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.

JSC BTA Bank (BTA), reportedly the second largest bank in Khazakstan, sought protection for its US-based assets through Chapter 15 last Thursday in New York’s Southern District.

The Chapter 15 filing in Manhattan appears to be part of Khazakstan’s own banking bailout for BTA.  In papers submitted to Bankruptcy Judge James Peck, BTA Chairman Anvar Saidenov represented, through BTA’s counsel, that between 2004 and 2007 BTA expanded rapidly with significant increases in its total assets and number of branches and cash offices.  This expansion was primarily funded through short- and medium-term bank borrowings and the issue of securities in the international capital markets.  Khazakstan’s credit-rating downgrade in late 2007 precluded BTA from refinancing its short-term credit lines, which in turn curtailed BTA’s ability to make new loans.

Beyond the Kazakh credit downgrades, BTA allegedly further suffered “significant losses” due to “fraudulent and ulawful transactions entered into by [BTA's] former management prior to February 2009.”

Before last February, the Republic of Kazakhstan and its Agency for Regulation and Supervision of Financial Markets and Financial Organizations (FMSA) had previously announced a proposal to recapitalize BTA as part of a broader plan to stabilize the country’s financial system. The plan involved JSC National Welfare Fund Samruk-Kazyna (Samruk-Kazyna), Kazakhstan’s sovereign wealth fund, providing financial support to struggling financial institutions. At the same time, Samruk-Kazyna acquired a controlling 75.1 % of BTA’s total share capital. BTA also continued to down-size its operating activities in response to the deteriorating market and BTA’s financial condition.

 BTA’s recapitalization triggered “change-of-ownership” clauses and demands for repayment under some of its lines of credit from foreign lenders.  These and other, continuing regulatory problems inside Khazakstan ultimately led to a preliminary restructuring plan in mid-2009.

At the end of August 2009, the Kazakh government enacted banking regulatory legislation which put into place, among other things, an insolvency regime to deal with the restructuring of financial institutions.  BTA sought protection under this new legislation less than 45 days after its enactment, thereby obtaining a stay of all relevant claims of BTA’s creditors and protection of BTA’s property from execution and attachment until completion of the restructuring.

BTA’s restructuing – presently contemplated within the third quarter of 2010 – presently contemplates that creditors of the Bank, including Samruk-Kazyna and certain related parties (excluding depositors and certain government agencies funding special loan programs) will receive a mixture of cash, senior debt, subordinated debt, other forms of debt, equity and so-called “recovery notes” in consideration for the restructuring of their claims.  Payments on the “recovery notes” will be funded by cash recoveries on any provisioned assets, litigation recoveries, and deferred tax recoveries.

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.

Evidentiary hearings are scheduled for later this month in the ongoing struggle for control over the financial assets of Stanford International Bank, Ltd. (SIB), the cornerstone of Allen Stanford’s financial-empire-turned-Ponzi-scheme.  A series of posts on this blog have covered liquidators Peter Wastell and Nigel Hamilton-Smith’s efforts to obtain recognition in the US for their Antiguan wind-up of SIB, and US receiver Ralph Janvey’s competing efforts to do the same in Canadian and UK courts.

The Stanford case is of considerable significance in the US – and in the UK and Canada, where it has spawned at least two decisions and related appeals over the parties’ efforts to obtain cross-border recognition for their respective efforts to clean up the Stanford mess.

In Dallas, Texas, where an enforcement action commenced by the American Securities and Exchange Commission remains pending (and where Mr. Janvey has been appointed as a receiver for the purposes of marshalling Stanford assets for distribution to creditors), US District Court Judge David Godbey has taken prior pleadings from both sides under advisement and, in advance of this month’s hearing, has requested further briefing on three issues.  Mr. Janvey’s brief, submitted last week, addresses each of these as follows:

The Current State of Fifth Circuit Law on What Constitutes an Entity’s “Principal Place of Business,” Including Whether Stanford International Bank’s (“SIB”) Activities Were Active, Passive or “Far Flung.”

The Liquidators have argued that, under applicable Fifth Circuit standards, SIB’s “principal place of business” was Antigua and that its activities were actively managed from Antigua, and were not “far flung” so as to render SIB’s Antiguan location irrelevant.

