July 10th, 2013
Portrait of Émile Zola (1848), by Édouard Manet (Photo credit: Wikipedia)
“The humorist Douglas Adams was fond of saying, ‘I love deadlines. I love the whooshing sound they make as they fly by.’ But the law more often follows Benjamin Franklin’s stern admonition: ‘You may delay, but time will not.’ To paraphrase Émile Zola, deadlines are often the terrible anvil on which a legal result is forged.”
With these words, Ninth Circuit Court of Appeals last week declined to retroactively extend Federal Rule of Bankruptcy Procedure 4007(c)’s deadline to file a non-dischargeability complaint. That deadline permits creditors only 60 days following an individual debtor’s initial meeting of creditors (otherwise known as the debtor’s “section 341(a) meeting”) to file a complaint to have certain types of debt determined non-dischargeable, unless a request for extension of the deadline is filed within the same, initial 60-day period.
The case before the 3-judge panel involved a creditor who had, in fact, previously obtained an extension to file a non-dischargeability complaint – but who, due to internal word-processing difficulties with conversion to the “Portable Document Format” (*.pdf) format now required for electronic filings with federal bankruptcy courts, missed the extended deadline by less than an hour.
The brief, 14-page decision (available here) upheld prior rulings in the same matter by both the Bankruptcy Court and the District Court. It raised, but did not answer, the question of what happens when a missed deadline is due to external problems (e.g., technical difficulties with the Bankruptcy Court’s filing system), rather than problems with counsel’s IT configuration or office procedures. But it also declined to recognize an “equitable exception” to the rule in the absence of a Supreme Court directive to the contrary:
We acknowledge that the U.S. Supreme Court has not expressly addressed whether FRBP 4007(c)’s filing deadline admits of any equitable exceptions and that lower courts are divided on the issue. See Kontrick v. Ryan, 540 U.S. 443, 457 & nn.11–12 (2004) (declining to decide question and noting circuit split). We need not, and do not, reach the question of whether external forces that prevented any filings—such as emergency situations, the loss of the court’s own electronic filing capacity, or the court’s affirmative misleading of a party—would warrant such an exception. See, e.g., In re Kennerley, 995 F.2d at 147–48; see also Ticknor v. Choice Hotels Intern., Inc., 275 F.3d 1164, 1165 (9th Cir. 2002). . . . In short, absent unique and exceptional circumstances not present here, we do not inquire into the reason a party failed to file on time in assessing whether she is entitled to an equitable exception from FRBP 4007(c)’s filing deadline; under the plain language of the rules and our controlling precedent, there is no such exception.
July 1st, 2013
A very recent decision out of California’s Central District Bankruptcy Court highlights the boundaries of “commercial reason” and “diligence” where distressed asset sales are concerned.
In re 1617 Westcliff, LLC (Case No. 8:12-bk-19326-MW) involved the court-approved sale of the debtor’s real property under a purchase agreement in which the debtor and the purchaser agreed to use their “commercially reasonable and diligent efforts” to obtain the approval of the debtor’s mortgage lender for the assumption of the mortgage debt by the buyer. If the approval was not obtainable, the buyer had the right to terminate the transaction. The buyer also had the right to terminate the deal if the assumption required payment of more than a 1% assumption fee.
As is sometimes the case where due diligence remains while a deal is approved, things didn’t quite work out as planned. Unfortunately, the bank proved less cooperative than the parties had anticipated. More importantly, however, the buyer notified the debtor-seller 4 days prior to closing that it would not proceed with the transaction as structured, but might be willing to proceed if the transaction was framed as a tax deferred exchange.
The debtor was, understandably, somewhat less than receptive to restructuring the deal at the 11th hour. It insisted that the buyer proceed with the transaction as originally agreed and as approved by the court. In response, the buyer effectively walked away. The parties then made competing demands on the escrow company regarding the buyer’s $200,000 deposit, and filed cross-motions with Bankruptcy Judge Mark Wallace to enforce them.
