the first-priority lien holders, requested reconsideration of the DIP financing order so it could offer alternative financing on better terms, objected to ION’s disclosure statement, commenced its own adversary proceeding for a declaratory judgment, prosecuted a motion to withdraw the reference with respect to two adversary proceedings concerning ION’s FCC broadcast licenses, objected to confirmation, proposed amendments to the Plan to enable it more effectively to appeal adverse rulings of the Bankruptcy Court, and even filed supplemental papers in opposition to confirmation on the morning of the confirmation hearing.
Cyrus’ basic objective in this campaign was quite straightforward.¬† It sought to¬†challenge the rights of ION’s first lien holders (and DIP lenders) to recover any of the enterprise value attributable to ION’s FCC broadcast licenses.¬† Its ultimate objective was to leverage itself into economic concessions from ION and the first lien holders¬†- and a hefty profit on its debt acquisition.
Cyrus picked its fight (i) while its position¬†was “out of the money”; and (ii) in the face of an Intercreditor Agreement prohibiting Cyrus from “tak[ing] any action or vot[ing] [on a Chapter 11 plan] in any way . . . so as to contest (1) the validity or enforcement of any of the [first lien holders'] Security Documents … (2) the validity, priority, or enforceability of the [first lien holders'] Liens, mortgages, assignments, and security interests granted pursuant to the Security Documents … or (3) the relative rights and duties of the holders of the [first lien holders'] Secured Obligations . . .”).
Cyrus apparently decided to go forward because, in its view, ION’s valuable FCC broadcast licenses were not encumbered by the first-priority liens that were the subject of the Intercreditor Agreement.¬†¬†As a result, Cyrus claimed a right to pro rata distribution, along with the first-priority lien holders (who were themselves undersecured), in the proceeds of the purportedly unencumbered FCC licenses.¬† Therefore, its objections, based on Cyrus’ position as an unsecured creditor, were appropriate.¬† By the time the cases moved to confirmation, the ION debtors had commenced their own adversary proceeding to determine whether or not Cyrus’ objections were¬†so justified.
Second-Guessing Cyrus’ Strategy.
Cyrus’ game of legal “chicken” was, in the words of New York Bankruptcy Judge James Peck, a “high risk strategy” designed to “gain negotiating leverage or obtain judicial rulings that will enable it to earn outsize returns on its bargain basement debt purchases at the expense of the [first lien holders].”
Unfortunately for Cyrus, its “high risk strategy” was not a winning one.
In a 30-page decision overruling Cyrus’ objections to ION’s Chapter 11 plan, Judge Peck appeared to have little quarrel with Cyrus’ economic objectives or with its activitst approach.¬†¬†But he was sharply critical of Cyrus’ apparent willingness to jump into the ION case without first obtaining a determination of its rights (or lack thereof) under the Intercreditor Agreement:
Cyrus has chosen . . . to object to confirmation and thereby assume the consequence of being found liable for a breach of the Intercreditor Agreement.¬† Cyrus’ reasoning is based on the asserted correctness of its own legal position regarding the definition of collateral and the proper interpretation of the Intercreditor Agreement.¬† To avoid potential liability for breach of the agreement, Cyrus must prevail in showing that objections to confirmation are not prohibited because those objections are grounded in the proposition that the FCC Licenses are not collateral and so are not covered by the agreement.¬† But that argument is hopelessly circular. Cyrus is free to object only if it can convince this Court or an appellate court that it has correctly analyzed a disputed legal issue. It is objecting as if it has the right to do so without regard to the incremental administrative expenses that are being incurred in the process.
In contrast to Cyrus’ reading of the Intercreditor Agreement,¬†Judge Peck read it to “expressly prohibit Cyrus from arguing that the FCC Licenses are unencumbered and that the [first lien holders'] claims . . . are therefore unsecured . . . .¬† At bottom, the language of the Intercreditor Agreement demonstrates that [Cyrus' predecessors]¬†agreed to be ‘silent’ as to any dispute regarding the validity of liens granted by the Debtors in favor of the [first lien holders] and conclusively accepted their relative priorities regardless of whether a lien ever was properly granted in the FCC Licenses.”
