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    Posts Tagged ‘“United States Court of Appeals for the Fifth Circuit”’

    River Road Hotel Partners

    Sunday, July 10th, 2011

    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.

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    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?

    Stay tuned.

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    US Recognition of Individual Foreign Bankruptcies: What It (Doesn’t) Take

    Monday, June 7th, 2010

    From the Fifth Circuit Court of Appeals, a recent decision regarding the curious (and well-aged) bankruptcy of Yuval Ran offers a thought-provoking consideration of what is required to obtain US recognition of a foreign individual’s bankruptcy case.

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    The Curious Case of Mr. Ran

    Mr. Ran, an Israeli citizen, was at one point a director or shareholder in almost one hundred Israeli companies – some publicly-traded, and the largest of which was Israel Credit Lines Supplementary Financial Services Ltd. (“Credit Lines”), a public company co-founded and run by Ran, who served as CEO.

    After raising millions of dollars from investors and acquiring interests in numerous other companies, Credit Lines ultimately found itself in liquidation through an Israeli bankruptcy proceeding. Credit Lines’ bankruptcy receiver asserted claims against Ran for millions of dollars in damages.

    In June 1997, an involuntary bankruptcy proceeding was commenced against Ran in the Israeli District Court of Tel Aviv-Jaffa – but not before Ran and his family had departed Israel for Houston, Texas. Since their departure, Ran and his wife purchased a home and went to work for a local furniture company. Ran’s wife and five children are US citizens, and Ran himself is a permanent resident seeking US citizenship. With the exception of some minimal collection work on Credit Lines’ behalf shortly after he arrived in the US, Ran did no further business in Israel.

    In December 2006 – nearly a decade after Ran and his family emigrated, and more than eight years after being appointed receiver of Ran’s estate – Zuriel Lavie, the receiver appointed for Ran’s Israeli assets, sought recognition of the Israeli bankruptcy proceeding as a foreign main or non-main proceeding under Chapter 15 of the Bankruptcy Code in the Southern District of Texas’ Bankruptcy Court.

    Levie’s petition was denied the following May. After two rounds of appeals to the District Court, the parties finally found themselves before the Fifth Circuit Court of Appeals.

    In affirming the District Court and the Bankruptcy Court’s denials, the Fifth Circuit briefly reviewed the procedural requirements for recognition set forth in Section 1517 of the Bankruptcy Code, then turned its attention to the one item of substance – whether the debtor’s bankruptcy proceeding qualified either as a foreign “main” or “non-main” proceeding as contemplated by Chapter 15.

    Main Proceeding” – Where is COMI?

    Under US law – as under the UNCITRAL Model Law upon which it is based – a foreign “main proceeding” qualifies as such if the jurisdiction where it is pending is the debtor’s “center of main interests” (COMI). In the case of an individual such as Ran, COMI is presumptively the debtor’s “place of habitual residence” – a concept roughly equivalent to the debtor’s “domicile,” or physical presence coupled with an intent to remain there. One acquires a “domicile of origin” at birth, and that domicile continues until a new one (a “domicile of choice”) is acquired.

    A similar concept – that of “habitual residence” – likewise applies under foreign law when the individual intends to stay in a specified location permanently. Factors pertinent to establishing an individual’s “habitual residence” include: (1) the length of time spent in the location; (2) the occupational or familial ties to the area; and (3) the location of the individual’s regular activities, jobs, assets, investments, clubs, unions, and institutions of which he is a member.

    Under these facts, Ran’s COMI was presumptively in the US – and not in Israel. However, the presumption of COMI may be rebutted. Levie sought to do so by introducing evidence at the District Court that: (1) Ran’s creditors are located in Israel; (2) Ran’s principal assets are being administered in bankruptcy pending in Israel; and (3) Ran’s bankruptcy proceedings initiated in Israel and would be governed by Israeli law.

