Posts Tagged ‘Canadian Companies’ Creditors Arrangement Act’
Monday, April 19th, 2010
International readers of this blog – and those in the US who practice internationally – are more than likely aware of the doctrine of “comity” embraced by US commercial law.¬† In a nutshell, “comity” is shorthand for the idea that US courts typically afford respect and recogntion (i.e., enforcement) within the US to the judgment or decision of a non-US court – so long as that decision comports with those notions of “fundamental fairness” that are common to American jurisprudence.
In the bankruptcy context, “comity” forms the backbone for significant portions of the US Bankruptcy Code’s Chapter 15.¬† Chapter 15 – enacted in 2005 – provides a mechanisim by which the administrators of non-US bankruptcy proceedings can obtain recogntion of those proceedings, and further protection and assistance for them, inside the US.
But in at least some US bankruptcy courts, “comity” for non-US insolvencies only goes so far.¬† Last month, US Bankruptcy Judge Thomas Argesti, of Pennsylvania’s Western District, offered his understanding of¬†where “comity” stops – and where US bankruptcy proceedings begin.
Judge Argesti currently presides over¬†Chapter 15 proceedings commenced in furtherance of two companies – Canada’s Railpower Technologies Corp. (“Railpower Canada”) and its wholly-owned US subsidiary, Railpower US.¬† The two Railpower entities commenced proceedings under the Canadian Companies Creditors’ Arrangement Act (“CCAA”) in Quebec in February 2009.¬† Soon afterward, their court-appointed monitors, Ernst & Young, Inc., sought recogntition of the Canadian Railpower cases in the US.
Railpower US’ assets and¬†employees – and¬†90% of its creditors – were¬†located in the US.¬†¬†The company was managed from offices in Erie, PA.¬† Nevertheless, it carried on its books an inter-company obligation of $66.9 million, owed to its Canadian parent.¬† From the outset, Railpower US’ American¬†creditors asserted this “intercompany debt” was, in fact, a contribution to equity which should be subordinate to their trade claims.¬† Judge Argesti’s predecessor, now-retired Judge Warren Bentz, therefore conditioned recognition of Railpower US’ case upon his ability to review and approve any proposed distribution of Railpower US’ assets.¬† After the company’s assets were sold, Judge Bentz further required segregation of the sale proceeds pending his authorization as to their distribution.¬† Finally,¬†after the Canadian monitors obtained a “Claims Process Order” for the resolution of claims in the CCAA proceedings and sought that order’s enforcement in the US, Judge Bentz further “carved out” jurisdiction for himself to adjudicate the inter-company claim if the trade creditors received anything less than a 100% distribution under the CCAA plan.
Railpower US’ assets were sold – along with the assets of its Canadian parent – to R.J. Corman Group, LLC.¬† Railpower US was left with US$2 million in sale proceeds against US$9.3 million in claims (other than the inter-company debt).¬† The Canadian monitor indicated¬†its intention to file a “Notice of Disallowance” of the inter-company debt in the Canadian proceedings, but apparently never did.¬† Meanwhile, approximately CN$700,000 was somehow “upstreamed” from Railpower US to Railpower Canada.¬† Finally, despite the¬†monitor’s¬†assurances to the contrary, Railpower Canada’s largest shareholder – and an alleged secured creditor – sought relief in Quebec to throw both¬†Railpower entities into liquidation proceedings under¬†Canada’s Bankruptcy and Insolvency Act.
Enough was enough for Railpower US’ American creditors.¬† In August 2009, they filed an involuntary Chapter 7 proceeding against Railpower US, seeking to regain control over the case – and Railpower US’ assets – under the auspices of an American panel trustee.
The Canadian monitor requested abstention under Section 305 of the Bankruptcy Code.¬† Significantly re-drafted in the wake of Chapter 15’s enactment, that section permits a US bankruptcy court to dismiss a bankruptcy case, or to suspend bankruptcy proceedings, if doing so (1) would better serve the interests of the creditors and the debtor; or (2) would best serve the purposes of a recognized Chapter 15 case.
Judge Argesti’s 14-page decision, in which he denied the monitors’ motion and permitted the Chapter 7 case to proceed,¬†is one of apparent first impression on this section where it regards a Chapter 15 case.
