Secured Claims and Credit
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Posts Tagged ‘Insolvency’
Secured Claims and Credit
Avoidance and Recovery
Some of the week’s top bankruptcy and restructuring headlines:
And Still More:
Back in May, this blog featured a post on some preliminary research addressing the idea of “probability-based” fraudulent transfer analysis. PBGC lawyer (and Cadwalader alum) John Ginsburg has argued that rather than merely asking whether insolvency is “reasonably foreseeable,” courts ought to clarify “reasonable foreseeability” in probabalistic terms. The basic idea underlying this argument is that it should be easier to attack (or to defend) a fraudulent transfer if it can be shown, for example, that the “probability” of insolvency at the time of an LBO was 50% – or 60%, or 75%.
Mr. Ginsberg argues further that courts ought to articulate what, for them, constitutes an acceptable margin of error (say, 40% risk of insolvency with a margin of error of +/- 15%).
Following comments offered here and elsewhere, Mr. Ginsberg – and colleagues Zachary Caldwell, Daniel Czerwonka, and Mary Burgess – have gone through a number of revisions and have a final draft version of the article available for review prior to going to publication with ABI Law Review in March.
A discussion is hosted at http://www.bulletinboards.com/view.cfm?comcode=LBO_FT, where anyone can critique and debate the paper, upload a rebuttal from a word-processor, or upload a handwritten mark-up in PDF. In written comments to South Bay Law Firm, Mr. Ginsberg notes that the authors are particularly “interested in hearing from private equity fund managers, from the investment bankers who finance their deals, and from the lawyers, financial analysts and others who earn fees helping put those deals together. The paper has significant implications for them.”
Last week’s post discussed public-market data as the benchmark for solvency in assessing fraudulent transfers. This week’s post covers solvency the “old fashioned” way – in addressing preference litigation.
Ray Clark, who runs Valcor Consulting – an Irvine-based restructuring, valuation, and litigation consultancy – and who contributes regularly to this blog, recently offered an overview of the solvency analysis and valuation techniques that apply when a company faces claims for payments made within 90 days of a debtor’s bankruptcy:
Practitioners and business people who have toiled in and around US-based restructuring work are well-acquainted with one of the great strengths (and primary threats) of Chapter 11: The ability of a debtor to restructure its secured obligations over the objection of a lender through the use of the “cram-down” procedures of Section 1129(b).
For those who may be less familiar, the concept of “cram-down” is not as difficult than the colorful term might suggest. Essentially, a debtor may confirm a Chapter 11 plan and restructure its debts over the objection of secured creditors so long as the debtor’s plan offers those creditors the present value of their allowed secured claims, such that they receive an appropriate rate of interest which accurately maintains the present value of their concern.
Fighting over “cram-down,” therefore, really boils down to fighting over which interest rate ought to apply to the lender’s restructured loan.
In an era where real estate and other collateralized capital assets are under significant duress (and “risk-free” rates of interest are near all-time lows), the issue of “cram-down” is once again a matter of immediate relevance – and its resolution can often spell the difference between restructuring or foreclosure.
Because the notion of “cram-down” has been part of US insolvency jurisprudence for decades, US Courts have accumulated considerable collective sophistication in addressing the financially-oriented evidence and arguments that surround “cram-down fights.”
But sophistication does not mean consistency.
Last week, Ray Clark of Orange County-headquartered VALCOR Consulting, LLC released a succinct overview of some of the more notable case law surrounding “cram down” developed in the years since the US Supreme Court decided Till v. SCS Credit Corp., 541 U.S. 465, 124 S.Ct. 1951 (2004).
Tracing several key cases issued by Circuit Courts of Appeal since Till, Ray – who has previously appeared on this blog as a guest – offers a very concise, readable summation of what it takes to win (or defeat) a “cram down” effort in Chapter 11.
One of Ray’s strengths is his ability to make the often unfamiliar and complex financial underpinnings of restructuring work accessible to the average, intelligent business person. His summary is available here – and is well worth a read.
A prior post on this blog mapped out the field of combat in the brewing battle between SEC receiver Ralph Janvey and Antiguan liqudators Nigel Hamilton-Smith and Peter Wastell for control of the now-defunct financial empire of Sir Allen Stanford, the native Texan who acceded to Antiguan knighthood but who now stands accused of running an alleged world-wide Ponzi scheme.
That battle has now commenced.
To review, the Securities and Exchange Commission obtained appointment of a receiver for Stanford’s assets and the Antiguan government appointed liquidators for Stanford International Bank, Ltd. (SIB) within 3 days of one another. The Receiver’s and the liquidators’ initial attempts to cooperate degenerated into a battle for control over global efforts to marshal assets and make distributions to creditors.
The parties recently brought their disputes before the US District Court in Dallas, where Judge David Godbey must now decide (i) whether his previously-issued receivership order (which prohibited the commencement of any bankruptcy proceeding during the pendency of the SEC receviership) should be modified to permit the liquidators’ commencement of a Chapter 15 case regarding SIB; and (ii) whether the Chapter 15 proceedings (if any) ought to be referred back to the Dallas bankruptcy court (itself a division of the District Court).
A hearing on these disputes has yet to be scheduled. However, the parties have put forth the following arguments (to see the parties’ respective briefs, click on each applicable party’s name):
The IRS complains that doing so will disrupt its efforts to litigate tax claims against Sir Allen. In essence, the IRS trusts Judge Godbey’s ability to facilitate this litigation more than it does the Antiguan court system. It also warns that the Antiguan liquidation scheme will not respect the IRS’s asserted tax liens against Stanford’s assets – including SIB assets – and will not sufficiently protect US taxpayers and investors.
