Posts Tagged ‘“United States”’
Thursday, February 9th, 2012
For those practitioners practicing locally here in SoCal – or for those who need to appear pro hac in one of the many Chapter 11’s pending in the nation’s largest bankruptcy district – the Central District has very recently collaborated with the local bankruptcy bar to produce a detailed list of individual judicial preferences.
In a District with nearly 30 sitting bankruptcy judges scattered overÂ five divisions, a “score-card” like this one is essential reading.Â A copy of the survey is available here.
Other Posts of Interest:
Friday, January 13th, 2012
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Last year, the Supreme Court issued one of its more significant bankruptcy decisions in recent years with Stern v. Marshall (a very brief note concerning the Stern decision as reported on this blog is available here).Â Stern, which addressed the limits of bankruptcy courtsâ€™ â€ścoreâ€ť jurisdiction, has been the focus of a considerable amount of academic and professional interest â€“ primarily because of its possible fundamental effect on the administration of bankruptcy cases.
Three weeks ago, the Seventh Circuit capped off 2011 with a decision â€“ the first at an appellate level â€“ discussing and applying Stern.
The procedural history of In re Ortiz is straightforward.Â Wisconsin medical provider Aurora Health Care, Inc. had filed proofs of claim in 3,200 individual debtorsâ€™ bankruptcy cases in the Eastern District of Wisconsin between 2003 and 2008.Â Two groups of these debtors took issue with these filings, claiming Aurora violated a Wisconsin statute that allows individuals to sue if their health care records are disclosed without permission.Â One group of debtors filed a class action adversary proceeding against Aurora in the Bankruptcy Court for Wisconsin’s Eastern District, while the other filed a similar class action complaint against Aurora in Wisconsin Superior Court.
For all their differences, it appears neither the debtor-plaintiffs nor Aurora wanted to have these matters heard by the US Bankruptcy Court.Â Aurora removed the Superior Court Action to the Bankruptcy Court, then immediately sought to have the US District Court for Wisconsin’s Eastern District withdraw the reference of these actions to the Bankruptcy Court and hear both matters itself.Â Both groups of debtor-plaintiffs, on the other hand, sought to have their claims heard by the Wisconsin Superior Court by asking the Bankruptcy Court to abstain from hearing them, and remand them to the state tribunal.
Both parties’ procedural jockeying for a forum other than the US Bankruptcy Court ultimately proved unfruitful:Â The District Court denied Aurora’s request to hear the matters, and the Bankruptcy Court declined to remand them back to Wisconsin Superior Court or otherwise abstain from hearing them.Â The District Court’s and the Bankruptcy Court’s reasoning was essentially the same – since the original “disclosure” of health records took place in the context of proofs of claim filed in individual debtors’ bankruptcy proceeding, both courts believed the matters were therefore “core” proceedings which Bankruptcy Courts were entitled to hear and determine on a final basis.
Ultimately, the Bankruptcy Court granted summary judgment and dismissed the class actions because both groups of debtors had failed to establish actual damages as required under the Wisconsin statute.Â Both the plaintiffs and Aurora requested, and were granted, a direct appeal to the Seventh Circuit Court of Appeals.
But if Ortiz’ procedural history is straightforward, the Seventh Circuit’s disposition of the appeal was not.Â After the case was argued on appeal in February 2011, the Supreme Court issued its decision in Stern v. Marshall.Â In that decision, the high court called into question the viability of Congress’ statutory scheme in which bankruptcy courts were empowered to finally adjudicate “core” proceedings – i.e., those proceedings “arising in a bankruptcy case or under title 11″ of the US Code.Â The Stern court held that a dispute – even if “core” – was nevertheless improper for final adjudication by a bankruptcy court if the dispute was not integral to the claims allowance process, and constituted a private, common-law action as recognized by the courts at Westminster in 1789.Â Such matters were – and are – the province of Article III (i.e., US District Court) judges, and it was not up to Congress to “chip away” at federal courts’ authority by delegating such matters to other, non-Article III (i.e., Bankruptcy) courts.
In order to resolve the Aurora class actions in a manner consistent with Stern, the Seventh Circuit requested supplemental briefing, and then undertook a lengthy analysis of that decision.Â To isolate and identify the type of dispute that the Stern court found “off-limits” for final decisions by bankruptcy courts, it distinguished the Aurora class action disputes from those cases which:
-Â Â Â Â Â Â Â InvolvedÂ “public rights” or a government litigant;
-Â Â Â Â Â Â Â Flowed from a federal statutory scheme or a particularized area of law which Congress had determined best addressed through administrative proceedings; or
-Â Â Â Â Â Â Â Were â€śintegral to the restructuring of the debtor-creditor relationshipâ€ť or otherwise part of the process of allowance and disallowance of claims.