In a brief, 11-page decision, Judge Wallace found that the buyer’s renunciation of the deal 4 days before closing was a material breach of the buyer’s obligation to use “commercially reasonable and diligent efforts” to obtain assumption consent:
The Purchase Agreement required [the buyer] to keep working in good faith for an assumption until the close of business on May 10, 2013, not to throw up its hands and to propose – at the eleventh hour – a wholesale restructuring of the purchase transaction in a manner completely foreign to the Purchase Agreement. On [the date of the proposal] there were still four days left to reach agreement with the Bank, but [the buyer] chose (five months into the deal) to abandon the assumption. It was not commercially reasonable nor was it diligent for [the buyer] to cease negotiations with the Bank relating to the assumption of the loan under these circumstances.
Judge Wallace found that due to this breach the debtor was entitled to retain the $200,000 deposit. He found further that the buyer, by offering to purchase the property in a restructured transaction, had failed to effectively terminate the deal. Instead, the buyer had indicated that it was “eager to keep the Purchase Agreement in force (on terms other than those agreed to).” Since the deal had not terminated, the buyer remained under a duty to continue to use reasonable efforts to obtain the bank’s consent. Its failure to do so caused the loss of its deposit.
Bill of sale sedan 1927 (Photo credit: dlofink)
The 1617 Westcliff decision (the unpublished slip copy is available here) serves as a reminder to buyer’s counsel of the unique nature of distressed asset purchases. The Bankruptcy Court which originally approved the purchase remains available and prepared to resolve any issues which may arise prior to closing, often at a fraction of what it would cost to get a Superior Court involved in connection with an unraveled private sale. And conditions and contingencies to the sale must be carefully drafted and observed. This applies even to common asset-purchase “boilerplate” such as “commercial reasonableness” and “diligence.”
June 19th, 2013
In a decision released Monday, Central District of California Bankruptcy Judge Robert Kwan clarified some uncertainty over the standard necessary to impose of the automatic stay immediately after the commencement of a Chapter 15 case, but before recognition is granted to a foreign representative under US law.
Map of California showing the primary cities and roadways (Photo credit: Wikipedia)
An earlier decision issued in the same district, In re Pro-Fit Holdings Ltd., 391 B.R. 850 (Bankr. C.D. Cal. 2008), imposed the automatic stay on an interim basis under Bankruptcy Code section 1519(a) without requiring that the requesting party meet the standards of a preliminary injunction, as the language of section 1519(a) seems to require.
Of the 10 or so published decisions citing Pro-Fit , none follows or even mentions this reasoning, though one unpublished decision does. See In re SIVEC SRL., 2011 WL 2445754 (Bankr. E.D. Ok., June 15, 2011).
Recently, the appointed foreign representative and liquidator of Worldwide Education Services, Inc. relied on Pro-Fit to request a stay of impending trials in California’s Central District Court, ostensibly as a means of preserving whatever assets the company – which has been in a “wind-down” mode for nearly three years – might have left. In reviewing the liquidator’s request, Judge Kwan declined to follow Pro-Fit – and, in fact, specifically held that Pro-Fit was wrongly decided.
Though Pro-Fit held that a motion for provisional relief requesting a temporary application of the automatic stay under Section 1519(a) does not need to meet the requirements for injunctive relief, either procedural or substantive, Judge Kwan held that, in fact, the statute does require a motion for provisional relief to meet those standards.
Further, he found that the liquidator had filed to satisfy the injunction standards, and thus provisional application of the automatic stay was inappropriate in this case.
The decision, though not controversial, nevertheless helps to harmonize the law within the Circuit – and nationwide – on the question of what a foreign representative must show in order to obtain provisional relief. A copy of the unpublished slip opinion is here.
June 14th, 2013
In a 23-page memorandum decision issued yesterday, New York Bankruptcy Judge Stewart Bernstein ruled that the debtor and a third party were parties to a master agreement that allowed the debtor to issue purchase orders that the counter-party was required to fill. Judge Bernstein held that the debtor could assume the master agreement but could reject individual purchase orders. The purchase orders were divisible from the master agreement.
