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      Insolvency News and Analysis - Week Ending December 5, 2014
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    Posts Tagged ‘“U.S. District Court”’

    Getting to the “Core” of the Matter

    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).  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.

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    The Stanford Saga – Chapter 16: Settlin’ Words? Or Something Else?

    Monday, February 15th, 2010

    A brief update on Stanford (earlier posts are available here):

    Evidentiary hearings scheduled for late January 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, were cancelled by presiding US District Court Judge David Godbey.

    As readers of this blog are aware, Antiguan 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, were to culminate in a hearing set for late last month.  But shortly after a scheduled status conference on pre-hearing matters, the evidentiary was cancelled.

    Recent reporting by Reuters (available here) may provide a reason for the change: Reuters reported on February 5 that the liquidators and Mr. Janvey may, in fact, be settling. According to staff writer Anna Driver, a dispute over $370 million in assets traced to Stanford, as well as $200 million located in Switzerland and the UK, are driving the parties toward a deal.

    But there may be other pressures as well. The Associated Press reported (here) that last Thursday, Judge Godbey indicated his intent to rule on a request by third-party investors to commence their own involuntary bankruptcy filing, thereby replacing Mr. Janvey as a receiver.

    Stay tuned.

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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 12: Showtime.

    Monday, November 23rd, 2009

    A brief but important update regarding Antiguan liquidators Peter Wastell and Nigel Hamitlon-Smith’s pending request for US recognition of their wind-up of Stanford International Bank, Ltd. (SIB):

    US District Court Judge David Godbey has set an evidentiary hearing to determine whether SIB’s center of main interest (COMI) is Antigua – or whether, as urged by US receiver Ralph Janvey, Dallas-based enforcement proceedings commenced by the US Securities and Exchange Commission (SEC) and involving numerous Stanford entities (including SIB) should serve as SIB’s “main case.”

    As readers of this blog are aware, Wastell and Hamitlon-Smith’s request to modify an injunction in the SEC enforcement matter and seek US recognition of their Antiguan wind-up proceeding was previously granted over Mr. Janvey’s objection.  Recognition of the Antiguan wind-up already has been granted in the UK through London’s High Court of Justice (Chancery Division) – and already has been the source of some scholarly commentary in that jurisdiction.  Prior posts on the UK ruling – as well as on other aspects of the Stanford case – are available here.

    Judge Godbey’s evidentiary hearing is scheduled for January 21, 2010.  The parties’ proposed briefing schedule is available here.

    Stay tuned.

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    The Stanford Saga – Chapter 11: Is Something Rotten in the State of Antigua?

    Monday, November 16th, 2009

    As readers of this blog are aware, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey have been busy in several forums battling for control of the financial assets previously controlled by Allen Stanford, including Stanford International Bank, Ltd. (SIB).  Prior posts are accessible here.

    Messr’s. Wastell and Hamilton-Smith have filed numerous pleadings from other courts in support of their pending request, before US District Court Judge David Godbey, for recognition of their liquidation of SIB as a “main case” under Chapter 15 of the US Bankruptcy Code.

    Mr. Janvey has recently filed his own copies of several recent rulings.  These include a ruling in which the Quebec Superior Court’s Mr. Justice Claude Auclair found that Vantis Business Recovery Services – a division of British accounting, tax, and advisory firm Vantis plc, and the firm through which Messr’s. Wastell and Nigel Hamilton-Smith were appointed liquidators for SIB – should be removed from receivership of SIB’s Canadian operations.

    More recently, Mr. Janvey has filed a copy of a recently unsealed plea agreement between Stanford affiliate James Davis and federal prosecutors.

    Mr. Janvey’s papers provide a glimpse into Davis’ relationship with Stanford, and into the origins of SIB.  Summarized briefly:

    SIB’s Background

    – Davis’ and Stanford’s relationship dates back to the late 1980s, when Stanford retained Davis to act as the controller for then-Montserrat-based Guardian International Bank, Ltd.  Davis’ plea agreement recites that Stanford had Davis falsify the bank’s revenues and portfolio balances for banking regulators.  Continued regulatory scrutiny in Montserrat eventually led to Stanford’s closure of Guardian and removal of its banking operations to Antigua – where, in 1990, it resumed operations under the name of Stanford International Bank, Ltd.

    – SIB and a “web of other affiliated financial services companies” operated under the corporate umbrella of Stanford Financial Group.  SIB’s primary function was to market supposedly safe and liquid “certificates of deposit” (CDs).  By 2008, SIB had sold nearly $7 billion of them to investors worldwide.

    – Davis’ plea agreement further recites that investors were assured SIB’s operations were subject to scrutiny by the Antiguan Financial Services Regulatory Commission (FSRC), and to independent, outside audits.

