Avoidance and Recovery
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Posts Tagged ‘“United States Bankruptcy Court”’
Avoidance and Recovery
Avoidance Actions and Recoveries
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.