Instead, the Aurora disputes had nothing to do with the original claims filed by Aurora in the debtorsâ€™ cases, was between private litigants, and was not a federal statutory claim or an administrative matter.Â Consequently, the Bankruptcy Court had no jurisdiction to determine it on a final basis.Â Consequently, the Seventh Circuit had no jurisdiction to hear the appeal.
Ortiz, like Stern, has received a considerable amount of attention within the bankruptcy community.Â Â Among some of the communityâ€™s immediate reactions to Ortiz:
-Â Â Â Â Â Â Â Despite the fact that the class actions arose out of Auroraâ€™s filing proofs of claim in bankruptcy cases, the bankruptcy court could not decide those class actions.Â More importantly, the Seventh Circuit suggested that a bankruptcy judge may not even have â€śauthority to resolve disputes claiming that the way one party acted in the course of the courtâ€™s proceedings violated another partyâ€™s rights.â€ťÂ In other words, it seems possible to argue, under Ortiz (and Stern), that though US District Courts have authority to police their own dockets, Bankruptcy Courts do not.
-Â Â Â Â Â Â Â The Seventh Circuitâ€™s decision appears circular in some respects.Â Specifically, the Seventh Circuit declined to hear the appeals from the bankruptcy court as proposed findings of fact and conclusions of law (rather than as a final judgment), because such recommendations from a bankruptcy court are available only in â€śnon-coreâ€ť proceedings â€“ and since the Aurora class actions were â€ścore,â€ť an appellate review of such proposed findings and conclusions simply wasnâ€™t available.Â But if a â€ścoreâ€ť matter is outside a bankruptcy courtâ€™s jurisdiction, is it really â€ścoreâ€ť?Â In other words, wouldnâ€™t it have been easier for the Seventh Circuit to have simply sent the matter back to the bankruptcy court as a recommended resolution, not yet ripe for an appeal?
As the results of Stern begin to percolate their way through the bankruptcy system and other circuits weigh in on the Supreme Courtâ€™s 2011 guidance, it appears the administration of bankruptcy cases faces some significant adjustment.
Monday, June 20th, 2011
A prior post on this blog featured an article highlighting some of the basic principles from Shari’a law which apply to insolvent individuals and businesses.
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Another,Â more recent article explores the intriguing question of what happens when an investment structured according to Shari’a law needs to be restructured in a non-Shari’a forum – such as a United States Bankruptcy Court.Â The University of Pennsylvania’s Michael J.T. McMillen uses the recent Chapter 11 filing of In re East Cameron Partners, LP as a case study to highlight some of the issues.
According to McMillen:
The issues to be considered [in connection with efforts to introduce Shariah principles into secular bankruptcy and insolvency regimes throughout the world] are legion. Starting at the level of fundamental principle, will the contemplated regime provide for reorganization along the lines of Chapter 11 systems, or will liquidation be the essential thrust of the system?Â If, in line with international trends, the system will incorporate reorganization concepts and principles, what is the SharÄ«Ężah basis for this regime?Â Even the fundamental questions are daunting.Â For example, consideration will need to be given to debt rescheduling concepts, debt forgiveness concepts, delayed debt payment concepts, equity conversion concepts, asset sale concepts, and differential equity conceptions.Â There will have to be consideration of whether voluntary bankruptcies can and will be permissible.Â And after agreement is reached on the basic nature and parameters of the system, the long road of discovery and elucidation of specific SharÄ«Ężah principles will have to be addressed.Â That undertaking will wind through a great deal of new territory, from the SharÄ«Ężah perspective, and will entail a comparative laws analyses, and a systemic comparison, unlike any in history.
The article is availableÂ here.
Monday, May 16th, 2011
When a retailerÂ becomes insolvent, suppliers or vendors who have recently provided goods on credit typicallyÂ have the ability toÂ assert “reclamation” rights for the return of those goods.Â Retailers may respond to theseÂ rights by seeking the protection the federal bankruptcy laws – and, in particular, the automatic stay.
When a retailer files for bankruptcy while holding goods which are subject to creditors’ “reclamation” rights, what should “reclamation” creditors do?