The SEC, in an argument that appears somewhat circular, reminds Judge Godbey that he originally imposed a stay on extraneous litigation in connection with the receivership; therefore, that stay ought not to be modified because . . . to do so would countenance extraneous litigation.
In a footnote, the SEC signals its willingness to appeal an adverse ruling by noting that where the receivership order has already been appealed by other third parties, Judge Godbey is without jurisdiction to make any further amendments to it – but must instead preserve the status quo. At a substantive level, the SEC intimates that the pre-liquidation relationship between SIB and the Antiguan goverment was overly cozy and that because SIB lent over US$100 million to the Antiguan government (and holds approximately $84 million in receivables payable by the Antiguan government), the Antiguan court’s judgment (and, by extension, that of the liquidators) in handling the Antiguan liquidation is not to be trusted. At an equitable level, the SEC argues that the Antiguan liquidators may not urge the Antiguan courts to ignore the SEC’s receivership, then request that Judge Godbey recognize their liquidation.
– The Receiver. Mr. Janvey – himself acting as the arm of the District Court’s equitable jurisdiction – argues that the Court’s exclusive control over the Stanford entities through his receivership is . . . well, equitable.
Janvey’s 24-page brief is generally consistent with that of the SEC and, in the end, reduces itself to the old adage that “there are too many cooks in the kitchen”: It accuses Messr’s. Wastell and Hamilton-Smith of grabbing for control of substantially all of the Stanford entities’ assets through their administration of one Stanford entity, of attempting to “end run” the Texas receivership through a Canadian proceeding, of standing idly by while the Antiguan government seeks to appropriate Antiguan real estate otherwise available for general creditors’ benefit, and of generally hampering the Receiver’s job.
Mr. Janvey further argues there is nothing to preclude the District Court from exercising its very broad equitable powers to enjoin a Chapter 15 proceeding.
– The Examiner. In a thoughtful brief, John Little – an Examiner appointed by Judge Godbey to assist him in running the receivership – advises the Court that, in fact, it is a good idea to first permit the commencement of a Chapter 15 case, then to address the validity of the Antiguan liquidators’ requests for recogntion on their own legal and factual merits.
Essentially, Mr. Little, while not disagreeing that a District Court sitting in equity has broad discretion, suggests that Judge Godbey utilize that discretion to grant the liquidators’ request, then determine (i) whether Messr’s. Hamilton-Smith’s and Wastell’s request for recognition is viable or otherwise impermissible on the grounds that SIB is a “foreign bank,” ineligible for Chapter 15 relief; and (ii) if recognition applies, whether SIB’s “center of main interests” is Antigua, or elsewhere.
– The Liquidators. Messr’s. Hamilton-Smith and Wastell call the Receiver’s and the SEC’s mud-slinging exactly what it is . . . then waste precious little time in slinging their own.
In a number of reprises, all of which end in the same refrain – “The Pot is Calling the Kettle Black” – the Antiguan liquidators bristle with indignance at the misconduct alleged of them, accuse Mr. Janvey and his federal government allies of misstating both the facts and the law, and point out that many of the “parade of horribles” supposedly arising in Antiguan insolvency proceedings apply with equal force (or much worse) in US-based federal equitable receiverships.
They note, for example, that Judge Godbey’s refusal to entertain a request for recognition will do nothing to prohibit courts with Stanford-related insolvency proceedings now pending in the UK, Switzerland, and Canada from refusing the same recogntion to Mr. Janvey – and will therefore fail to accomplish the global administration and control Mr. Janvey seeks. Likewise, the IRS’s complaint that Antiguan insolvency proceedings do not embrace a priority scheme analogous to the US Bankruptcy Code strikes Messr’s. Hamilton-Smith and Wastell as ironic, since the distribution that arises under a federal receivership is entirely arbitrary, and effectively outside any statutory distribution scheme (including the US Bankruptcy Code’s).
Amidst the name-calling and the attempts to find precedent in a federal receivership which appears, by all accounts, to be one of first impression, it may be easy to miss the importance – and the potential – of the wide discretion provided to the US District Court in Chapter 15.
This discretion appears in at least two ways.
First, a US Court applying Chapter 15 is generally free to communicate and coordinate insolvency proceedings directly with courts of other jurisdictions. Prior to Chapter 15’s enactment, it was common practice for separate courts administering a multi-national insolvency to confer directly by means of “protocols” specifically designed for the purpose of administering the case at hand. These “protocols” – often individually negotiated for a specific case – facilitated adminsitration and helped coordinate the rulings of various courts for maximum efficiency and uniformity. Much of this former practice lives on in Chapter 15: Section 1525 specifically codifies and authorizes it, while Section 1527 lists several, non-exclusive means of such cooperation.
Second, US Courts applying Chapter 15 have broad discretion to grant, modify, or otherwise tailor relief for foreign representatives, thereby shaping the administration of a foreign case inside the US. Though certain types of relief are “automatic” upon recognition of a foreign “main” case, Section 1522 permits a court to “modify or terminate” much of the relief available to foreign representatives on its own motion, and in a manner which protects all of the entities involved.
How might a Chapter 15 proceeding alleviate some of the rancor that has developed between Mr. Janvey and his Antiguan counterparts?
Perhaps some coordination and cooperation of the sort envisioned by the Bankruptcy Code – for example, web conferencing between judges in Antigua, the UK, the US, Canada, and Switzerland designed to develop a “Stanford protocol” within the context of Chapter 15’s provisions and foster unified worldwide administration of the Stanford cases – would go some distance toward establishing the judicial “end game” that preserves the integrity of the federal receivership process and of the foreign insolvency proceedings.
Along the way, the same cooperation might further demonstrate the remarkable flexibility of Chapter 15. And who knows? It might prevent all of the cooks in the kitchen from hitting one another with blackened pots . . . thereby preserving a little more for Stanford’s creditors and investors.