Predictably enough, Mr. Janvey responds that under appropriate circumstances, the Fifth Circuit applies principles of alter ego and disregards corporate formalities in determining an entity’s “principal place of business:”  “The Fifth Circuit applies alter ego doctrines not only to enforce liability against shareholders and parent companies, but also to determine a corporation’s ‘principal place of business’ for jurisdictional purposes.” (citing Freeman v. Nw. Acceptance Corp., 754 F.2d 553, 558 (5th Cir. 1985)).

Based on this construction of Fifth Circuit law – and because COMI is generally equated to an entity’s “principal place of business” under US corporate law –   Janvey then argues that consistency and logic require the same rules be followed for COMI purposes.  He then goes on to argue that Stanford’s Ponzi scheme activities were “far flung,” that SIB’s Antiguan operations were “passive,” and that its “nerve center” and “place of activity” were both in the U.S.

The Relationship Between SIB and the Financial Advisors Who Marketed SIB’s CDs to Potential Investors.

Wastell and Hamilton-Smith have argued that financial advisors who sold SIB’s CDs to potential investors were, in fact, independent agents employed by other, independent Stanford broker-dealer entities and were not controlled by SIB.

Mr. Janvey pours scorn on this argument.  According to him, it does not matter that there were inter-company “contracts” purporting to make the Stanford broker-dealer entities agents for SIB in the sale of CDs.  As Mr. Janvey views it, a fraud is a fraud . . . from beginning to end.  Consequently, there was no substance to the “contracts” as all the entities involved were instruments of Stanford’s fraud.

The “Single Business Enterprise” Concept as Part of the “Alter Ego” Theory of Imposing Liability.

As noted above, Mr. Janvey takes the position that “alter ego” treatment of the Stanford entities is not only viable – it is the only appropriate means of treating SIB’s relationship to other, US-based Stanford entities, and of determining COMI for SIB.  He argues further that substantive consolidation – the bankruptcy remedy referred to by Messr’s. Wastell and Hamilton-Smith – can be just as effectively accomplished through a federal receivership, which affords US District Courts significant latitude in fashioning equitable remedies and determining distributions to various classes of creditors.

Mr. Janvey’s argument appears quite straightforward.  Because a fraud is a fraud, geography matters very little in determining its “center of main interests.”  According to him, what should count instead is the location of the fraudsters and the place from which the fraud was managed and directed.  Yet even Mr. Janvey acknowledges that “Antigua played a role in [Stanford's Ponzi] scheme . . . [in that] [Antigua] was where Stanford could buy off key officials in order to conduct his sham business without regulatory interference.”  In other words, geography was important . . . at least for Stanford.  Specifically, geography provided Stanford direct access to a corrupt regulator who would afford cover for the conduct of Stanford’s fraudulent CD sales to investors.

Mr. Janvey addresses this potential problem by taking aim at the entire Antiguan regulatory structure:

“Chapter 15 contains a public policy exception: ‘Nothing in the chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.’ 11 U.S.C. § 1506. The facts warrant application of the public policy exception here. The very agency that first appointed the Antiguan [l]iquidators and then obtained their confirmation from the Antiguan court was complicit in Stanford’s fraud. That same agency has allowed financial fraud to flourish on Antigua for decades. It would be contrary to public policy for this Court to cede to Antigua the winding up of a company that bilked Americans and others out of billions when it was Antigua that permitted the fraud.”

Mr. Janvey then goes further still, arguing that Messr’s. Wastell and Hamilton-Smith (and their employer, British-based Vantis plc) are precluded by Antiguan law from complying with the disclosure requirements Judge Godbey has imposed on the US receivership – and therefore simply unable to concurrently administer a “main case” in Antigua and cooperate with the Receiver (or with the District Court) in the US.

Finally, Mr. Janvey gets directly personal: He recites the opinion of the Canadian court that revoked Vantis’ administration of Stanford’s Canadian operations and refused recognition of the Antiguan wind-up on the grounds that “Vantis’ conduct, through [Messr's. Wastell and Hamiton-Smith], disqualifies it from acting and precludes it from presenting the motion [for Canadian recognition], as [Vantis] cannot be trusted by the [Canadian] Court . . . .”  The Canadian court’s opinion has been upheld on appeal, and is now final.

In a nutshell, Mr. Janvey argues that geography shouldn’t matter where a fraud is concerned . . . but if it does matter, it ought to count against jurisdictions such as Antigua, an “impoverished island” which has a population “about 80% that of Waco, Texas” and a history of financial fraud.

As is sometimes said in Texas, “Them’s fightin’ words.”