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The Bankruptcy Code itself provides some protection for “reclamation” creditors by providing such creditors additional time in which to assert their claims, and by affording administrative priority for a certain portionÂ for such claims even when they are not formally asserted.
But is merely asserting a reclamation claim under the Bankruptcy Code sufficient to protect a supplier once a retailer is in bankruptcy?Â A recent appellate decision from Virginia’s Eastern District serves as a reminder that merely speaking up about a reclamation claim isn’t enough.
When Circuit City sought bankruptcy protection in 2009, Paramount Home Entertainment was stuck with the tab for more than $11 million in goods.Â Though it didn’t object to blanket liens on Circuit City’s merchandise which came with the retailer’s debtor-in-possession financing, and stood by quietly while Circuit City laterÂ liquidated its merchandise througÂ a going-out-of-business sale, Paramount did file a timely reclamation demand as required by the Bankruptcy Code.Â It also complied with what it understood to be the Bankruptcy Court’s orders regarding administrative procedures for processing its reclamation claims in Circuit City’s case.Â It was therefore unpleasantly surprised when Circuit City objected to Paramount’s reclamation claim – and when the Bankruptcy Court sustained that objection – on the grounds that Paramount hadn’t done enough to establish or preserve its reclamation rights.
Paramount appealed the Bankruptcy Court’s ruling, claiming that it complied with what it understood to have been the Bankruptcy Court’s administrative procedures for processing reclamation claims.Â Â Paramount argued that to have done more (i.e., to have sought relief from the automatic stay to take back its goods or commenced litigation to preserve its rights to the proceeds of such goods) would have disrupted Circuit City’s bankruptcy case.
In affirming the Bankruptcy Court, US District Judge James Spencer held that the Bankruptcy Code, while protecting a creditor’s reclamation rights, doesn’t impose them on the debtor.Â Instead, a reclaiming creditor must take further steps consistent with the Bankruptcy Code and state law to preserve the remedies which reclamation claims afford.Â Merely asserting a reclamation claim under the Bankruptcy Code – or under a Bankruptcy Court’s administrative procedure – isn’t enough:
“Filing a demand, but then doing little else in the end likely creates more litigation and pressure on the Bankruptcy Court than seeking relief from the automatic stay. . . or seeking a [temporary restraining order] or initiating an adversary proceeding.Â In this case, Paramount filed its reclamation demand, but then failed to seek court intervention to perfect that right.Â As the Bankruptcy Court held, the Bankruptcy Code is not self-executing.Â Although [the Bankruptcy Code] does not explicitly state that a reclaiming seller must seek judicial intervention, that statute does not exist in a vacuum.Â The mandatory stay as well as the other sections of the Bankruptcy Code that protect and enforce the hierarchy of creditors create a statutory scheme that cannot be overlooked.Â Once Paramount learned that Circuit City planned to use the goods in connection with the post-petition [debtor-in-possession financing], it should have objected.Â It didn’t.Â To make matters worse, Paramount then failed to object to Circuit City’s liquidation of its entire inventory as part of the closing [going-out-of-business] [s]ales.”
Let the seller beware.
Tuesday, May 10th, 2011
Most insolvency practitioners are familiar with the fighting which often ensues when creditors jockey for position over a troubled firm’s capital structure.Â From Kansas, a recentÂ decision issued in February highlights the standards which apply to claims that a senior creditor’s claim ought to be “subordinated” to those of more junior creditors or equity-holders.
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QuVIS, Inc. (“QuVIS”),Â a provider of digital motion imaging technology solutions in a number of industries, found itself the target of an involuntary Chapter 7 filing in 2oo9.Â The company converted its case to one under Chapter 11 and thereafter sought to reorganize its affairs.
QuVIS â€™ debt was structured in an unusual way.Â When presented with some growth opportunities in the early 2000’s, the company issued secured notes under a credit agreement that capped its lending at $30,000,000.Â â€śInvestorsâ€ť acquired these notes for cash and received a security interest, evidenced by a UCC-1 recorded in 2002.Â One of QuVIS’ “investors” was Seacoast Capital Partners II, L.P. (“Seacoast”), a Small Business Investment Company (â€śSBICâ€ť) licensed by the United States Small Business Administration.Â Between 2005 and 2007, Seacoast lent approximately $4.25 million through a series of three separate promissory notes issued by QuVIS.Â In 2006, and consistent with the purposes of the Small Business Investment Act of 1958, under which licensed SBICs are expected to provide management support to the small business ventures in which they invest, Seacoast’s Managing Director, Eben S. Moulton (â€śMoultonâ€ť), was designated as an outside director to QuVIS’ board.
