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    Posts Tagged ‘Delaware’

    Examining Examiners

    Tuesday, June 29th, 2010

    What’s it worth to learn from prior mistakes or misdeeds?

    For interested parties in most large Chapter 11 cases, apparently not much.

    Bankruptcy “examiners” are private individuals appointed by the Office of the Unites States Trustee at the direction of a Bankruptcy Court to investigate and report on the causes of a company’s failure.

    Chapter 11 of the Bankruptcy Code provides that examiners “shall” be appointed if requested in any case involving, among other things, more than $5 million in certain types of unsecured debt.  In creating this position, Congress apparently expected examiners to be ubiquitous in the reorganization of large, public companies.

    Nevertheless, it simply ain’t so.  Anyone with restructuring experience can attest to the truisim that examiners are a rarity in Chapter 11 cases.

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    Earlier this month, Temple University Professor Jonathan Lipson posted statistical analysis on the appointment of bankruptcy examiners – and why, despite the mandatory language addressing their appointment in the Bankruptcy Code – so few are, in fact, actually appointed.

    In “Understanding Failure: Examiners and the Bankruptcy Reorganization of Large Public Companies,” Lipson – whose work will appear in a forthcoming edition of the American Bankruptcy Institute Law Journal – observes that examiners are rarely sought in Chapter 11 cases, and even less frequently appointed.  Lipson’s docket-level analysis of 576 of the largest chapter 11 reorganizations from 1991 to 2007 shows they were requested in only 15% of cases.  Despite the seemingly mandatory language of the Bankruptcy Code, examiners were appointed in fewer than half of the cases where sought, or less than 7% of the sample.

    So what does it take to get an examiner appointed?  Lipson summarizes the article’s findings as follows:

    - Size matters. Cases in which examiners are sought are huge. The average case in which an examiner was sought was almost twice as large as the sample measured by median asset values and more than four times larger measured by mean asset values. Holding other things equal, a request for an examiner was three times more likely in a case with a debtor having at least $100 million in net assets. Cases in which examiners were appointed had mean liabilities twice the size of cases where the motions were not granted.

    - Conflict matters. Cases in which examiners were sought or appointed were much more likely to be contentious, as measured by docket size and requests for chapter 11 trustees, than were cases without.  Holding other things equal, a request for a chapter 11 trustee in a large case increases the odds of an examiner request by a factor of five.

    - Venue matters. Examiners are much more likely to be sought—although not necessarily appointed—in the two districts that tend to have the largest cases, Delaware and the Southern District of New York (SDNY). Together, Delaware and the SDNY had forty-six (52%) of requests for an examiner, but actually appointed an examiner in only seventeen cases (about 43%). By contrast, examiners were appointed in twenty-two cases (about 57% of appointments) when requested in other districts.

    - Fraud matters—somewhat. Although requests for an examiner correlated with allegations of pre-bankruptcy fraud—the paradigm grounds for an examiner—they were nevertheless rare even when a bankruptcy was precipitated by that form of wrongdoing: Of the thirty-one cases in the sample that allegedly involved fraud, examiners were sought in only nine and, of those, were appointed in only five.

    - Strategy matters—somewhat.  There is evidence that examiners will sometimes be sought for strategic, not information-seeking, reasons. Requests to appoint an examiner were withdrawn in fourteen cases (about 17% of requests in the sample) and rendered moot by subsequent events (e.g., plan confirmation) in sixteen cases (about 20% of requests). Judges and system participants interviewed for [Lipson's] paper indicated that they believed that, in many cases, the arguably “mandatory” language of the Bankruptcy Code produces gamesmanship,not enlightenment.

    - Investors do not matter much.  Notwithstanding a purported goal of protecting the “investing public,” individual investors made only eighteen requests for examiners.  Far more likely to request an examiner (thirty-two cases) were individual creditors whose claims did not arise from investment securities (such as bonds) or fraud, but who apparently held claims for unpaid goods or services.

    Lipson’s work provides empirically grounded insight on this little-used feature of Chapter 11, and is well worth a read.

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    Figuring Out the House Rules

    Monday, November 2nd, 2009

    In an age of globalized business, US-based firms commonly find themselves dealing with foreign creditors or in contractual relationships with foreign parties.  Those off-shore relationships can sometimes raise challenging issues when the firm needs to reorganize or wind down its operations under US insolvency law, and foreign creditors or contractual parties must determine how to proceed.

    Last week, the Delaware bankruptcy court addressed just one of those challenging issues:

    What happens when a claims dispute in US Bankruptcy Court runs afoul of European litigation procedures?

    Here’s the set-up:

    Global Power Equipment Group, Inc. and its related entities sought Chapter 11 protection in Delaware over three years ago after sustained losses in the companies’ heat recovery steam generator (HRSG) segment, and related liquidity problems, necessitated wind-down of the companies’ HRSG operations.