The SEC’s brief, like Mr. Janvey’s, is also on file.  Messr’s. Wastell and Hamilton-Smith’s reply will be due shortly.

An update regarding Peter Wastell and Nigel Hamilton-Smith’s dispute with federal Receiver Ralph Janvey over control of Stanford International Bank Ltd. (SIB)’s financial assets, and the 13th in a series on this blog covering the dissolution of Allen Stanford’s erstwhile financial empire and alleged international “Ponzi scheme” – a dissolution playing out in Montreal, London, and Dallas.

Wastell and Hamilton-Smith, liquidators appointed by Antiguan regulators for the purpose of winding up SIB in Antigua, and Janvey – a federal Receiver appointed at the behest of the US Securities and Exchange Commission to oversee the dissolution of Stanford’s financial interests in connection with an enforcement proceeding in the US – have sought recognition of their respective efforts in courts outside their home jurisdictions.  Each has met with mixed results: Janvey’s request for recognition was denied in the UK, while Wastell and Hamilton-Smith, originally recognized in Canada, have been removed and replaced by a Canadian firm.  Each of these results has been appealed.

Meanwhile, Wastell and Hamilton-Smith have sought recognition of the Antiguan wind-up in Janvey’s home court pursuant to Chapter 15 of the US Bankruptcy Code.  Initial briefing was submitted several months ago; supplemental filings (including copies of the decisions rendered in London and Montreal) have been trickling in.  US District Court Judge David Godbey has set an evidentiary hearing for mid-January 2010.

Messr’s. Wastell and Hamilton-Smith’s supplemental brief, filed last week in Dallas, addresses three issues, apparently raised by Judge Godbey during a recent conference call with the parties:

The Current State of Fifth Circuit Law on What Constitutes an Entity’s “Principal Place of Business,” Including Whether Stanford International Bank’s (“SIB”) Activities Were Active, Passive or “Far Flung.”

The liquidators acknowledge that while Chapter 15 of the US Bankruptcy Code doesn’t refer to an entity’s “principal place of business” in dealing with a cross-border insolvency, many US courts nevertheless analogize an entity’s “principal place of business” to its “center of main interests” (COMI) for purposes of determining the forum that should host the “main case.”   The American approach is, according to the liquidators, similar to that followed by European courts.

That said, what constitutes an entity’s ”principal place of business” is not a settled question under US federal case law: The Fifth Circuit (where the Stanford matters are pending) applies a “total activity” test, which is also applied by the Sixth, Eighth, Tenth and Eleventh Circuits, whereas the Ninth Circuit applies a “place of operations” test, the Seventh Circuit applies a “nerve center” test, and the Third Circuit examines the corporation’s center of activity.  The liquidators suggest in a footnote that these “varying verbal formulas” are functional equivalents, and “generally amount to about the same thing” under nearly any given set of facts.

A significant portion of the liquidators’ brief is devoted to applying the facts of SIB’s dissolution to the Fifth Circuit’s “verbal formula;” i.e., “(1) when considering a corporation whose operations are far-flung, the sole nerve center of that corporation is more significant in determining principal place of business, (2) when a corporation has its sole operation in one state and executive offices in another, the place of activity is regarded as more significant, but (3) when the activity of a corporation is passive and the ‘brain’ of that corporation is in another state, the situs of the corporation’s brain is given greater significance.”  See J.A. Olson Co. v. City of Winona, 818 F.2d 401, 411 (5th Cir. 1987).

The liquidators argue:

- SIB’s principal place of business was in Antigua;

- SIB’s activities were neither “passive” nor “far flung” and thus the “nerve center” test should not predominate; but

- even if SIB’s operations were passive or far flung (which they were not), its “nerve center” was in Antigua.

The Relationship Between SIB and the Financial Advisors Who Marketed SIB’s CDs to Potential Investors.

The liquidators are emphatic that financial advisors who marketed and sold SIB’s CD’s to potential investors were not, in fact, agents of SIB.  Rather, “they operated individually under management agreements with SIB, or were employed by other Stanford companies which had management agreements with SIB . . . .  These advisors worked for Stanford related entities all over the world, including Antigua, Aruba, Canada, Colombia, Ecuador, Mexico, Panama, Peru, Switzerland, and Venezuela, as well as in the United States . . . . All of the financial advisors marketed the CDs but none had authority to contract on behalf of SIB . . . . Further, Liquidators understand that the financial advisors sold other Stanford-related products besides SIB CDs.”  Those advisors who were located in the US ‘worked for an entity called the Stanford Group Companies (“SGC”), and though they marketed SIB CDs to potential depositors, they were not agents of SIB.’”