Where the “better interests of the creditors and the debtor” are concerned, Judge Argesti’s discussion essentially boils down to the proposition that because creditors representing 85% – by number and by dollar amount – of Railpower US’ case sought¬†Chapter 7, those creditors have spoken for themselves as to what constitutes their “best interests” (“The Court starts with a presumption that these creditors have made a studied decision that their interests are best served by pursuing the involuntary Chapter 7 case rather than simply acquiescing in what happens in the Canadian [p]roceeding.”).
The more interesting aspect of the decision concerns Judge Argesti’s discussion of whether or not the requested dismissal “best serve[d] the purposes” of Railpower’s Chapter 15 cases.¬† For guidance on this issue, Judge Argesti turned to Chapter 15’s statement of policy, set forth in Section 1501 (“Purpose and Scope of Application”) – which states Chapter 15’s purpose of furthering principles of comity and protecting the interests of all creditors.¬† Then, proceeding point by point through each of the 5 enunciated principles behind the statute, he arrived at the conclusion that the purposes of Chapter 15 were not “best served” by dismissing the involuntary Chapter 7 case.¬† As a result, Railpower US’ Chapter 7 case would be permitted to proceed.
Judge Argesti’s analysis appears¬†to focus primarily on (i) the Canadian monitors’ apparent delay in seeking disallowance of the inter-company debt in Canada; (ii) the “upstreaming” of CN$700,000 to Railpower Canada; and (iii) the monitors’ apparent failure, as of the commencement of the involuntary Chapter 7, to “unwind” these transfers or to recover them from Railpower Canada for the benefit of Railpower US’ creditors.¬† It also rests on the fact that Railpower US was – for all purposes – a US debtor, with its assets and creditors located primarily in the US.
In this context, and in response to the monitors’ protestations that comity entitled them to judicial deference regarding the Chapter 15 proceedings, Judge Argesti noted that:
comity is not just a one-way street.¬† Just as this Court will defer to a [non-US] court if the circumstances require it, so too should a foreign court defer to this Court when appropriate.¬† In this case it was clear from the start that [this Court] expressed reservations about the distribution of Railpower US assets in the Canadian [p]roceeding . . . .¬† The Monitor has [not] explained how this¬†[reservation] is to be [addressed] unless the Canadian Court shows comity to this Court.
Judge Argesti’s decision may be limited to its comparatively unique facts.¬† However, it should also serve as a cautionary tale for representatives seeking to rely on principles of comity when administering business assets in the US.¬† In addition to his more limited construction of “comity,” Judge Argesti also noted that recognition of Railpower US’ Chapter 15 case was itself subject to second-guessing where subsequently developed evidence suggested that the company’s “Center of Main Interests” was not in Canada, but in the US.
For anyone weighing strategy attendant to the American recognition of a non-US insolvency proceeding, this decision is important reading.
Monday, January 25th, 2010
From New York’s Southern District comes the strange tale of the Canadian asset backed commercial paper market, and a decision that raises the question of whether foreign courts provide a possible strategic “end run” around US law for parties doing business in the US – and even for US litigants with a business presence overseas.
Collapse of the Canadian Asset Backed Commercial Paper Market
Asset backed commercial paper (ABCP) is a¬†Canadian short-term investment with a low interest yield.¬† Generally marketed as a “safe” investment, ABCP is considered “asset backed” because the cash used to purchase these notes goes to create a portfolio of financial or other assets, which are then security for repayment of the originally issued paper.¬† In flush times, ABCPs were typically paid off with the proceeds from the purchase of new paper – or simply rolled over into new paper purchases themselves.
But times did not stay flush.
By 2007, ABCPs were collateralized by everything from auto loans to residential mortgages – which, unlike the “short-term” paper they backed, had much longer maturities.¬† With the rapidly-cresting economic downturn, uncertainty began to ripple through the ABCP market by mid-2007.¬† Because ABCPs were not transparent investments and investors could not determine which assets backed their paper, the uncertainty soon grew into a full-scale liquidity crisis.