In 2007, it came to Seacoast’s attention that, despite its belief to the contrary, a UCC-1 had never been filed on Seacoast’s behalf regarding its loans to QuVIS.Â Nor had the earlier (and now lapsed) UCC-1 filed regarding QuVIS’ other “investors” ever been modified to reflect Seacoast’s participation in the company’s loan structure.Â Seacoast immediately filed a UCC-1 on its own behalf in order to protect its position.Â Some time after QuVIS found itself in Chapter 11 in 2009, the Committee of Unsecured Creditors (and other, less alertÂ ”investors”) sought to subordinate Seacoast’s position.
The Committee’s argument was based exclusively onÂ 11 U.S.C. Â§ 510(c), which provides, in pertinent part:
Notwithstanding subsections (a) and (b) of this section, after notice and a hearing, the court mayâ€” (1) under principles of equitable subordination, subordinate for purposes of distribution all or part of an allowed claim to all or part of another allowed claim …
“Equitable” subordination is based on the idea of “inequitable” conduct -Â such asÂ fraud, illegality, or breach of fiduciary duties.Â Where an “insider” or a fiduciary of the debtor is the target of a subordination claim, however, the party seeking subordination need only show some unfair conduct, and a degree of culpability, on the part of the insider.
Seacoast sought summary judgment denying the subordination claim.Â In granting Seacoast’s request, Judge Nugent of the Kansas Bankruptcy Court distinguishedÂ Seacoast’sÂ Managing DirectorÂ from Seacoast, finding that though Moulton was indeed an “insider,” Seacoast was not.Â Â Therefore, Seacoast’s claim was not subject to subordination for any “unfair conduct” which might be attributable to Moulton.Â To that end, Judge Nugent also appeared to go to some lengths to demostrate that Mr. Moulton’s conduct was not in any way “unfair” or detrimental to the interests of other creditors.
Subordination claims are highly fact-specific.Â With this in mind, the facts of the QuVIS decisionÂ afford instructive reading for lenders whose lending arrangements may entitle them to designate one of the debtor’s directors.
Tuesday, April 19th, 2011
Title II of the Dodd-Frank Act provides â€śthe necessary authority to liquidate failing financial companies that pose a systemic risk to the financial stability of the United States in a manner that mitigates such risk and minimizes moral hazard.â€ť
Under this authority, the government would have had the requisite authority to structure a resolution of Lehman Brothers Holdings Inc. – which, as readers are aware, was one of the marquis bankruptcy filings of the 2008 – 2009 financial crisis.
Readers are also aware that Dodd-Frank is an significant piece of legislation, designed to implement extensive reforms to the banking industry.Â But would it have done any better job of resolving Lehman’s difficulties than did Lehman’s Chapter 11?
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Predictably, the FDIC is convinced that a government rescue would have beenÂ more beneficialÂ - and in “The Orderly Liquidation of Lehman Brothers Holdings Inc. under the Dodd-Frank Act” (forthcoming in Vol. 5 of the FDIC Quarterly), FDIC staff explain why this is so.
The 19-page paper boils down to the following comparison between Chapter 11 and a hypothetical resolution under Dodd-Frank:
[U]nsecured creditors of LBHI are projected to incur substantial losses. Immediately prior to its bankruptcy filing, LBHI reported equity of approximately $20 billion; short-term and long-term indebtedness of approximately $100 billion, of which approximately $15 billion represented junior and subordinated indebtedness; and other liabilities in the amount of approximately $90 billion, of which approximately $88 billion were amounts due to affiliates. The modified Chapter 11 plan of reorganization filed by the debtors on January 25, 2011, estimates a 21.4 percent recovery for senior unsecured creditors. Subordinated debt holders and shareholders will receive nothing under the plan of reorganization, and other unsecured creditors will recover between 11.2 percent and 16.6 percent, depending on their status.