    Ran countered by pointing out that: (1) Ran along with his family left Israel nearly a decade prior to the filing of the Chapter 15 petition; (2) Ran has no intent to return to Israel; (3) Ran has established employment and a residence in Houston, Texas; (4) Ran is a permanent legal resident of the United States and his children are United States citizens; and (5) Ran maintains his finances exclusively in Texas.

    In weighing this evidence, the Fifth Circuit relied on earlier analysis in In re SPhinX, Ltd., 351 B.R. 103 (Bankr. S.D.N.Y. 2006), aff’d, 371 B.R. 10 (S.D.N.Y. 2007) – and more specifically, on analysis in In re Loy, 380 B.R. 154. 162 (Bankr. E.D. Va. 2007) (the only case to address the concept of COMI with respect to an individual debtor) – in which the Bankruptcy Court noted that factors such as (1) the location of a debtor’s primary assets; (2) the location of the majority of the debtor’s creditors; and (3) the jurisdiction whose law would apply to most disputes, may be used to determine an individual debtor’s COMI when there exists a serious dispute. The Fifth Circuit found that, unlike the Loy decision, the initial presumption (and the ultimate preponderance of evidence) under these factors weighed in Ran’s favor.

    Undeterred, Lavie argued that the Fifth Circuit ought not to confine its COMI inquiry to the “snapshot” of Ran’s domicile that existed at the time the Chapter 15 petition was filed. Instead, he argued that the Fifth Circuit ought to look back to Ran’s “operational history” in Israel for a more comprehensive determination of COMI.

    The Fifth Circuit panel was not persuaded. Instead, it looked to the statute’s use of present tense (i.e., a “main proceeding” is a “foreign proceeding pending in the country where the debtor has the center of its main interests”) to determine the COMI inquiry as dispositive of what evidence was relevant, and what evidence was not.

    The panel then went on to provide policy bases for the “snapshot” approach to COMI, explaining that locating COMI as of the date the petition is filed aids international harmonization and promotes predictability. Perhaps most significantly the panel noted “it is important that the debtor’s COMI be ascertainable by third parties . . . . The presumption is that creditors will look to the law of the jurisdiction in which they perceive the debtor to be operating to resolve any difficulties they have with that debtor, regardless of whether such resolution is informal, administrative or judicial.”

    Non-Main” Proceeding

    On the question of whether Ran’s proceeding was a foreign “non-main” proceeding, the Fifth Circuit panel pondered its definition, i.e., “a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment.” Lavie argued that Ran’s involuntary proceeding in Israel was, in itself, an “establishment.” Section 1502(2), however, defines an “establishment” as “any place of operations where the debtor carries out a nontransitory economic activity.”

    Unlike COMI, the existence of an “establishment” is a simple factual determination with no presumptions in anyone’s favor.  However, one court has noted that “the bar is rather high” to prove the debtor maintains an “establishment” in a foreign jurisdiction.

    In essence, the Fifth Circuit found that in order to have an “establishment,” Ran must have had “a place from which economic activities are exercised on the market (i.e. externally), whether the said activities are commercial, industrial or professional” at the time that Lavie filed the petition for recognition.

    For the same reasons that gave rise to the Fifth Circuit’s weight of the evidence in Ran’s favor regarding the “main proceeding,” the Israeli proceeding was determined not to be a “non-main” proceeding – and, therefore, not entitled to any recognition within the US.

    In addition to being the first appellate decision addressing an individual’s COMI, the Ran case is noteworthy for the proposition that the mere existence of an individual’s insolvency proceeding, pending in another jurisdiction, is insufficient to qualify for recognition under US law. Instead, there must be a demonstration of ongoing activity – either through a showing of COMI, or through the “establishment” of ongoing activity – to qualify.

    Further, though it is specifically limited to its own facts, the Ran decision offers a glimpse into the Fifth Circuit’s general approach to COMI – in particular, its observance that the debtor’s COMI should be ascertainable by third parties. This observance may prove significant in the event that similar disputes over the much larger and more contentious Stanford proceedings (see prior posts about Stanford here) ever make their way to the Circuit Court.