The Big Freeze – And The Planned Thaw
In August 2007, approximately CAN$32 billion of non-bank sponsored ABCP in the Canadian market was frozen after an agreement between the major market participants.¬† This “freeze” was implemented pending an attempt to resolve the crisis through a restructuring of the market.¬† A “Pan-Canadian Investors Committee” was created, which introduced a creditor-initiated Plan of Compromise and Arrangement under the Canadian Companies’ Creditors Arrangement Act (CCAA).¬† The Plan¬†was sanctioned in June 2008 in the Metcalfe cases.¬† Essentially, the Plan converted the noteholders’ frozen paper into new, long-term notes with a discounted face value that could be traded freely, in the hope that a strong secondary market for the notes would emerge in the long run.
Releases for Third Parties
Part of the Plan required that market participants, including banks, dealers, noteholders, asset providers, issuer trustees, and liquidity providers be released from any liability related to ABCP, with the exception of certain narrow fraud claims.¬† Among those receiving these releases were Bank of America, Deutsche Bank, HSBC Bank USA, Merrill Lynch International, UBS, and Wachovia Bank and their respective affiliates.
These third party releases were themselves the subject of appellate litigation in Canada, but were eventually upheld as within the ambit of the CCAA.¬† The Plan became effective in January 2009, and the court-appointed monitors (Ernst & Young, Inc.) sought US recognition of the Metcalfe cases in New York the following October.¬† More specifically, the monitors sought enforcement in the US of the third-party releases which were a centerpiece of the Canadian Plan.
Third-party releases of non-bankrupt parties are significantly limited under US bankruptcy law – and, in a number of circuits, prohibited altogether.¬† In the 2d Circuit – where the recognition cases are pending – they are permissible only where (i) “truly unusual circumstances render the release terms important to the success of the plan;” and (ii) the released claims “directly affect the res (i.e., the property) of the bankruptcy estate.”¬† In Bankruptcy Judge Martin Glenn’s view, the Canadian releases went a bit further than what the 2d Circuit would otherwise permit.¬† Nevertheless, Ernst & Young asked Judge Glenn to permit them.
Recognition and Enforcement In the US
Ernst &¬†Young’s request was based, first,¬†on Section 1509, which requires that if a US Bankruptcy Court grants recognition in a foreign main proceeding, it “shall grant comity or cooperation to the foreign representative.”¬† Moreover, where recognition is granted, the US court “may provide additional assistance to [the] foreign representative” (Section 1507(a)), provided that such assistance is “consistent with the principles of comity” and serves one or more articulated policy goals set forth in Section 1507(b).¬† The decision to provide such assistance “is largely discretionary and turns on subjective factors that embody principles of comity.”¬† It is also subject to a general but narrowly construed¬†”public policy” restriction in Section 1506.
Though it is given prominence in Chapter 15, the American concept of “comity” in fact grows out of many decades of US commercial experience: Over a century ago, the emerging freedom of markets, comparatively few limits on imports, exports, immigration and exchanges of information and capital flows gave rise to what has been termed as the “first age of globalization.” In keeping with the spirit of that age, US courts of the period sought to resolve commercial disputes involving international litigants in a manner that would facilitate free international trade. They did so by preserving, where possible, the sanctity of rulings rendered in foreign tribunals as those rulings pertained to US citizens involved in foreign transactions. Those efforts found their expression through application of the case law doctrine of “comity.”
As expressed long ago by the US Supreme Court, “comity” is that “recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation.” As described by more modern precedent, US courts will recognize the “[a]cts of foreign governments purporting to have extraterritorial effect” when those acts are consistent with US law and policy.
It is worth noting that “consistent with US law and policy” does not mean identical with US law and policy.¬† As Judge Glenn observed, “[t]he relief granted in the foreign proceeding and the relief available in a [US] proceeding need not be identical.”¬† Instead, the “key determination” is “whether the procedures used in [the foreign court] meet [US] fundamental standards of fairness.”
“Fundamental standards of fairness” are understandably vague, and – beyond the basic idea of due process – often difficult to establish.¬† In this case, Judge Glenn essentially found that though the releases in question likely went beyond what would pass muster under US law, third party releases weren’t completely unheard of – and besides, the decision of a Canadian court of competent jurisdiction should be entitled to recognition as a matter of comity in any event.
