Legislation and Reform
Reorganization and Exit Strategy
|The South Bay Law Firm Law Blog highlights developing trends in bankruptcy law and practice. Our aim is to provide general commentary on this evolving practice specialty.|
Posts Tagged ‘“United States Bankruptcy Court”’
Legislation and Reform
Reorganization and Exit Strategy
“What’s in a name?” Shakespeare once asked, rhetorically. According to Shakespeare’s character Juliet – and according to the US Bankruptcy Court for the District of Columbia – not a great deal.
In a decision issued in early August, US Bankruptcy Judge Martin Teel, Jr. held that the so-called “general partner” of a District of Columbia limited liability partnership (LLP) could not, despite her title, initiate an involuntary bankruptcy proceeding against the debtor LLP.
Bankruptcy Code section 303(b)(3) provides that one or more of a partnership’s general partners are eligible to commence an involuntary petition against the entity. Acting under this section, the designated “general partner” of Washington DC’s Beltway Law Group, LLP commenced an involuntary Chapter 7 case against her own firm. Judge Teel subsequently found in reviewing the petition that – notwithstanding her title of “general partner” – the principal of a District of Columbia LLP could not commence an involuntary petition against the entity.
Judge Teel observed that the term “general partner,” for purposes of section 303(b)(3), refers to a partner who has at least some personal liability for the partnership’s debts. Under District of Columbia partnership law, however, partners in an LLP are not liable for the LLP’s debts as a result of their partnership status. Instead, such partners are at risk only to the extent of the capital subscribed. An LLP is therefore more akin to a “corporation” as that term is used in section 101(9)(A).
Judge Teel allowed that if an LLP had previously been a partnership within the contemplation of section 303(b) such that its partners were liable for the former partnership’s debts, the LLP’s status as a partnership for purposes of those debts would remain in place. But this was not Beltway Law Group’s case. Consequently, the petitioner – despite her title – was not a “general partner” for purposes of commencing an involuntary petition against the LLP.
The limited liability partnership is a common entity form in many jurisdictions. It is also an entity form which did not exist at the time the Code was drafted. Understanding how the form is treated for purposes of involuntary filings provides useful guidance in the event of financial distress and/or a dispute amongst the holders of interests in an LLP.
Though based in local law (here, the District of Columbia), Beltway Law Group’s discussion provides a helpful, straightforward analytical framework for determining whether an LLP may ever be classified as a “partnership” for purposes of an involuntary bankruptcy filing. Of particular help is Judge Teel’s clarification of the difference between a “corporation” and a “partnership” as those terms are employed by the Code.
Beltway Law Group provides localized – but nevertheless useful – guidance for practitioners who may be evaluating the possibility of an involuntary “partnership” bankruptcy filing.
One of the fundamental functions of any bankruptcy proceeding is the establishment of an amount and priority for each creditor’s claim against the debtor. A short, 5-page decision issued late last month by the Nebraska Bankruptcy Court in two related Chapter 11 cases (Biovance and Julien) serves as a reminder that although creditors are not permitted a “double recovery” on their claims, they are nevertheless permitted to assert the full value of their claims until those claims are paid in full.
Canadian gold mining concern Crystallex International Corp. filed for protection under Canada’s Companies’ Creditors Arrangement Act (CCAA) on Dec. 23, 2011. The company operates an open pit mine in Uruguay and three gold mines in Venezuela.
Among its Venezuelan projects is the 9,600-acre Las Cristinas mine. Court papers said the site’s untapped gold deposits are among the largest in the world, containing an estimated 20 million ounces of gold. Crystallex filed for Chapter 15 bankruptcy protection in Delaware on the same date to protect its US assets while seeking a Canadian restructuring. Delaware Bankruptcy Judge Peter Walsh granted recognition on January 20.
Crystallex’s financial troubles allegedly stem from the Venezuelan government’s threatened revocation of Crystallex’s operating agreement for the Las Cristinas project as a result of the company’s failure to obtain an environmental permit. Crystallex blames this failure on the Venezuelan government’s own continued failure to grant the permit.
The company continues to operate, but appears to be staking its restructuring hopes primarily on arbitration claims for $3.8 billion in alleged losses suffered in connection with the Las Cristinas agreement. Crystallex said it has invested more than C$500 million in the uncompleted Las Cristinas project. The company believes an arbitration award will provide sufficient funds to pay all its creditors in full while leaving value for the company’s shareholders.
Those creditors include secured lenders China Railway Resources Group (owed C$2.5 million) and Venezolano Bank about (owed $1 million). They also include $104.14 million in 9.34% senior unsecured notes the company issued on Dec. 23, 2004. Crystallex’s CCAA filing and its concurrent Chapter 15 petition were filed on the same date its notes matured.
Recently, the company sought to alleviate its immediate liquidity concerns by means of an auctioned DIP facility. Specifically, Crystallex sought a debtor-in-possession loan of C$35 million, convertible into an “exit facility.”
Crystallex reported to the US Bankruptcy Court that it was in receipt of multiple expressions of interest in such a facility. Meanwhile, pending the completion of due diligence and approval by the Canadian Court, Cyrstallex sought recognition of a much smaller C$3.125 million “bridge facility” from Tenor Special Situations Fund, L.P., which the Canadian Court approved January 20.
The bridge facility expires April 16, and required US Bankruptcy Court approval by February 20. Judge Walsh provided that approval at a hearing held yesterday.