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    The Deafening Silence

    Monday, March 22nd, 2010

    A number of advanced commercial jurisdictions – such as the US, the UK, Germany, and Japan – permit a debtor’s bankruptcy administrator or trustee to pursue and recover preferential or fraudulent transfers.  Unwinding such transfers, typically made from the debtor to a third party located in the same country, is often an important source of recovery for creditors.

    But what happens when the transfer crosses international borders?  More specifically, which country’s avoidance law applies:  The law of the jurisdiction where the transfer was initiated?  Or the law of the “destination” jurisdiction?

    An important decision issued last Thursday by the Fifth Circuit Court of Appeals provides a preliminary answer for at least a portion of this question.

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     “Before” Chapter 15.

    Prior to the enactment of Chapter 15, US bankruptcy courts disagreed on whether – and how – the administrator of a foreign insolvency proceeding could pursue such transfers in the US.  Some courts permitted non-US administrators to pursue such recovery efforts directly (through an ancillary proceeding), under the fraudulent transfer law of the debtor’s home jurisdiction.  Others permitted such recoveries only under US law, and only through a separately filed (and far more expensive and time-consuming) Chapter 11 or 7 bankruptcy case.

    After” Chapter 15.

    Chapter 15 resolved at least a portion of this debate.  Section 1521(a)(7) provides that upon recognition of a foreign proceeding, the court may grant “any appropriate relief” including “additional relief that may be available to a trustee, except for relief available under [the avoidance sections of the US Bankruptcy Code].” Section 1523(b) authorizes the bankruptcy court to order relief necessary to avoid acts that are “detrimental to creditors,” providing that, upon recognition of a foreign proceeding, a foreign representative has “standing in [the debtor’s US bankruptcy] case . . . to initiate [avoidance] actions.”  In other words, Congress appeared to clear up the question where recovery efforts are initiated under US law:  A full Chapter 11 (or 7) case is required.

    But what about recovery efforts commenced under non­-US law?

    Courts visiting this issue under Chapter 15 appear almost as divided as those who looked at it prior to the Bankruptcy Code’s 2005 amendments.

    Two cases, both addressing the question in dicta, have gone in opposite directions.  In one, the Bankruptcy Court forbade a sale “free and clear” of an avoidable English lien on procedural grounds – but along the way, acknowledged that avoidance actions under the US Bankruptcy Code are cognizable only if the debtor is the subject of a case under another chapter of the Bankruptcy Code.  In another, the Bankruptcy Court denied a request by the administrator of a Danish insolvency proceeding for turnover of previously-garnished funds on the grounds that such turnover provisions were not applicable in Chapter 15 – but nevertheless went out of its way to note that nothing in Chapter 15’s legislative history – or in prior US cross-border law – prohibited avoidance actions commenced under the law of the debtor’s home jurisdiction.

    To date, however, only one case has addressed the issue directly.

    Condor Insurance and the Bankruptcy Code’s Deafening Silence.

    Condor Insurance, Limited (“Condor”), a Nevis-incorporated insurer and surety bond issuer, was placed into a winding-up proceeding in its home jurisdiction in 2007.  The following year, Condor’s liquidators sought recognition in Mississippi – in part, to pursue alleged fraudulent transfers aggregating more than $313 million to Condor affiliates and principals.

    The Bankruptcy Court and District Court Decisions.

    The Condor defendants moved to dismiss, claiming the Bankruptcy Court lacked jurisdiction to grant the relief requested. The Bankruptcy Court agreed, and – on appeal, and in a published decision – the District Court affirmed.  Central to the District Court’s reasoning was the idea that, in US courts, “the choice of law that is to be applied to a lawsuit is determined by a court having jurisdiction over the case, and the parties are not permitted to choose whatever law they wish when filing a lawsuit.”  As a result, the District Court found it lacked jurisdiction to hear the avoidance action.  Instead, it suggested that the liquidators commence and resolve the avoidance claims in Nevis – and then, upon procurement of a judgment, seek enforcement under principles of international comity.