Judge Peck further found that because Cyrus’ second-priority predecessor had agreed to an indisputable first-priority interest in favor of the first lien holders regarding any “Collateral,” this agreement also included any purported “Collateral” – and, therefore, prohibited Cyrus’ dispute of liens in the FCC broadcast licenses . . . even if such licenses couldn’t be directly encumbered:
The objective was to prevent or render moot the very sort of technical argument that is being made here by Cyrus regarding the validity of liens on the FCC [l]icenses. By virtue of the Intercreditor Agreement, the parties have allocated among themselves the economic value of the FCC [l]icenses as “Collateral” (regardless of the actual validity of liens in these licenses).¬† The claims of the First Lien Lenders are, therefore, entitled to higher priority . . . .¬† Affirming the legal efficacy of unambiguous intercreditor agreements leads to more predictable and efficient commercial outcomes and minimizes the potential for wasteful and vexatious litigation . . . .¬† Moreover, plainly worded contracts establishing priorities and limiting obstructionist, destabilizing and wasteful behavior should be enforced and creditor expectations should be appropriately fulfilled.
Judge Peck acknowledged case law from outside New York’s Southern District that disfavors pre-petition intercreditor agreements which prohibit junior creditor voting on a Chapter 11 plan or a junior creditor’s appearance in the case as an unsecured creditor.¬† But these features were not the ones at issue here: Cyrus was permitted to vote, and it could (presumably) make a general¬†appearance as an unsecured creditor.¬† However, it could not, in this capacity, object to the ION Chapter 11 plan.
Finally, Judge Peck noted that his own prior DIP Order acknowledged the first lien holders’ senior liens on “substantially all the [ION] Debtors’ assets.”¬† As a result, Cyrus was independently prohibited from re-litigating this issue before him – and couldn’t have done so in any event because it had no standing to raise a proper objection.
Food for Thought.
The ION decision raises a number of questions – about the activist litigation tactics often used to extract the perceived value inherent in distressed debt acquisitions, and about the debt itself.
Was Cyrus overly aggressive in enforcing its purchased position?¬† Judge Peck suggests, in a footnote, that Cyrus would have been free to raise objections to a settlement between the ION debtors and unsecured creditors by which the unsecured creditors were provided consideration sufficient to meet the “best interests of creditors” test required for confirmation.¬† But wouldn’t any objection ultimately have raised the same issues as those put forward by Cyrus independently – i.e., the claimed lack of any direct encumbrance on ION’s FCC licenses, and the extra value available to unsecured creditors?
Or perhaps Cyrus wasn’t agressive enough?¬† For all the paper it filed in the ION cases, shouldn’t Cyrus have concurrently given appropriate notice under its second-priority debt Indenture and commenced an adversary proceeding to determine its rights under the Intercreditor Agreement?
Finally, what of Cyrus’ purchased position?¬† Was the Intercreditor Agreement truly “unambiguous” regarding Cyrus’ rights?¬† Didn’t the “Collateral” described and the difficulty of directly encumbering FCC licenses create sufficient ambiguity to trigger an objection of the sort Cyrus offered?¬† Are “purported liens” the same as “purported collateral“?¬† And is a distinction between the two merely “technical”?
For distressed debt investors (and for lenders negotiating pre-petition intercreditor agreements), ION Media offers provoking food for thought.
But while you’re thinking . . .¬†be sure to check your loan documents.
Monday, November 23rd, 2009
A brief but important update regarding Antiguan liquidators Peter Wastell and Nigel Hamitlon-Smith’s pending request for US recognition of their wind-up of Stanford International Bank, Ltd. (SIB):
US District Court Judge David Godbey has set an evidentiary hearing to determine whether SIB’s center of main interest (COMI) is Antigua – or whether, as urged by US receiver Ralph Janvey, Dallas-based enforcement proceedings commenced by the US Securities and Exchange Commission (SEC) and involving numerous Stanford entities (including SIB) should serve as SIB’s “main case.”
As readers of this blog are aware, Wastell and Hamitlon-Smith’s request to modify an injunction in the SEC enforcement matter and seek US recognition of their Antiguan wind-up proceeding was previously granted over Mr. Janvey’s objection.¬† Recognition of the Antiguan wind-up already has been granted in the UK through London’s High Court of Justice (Chancery Division) – and already has been the source of some scholarly commentary in that jurisdiction.¬† Prior posts on the UK ruling – as well as on other aspects of the Stanford case – are available here.
Judge Godbey’s evidentiary hearing is scheduled for January 21, 2010.¬† The parties’ proposed briefing schedule is available here.