Put succinctly, the liquidators’ argument is that an international network of independent sales agents does not create the sort of “agency” that would alter cross-border COMI analysis under US law: “[US] Courts analyzing similar circumstances have consistently held that a company’s COMI or its principal place of business is in the jurisdiction where its operations are conducted even if the company has sales representatives in other jurisdictions.”

The “Single Business Enterprise” Concept as Part of the “Alter Ego” Theory of Imposing Liability.

 Finally, the liquidators argue that SIB is neither part of a “single business enterprise” nor an “alter ego” of other Stanford entities or of Stanford’s senior managers - and their respective “principal place[s] of business” in the US cannot be imputed to SIB for purposes of determining SIB’s COMI.  This is so, according to Messr’s. Wastell and Hamilton-Smith, because:

- The doctrine of “single business enterprise” liability is a particular creature of Texas law – which, in addition to being inapplicable to an Antiguan-chartered international bank such as SIB, is itself no longer viable even in Texas.  See SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 456(Tex. 2008) (rejecting the theory because Texas law does not “support the imposition of one corporation’s obligations on another” as permitted by the theory); see also Acceptance Indemn. Ins. Co. v. Maltez, No. 08-20288, 2009 WL 2748201, at *5 (5th Cir. June 30, 2009) (unpublished) (recognizing the holding of Gladstrong).

- The doctrine of “alter ego” does not apply because its primary use is to permit corporate creditors to “pierce the corporate veil” and seek recourse from the corporation’s parent or individual shareholders.  Here, the liquidators argue, Mr. Janvey is attempting to pierce the corporate veil in the opposite direction:  He is attempting to permit creditors of a corporate parent or individual principals to seek recourse from a distinct and separate foreign subsidiary.  Such “reverse veil piercing” is properly obtained (if at all) through the “extreme and unsual” remedy of substantive consolidation through bankruptcy.  However, liquidation of the Stanford entities through a federal bankruptcy proceeding is something Mr. Janvey has, to date, ”studiously avoided.”

- The equitable purposes of the “alter ego” doctrine would be frustrated in this case.  The “injustice” that “alter ego” relief is designed to reverse would, in fact, only be furthered where SIB investors would see their recoveries diluted by creditors of other Stanford entities.

Mr. Janvey’s response is due December 17.

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.

Stay tuned.

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:

SIB’s Background

- 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.

Postings on this blog have focused on the cross-border battle between Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey for control of the financial assets previously controlled by Sir Allen Stanford, including Stanford International Bank, Ltd. (SIB).  A complete digest of prior posts is available here.

Mr. Janvey, meanwhile, has had to address yet another challenge to his receivership - from investors seeking to commence an involuntary Chapter 7 case.  In early September, an ad hoc group of CD and deposit-holders fronted by Dr. Samuel Bukrinsky, Jaime Alexis Arroyo Bornstein, and Mario Gebel requested an expedited hearing on their request for leave to commence an involuntary bankruptcy against the Stanford entities.

The ad hoc investor group’s September request was not their first: In May of this year, the same investors requested essentially the same relief.  That request was never acted on, presumably because presiding US District Court Judge David Godbey already had imposed a 6-month moratorium on interference with the receivership.

With the moratorium’s expiration, the investors have raised the issue once again.

A Receivership Run Wild?

Their second request largely repeats the investors’ prior arguments, many of them rather personal: No one is happy with the way this receivership has been run, they claim.  Specifically, the receivership is far too expensive and the lack of meaningful participation deprives creditors of significant due process rights.  Instead, an involuntary liquidation under Chapter 7 of the US Bankruptcy Code is the best and most efficient means of reining in expenses and preserving those rights.  The investors’ brief offers a picture of the 21st century Stanford receivership more closely resembling Dickens’ 19th century “Bleak House”: Professional fees accruing at an “alarming” rate (in this case, an estimated $1.1M per week); an estate at risk of being consumed entirely by administrative costs; and investors ultimately twice victimized.

The investors further argue that an injunction prohibiting creditors’ access to the US bankruptcy system is, at best, an interim measure.  As such, it can never be employed on a permanent basis - and, therefore, cannot survive the standards for injunctive relief articulated under the Federal Rules of Civil Procedure.  They cite a variety of decisions which stand – according to them – for the proposition that the US Bankruptcy Court offers the best forum for complex liquidations such as the one at hand.

