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      Insolvency News and Analysis - Week Ending July 25, 2014
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    Posts Tagged ‘Stephen J. Lubben’

    Sales or Plans: A Comparative Account of the “New” Corporate Reorganization

    Monday, April 5th, 2010

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

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

    Why not?

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

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

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

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

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

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

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    Credit Default Swaps and Bankruptcy

    Sunday, April 5th, 2009

    In a series of papers – the most recent a chapter in Greg N. Gregoriou’s and Paul U. Ali’s Credit Derivatives Handbook: Global Perspectives, Innovations, and Market Drivers (McGraw-Hill 2008) – Seton Hall Professor Stephen J. Lubben has argued over the past year or so that credit default swaps (CDS’s) will change the negotiation dynamic of large Chapter 11 cases.

    How so?

    An understanding of Lubben’s argument requires at least a rudimentary understanding of what CDS’s are and the purpose they serve.  As discussed by a brief article appearing in the March 5, 2009 edition of The Economist, “[a] CDS works like a fire-insurance policy: the holder pays a regular premium, but if the house burns down there is a big payoff. With CDSs, the payoff is triggered by a default – and filing for Chapter 11 [does] indeed trigger some CDSs.”

    Against this conceptual background, Lubben argues that where the holder of a CDS is better off with with a default on the debt underlying the swap than it is waiting for the debt to pay out, the dynamics of debtor-creditor negotiation before and during Chapter 11 will change.  In particular:

    - CDS’s could impede the negotiation of workouts, pre-arranged or pre-negotiated Chapter 11 plans, as creditors with a vested interest in the debtor’s failure either refuse to negotiate or – worse yet – actively seek the company’s demise.

    - CDS’s may shorten the timeframe for workout negotiations or promote the increased use of involuntary bankruptcy filings. 

    In a helpful post offered last month on the academically-oriented bankruptcy blog “Credit Slips,” John Marshall Law School Professor (and fellow “Credit Slips” blogger) Jason Kilborn points readers to the March 5 Economist article and suggests further that the CDS market may incentivize claims trading amongst speculators betting on the debtor’s failure:

    [W]hat if high-risk investors (speculators?) buy CDS['s], banking on a corporation’s default (akin to “naked short selling” of a company’s stock) [?]  This explosive situation comes to a head if the borrower company attempts a reorganization.  Now you’ve got very dedicated and often aggressive investors hoping for your failure!  [With] enough riding on the CDS paying out, one can easily imagine a CDS holder offering to buy a blocking position (34%) of the unsecured debt of a company attempting reorganization – which the CDS holder can probably do for a song in light of the pending reorganization (and the payout on the CDS will almost inevitably be more than a plan promises to unsecureds).  I’ve heard lots of grousing among judges wanting to know how certain “creditors” voting unsecured claims came to own those claims – now I understand why these judges want that info and what scary info they might find if the question is answered.  I presume the “not in good faith” votes of CDS holders voting down a reasonable reorg plan could be equitably subordinated or classified (rejected).  What a nightmare for debtor’s counsel!  All that work to then have your plan fail because investors with no real skin in your game tank your deal so they can collect the equivalent of hazard insurance on your failure.

    Precisely how – and under just what circumstances – CDS’s will affect the negotiation dynamics that for years have been a staple of reorganizations remains to be seen.  Lubben suggests that under some circumstances, the holders of CDSs may, in fact, still retain an interest in seeing the debtor succeed.  Kilborn himself points to recent developments in the case of LyondellBasell, the Dutch petrochemicals giant whose American unit, Lyondell Chemicals, commenced Chapter 11 proceedings in January: According to the March 7 Economist article, “some CDS holders want to force the debtor’s European parent to default, bringing in the complications of a cross-border reorganization.  That would so complicate the case that the chance of a total meltdown – and a payout on the CDS – would spike, so DIP lenders have ponied up just to avoid that eventuality.”

    Regardless of the ultimate outcome, this formerly esoteric and little-understood corner of the bond market appears to be having a very practical, real-world effect on larger Chapter 11 cases.

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