Monday, November 16th, 2009
As readers of this blog are aware, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey have been busy in several forums battling for control of the financial assets previously controlled by Allen Stanford, including Stanford International Bank, Ltd. (SIB).¬† Prior posts are accessible here.
Messr’s. Wastell and Hamilton-Smith have filed numerous pleadings from other courts in support of their pending request, before US District Court Judge David Godbey, for recognition of their liquidation of SIB as a “main case” under Chapter 15 of the US Bankruptcy Code.
Mr. Janvey has recently filed his own copies of several recent rulings.¬† These include a ruling in which the Quebec Superior Court’s¬†Mr. Justice Claude Auclair found that Vantis Business Recovery Services – a division of British accounting, tax, and advisory firm Vantis plc, and the firm through which Messr’s. Wastell and Nigel Hamilton-Smith were appointed liquidators for SIB – should be removed from receivership of SIB’s Canadian operations.
More recently, Mr. Janvey has filed a copy of a recently unsealed plea agreement between Stanford affiliate James Davis and federal prosecutors.
Mr. Janvey’s papers provide a glimpse into Davis’ relationship with Stanford, and into the origins of SIB.¬† Summarized briefly:
- Davis’ and Stanford’s relationship dates back to the late 1980s, when Stanford retained Davis to act as the controller for then-Montserrat-based Guardian International Bank, Ltd.¬† Davis’ plea agreement recites that Stanford had Davis falsify the bank’s revenues and portfolio balances for banking regulators.¬† Continued regulatory scrutiny in Montserrat eventually led to Stanford’s closure of Guardian and removal of its banking operations to Antigua – where, in 1990, it resumed operations under the name of Stanford International Bank, Ltd.
- SIB and a “web of other affiliated financial services companies” operated under the corporate umbrella of Stanford Financial Group.¬† SIB’s primary function was to market supposedly safe and liquid “certificates of deposit” (CDs).¬† By 2008, SIB had sold nearly $7 billion of them to investors worldwide.
- Davis’ plea agreement further recites that investors were assured SIB’s operations were subject to scrutiny by the Antiguan Financial Services Regulatory Commission (FSRC), and to independent, outside audits.
SIB’s Asset Allocation and Operations
- In fact, SIB investor funds were neither safe nor secure.¬† According to Davis’ plea agreement, investor funds did not go into the marketed CDs.¬† Instead, they were placed into three general “tiers”: (i) cash and cash equivalents (“Tier I”); (ii) investments managed by outside advisors (“Tier II”); and (iii) “other” investments (“Tier III”).¬† By 2008, the majority of SIB’s investor funds – approximately 80% – were¬†held in “highly illiquid real and personal property” in “Tier III,”¬†including $2 billion in “undisclosed, unsecured personal loans” to Allen Stanford.¬† A further 10% was held in “Tier II.”¬†¬†The remaining 10% balance was presumably held in “Tier I.”
- Likewise, SIB’s operations were not subject to any meaningful scrutiny.¬† Davis’ plea agreement recites that in or about 2002, Stanford introduced him to Leroy King, a former Bank of America executive and Antiguan ambassador to the US, and soon-to-be Chief Executive Officer of the FSRC.¬† Stanford, King, and another FSRC employee responsible for regulatory oversight performed a “blood oath” brotherhood ceremony sometime in 2003 – ostensibly to cement their commitment to one another and King’s commitment to the protection of SIB – i.e., to “ensure that Antiguan bank regulators would not ‘kill [SIB's] business’” in Antigua.
- Though blood may be thicker than water, it is not thicker than cash: Stanford’s and King’s “brotherhood” was cemented further by bribes paid to King for his protection of SIB.¬† Acccording to Davis’ plea agreement, these bribes ultimately exceeded $200,000.¬† In return for this largesse, King reassigned two overly inqusitive Antiguan examiners of which Stanford complained sometime in 2003.¬† In 2005 and again in 2006, King further cooperated with Stanford in providing misleading responses to the US Securities and Exchange Commission (SEC)’s inquiries to the FSRC, in which the SEC divulged to the FSRC that it had evidence of SIB’s involvement in a¬†”possible Ponzi scheme.”¬† King and Stanford similarly collaborated in responding to a 2006 inquiry by the Director of the Eastern Caribbean Central Bank’s Bank Supervision Department regarding SIB’s affiliate relationship with the Bank of Antigua.