    In connection with the wind-down, Global Power and its affiliates sought – and obtained – permission to reject existing HRSG development contracts and to enter into new “completion” contracts with customers who still required delivery of HRSG units.  One of these customers was Maasvlakte, a Dutch company who had contracted for the construction of an HRSG project at a port facility in Rotterdam, the Netherlands.  Maasvlakte and several other companies involved in the project were corporate subsidiaries of Air Liquide Engineering, S.A., a French concern.

    Maasvlakte executed a completion contract which provided for a “step-down” of contractual claims commensurate with delivery of the project.  In the meantime, it filed two proofs of claim based on the prior contract: One against Deltak L.L.C. (the entity responsible for the project), and one against Global Power as guarantor of Deltak’s obligations.

    Sometime afterward, Deltak’s and Global Power’s plan administrator filed objections to Maasvlakte’s claims, on the basis of the “step-down” provisions in Deltak’s completion contract with Maasvlakte.  Maasvlakte responded, and the parties prepared to litigate their respective positions under the Federal Rules of Civil Procedure (FRCP), made applicable to claims objections through the Federal Rules of Bankruptcy Procedure.

    In early 2009, Deltak and Global Power propounded discovery on Maasvlakte to obtain information about testing in connection with the HRSG project; however, three days before production was due, Maasvlakte took the position that because many of the documents sought were physically located in France, under control of Air Liquide and unavailable to Maasvlakte, their production under the FRCP could not proceed because a French statute outlawed French companies’ participation in foreign discovery procedures outside those set forth in the Hague Convention.

    Under the Hague Convention rules claimed by Maasvlakte, discovery would require issuance of Letters of Commission through the US Consulate to the French Ministry of Justice – and it appears compliance would not be mandatory.  Processing them would require an additional 2 – 6 weeks.  Failure to comply with this procedure would subject the participating French company to sanctions in France.

    Deltak and Global Power disagreed, and sought to compel the discovery in Delaware.  Judge Brendan Shannon ordered the parties to meet and confer; however, the parties were apparently unable to come to terms.

    In a 40-page decision, Judge Shannon found that (i) Maasvlakte had the “control” of documents necessary for compelled production under the FRCP; and (ii) the “comity analysis” applicable to alternate discovery procedures in this case favored use of the FRCP.

    For the “comity analysis,” Judge Shannon employed prior Supeme Court authority - Société Nationale Indust. Aérospatiale v. U.S. Dist. Ct. for the S. Dist. Of Iowa, 482 U.S. 522 (1987) – to note that the Hague convention need not be employed ahead of the FRCP to obtain discovery from foreign litigants in connection with actions pending in the US.  Instead, it is an alternate procedure that does not automatically override existing US procedural rules.  This is so even when foreign law – such as the French statute in question (which, coincidentally, was the same one at issue in Société Nationale) – requires compliance with the Hague convention.

    To determine whether the Hague Convention should apply in place of ordinary US procedural rules, US courts are directed to apply a multi-part “comity analysis.”  This involves an evaluation of:

    - the importance of the documents or information requested to the litigation;

    - the degree of specificity of the request;

    - whether the information originated in the United States;

    - the availability of alternative means of securing the information; and

    - the extent to which noncompliance with the request would undermine important interests of the United States, or compliance with the requests would undermine important interests of the state where the information is located.

    Some US courts have added two other steps to the analysis: (i) good faith of the party resisting discovery; and (ii) the hardship of compliance on the party or witness from whom discovery is sought.

    In Maasvlakte’s case, Judge Shannon found that (i) the documents sought were central to the claims dispute between the parties; (ii) the request was sufficiently specific; (iii) the documents were originally produced in the Netherlands (where the French blocking statute does not apply) and only subsequently sent to France; (iv) the documents were not otherwise available to Deltak and Global Power, except through the Hague Convention; (v) the US interest in adjudicating the matter expeditiously through its courts outweighed the “attenuated” French interest occasioned by the fact that documents originally produced in the Netherlands were now held in France by a French company; and (vi) the hardship to Maasvlakte was “minimal” since, after all, it originally subjected itself to the Bankruptcy Court’s jurisdiction – and, apparently, assumed the risk of prosecution in France for so doing.  As for the risk of criminal sanctions to Maasvlakte and Air Liquide, it was Judge Shannon’s estimation that the French statute in question would “not subject [Maasvlakte or Air Liquide] to a realistic risk of prosecution, and cannot be construed as a law intended to universally govern the conduct of litigation within the jurisdiction of a United States court.”

    The only factor found weighing in favor of the Hague Convention in this case was Maasvlakte’s lack of bad faith.

    Judge Shannon’s decision offers counsel something to consider the next time a trans-national dispute forms the basis for a claim in a US bankruptcy.

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    Chapter 15 Round-Up: July-September 2009

    Monday, October 5th, 2009

    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.

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    Chapter 15 Round-Up: May and June 2009

    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 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.

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