    The Fifth Circuit Decision.

    In a decision issued last week, the Fifth Circuit Court of Appeals respectfully disagreed.  Writing for a 3-judge panel, Judge Patrick Higgenbotham observed Chapter 15’s “international origins” to encompass “international law.”  For the panel, Chapter 15 is not merely a procedural vehicle by which foreign administrators may cost-effectively protect assets domiciled, or control litigation originating, in the US.  Instead, foreign administrators may import the substantive insolvency law of foreign jurisdictions into US courts, which have jurisdiction to apply such law to disputes pending in the US.  See pp. 8-9 (“Whatever its full reach, Chapter 15 does not constrain the federal court’s exercise of the powers of foreign law it is to apply.”).

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    As a result, the statute’s silence speaks volumes.  Once recognized in the US court system through Chapter 15, foreign administrators have direct access to the panoply of federal judicial powers available to assist their administration of insolvency-related matters in the US, limited only by the specific “carve-outs” for US avoidance actions reserved in Section 1521:

    “The structure of Chapter 15 provides authority to the district court to assist foreign representatives once a foreign proceeding has been recognized by the district court. Neither text nor structure suggests additional exceptions to available relief. Though the language does not explicitly address the use of foreign avoidance law, it suggests a broad reading of the powers granted to the district court in order to advance the goals of comity to foreign jurisdictions.  And this silence is loud given the history of the statute including the efforts of the United States to create processes for transnational businesses in extremis.”  Decision at pp. 9-10.

    -          What About “Section Shopping?”

    The Fifth Circuit recognized the appellees’ concern over “section shopping” – i.e., the strategic use of Chapter 15 (rather than Chapter 11 or Chapter 7) by foreign administrators to leverage the benefits of foreign avoidance law in US forums.  But where Congress had not taken further steps to guard against this threat, the Fifth Circuit overruled the District Court’s own efforts to do so.  In fact, Judge Higgenbotham and his colleagues did not appear bothered by the spectre of “section shopping,” noting that in the case before it – that of a foreign insurance company – Chapters 7 and 11 were not eligible relief.  Moreover, the District Court’s suggestion that the foreign administrator should simply obtain an avoidance judgment in Nevis, then seek enforcement of that judgment in the US, was “no answer.  Not all defendants are necessarily within the jurisdictional reach of the Nevis court.”  Decision at p.14.

    -          What Of “Mixing and Matching?”

    Instead of “section shopping,” Judge Higgenbotham saw the danger of “mixing and matching” foreign insolvency proceedings with US avoidance law, arising in connection with a Chapter 11 or Chapter 7 case.  See p. 11 (“When courts mix and match different aspects of bankruptcy law, the goals of any particular bankruptcy regime may be thwarted and the end result may be that the final distribution is contrary to the result that either system applied alone would have reached.”).  The Fifth Circuit traced the development of the UNCITRAL’s efforts to address choice of law in avoidance actions while drafting the model law that forms the basis for Chapter 15, concluding:

    “The application of foreign avoidance law in a Chapter 15 ancillary proceeding raises fewer choice of law concerns as the court is not required to create a separate bankruptcy estate.  It accepts the helpful marriage of avoidance and distribution whether the proceeding is ancillary applying foreign law or a full proceeding applying domestic law—a marriage that avoids the more difficult depecage rules of conflict law presented by avoidance and distribution decisions governed by different sources of law.”  Decision at p.13.