SIB’s Financial Reporting
- A central premise of Stanford’s approach to soliciting investments – and, perhaps understandably, a central point of interest for would-be investors¬†- was that SIB must show a profit each year.¬† To accomplish this, Davis and Stanford reportedly initially determined false revenue numbers for SIB.¬† Ultimately, this collaboration gave rise to a fabricated annual “budget” for SIB, which would show financial growth.¬† Using these “budgeted” growth numbers, Stanford accounting employees working in St. Croix would generate artificial revenues (and resulting artificial ROIs), which were then transmitted to Stanford’s Chief Accounting Officer in Houston and ultimately to Davis in Mississippi for final adjustment and approval before making their way back to the Caribbean for reporting to SIB investors.
- According to Davis’ plea agreement, “[t]his continued routine false reporting . . . created an ever-widening hole between reported assets and actual liabilities, causing the creation of a massive Ponzi scheme . . . .¬† By the end of 2008, [SIB reported] that it held over $7 billion in assets, when in truth . . . [SIB] actually held less than $2 billion in assets.”
- In about mid-2008, Stanford, Davis, and others attempted to plug this “hole” created by converting a $65 million real estate transaction in Antigua into a $3.2 billion asset of SIB through a “series of related party property flips through business entities controlled by Stanford.”
SEC Subpoenas and SIB’s Insolvency
- By early 2009, the SEC had issued subpoenas related to SIB’s investment portfolio.¬† At a February meeting held in advance of SEC testimony, Stanford management determined that SIB’s “Tier II” assets were then valued at approximately $350 million – down from $850 million in mid-2008.¬† Management further determined that¬† and¬†SIB’s “Tier III” assets consisted of (i) real estate acquired for less than $90 million earlier in the year, but now valued at more than $3 billion; (ii) $1.6 billion in “loans” to Stanford; and (iii) other private equity investments.¬† Davis’ plea agreement recites that at that same meeting, and despite the apparent disparity between actual and reported asset values, Stanford insisted that SIB had “‘at least $850 million more in assets than liabilities.’”¬† In a separate meeting later that day, however, Stanford reportedly acknowledged that SIB’s “assets and financial health had been misrepresented to investors, and were overstated in [SIB's] financials.”
Janvey doesn’t describe exactly how these acknowledged facts integrate into his prior opposition to the Antiguan liquidators’ request for recognition.¬† His prior pleadings have questioned indirectly the integrity of the Antiguan wind-up proceedings; consequently, Mr. King’s role in protecting SIB under the auspices of the Antiguan FSRC may well be the point.¬† Likewise, Janvey may point to the US-based control and direction of financial reporting manipulations that ultimately created a $5 billion “hole” in SIB’s asset structure as evidence of the American origin of SIB’s allegedly fraudulent operations.¬† Or the filing may be intended to blunt the effect of a previously filed detention order – issued by another US District Court and affirmed by the US Fifth Circuit Court of Appeals – confining Stanford to the US and observing that his ties to Texas were “tenuous at best.”
It remains for Judge Godbey to determine whether – and in what way and to what degree – Davis’ plea agreement impacts on the liquidators’ request for a determination that SIB’s “center of main interests” remains in Antigua.
For the moment, the parties await his decision.
Monday, November 9th, 2009
The fiduciary duty of directors and officers to the shareholders of their corporation is a fundamental axiom of corporate law.¬† Almost as familiar is the notion that when a corporation enters the “zone of insolvency”, those fiduciary duties expand to include creditors as well.
What may be far less familiar is determining precisely when the corporation has entered the zone of insolvency – and what to do¬†when it does.¬†
Where is the “zone of insolvency”?
It has been said that the zone of insolvency is a bit like obscenity:¬†¬†It’s practically impossible to define . . .¬†but you sure know it when you see it.¬† It may not be as well known that many businesses transit the zone of insolvency with surprising frequency at various points during their corporate lifecycles.
A recent law review article notes that “between 2000 and 2004, approximately 4% of 6,178 large publicly held companies engaged in merger and acquisition activity that placed over 75% of their assets at risk. Likewise, approximately 467 smaller businesses risked half their assets, and at least 603 smaller businesses risked one-fifth of their assets. Thus directors’ and officers’ fiduciary duties may oscillate between shareholders and creditors numerous times per year depending on the risk-taking strategies in which they engage.”¬† Jonathan T. Edwards and Andrew D. Appleby, The Twilight Zone of Insolvency: New Developments in Fiduciary Duty Jurisprudence That May Affect Directors and Officers While in the Zone of Insolvency, 18 J. Bankr. L. & Prac. 3 Art. 2 (2009) (citing Anna M. Dionne, Living on the Edge: Fiduciary Duties, Business Judgment, and Expensive Uncertainty in the Zone of Insolvency, 13 Stan. J.L. Bus. & Fin. 188, 191 (2007)).