By contrast, under Dodd-Frank:
As mentioned earlier, by September of 2008, LBHIâ€™s book equity was down to $20 billion and it had $15 billion of subordinated debt, $85 billion in other outstanding short- and long-term debt, and $90 billion of other liabilities, most of which represented intracompany funding. The equity and subordinated debt represented a buffer of $35 billion to absorb losses before other creditors took losses. Of the $210 billion in assets, potential acquirers had identified $50 to $70 billion as impaired or of questionable value. If losses on those assets had been $40 billion (which would represent a loss rate in the range of 60 to 80 percent), then the entire $35 billion buffer of equity and subordinated debt would have been eliminated and losses of $5 billion would have remained. The distribution of these losses would depend on the extent of collateralization and other features of the debt instruments.
If losses had been distributed equally among all of Lehmanâ€™s remaining general unsecured creditors, the $5 billion in losses would have resulted in a recovery rate of approximately $0.97 for every claim of $1.00, assuming that no affiliate guarantee claims would be triggered. This is significantly more than what these creditors are expected to receive under the Lehman bankruptcy. This benefit to creditors derives primarily from the ability to plan, arrange due diligence, and conduct a well structured competitive bidding process.
Convinced?Â You decide.
Tuesday, April 12th, 2011
When a municipality faces municipal distress, who ultimately picks up the tab?Â More importantly, who should pick up the tab?
Thatâ€™s the issue taken up by Clayton P. Gillette, NYUâ€™s Max E. Greenberg Professor of Contract Law, in a recent paper titled â€śPOLITICAL WILL AND FISCAL FEDERALISM IN MUNICIPAL BANKRUPTCY.â€ťÂ Though the academic prose doesnâ€™t read quite like the Economist, Professor Gilletteâ€™s discussion is a timely and important one for observers of US municipalities and their current financial troubles.
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In essence, Professor Gillette argues that Chapter 9 of the Bankruptcy Code (municipal bankruptcy) is often perceived as a â€śdumping groundâ€ť for governmental entities who could raise taxes, but simply donâ€™t have the political gumption to do so.Â Historically, municipal debtors have attempted to utilize Chapter 9 as a means of shifting the burden of imprudent debt onto creditors.Â But Gillette argues that in an age of government bailout and centralized governmental assistance for failing municipalities, Chapter 9 also effectively acts as a â€śbargaining chipâ€ť for municipal debtors dealing with federal and state agencies who would prefer to address municipal financial distress outside of bankruptcy â€“ albeit at a moderate cost to local officials.
In support of this argument, Gillette explains that the structure of Chapter 9 offers municipalities a shot at having it both ways:Â They can run up a tab, then determine whom (other than themselves or their taxpayers â€“ i.e., private creditors or states and federal agencies) theyâ€™d prefer to pick it up.
Whatâ€™s the answer to this perceived recipe for irresponsibility?Â For Professor Gillette, it involves giving bankruptcy courts the power to impose affordable tax increases:
As a general proposition, fiscal federalism requires each level of government to internalize both the costs and the benefits of its activities.Â Centralized governments should, therefore, subsidize decentralized governments only to control negative spillovers of local activity or to induce activities that generate positive spillovers.Â Concomitantly, decentralized governments should be discouraged from engaging in activities that impose adverse external effects. In at least some cases of fiscal distress, however, â€“ primarily those involving localities that have substantial state or national importance â€“ municipalities can externalize some costs of idiosyncratic choices or local public goods onto more centralized levels of government or creditors. As a result, municipalities have tendencies both to overgraze on the commons of more centralized budgets and to avoid the exercise of political will to satisfy the debts they incur. The current legal structure for addressing municipal fiscal distress may interfere with, rather than advance the objectives of fiscal federalism insofar as it insulates local decisions from centralized influence and reduces the need for distressed localities to internalize the consequences of fiscal decisions. The result is that while theories of federalism typically focus on the security that decentralization confers against an onerous centralized government, the capacity of sub-national governments to exploit the financial strength of more central governments raises the possibility that the latter requires protection from the former. The claim of this Article is that judicially imposed tax increases may be used as a means of providing such protection by reducing the incentives of municipalities to [strategically] exploit bankruptcy proceedings . . . .
Whatever readers may think of the constitutionality of his idea, Professor Gilletteâ€™s article is an intriguing contribution to evolving thought on municipal distress.
Tuesday, April 5th, 2011
It is axiomatic in American business bankruptcy practice that though they may disagree strenuously on the particulars, all parties to a Chapter 11 case are interested in the same basic goal: maximization of the debtor’s asset values.
Or are they?