    The Fifth Circuit panel also found its own approach more consistent with that of US cross-border law that pre-dated Chapter 15, noting Bankruptcy Courts could – and sometimes did – apply either US avoidance law or foreign avoidance law to an action pending in an ancillary case under former Section 304.  At least one court, however, had criticized this approach for the same “mixing and matching” of foreign and domestic insolvency law noted by the Fifth Circuit.  See p.16 (citing and discussing In re Metzeler, 78  B.R. 674, 677 (Bankr. S.D.N.Y. 1987)):

    “In sum, under section 304, avoidance actions under foreign law were permitted when foreign law applied and would provide for such relief.  Congress essentially made explicit In re Metzeler’s articulation of the bar on access to avoidance powers created by the U.S. Code by foreign representatives in ancillary proceedings.”  Decision at p.16.

    -          Wholesale Importation of Foreign Avoidance Actions?

    As for concerns that US insolvency courts – and US businesses – might find themselves awash in avoidance claims arising under non-US law, the Fifth Circuit again reverted to the international policies undergirding the legislation:

    “Providing access to domestic federal courts to proceedings ancillary to foreign main proceedings springs from distinct impulses of providing protection to domestic business and its creditors as they develop foreign markets. Settled expectations of the rules that will govern their efforts on distant shores is an important ingredient to the risk calculations of lenders and corporate management. In short, Chapter 15 is a congressional implementation of efforts to achieve the cooperative relationships with other countries essential to this objective.”

    The Unanswered Question.

    The Fifth Circuit’s Condor decision leaves unanswered the question of whether avoidance actions commenced under Section 544 of the Bankruptcy Code – which itself references “applicable [non-bankruptcy] law” – includes foreign law.  Section 1521, by its terms, excludes avoidance actions predicated on this section.  But the Bankruptcy Court, the District Court, and the Fifth Circuit all ducked this issue.

    One Manhattan bankruptcy judge recently observed, in dicta, that Section 544(b) gives the trustee the standing of a judgment lien creditor.  Because a preference action under foreign law would not appear to depend on status as a judgment lien creditor, this section would appear inapplicable to preference claims. A preference action under foreign law might therefore be available as “additional assistance” under § 1507.  See In re Atlas Shipping A/S, 404 B.R. 726, 744 at n.16 (Bankr. S.D.N.Y. 2009).

    But Condor’s brief analysis didn’t address preference claims.  It addressed avoidance actions, which – at least in the US – do depend upon judgment lien creditor status.  As a result, the availability of foreign avoidance actions, while resolved in the Fifth Circuit – remains likely unanswered elsewhere.

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    The Stanford Saga – Chapter 14: Fightin’ Words.

    Monday, January 4th, 2010

    Evidentiary hearings are scheduled for later this month in the ongoing struggle for control over the financial assets of Stanford International Bank, Ltd. (SIB), the cornerstone of Allen Stanford’s financial-empire-turned-Ponzi-scheme.  A series of posts on this blog have covered liquidators Peter Wastell and Nigel Hamilton-Smith’s efforts to obtain recognition in the US for their Antiguan wind-up of SIB, and US receiver Ralph Janvey’s competing efforts to do the same in Canadian and UK courts.

    The Stanford case is of considerable significance in the US – and in the UK and Canada, where it has spawned at least two decisions and related appeals over the parties’ efforts to obtain cross-border recognition for their respective efforts to clean up the Stanford mess.

    In Dallas, Texas, where an enforcement action commenced by the American Securities and Exchange Commission remains pending (and where Mr. Janvey has been appointed as a receiver for the purposes of marshalling Stanford assets for distribution to creditors), US District Court Judge David Godbey has taken prior pleadings from both sides under advisement and, in advance of this month’s hearing, has requested further briefing on three issues.  Mr. Janvey’s brief, submitted last week, addresses each of these as follows:

    The Current State of Fifth Circuit Law on What Constitutes an Entity’s “Principal Place of Business,” Including Whether Stanford International Bank’s (“SIB”) Activities Were Active, Passive or “Far Flung.”

    The Liquidators have argued that, under applicable Fifth Circuit standards, SIB’s “principal place of business” was Antigua and that its activities were actively managed from Antigua, and were not “far flung” so as to render SIB’s Antiguan location irrelevant.