Add to this the changing nature of financial investments in many companies (which now feature “hybrid” instruments with both¬†equity and debt characteristics) and the dramatic adjustment of multiples and valuations that have occured in the capital markets over the last 12 months, and it is easy to see that the “zone of insolvency” is hardly a bright line.¬† Instead,¬†it is more akin to a solar flare – it can depend as much upon the corporation’s financial structure and upon market conditions as upon the decisions made by the corporation’s officers and directors.
What to do once you’re there?
When a financially¬†at-risk corporation faces either operational or balance sheet insolvency, its directors and officers may face a variety of unique pressures and challenges.¬† Among them:
- Time pressure: A corporation with little or no operating liquidity is like a swimmer deprived of oxygen – precious little time remains before everything goes completely black.
- Credit constraint:¬† The corporation may face an uphill battle for additional, needed credit. Frequently, the only readily available source of cash are parties with close ties to the corporation – i.e., insiders.¬†¬†And such parties are apt to require advantageous terms in exchange for their incremental risk.
- Anxious stakeholders:¬† Creditors and shareholders anxious to protect their respective stakes in the corporation are likely to increase their scrutiny of every new transaction, and to “second-guess” anything that might further jeopardize their positions.
Top management’s response to these pressures is well-summarized by the adage that “process rules.”¬† Because each corporation’s situation calls for a unique set of decisions, and because corporate officers and directors have general duties of care and loyalty to the corporation (and to creditors when the corporation is operating in the “zone of insolvency”), they best protect themselves who ensure that any decision:
- Is advised by (but not delegated to) outside advisors.
- Involves directors who are independent and disinterested.
- Considers shareolders and creditors.
- Documents full, open, neutral and reasonable exploration of available options.
Two very recent articles offer similar advice and summarize some practical tips on insulating directors and officers – or on identifying behavior that may fall short of the fiduciary duties expected of such individuals when a corporation faces troubled times or elevated risk.
Gerard S. Catalanello and Jeffrey R. Manning offer their insights in a recent Turnaround Management Journal piece entitled “A Fresh Look into the Zone of Insolvency,” while Frank Aquila and Peter Naismith provide similar guidance in¬†”Directing Within the ‘Zone’,” available in Banking Director magazine’s 4th Quarter’s issue.¬† Each is worth perusal.
When do “zone of insolvency” considerations kick in?¬† And how frequent are such concerns likely to be in this market?¬† Catalanello and Manning put it this way:
[G]iven the realities of today’s economy and the capital markets, a company that has debt maturing in the next 18 months is likely to be at least approaching the zone [of insolvency].¬† If its corporate debt is trading at a material discount (i.e., more than 20 percent discount to par), a company probably is well over that stark demarcation.
Officers, directors . . . and creditors – take note.
Monday, November 2nd, 2009
In an age of globalized business, US-based firms commonly find themselves dealing with foreign creditors or in contractual relationships with foreign parties.¬† Those off-shore relationships can sometimes raise challenging issues when the firm needs to reorganize or wind down its operations under US insolvency law, and foreign creditors or contractual parties must determine how to proceed.
Last week, the Delaware bankruptcy court addressed¬†just one of those challenging issues:
What happens when a claims dispute¬†in US Bankruptcy Court runs afoul of European litigation procedures?
Here’s the set-up:
Global Power Equipment Group, Inc. and its related entities sought Chapter 11 protection in Delaware over three years ago after sustained losses in the companies’ heat recovery steam generator (HRSG) segment, and related liquidity problems, necessitated wind-down of the companies’ HRSG operations.
In connection with the wind-down, Global Power and its affiliates sought – and obtained – permission to reject existing HRSG development contracts and to enter into new “completion” contracts with customers who still required delivery of HRSG units.¬† One of these customers was Maasvlakte, a Dutch company who had contracted for the construction of an HRSG project at a port facility in Rotterdam, the Netherlands.¬† Maasvlakte and several other companies involved in the project were corporate subsidiaries of Air Liquide Engineering, S.A., a French concern.