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NYU Professor Sarah Woo has recently published an empirically-based analysis of this assumed common goal, and the results of that analysis are striking.Â As sheÂ describes her own research (presented in an article titled “Regulatory Bankruptcy: How Bank Regulation Causes Firesales“):
This Article demonstrates empirically that this assumption is inaccurate: the actions of banks in bankruptcy proceedings are not necessarily driven by value maximization. The findings in this Article have groundbreaking implications for bankruptcy policy which focuses on the debtor and overlooks exogenous creditor-specific factors. Where banks, which extend the bulk of the outstanding credit in the United States, are driven by financial regulatory policy to over-liquidation of their own borrowers, these actions lead to fire sales which potentially amplifyliquidity shocks and systemic risk.
Ms. Woo’s working hypothesis is that changes in the banking sector over the past decade, including increased consolidation and increased leverage,Â eventuallyÂ pushed banks to pursue higher portfolio returns.Â As a result, many banksÂ over-concentrated their portfolios in commercial real estate – a strategy which worked well during frothier times, but which proved disatrous in the aftermath of 2008’s economic collapse.
In the aftermath of the banking crisis, over-concentration by banks drew significant regulatory scrutiny – and, ultimately, significant new regulation designed to pressure banks to reduce their concentration risk.Â According toÂ Professor Woo:
As with many episodes of financial instability which can be traced to misguided attempts to use regulatory power, pervasive regulatory pressure with capital adequacy as a centerpiece affected bank behavior in bankruptcy, interfering with investment expectations and diminishing asset values. In the case of IndyMac Bank, the bank shed more than a billion dollars of construction and development loans in the first six months of 2008 under regulatory pressure, partly through liquidations in bankruptcy. The actions of bank regulators thus had unintended but dire consequences of rendering the standard assumption of value maximization in bankruptcy policy obsolete by creating a different set of incentives dependent on the bank creditorâ€™s own health. The phenomenon of regulatory bankruptcy thus demands a comprehensive reevaluation of current bankruptcy policy which has not kept up with these developments in the banking industry.
Professor Woo’s work is important, not only for the specific question of how and why banks behave the way they do in bankruptcy, but also as an example of how industry dynamics can mold and shape the bankruptcy process – and further, how empirical data can be marshalled for the benefit of informed legislative change and judicial decision-making.
Saturday, March 12th, 2011
Chapter 15 of the US Bankruptcy Code, enacted in 2005, was Congress’ effort to make cross-border insolvency proceedings just a little more predictable.Â
Specifically,Â the statute’s policy objective was toÂ ”recognize” the efforts of foreign insolvency administrators and trustees to administer their debtors’ US-based assets – therebyÂ helping to “standardize” the way assets and claims are treated in non-US insolvency proceedings.
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Chapter 15 reflects a strong Congressional preference for what has been described as a “universalist” (rather than a “territorial”) approach to cross-border insolvency administration.Â But have US Bankruptcy Courts actually followed through on this “universalist” policy?
That is the question behind an empirical study on Chapter 15 recently published by Jeremy Leong, an advocate and solicitor with Singapore’s Wong Partnership.Â According to Mr. Leong, the study (entitledÂ IS CHAPTER 15 UNIVERSALIST OR TERRITORIALIST? EMPIRICAL EVIDENCE FROM UNITED STATES BANKRUPTCY COURT CASES, and forthcoming in the Wisconsin International Law Journal) and its results indicate that, despite its ostensibly “universalist” objectives:
United States courts applying Chapter 15 have not unconditionally turned over [the] debtorâ€™s assets in the United States to foreign main proceedings.Â The results of the study show that while United States courts recognized foreign proceedings in almost every Chapter 15 case, courts entrusted United States assets to foreign proceedings for distribution in only 45.5% of cases where foreign proceedings were recognized.Â When such entrustment was granted, 31.8% of cases were accompanied by qualifying factors[,] including orders which protected United States creditors by allowing them to be paid according to the priority scheme under United States bankruptcy law[,] or assurances that certain United States creditors would be paid in full or in priority.Â In only 9.1% of cases, entrustment of assets for distribution was ordered without any qualifications and where there were US creditors and assets at stake.
Based on this data, Mr. Leong goes on to conclude that “when deciding Chapter 15 cases, United States courts seldom grant entrustment [of assets for foreign distributions] without [protective] qualifications when United States creditors may be adversely affected.”Â Consequently,Â ”Chapter 15 is not as universalist as its proponents claim it to be and exposes the inability of Chapter 15 to resolve conflicting priority rules between the United States and foreign proceedings.”