Crystallex’s Chapter 15 proceeding is pending as Case No. 11-bk-14074.
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 over five divisions, a “score-card” like this one is essential reading. A copy of the survey is available here.
Other Posts of Interest:
JonesDay’s comprehensive and always-readable summary of notable bankruptcies, decisions, legislation, and economic events was released just over a week ago. A copy is available here.
As 2012 gets off to an uncertain start, some more recent headlines are accessible immediately below.
Can a senior secured lender require, through an inter-creditor agreement, that a junior lender relinquish the junior’s rights under the Bankruptcy Code vis á vis a common debtor?
Though the practice is a common one, the answer to this question is not clear-cut. Bankruptcy Courts addressing this issue have come down on both sides, some holding “yea,” and others “nay.” Late last year, the Massachusetts Bankruptcy Court sided with the “nays” in In re SW Boston Hotel Venture, LLC, 460 B.R. 38 (Bankr. D. Mass. 2011).
The decision (available here) acknowledges and cites case law on either side of the issue. It further highlights the reality that lenders employing the protective practice of an inter-creditor agreement as a “hedge” against the debtor’s potential future bankruptcy may not be as well-protected as they might otherwise believe.
In light of this uncertainty, do lenders have other means of protection? One suggested (but, as yet, untested) method is to take the senior lender’s bankruptcy-related protections out of the agreement, and provide instead that in the event of the debtor’s filing, the junior’s claim will be automatically assigned to the senior creditor, re-vesting in the junior creditor once the senior’s claim has been paid in full.
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). Stern, which addressed the limits of bankruptcy courts’ “core” jurisdiction, has been the focus of a considerable amount of academic and professional interest – 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 – the first at an appellate level – discussing and applying Stern.
The procedural history of In re Ortiz is straightforward. Wisconsin medical provider Aurora Health Care, Inc. had filed proofs of claim in 3,200 individual debtors’ bankruptcy cases in the Eastern District of Wisconsin between 2003 and 2008. 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. 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. 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. 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: 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. 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. 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. After the case was argued on appeal in February 2011, the Supreme Court issued its decision in Stern v. Marshall. 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. 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. 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. 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:
- Involved “public rights” or a government litigant;
- Flowed from a federal statutory scheme or a particularized area of law which Congress had determined best addressed through administrative proceedings; or
- Were “integral to the restructuring of the debtor-creditor relationship” 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 debtors’ cases, was between private litigants, and was not a federal statutory claim or an administrative matter. Consequently, the Bankruptcy Court had no jurisdiction to determine it on a final basis. 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. Among some of the community’s immediate reactions to Ortiz:
- Despite the fact that the class actions arose out of Aurora’s filing proofs of claim in bankruptcy cases, the bankruptcy court could not decide those class actions. More importantly, the Seventh Circuit suggested that a bankruptcy judge may not even have “authority to resolve disputes claiming that the way one party acted in the course of the court’s proceedings violated another party’s rights.” 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.
- The Seventh Circuit’s decision appears circular in some respects. 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 “non-core” proceedings – and since the Aurora class actions were “core,” an appellate review of such proposed findings and conclusions simply wasn’t available. But if a “core” matter is outside a bankruptcy court’s jurisdiction, is it really “core”? In other words, wouldn’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 Court’s 2011 guidance, it appears the administration of bankruptcy cases faces some significant adjustment.
One of the time-honored attractions of US bankruptcy practice is the set of tools provided for the purchase and sale of distressed firms, assets and real estate. In recent years, the so-called “363 sale” has been a favorite mechanism for such transactions – its popularity owing primarily to the speed with which they can be accomplished, as well as to the comparatively limited liability which follows the assets through such sales.
But “363 sales” have their limits: In such a sale, a secured creditor is permitted to “credit bid” against the assets securing its lien – often permitting that creditor to obtain a “blocking” position with respect to sale of the assets.
Until very recently, many practitioners believed these “credit bid” protections also applied whenever assets were being sold through a Chapter 11 plan. In 2009 and again in 2010, however, the Fifth and Third Circuit Courts of Appeal held, respectively, that a sale through a Chapter 11 Plan didn’t require credit bidding and could be approved over the objection of a secured lender, so long as the lienholder received the “indubitable equivalent” of its interest in the assets (for more on the meaning of “indubitable equivalence,” see this recent post).
Lenders, understandably concerned about the implications of this rule for their bargaining positions vis a vis their collateral in bankruptcy, were relieved when, about 10 days ago, the Seventh Circuit Court of Appeals respectfully disagreed – and held that “credit bidding” protections still apply whenever a sale is proposed through a Chapter 11 Plan.
The Circuit’s decision in In re River Road Hotel Partners (available here) sets up a split in the circuits – and the possibility of Supreme Court review. In the meanwhile, lenders may rest a little easier, at least in the Seventh Circuit.
Or can they?
It has been observed that the Seventh Circuit’s River Road Hotel Partners decision and the Third Circuit’s earlier decision both involved competitive auctions – i.e., bidding – in which the only “bid” not permitted was the lender’s credit bid. The Fifth Circuit’s earlier decision, however, involved a sale following a judicial valuation of the collateral at issue.
Is it possible to accomplish a sale without credit bidding – even in the Seventh Circuit – so long as the sale does not involve an auction, and is instead preceded by a judicial valuation?
Ray’s piece focuses on the supportability of assumptions underlying valuations. As he notes:
The piece is here.