Maasvlakte executed a completion contract which provided for a “step-down” of contractual claims commensurate with delivery of the project.¬† In the meantime, it filed two proofs of claim based on the prior contract: One against Deltak L.L.C. (the entity responsible for the project), and one against Global Power as guarantor of Deltak’s obligations.
Sometime afterward, Deltak’s and Global Power’s plan administrator¬†filed objections to Maasvlakte’s claims, on the basis of the “step-down” provisions in Deltak’s completion contract with Maasvlakte.¬† Maasvlakte responded, and the parties prepared to litigate their respective positions under the Federal Rules of Civil Procedure (FRCP), made applicable to claims objections through the Federal Rules of Bankruptcy Procedure.
In early 2009, Deltak and Global Power propounded discovery on Maasvlakte to obtain information about testing in connection with the¬†HRSG project; however, three days before production was due, Maasvlakte¬†took the position¬†that because many of the documents sought were physically located in France, under¬†control of Air Liquide¬†and unavailable to Maasvlakte, their production under the FRCP could not proceed because a French statute outlawed French companies’ participation in foreign discovery procedures outside those set forth in the Hague Convention.
Under the Hague Convention rules claimed by Maasvlakte, discovery would require issuance of Letters of Commission through the US Consulate to the French Ministry of Justice – and it appears compliance would not be mandatory.¬† Processing them would require an additional 2 – 6 weeks.¬† Failure to comply with this procedure would subject the participating French company to sanctions in France.
Deltak and Global Power disagreed, and sought to compel the discovery in Delaware.¬† Judge Brendan Shannon ordered the parties to meet and confer; however, the parties were apparently unable to come to terms.
In a¬†40-page decision,¬†Judge Shannon found that (i) Maasvlakte had the “control” of documents necessary for compelled production under the FRCP; and (ii) the “comity analysis” applicable to alternate discovery procedures in this case favored use of the FRCP.
For the “comity analysis,” Judge Shannon employed prior Supeme Court authority¬†- Soci√©t√© Nationale Indust. A√©rospatiale v. U.S. Dist. Ct. for the S. Dist. Of Iowa, 482 U.S. 522 (1987) – to note that the Hague convention need not be employed ahead of the FRCP to obtain discovery from foreign litigants in connection with¬†actions pending in the US.¬† Instead, it is an alternate procedure that does not automatically override existing US procedural rules.¬† This is so even when foreign law – such as the French statute in question (which, coincidentally, was the same one at issue in Soci√©t√© Nationale) – requires compliance with the Hague convention.
To determine whether the Hague Convention should apply in place of ordinary US procedural rules, US courts are directed to apply a multi-part “comity analysis.”¬† This involves an evaluation of:
- the importance of the documents or information requested to the litigation;
- the degree of specificity of the request;
- whether the information originated in the United States;
- the availability of alternative means of securing the information; and
- the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the requests would undermine important interests of the state where the information is located.
Some¬†US courts have added two other steps to the analysis: (i) good faith of the party resisting discovery; and (ii) the hardship of compliance on the party or witness from whom discovery is sought.
In Maasvlakte’s case, Judge Shannon found that (i) the documents sought were central to the claims dispute between the parties; (ii) the request was sufficiently specific; (iii) the documents were originally produced in the Netherlands (where the French blocking statute does not apply) and only subsequently sent to France; (iv) the documents were not otherwise available to Deltak and Global Power, except through the Hague Convention; (v) the US interest in adjudicating the matter expeditiously through its courts outweighed the “attenuated” French interest occasioned by the fact that documents originally produced in the Netherlands were now held in France by a French company; and (vi) the hardship to Maasvlakte was “minimal” since, after all, it originally subjected itself to the Bankruptcy Court’s jurisdiction – and, apparently, assumed the risk of prosecution in France for so doing.¬† As for the risk of criminal sanctions to Maasvlakte and Air Liquide, it was Judge Shannon’s estimation that the French statute in question would “not subject [Maasvlakte or Air Liquide] to a realistic risk of prosecution, and cannot be construed as a law intended to universally govern the conduct of litigation within the jurisdiction of a United States court.”
The only factor found weighing in favor of the Hague Convention in this case was Maasvlakte’s lack of bad faith.
Judge Shannon’s decision offers counsel something to consider the next time a trans-national dispute forms the basis for a claim in a US bankruptcy.