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      Insolvency News and Analysis - Week Ending October 17, 2014
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    Posts Tagged ‘“good faith”’

    Hope May Spring Eternal . . . But the Automatic Stay Does Not.

    Saturday, March 26th, 2011

    A South Carolina bankruptcy court decision issued earlier this month highlights and illustrates the perils facing individual sole proprietors who struggle to reorganize their financial affairs through the Chapter 11 process.

    The debtors – a husband and wife who owned a business and several pieces of rental property – filed a Chapter 11 in November 2009, but the case was dismissed approximately 10 months later.  In February this year, while their appeal of that dismissal was pending, they filed a second Chapter 11.

    When an individual debtor seeks bankruptcy protection for a second time within 12 months, Section 362(c)(3) (added in connection with the 2005 BAPCPA amendments) terminates the automatic stay by default unless, within 30 days, the debtor can demonstrate that their second attempt is in “good faith.”

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    Put another way, an individual debtor’s second attempt at bankruptcy protection is presumptively in “bad faith” – and the automatic stay will self-terminate – unless the debtor can demonstrate otherwise.

    Demonstrating otherwise is what the debtors attempted to do in In re Washington.

    So what does it take for an individual to establish “clear and convincing” evidence of “good faith” in these circumstances?

    Apparently, a good deal of personal organization – and evidence of consistent, clearly documented efforts to reorganize, with clearly documented results to show for it.

    In Washington, the debtors produced evidence regarding their business income and rental receipts which the Court characterized as “inconsistent and confusing.”  The Court took issue with the debtors’ estimates of present income, found holes in their testimony regarding decreased expenses, and found the debtors’ revenue projections to be “unjustifiably rosy.”

    In sum, although Debtors claim that their financial circumstances have changed substantially, it appears to the Court that, with minor exceptions, Debtors have the same debt, same business, same properties, and same financial circumstances as they did in their previous case. The Court finds that there has not been a substantial change in Debtors’ financial circumstances and therefore, a presumption arises under section 362(c)(3)(C)(i)(III) that Debtors’ case was not filed in good faith.

    The Court found that the same result applied under section 362(c)(3)(i)(III)(bb). That subsection imposes a presumption that a debtor’s second case was not filed in good faith if the court finds reason to conclude that the current case will not be concluded “with a confirmed plan that will be fully performed.”

    But if Washington provides a cautionary tale for individual debtors who are struggling through the bankruptcy process, it also emphasizes the touchstone for every successful reorganization, no matter how small:  A viable business strategy.

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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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