What It All Means
The Metcalfe decision is interesting.¬† One one hand, it seems to provide merely another example of the well-recognized fact that Canadian judgments are routinely upheld by US courts.¬† However, it also suggests that parties with access to foreign tribunals with insolvency schemes resembling the US, but providing relief somewhat different from (i.e., more favorable to) that available under US insolvency law, may be able to maneuver around US law by filing a “main [insolvency] case” in¬†a foreign jurisdiction, then seeking recognition and enforcement of that relief in the US – on the basis of comity.
Something to think about.
Friday, July 3rd, 2009
2009 is shaping up to be an extraordinary¬†year for business bankruptcy.¬† Headlines and hoopla aside, however, it hasn’t been all about domestic Chapter 11 work.¬† The following brief summaries (drawn from news reports and from the national dockets) highlight some of the more newsworthy cross-border matters of the past 60 days:
- WC Wood – Guelph, Ontario-based W.C. Wood Ltd., manufacturer of freezers, fridges and commercial dehumidifiers, sought Chapter 15 recognition in Delaware along with its affiliates concurrently with¬†the companies’¬†application for protection under the Canadian Companies’ Creditors Arrangement Act.¬† The US filing was commenced to further the Canadian reorganization, and to extend the automatic stay to protect officers and directors of the companies.
- Kumkang Valve – Kumkang Valve Co. Ltd. sought Chapter 15 recognition in Houston to protect its US -based assets while it pursued a “revival proceeding” in the District Bankruptcy Court for Daegu, South Korea, where it is headquartered. To do so, the manufacturer of trunnion mount ball valves for the oil and gas industry had to overcome objections lodged by Enterprise Products Operating LLC, who had previously filed a US District Court suit alleging that Kumkang knowingly supplied faulty valves to Enterprise when it was constructing facilities in Wyoming and Colorado.¬† Bankruptcy Judge Wesley Steen is presiding over the US proceeding.
- Gandi Innovations – Canadian grand-format inkjet manufacturer Gandi Innovations, which operates under the brand name Gandinnovations, obtained recognition from Bankruptcy Judge Leif Clark in San Antonio, TX very shortly after its entry into Canadian Companies’ Creditors Arrangement Act proceedings.¬† The company sought to protect US assets and stay litigation then pending in Bexar County, TX while it prosecuted a plan of arrangement in Toronto.
- Straumur-Burdaras Investment Bank – Iceland’s Straumur-Burdaras Investment Bank hf is seeking recognition of its Reykjav√≠k-based restructuring efforts from New York Bankruptcy Judge Robert E. Gerber. Recognition would protect Straumur-Burdaras’ US-based assets, valued at $190 million.¬† The commercial bank’s Chapter 15 petition, filed June 2, follows that of three other Icelandic financial institutions – Glitnir Banki hf, Kaupthing Bank hf and Landsbanki Islands hf – all of which sought similar protection in New York. Straumur-Burdaras’ recognition hearing is calendared for July 14.
- Fraser Papers – Toronto-based lumber, pulp and paper producer Fraser Papers Inc. and affiliates sought recognition in Delaware for their restructuring under the Canadian Companies’ Creditors Arrangement Act (CCAA). According to papers filed in connection with the related June 18 petitions, the filing was commenced to further the effect of orders already entered under the CCAA and designed both to protect the companies’ US assets and to enjoin suits against officers and directors.
- Nanbu – Tokyo-based Nanbu Inc. has requested that US Bankruptcy Judge Robert J. Faris of Honolulu grant recognition of its foreign bankruptcy proceeding currently pending in the Civil Affairs division of Tokyo District Court. Court papers reveal virtually nothing about the company or its Japanese proceeding, and note only that recognition was sought in the US so that the company’s foreign representative, Tsunehiro Sasanami, can take title to and convey certain timeshare properties located in Hawaii.¬† A hearing on the recognition request is calendared for July 13; however, under the Bankruptcy Court’s local rules, a recognition order may be entered without a formal hearing where there are no objections.
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 S√£o 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.