English: Sketch of Richard Mentor Johnson freeing a man from debtors' prison. Johnson was an advocate of ending the practice of debt imprisonment throughout his political career. (Photo credit: Wikipedia)
The decision (available here) provides a thorough analysis of when – and under what circumstances – an executory agreement may be “divisible” into separate, individual agreements . . . which can then be selectively assumed or rejected by a debtor or trustee.
June 7th, 2013
Early last month the Supreme Court held that non-dischargeability for defalcation in breach of a fiduciary duty (see 11 U.S.C. 523(a)(4)) requires a showing of subjective intent (i.e., “scienter“) to misuse funds.
English: The Supreme Court of the United States. Washington, D.C. Français : La Cour suprême des États-Unis. Washington D.C., États-Unis. Norsk (bokmål)â¬: Høyesterett i USA. Washington, D.C. (Photo credit: Wikipedia)
BULLOCK v. BANKCHAMPAIGN, N. A. resolves a split in the Circuit courts over whether scienter was required to establish non-dischargeability under this section. Compare In re Sherman, 658 F. 3d 1009, 1017 (CA9 2011) (“defalcation” includes “even innocent acts of failure to fully account for money received in trust” (internal quotation marks and brackets omitted)), with In re Uwimana, 274 F. 3d 806, 811 (CA42001) (defalcation occurs when “negligence or even an innocent mistake . . . results in misappropriation”), with 670 F. 3d, at 1166 (“defalcation requires . . . conduct [that] can be characterized as objectively reckless”), and with In re Baylis, 313 F. 3d 9, 20 (CA1 2002) (“defalcation requires something close to a showing of extreme recklessness”).
The Supremes found that to establish 523(a)(4) non-dischargeability, scienter is required. As seems to be frequently the case with this Court, the Ninth Circuit was not on the prevailing end of the circuit split.
A copy of the slip opinion is here.
June 4th, 2013
A recently-issued Ninth Circuit decision creates potentially new avenues of recovery for creditors of an insolvent debtor.
Fitness Holdings International, Inc. (FHI), a home fitness corporation, had received significant funding between 2003 and 2006 from two entities: Hancock Park, its sole shareholder, and Pacific Western Bank. FHI’s unsecured obligations to Hancock Park, totaling $24 million, were subordinated to $12 million in secured financing by Pacific Western Bank in the form of a $5 million term loan and a $7 million line of credit (all guaranteed by Hancock Park).
In 2007, after numerous amendments, FHI re-financed its remaining obligations to Pacific Western Bank and to Hancock Park with a new $17 million term loan and an $8 million line of credit. The payoff of Pacific Western Bank’s prior secured loan had the effect of releasing Hancock Park from its guarantee. FHI’s efforts to restructure were ultimately not successful, however, and in 2008, the company sought protection under Chapter 11.
A Committee of Unsecured Creditors in FHI’s case sued Hancock Park, seeking to recover the earlier pay-off of Hancock Park’s debt and alleging that the debt ought, in fact, to be re-characterized as “equity” (and that the “repayment” of the “debt” ought therefore to be avoided as a constructively fraudulent transfer
, since FHI allegedly received “less than equivalent value” in exchange for the payments).
The Committee’s complaint was dismissed; however, FHI’s case was subsequently converted from one under Chapter 11 to one under Chapter 7, and the trustee appealed the dismissal to the US District Court. The District Court affirmed the dismissal, finding that under longstanding precedent of the Ninth Circuit Bankruptcy Appellate Panel
, Hancock Park’s advances to Fitness Holdings were loans and, as a matter of law, it was barred from re-characterizing such loans as equity investments.
The trustee appealed to the Ninth Circuit, which vacated the District Court’s decision and remanded for further findings. In doing so, the Ninth Circuit held that in an action to avoid a transfer as constructively fraudulent under § 548(a)(1)(B), if any party claims that the transfer constituted the repayment of a debt (and thus was a transfer for “reasonably equivalent value”), the court must determine whether the purported “debt” constituted a right to payment under state law. If it did not, the court may re-characterize the debtor’s obligation to the transferee under state law principles.