Creditors Who Don’t Know What’s Best For Them?

Predictably, Mr. Janvey disagrees in the strongest terms.

As he sees it (and as he sees a string of federal cases referenced in his response), a federal equity receivership – and not a federal bankruptcy proceeding – is the accepted, “decades-long practice” of federal courts in winding up entities that were the subject of alleged Ponzi schemes and other frauds.  Moreover, Mr. Janvey suggests that if creditors are dissatisfied with the expense and claimed inefficiency of this proceeding, transition to a liquidation under the US Bankruptcy Code would be even more so.  In support, Mr. Janvey offers a “parade of horribles,” such as the “procedural nightmare” involved in transitioning much of the complex litigation already underway in the receivership to a bankruptcy trustee’s administration, the likely existence of multiple creditors’ committees (and the attendant expense of their counsel), and the need to sort out the Antiguans liquidators’ competing Chapter 15 recognition request even if a Chapter 7 petition is filed.

Perhaps most significantly, however, Mr. Janvey believes that flexibility regarding a plan of distribution should govern the administration of the Stanford matters:

Like the Bankruptcy Code, equity receiverships ensure that persons similarly situated receive similar treatment. In a case such as this involving massive deception, however, a searching evaluation of the facts is required to discern relevant differences between and among categories of creditors. Unlike a trustee in bankruptcy, the Receiver can take into account relative fault within a class of creditors, and fashion an equitable plan of distribution that does not treat all creditors within a class identically if they are not deserving of equal treatment.

Mr. Janvey does not develop how a receiver’s application of equitable principles might differ from the equitable and other subordination provisions of Bankruptcy Code section 510.  Ultimately, his response reduces itself to a simple proposition for Judge Godbey and for creditors:

“Trust me.”

Unfortunately, Messr’s. Bukrinsky, Bornstein, and Gebel do not.  Their reply brief - submitted last Friday – again reiterates that the Stanford receivership has outlived its usefulness in this highly complex insolvency.  According to them, the Stanford record speaks for itself.  It is time for a new regime.

Like the liquidators’ request for US recognition of their Antiguan-based wind-up of SIB, the parties now await Judge Godbey’s decision.

After a blazing start during the first half of 2009, it was a longer, slower summer for newsworthy Chapter 15 filings.  The last 3 months have produced a handful of new cases, including:

- Stomp Pork – The Saskatoon, Saskatchewan-based pig-farm operator sought Chapter 15 protection in Iowa’s Northern District on May 29 after being placed into receivership the same day under the Bankruptcy and Insolvency Act in the Court of the Queen’s Bench, Judicial Centre of Saskatoon.  It was the company’s second trip to bankruptcy court after a prior, 2008 reorganization under the Companies’ Creditors Arrangement Act.

The company’s Candian receiver, Ernst & Young Inc., planned to liquidate the company’s assets and distribute the proceeds to its creditors.  Prior to seeking protection in the US, the company received approval from the Candian court to sell its 130,000 pigs to Sheldon, Ohio-based G&D Pork LLC for $2.8 million.  Of these proceeds, creditor National Bank reportedly received $2.7 million.

The filing was made in an abundance of caution, but ultimately proved unnecessary: Following the sale and the distribution of proceeds, the debtor obtained a dismissal of the recognition petition on the grounds that no further assets remained for the Iowa Bankruptcy Court to protect.

- Sky Power Corp. – The Toronto-based developer of solar and wind-powered energy projects in Canada, the US, India and Panama (and portfolio company of bankrupt Lehman Brothers) sought protection in Delaware in August, seven days after seeking protection under Canada’s Companies’ Creditors Arrangement Act in the Ontario Superior Court of Justice.

The company characterized its bankruptcy as part of a “domino effect” created by Lehman’s bankruptcy (Lehman was the major shareholder), as well as on reduced liquidity and on defaults triggered with respect to its senior debt by Lehman’s filing.

At the time of the filing, the company was reportedly relying on a $15 million DIP financing commitment from CIM Group Inc. for liquidity.  The facility was priced at prime plus 875 basis points (prime is given a 3.5% floor), matures November 30, and permits CIM Group to credit bid the DIP obligation toward a purchase of SkyPower.

Judge Peter Walsh entered a recognition order on September 15.

- Daewoo Logistics Corp. - The Seoul, Korea-based shipping company sought protection in New York in mid-September to protect US-based assets from the immediate effects of an adverse arbitration ruling.