    Predictably enough, Mr. Janvey responds that under appropriate circumstances, the Fifth Circuit applies principles of alter ego and disregards corporate formalities in determining an entity’s “principal place of business:”  “The Fifth Circuit applies alter ego doctrines not only to enforce liability against shareholders and parent companies, but also to determine a corporation’s ‘principal place of business’ for jurisdictional purposes.” (citing Freeman v. Nw. Acceptance Corp., 754 F.2d 553, 558 (5th Cir. 1985)).

    Based on this construction of Fifth Circuit law – and because COMI is generally equated to an entity’s “principal place of business” under US corporate law –   Janvey then argues that consistency and logic require the same rules be followed for COMI purposes.  He then goes on to argue that Stanford’s Ponzi scheme activities were “far flung,” that SIB’s Antiguan operations were “passive,” and that its “nerve center” and “place of activity” were both in the U.S.

    The Relationship Between SIB and the Financial Advisors Who Marketed SIB’s CDs to Potential Investors.

    Wastell and Hamilton-Smith have argued that financial advisors who sold SIB’s CDs to potential investors were, in fact, independent agents employed by other, independent Stanford broker-dealer entities and were not controlled by SIB.

    Mr. Janvey pours scorn on this argument.  According to him, it does not matter that there were inter-company “contracts” purporting to make the Stanford broker-dealer entities agents for SIB in the sale of CDs.  As Mr. Janvey views it, a fraud is a fraud . . . from beginning to end.  Consequently, there was no substance to the “contracts” as all the entities involved were instruments of Stanford’s fraud.

    The “Single Business Enterprise” Concept as Part of the “Alter Ego” Theory of Imposing Liability.

    As noted above, Mr. Janvey takes the position that “alter ego” treatment of the Stanford entities is not only viable – it is the only appropriate means of treating SIB’s relationship to other, US-based Stanford entities, and of determining COMI for SIB.  He argues further that substantive consolidation – the bankruptcy remedy referred to by Messr’s. Wastell and Hamilton-Smith – can be just as effectively accomplished through a federal receivership, which affords US District Courts significant latitude in fashioning equitable remedies and determining distributions to various classes of creditors.

    Mr. Janvey’s argument appears quite straightforward.  Because a fraud is a fraud, geography matters very little in determining its “center of main interests.”  According to him, what should count instead is the location of the fraudsters and the place from which the fraud was managed and directed.  Yet even Mr. Janvey acknowledges that “Antigua played a role in [Stanford's Ponzi] scheme . . . [in that] [Antigua] was where Stanford could buy off key officials in order to conduct his sham business without regulatory interference.”  In other words, geography was important . . . at least for Stanford.  Specifically, geography provided Stanford direct access to a corrupt regulator who would afford cover for the conduct of Stanford’s fraudulent CD sales to investors.

    Mr. Janvey addresses this potential problem by taking aim at the entire Antiguan regulatory structure:

    “Chapter 15 contains a public policy exception: ‘Nothing in the chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.’ 11 U.S.C. § 1506. The facts warrant application of the public policy exception here. The very agency that first appointed the Antiguan [l]iquidators and then obtained their confirmation from the Antiguan court was complicit in Stanford’s fraud. That same agency has allowed financial fraud to flourish on Antigua for decades. It would be contrary to public policy for this Court to cede to Antigua the winding up of a company that bilked Americans and others out of billions when it was Antigua that permitted the fraud.”

    Mr. Janvey then goes further still, arguing that Messr’s. Wastell and Hamilton-Smith (and their employer, British-based Vantis plc) are precluded by Antiguan law from complying with the disclosure requirements Judge Godbey has imposed on the US receivership – and therefore simply unable to concurrently administer a “main case” in Antigua and cooperate with the Receiver (or with the District Court) in the US.