Mr. Leong’s study is commendable as one of the earliest pieces of empirical work on how Chapter 15 is actually applied.Â But it raises some questions along the way.Â For example:
- Is a 45.5% “entrustment” rate really accurate?Â Mr. Leong’s claim that “courts entrusted United States assets to foreign proceedings for distribution in only 45.5% of cases where foreign proceedings were recognized” does not really compare apples to apples.Â That is, it measures the “entrustment” of assets across all recognized foreign proceedings – and not the smaller subset of proceedings where entrustment was actually requested.
According to Mr. Leong’s study results, “of the 88 cases where recognition was granted, the [US bankruptcy] court made orders for [e]ntrustment in only 40 cases.Â Of the remaining 48 cases where [e]ntrustment was not granted, [e]ntrustment had been requested by foreign representatives in 25 of these cases.”Â In other words, “entrustment” of assets was requested in 65 of the cases in Mr. Leong’s sample – and in those cases, it was granted in 40, providing a 61.5% success rate for the “entrustment” of assets, rather than the study’s advertised 45.5% success rate.
- Is a 45.5% “entrustment” rate really all that bad?Â Success rates – like many other statistics – are significant only by virtue of their relative comparison to other success rates.Â Assuming for the moment thatÂ the 45.5% “entrustment” rate observed whereÂ US courts apply Chapter 15 was indeed accurate, how does that rate compareÂ against similar requests in the insolvency courts of other sophisticated business jurisdictions applying their ownÂ recognition statutes?Â Â
Without such benchmarks or relative rankings, the conclusion that US courts are not “universal” seems premature.
- Is “asset entrustment” really the true measure of “universalism?”Â Finally, and perhaps most fundamentally, Mr. Leong’s focus on the “entrustment” of assets – i.e., the turnover of US-based assets for distribution in a foreign insolvency case – seems to neglect the other reasons for which a US bankruptcy court’s recognition of cross-border insolvency might be sought.Â Such reasons include the “automatic stay” of US-initiated litigation against the debtor, access to US courts for the purpose of gaining personal jurisdiction over US-based defendants and the recovery of assets, and access to the “asset sale” provisions of the US Bankruptcy Code which automatically apply along with recognition under Chapter 15.
Given the breadth of strategic reasons for seeking recognition of a foreign insolvency in the United States (many of which are unrelated, at least directly,Â to the ultimate distribution of assets), the study’s focus on “entrustment” as a measure of “universalism” may be over-narrow.
These questions aside, however, Mr. Leong’s studyÂ asks thought-provoking and empirically-grounded questions about the true nature of “universalism” as applied in US bankruptcy courts.Â It is an important initial step in framing the proper assessment of cross-border insolvencies in coming years.
Monday, February 21st, 2011
During recent years, the global economy has seen significant growth in transactions which purport to be governed by classic Islamic – or Shari’a – law.Â Primarily, the legal and business community’s focus has been on Shari’a finance.Â But what happens under Shari’a law when a transaction or venture turns sour?
That is the question posed recently by Abed Awad and Robert E. Michael of Pace Univeristy in White Plains.Â In IFLAS AND CHAPTER 11: CLASSICAL ISLAMIC LAW AND MODERN BANKRUPTCY, AwadÂ and Michael (both adjunct professors at Pace, and both practicingÂ attorneys in the New Jersey-New York metropolitan area) explore this issue in some much-needed detail.
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Specifically, their article:
is intended to provide an exposition and analysis of the basic precepts of this side of Islamic commercial law and, in doing so, compare them to the basic elements of western bankruptcy, notably that of the most successful and emulated one, Chapter 11 of the U.S. Bankruptcy Code. Above all, this article will discuss what the authors consider to be the five primary concepts that underpin or constitute the foundation of the Islamic law of bankruptcy: (1) the prohibition of riba (interest), and the concomitantblack of a theory of the time value of money; (2) the obligation to be socially responsible; (3) the divine directive to pay all of one’s debts if you are able to do so, with death being the only source of a final discharge; (4) the absence of a limited liability or entity shielding concept; and (5) the absence of concepts of intangible assets and many forms of non-possessory rights common in other legal systems. These five concepts are interwoven in the fabric of Islamic commercial and financial law.
In light of continuing global financial turmoil and further political turmoil in the Middle East, the article – which first appeared in last fall’s issue (Vol. 44) ofÂ SMU’s International Lawyer – is worth reading.Â