In addition to the award – obtained by Saga Forest Carriers International for $609,638 in New York’s Southern District – the company also faced 12 other actions, including five others pending in New York.

The company had previously sought creditors’ protection under the Republic of Korea’s Debtor Rehabilitation and Bankruptcy Act with the 8th Bankruptcy Division of the Seoul Central District Court.  The Korean filing was allegedly a result of plummeting profits stemming from a decline in the market value of dry bulk shipping contracts.  The company also identified a failed land purchase in Madagascar, which was disrupted by a military coup in that country, as a source of financial stress.

Bankruptcy Judge Burton Lifland granted a preliminary injunction on September 24.

Several weeks have passed since Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey briefed US District Judge David Godbey on the liquidators’ request for US recognition of their proposed Antiguan liquidation of Stanford International Bank, Ltd. (SIB).

Readers will recall that Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, a federal receiver appointed in Dallas’ U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford (links to prior posts can be found here).  Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

One of the preliminary questions in these proceedings is which of them will receive deference from the others.  Of particular interest is which proceeding – and which court-appointed representative – will control the administration of SIB.  The Eastern Caribbean Surpeme Court (Antigua and Barbuda) has found, perhaps predictably, that SIB’s liquidation is to be adminsitered in Antigua.  It also has found that Mr. Janvey has no standing to appear as a “foreign representative” or otherwise on behalf of SIB or other Stanford entities.

In London, the English High Court of Justice, Chancery Division’s Mr. Justice Lewison reached a similar conclusion in early July.  Based on a determination under English law that SIB’s “Center of Main Interests” (COMI) is in Antigua, he designated Messr’s. Wastell and Hamilton-Smith as “foreign representatives” of SIB for purposes of Stanford’s English insolvency proceedings.

In Dallas, meanwhile, Judge Godbey has permitted the Antiguan liquidators to commence a Chapter 15 proceeding under the US Bankruptcy Code and to make application for similar recognition of SIB’s Antiguan liquidation in the US.  Messr’s. Wastell and Hamilton-Smith and Mr. Janvey have each briefed the question of whether, under US cross-border insolvency law, that liquidation ought to be recognized here as a “foreign main proceeding” – and, more specifically, whether Antigua or the US is the properly designated COMI for SIB.

In briefs submitted over six weeks ago, the liquidators urged a finding consistent with that of the English and Antiguan courts.  They argued essentially that a debtor’s “principal place of business” is essentially the location of its “business operations,” and referred repeatedly to SIB’s undeniably extensive physical and administrative operations in Antigua.

In opposition, Mr. Janvey argued strenuously for a finding that SIB’s COMI is, in fact, the US.  He did so relying largely on the contention that, despite SIB’s physical location and operations in Antigua, Sir Allen allegedly “spent little time in Antigua” – and that Sir Allen effectively managed and controlled SIB from the US.  Mr. Little, the examiner appointed by Judge Godbey to assist him in overseeing the receivership, generally concurred with Mr. Janvey.

Last week, Mr. Janvey’s contention may have received a set-back.

The United States Fifth Circuit Court of Appeals recently upheld a detention order confining Sir Allen to the US pursuant to a separate federal indictment issued against him – and in so doing, concurred in the lower court’s conclusion that Sir Allen’s ties to the State of Texas were “tenuous at best.”  The Fifth Circuit’s 3-judge panel recognized that Stanford “is both an American citizen and a citizen of Antigua and Barbuda, and has resided in that island nation for some fifteen years,” and further noted:

Stanford admitted that he established a new residence in Houston in preparation for his required presence during the pendency of the case against him.  Several of his children have recently moved to Houston to be closer to him during the proceedings.  While Stanford did grow up in Texas, he has spent the past fifiteen years abroad.  His international travels have been so extensive that, in recent years, he has spent little or no time in the United States . . . .  [O]ne of Stanford’s former pilots [testified] that Stanford . . . engaged in almost non-stop travel on the fleet of six private jets and one helicopter belonging to [Stanford Financial Group] and its affiliates . . . .

On September 1, Messr’s. Wastell and Hamilton-Smith sought leave to file the Fifth Circuit’s order in support of their prior application for recognition, and over Mr. Janvey’s anticipated objection.

It appears that where Sir Allen’s indictment is concerned, home is where the corporate jet is.

But where SIB’s liquidation is concerned . . . where is COMI?