    Finally, Mr. Janvey gets directly personal: He recites the opinion of the Canadian court that revoked Vantis’ administration of Stanford’s Canadian operations and refused recognition of the Antiguan wind-up on the grounds that “Vantis’ conduct, through [Messr's. Wastell and Hamiton-Smith], disqualifies it from acting and precludes it from presenting the motion [for Canadian recognition], as [Vantis] cannot be trusted by the [Canadian] Court . . . .”  The Canadian court’s opinion has been upheld on appeal, and is now final.

    In a nutshell, Mr. Janvey argues that geography shouldn’t matter where a fraud is concerned . . . but if it does matter, it ought to count against jurisdictions such as Antigua, an “impoverished island” which has a population “about 80% that of Waco, Texas” and a history of financial fraud.

    As is sometimes said in Texas, “Them’s fightin’ words.”

    The SEC’s brief, like Mr. Janvey’s, is also on file.  Messr’s. Wastell and Hamilton-Smith’s reply will be due shortly.

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    The Stanford Saga – Chapter 13: Three Questions About Recognition

    Monday, December 14th, 2009

    An update regarding Peter Wastell and Nigel Hamilton-Smith’s dispute with federal Receiver Ralph Janvey over control of Stanford International Bank Ltd. (SIB)’s financial assets, and the 13th in a series on this blog covering the dissolution of Allen Stanford’s erstwhile financial empire and alleged international “Ponzi scheme” – a dissolution playing out in Montreal, London, and Dallas.

    Wastell and Hamilton-Smith, liquidators appointed by Antiguan regulators for the purpose of winding up SIB in Antigua, and Janvey – a federal Receiver appointed at the behest of the US Securities and Exchange Commission to oversee the dissolution of Stanford’s financial interests in connection with an enforcement proceeding in the US – have sought recognition of their respective efforts in courts outside their home jurisdictions.  Each has met with mixed results: Janvey’s request for recognition was denied in the UK, while Wastell and Hamilton-Smith, originally recognized in Canada, have been removed and replaced by a Canadian firm.  Each of these results has been appealed.

    Meanwhile, Wastell and Hamilton-Smith have sought recognition of the Antiguan wind-up in Janvey’s home court pursuant to Chapter 15 of the US Bankruptcy Code.  Initial briefing was submitted several months ago; supplemental filings (including copies of the decisions rendered in London and Montreal) have been trickling in.  US District Court Judge David Godbey has set an evidentiary hearing for mid-January 2010.

    Messr’s. Wastell and Hamilton-Smith’s supplemental brief, filed last week in Dallas, addresses three issues, apparently raised by Judge Godbey during a recent conference call with the parties:

    The Current State of Fifth Circuit Law on What Constitutes an Entity’s “Principal Place of Business,” Including Whether Stanford International Bank’s (“SIB”) Activities Were Active, Passive or “Far Flung.”

    The liquidators acknowledge that while Chapter 15 of the US Bankruptcy Code doesn’t refer to an entity’s “principal place of business” in dealing with a cross-border insolvency, many US courts nevertheless analogize an entity’s “principal place of business” to its “center of main interests” (COMI) for purposes of determining the forum that should host the “main case.”   The American approach is, according to the liquidators, similar to that followed by European courts.

    That said, what constitutes an entity’s “principal place of business” is not a settled question under US federal case law: The Fifth Circuit (where the Stanford matters are pending) applies a “total activity” test, which is also applied by the Sixth, Eighth, Tenth and Eleventh Circuits, whereas the Ninth Circuit applies a “place of operations” test, the Seventh Circuit applies a “nerve center” test, and the Third Circuit examines the corporation’s center of activity.  The liquidators suggest in a footnote that these “varying verbal formulas” are functional equivalents, and “generally amount to about the same thing” under nearly any given set of facts.

