In April, this blog highlighted research done by Seton Hall’s Stephen Lubben and York University’s Stephanie Ben-Ishai on similarities and differences between asset sales conducted under the US Bankruptcy Code and those proceeding under the Canadian Companies Creditors’ Arrangement Act (“CCAA”).

Last week, the authors offered a revised version of their earlier work, available here.  As noted by the authors’ abstract:

Ultimately, . . . questions of speed and certainty mark the biggest difference between [asset sales in the US and Canada], as the American approach [to asset sales] offers greater flexibility, which is apt to facilitate quicker . . . sales.  However, . . . the Canadian approach also provides significant benefits, particularly in the realm of employee protection and the ability of the monitor to act as an independent check on quick sales proceedings. . . . [W]hile the American approach is advantageous in situations with exceptional time constraints, the Canadian approach under the . . . CCAA is more beneficial for a typical corporate reorganization, insofar as the role of the monitor and other limitations of the CCAA will prevent overuse of the quick sales process.

A great deal of scholarly ink has been spilled over last year’s well-publicized sales of Chrysler and GM, each authorized outside a Chapter 11 plan.  Some of that ink is available for review . . . here.

It’s worth noting that both Chrysler and GM have enjoyed a considerable presence in Canada.  Indeed, the Canadian government participated in the automakers’ Chapter 11 cases.  Yet their bankruptcy sales were not recognized under Canadian cross-border insolvency law, nor were Canadian insolvency proceedings ever initiated.

Why not?

Seton Hall’s Stephen Lubben and York University’s Stephanie Ben-Ishai collaborated last month to offer an answer to that question.  The essence of their article, “SALES OR PLANS: A COMPARATIVE ACCOUNT OF THE ‘NEW’ CORPORATE REORGANIZATION“ comes down to two points of difference between the Canadian reorganization process and US Chapter 11 – speed and certainty – and is captured in the following excerpt:

[B]oth the United States and Canada have well-established case law that supports the “pre-plan” sale of a debtor’s assets.  The key difference between the jurisdictions thus turns not on the basic procedures, but rather the broader context of those procedures . . . .   [I]n the United States it is generally possible to sell a debtor’s assets distinct from any obligations or liabilities associated with those assets.  Indeed, the only obligations that survive such a sale are those that the buyer willing[ly] accepts and those that must survive to comport with the U.S. Constitution’s requirements of due process.

[I]n Canada the debtor has less ability to “cleanse” assets through the sale process.  Particularly with regard to employee claims, a pre-plan sale under the CCAA is not apt to be quite as “free and clear” as its American counterpart.

The jurisdictions also differ on the point at which the reorganization procedures – and the sale process – can be invoked.  Canada, like most other jurisdictions, has an insolvency prerequisite for commencing [a reorganization] proceeding, whereas Chapter 11 does not.  And the Canadian sale process is tied to the oversight of cases by the [court-appointed] monitor: without the monitor’s consent, it is unlikely that a Canadian court would approve a pre-plan asset sale.  In the United States, on the other hand, there is no such position.  Accordingly, a [US] debtor can seek almost immediate approval of a sale upon filing.  Finally, there remains some doubt and conflicting case law in Canada about the use of the CCAA in circumstances that amount to liquidation, particularly following an asset sale.  In the US, it is quite clear that Chapter 11 can be used for liquidation.

[T]hese latter factors are the more likely explanations for the failure to use the CCAA in [GM's and Chrysler's] cases . . . .  [I]t is the questions of speed and certainty that mark[] the biggest difference between the two jurisdictions . . . .  In the case of GM and Chrysler, where the governments valued speed above all else, these issues came to the fore.

The article offers a very interesting perspective on the strategic use of specific insolvency features of different jurisdictions to effect cross-border bankruptcy sales, and is well worth the read.

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.

Comity

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.

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 Reykjavík-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.