The decision is worth noting because:
• Prior case law in the Ninth Circuit held that re-characterization of “debt” as “equity” was impermissible (see In re Pacific Express, 69 B.R. 112 (B.A.P. 9th Cir. 1986)). This decision overrules that earlier precedent.
• The Ninth Circuit joined the Fifth Circuit (In re Lothian Oil, 650 F.3d 539, 542–43 (5th Cir. 2011)) in holding that state law – and state law alone – controls in determining when, and whether, alleged “debt” ought to be re-characterized as “equity.”
The 3-judge panel’s ruling suggests that it is “substance” – and not “form” – which ultimately determines whether an obligation is an equity investment
(rather than debt) under applicable state law. The crucial question is “whether that obligation gives the holder of the obligation a ‘right to payment’ under state law.”
A copy of the decision is attached.
February 18th, 2012
Cravath’s always-well-done quarterly update of significant bankruptcy decisions, prepared by New York partner Richard Levin, has been recently completed. The most recent edition is available here.
February 14th, 2012
Image via Wikipedia
Canadian gold mining concern Crystallex International Corp. filed for protection under Canada’s Companies’ Creditors Arrangement Act (CCAA) on Dec. 23, 2011. The company operates an open pit mine in Uruguay and three gold mines in Venezuela.
Among its Venezuelan projects is the 9,600-acre Las Cristinas mine. Court papers said the site’s untapped gold deposits are among the largest in the world, containing an estimated 20 million ounces of gold. Crystallex filed for Chapter 15 bankruptcy protection in Delaware on the same date to protect its US assets while seeking a Canadian restructuring. Delaware Bankruptcy Judge Peter Walsh granted recognition on January 20.
Crystallex’s financial troubles allegedly stem from the Venezuelan government’s threatened revocation of Crystallex’s operating agreement for the Las Cristinas project as a result of the company’s failure to obtain an environmental permit. Crystallex blames this failure on the Venezuelan government’s own continued failure to grant the permit.
The company continues to operate, but appears to be staking its restructuring hopes primarily on arbitration claims for $3.8 billion in alleged losses suffered in connection with the Las Cristinas agreement. Crystallex said it has invested more than C$500 million in the uncompleted Las Cristinas project. The company believes an arbitration award will provide sufficient funds to pay all its creditors in full while leaving value for the company’s shareholders.
Those creditors include secured lenders China Railway Resources Group (owed C$2.5 million) and Venezolano Bank about (owed $1 million). They also include $104.14 million in 9.34% senior unsecured notes the company issued on Dec. 23, 2004. Crystallex’s CCAA filing and its concurrent Chapter 15 petition were filed on the same date its notes matured.
Recently, the company sought to alleviate its immediate liquidity concerns by means of an auctioned DIP facility. Specifically, Crystallex sought a debtor-in-possession loan of C$35 million, convertible into an “exit facility.”
Crystallex reported to the US Bankruptcy Court that it was in receipt of multiple expressions of interest in such a facility. Meanwhile, pending the completion of due diligence and approval by the Canadian Court, Cyrstallex sought recognition of a much smaller C$3.125 million “bridge facility” from Tenor Special Situations Fund, L.P., which the Canadian Court approved January 20.
The bridge facility expires April 16, and required US Bankruptcy Court approval by February 20. Judge Walsh provided that approval at a hearing held yesterday.
Crystallex’s Chapter 15 proceeding is pending as Case No. 11-bk-14074.
February 9th, 2012
For those practitioners practicing locally here in SoCal – or for those who need to appear pro hac in one of the many Chapter 11′s pending in the nation’s largest bankruptcy district – the Central District has very recently collaborated with the local bankruptcy bar to produce a detailed list of individual judicial preferences.
In a District with nearly 30 sitting bankruptcy judges scattered over five divisions, a “score-card” like this one is essential reading. A copy of the survey is available here.
Other Posts of Interest:
January 30th, 2012
JonesDay’s comprehensive and always-readable summary of notable bankruptcies, decisions, legislation, and economic events was released just over a week ago. A copy is available here.
As 2012 gets off to an uncertain start, some more recent headlines are accessible immediately below.