    A significant portion of the liquidators’ brief is devoted to applying the facts of SIB’s dissolution to the Fifth Circuit’s “verbal formula;” i.e., “(1) when considering a corporation whose operations are far-flung, the sole nerve center of that corporation is more significant in determining principal place of business, (2) when a corporation has its sole operation in one state and executive offices in another, the place of activity is regarded as more significant, but (3) when the activity of a corporation is passive and the ‘brain’ of that corporation is in another state, the situs of the corporation’s brain is given greater significance.”  See J.A. Olson Co. v. City of Winona, 818 F.2d 401, 411 (5th Cir. 1987).

    The liquidators argue:

    - SIB’s principal place of business was in Antigua;

    - SIB’s activities were neither “passive” nor “far flung” and thus the “nerve center” test should not predominate; but

    - even if SIB’s operations were passive or far flung (which they were not), its “nerve center” was in Antigua.

    The Relationship Between SIB and the Financial Advisors Who Marketed SIB’s CDs to Potential Investors.

    The liquidators are emphatic that financial advisors who marketed and sold SIB’s CD’s to potential investors were not, in fact, agents of SIB.  Rather, “they operated individually under management agreements with SIB, or were employed by other Stanford companies which had management agreements with SIB . . . .  These advisors worked for Stanford related entities all over the world, including Antigua, Aruba, Canada, Colombia, Ecuador, Mexico, Panama, Peru, Switzerland, and Venezuela, as well as in the United States . . . . All of the financial advisors marketed the CDs but none had authority to contract on behalf of SIB . . . . Further, Liquidators understand that the financial advisors sold other Stanford-related products besides SIB CDs.”  Those advisors who were located in the US ‘worked for an entity called the Stanford Group Companies (“SGC”), and though they marketed SIB CDs to potential depositors, they were not agents of SIB.’”

    Put succinctly, the liquidators’ argument is that an international network of independent sales agents does not create the sort of “agency” that would alter cross-border COMI analysis under US law: “[US] Courts analyzing similar circumstances have consistently held that a company’s COMI or its principal place of business is in the jurisdiction where its operations are conducted even if the company has sales representatives in other jurisdictions.”

    The “Single Business Enterprise” Concept as Part of the “Alter Ego” Theory of Imposing Liability.

     Finally, the liquidators argue that SIB is neither part of a “single business enterprise” nor an “alter ego” of other Stanford entities or of Stanford’s senior managers - and their respective “principal place[s] of business” in the US cannot be imputed to SIB for purposes of determining SIB’s COMI.  This is so, according to Messr’s. Wastell and Hamilton-Smith, because:

    - The doctrine of “single business enterprise” liability is a particular creature of Texas law – which, in addition to being inapplicable to an Antiguan-chartered international bank such as SIB, is itself no longer viable even in Texas.  See SSP Partners v. Gladstrong Invs. (USA) Corp., 275 S.W.3d 444, 456(Tex. 2008) (rejecting the theory because Texas law does not “support the imposition of one corporation’s obligations on another” as permitted by the theory); see also Acceptance Indemn. Ins. Co. v. Maltez, No. 08-20288, 2009 WL 2748201, at *5 (5th Cir. June 30, 2009) (unpublished) (recognizing the holding of Gladstrong).

    - The doctrine of “alter ego” does not apply because its primary use is to permit corporate creditors to “pierce the corporate veil” and seek recourse from the corporation’s parent or individual shareholders.  Here, the liquidators argue, Mr. Janvey is attempting to pierce the corporate veil in the opposite direction:  He is attempting to permit creditors of a corporate parent or individual principals to seek recourse from a distinct and separate foreign subsidiary.  Such “reverse veil piercing” is properly obtained (if at all) through the “extreme and unsual” remedy of substantive consolidation through bankruptcy.  However, liquidation of the Stanford entities through a federal bankruptcy proceeding is something Mr. Janvey has, to date, “studiously avoided.”

    - The equitable purposes of the “alter ego” doctrine would be frustrated in this case.  The “injustice” that “alter ego” relief is designed to reverse would, in fact, only be furthered where SIB investors would see their recoveries diluted by creditors of other Stanford entities.

    Mr. Janvey’s response is due December 17.

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