    SIB’s Asset Allocation and Operations

    – In fact, SIB investor funds were neither safe nor secure.  According to Davis’ plea agreement, investor funds did not go into the marketed CDs.  Instead, they were placed into three general “tiers”: (i) cash and cash equivalents (“Tier I”); (ii) investments managed by outside advisors (“Tier II”); and (iii) “other” investments (“Tier III”).  By 2008, the majority of SIB’s investor funds – approximately 80% – were held in “highly illiquid real and personal property” in “Tier III,” including $2 billion in “undisclosed, unsecured personal loans” to Allen Stanford.  A further 10% was held in “Tier II.”  The remaining 10% balance was presumably held in “Tier I.”

    – Likewise, SIB’s operations were not subject to any meaningful scrutiny.  Davis’ plea agreement recites that in or about 2002, Stanford introduced him to Leroy King, a former Bank of America executive and Antiguan ambassador to the US, and soon-to-be Chief Executive Officer of the FSRC.  Stanford, King, and another FSRC employee responsible for regulatory oversight performed a “blood oath” brotherhood ceremony sometime in 2003 – ostensibly to cement their commitment to one another and King’s commitment to the protection of SIB – i.e., to “ensure that Antiguan bank regulators would not ‘kill [SIB’s] business'” in Antigua.

    – Though blood may be thicker than water, it is not thicker than cash: Stanford’s and King’s “brotherhood” was cemented further by bribes paid to King for his protection of SIB.  Acccording to Davis’ plea agreement, these bribes ultimately exceeded $200,000.  In return for this largesse, King reassigned two overly inqusitive Antiguan examiners of which Stanford complained sometime in 2003.  In 2005 and again in 2006, King further cooperated with Stanford in providing misleading responses to the US Securities and Exchange Commission (SEC)’s inquiries to the FSRC, in which the SEC divulged to the FSRC that it had evidence of SIB’s involvement in a “possible Ponzi scheme.”  King and Stanford similarly collaborated in responding to a 2006 inquiry by the Director of the Eastern Caribbean Central Bank’s Bank Supervision Department regarding SIB’s affiliate relationship with the Bank of Antigua.

    SIB’s Financial Reporting

    – A central premise of Stanford’s approach to soliciting investments – and, perhaps understandably, a central point of interest for would-be investors – was that SIB must show a profit each year.  To accomplish this, Davis and Stanford reportedly initially determined false revenue numbers for SIB.  Ultimately, this collaboration gave rise to a fabricated annual “budget” for SIB, which would show financial growth.  Using these “budgeted” growth numbers, Stanford accounting employees working in St. Croix would generate artificial revenues (and resulting artificial ROIs), which were then transmitted to Stanford’s Chief Accounting Officer in Houston and ultimately to Davis in Mississippi for final adjustment and approval before making their way back to the Caribbean for reporting to SIB investors.

    – According to Davis’ plea agreement, “[t]his continued routine false reporting . . . created an ever-widening hole between reported assets and actual liabilities, causing the creation of a massive Ponzi scheme . . . .  By the end of 2008, [SIB reported] that it held over $7 billion in assets, when in truth . . . [SIB] actually held less than $2 billion in assets.”

    – In about mid-2008, Stanford, Davis, and others attempted to plug this “hole” created by converting a $65 million real estate transaction in Antigua into a $3.2 billion asset of SIB through a “series of related party property flips through business entities controlled by Stanford.”

    SEC Subpoenas and SIB’s Insolvency

    – By early 2009, the SEC had issued subpoenas related to SIB’s investment portfolio.  At a February meeting held in advance of SEC testimony, Stanford management determined that SIB’s “Tier II” assets were then valued at approximately $350 million – down from $850 million in mid-2008.  Management further determined that  and SIB’s “Tier III” assets consisted of (i) real estate acquired for less than $90 million earlier in the year, but now valued at more than $3 billion; (ii) $1.6 billion in “loans” to Stanford; and (iii) other private equity investments.  Davis’ plea agreement recites that at that same meeting, and despite the apparent disparity between actual and reported asset values, Stanford insisted that SIB had “‘at least $850 million more in assets than liabilities.'”  In a separate meeting later that day, however, Stanford reportedly acknowledged that SIB’s “assets and financial health had been misrepresented to investors, and were overstated in [SIB’s] financials.”

    Janvey doesn’t describe exactly how these acknowledged facts integrate into his prior opposition to the Antiguan liquidators’ request for recognition.  His prior pleadings have questioned indirectly the integrity of the Antiguan wind-up proceedings; consequently, Mr. King’s role in protecting SIB under the auspices of the Antiguan FSRC may well be the point.  Likewise, Janvey may point to the US-based control and direction of financial reporting manipulations that ultimately created a $5 billion “hole” in SIB’s asset structure as evidence of the American origin of SIB’s allegedly fraudulent operations.  Or the filing may be intended to blunt the effect of a previously filed detention order – issued by another US District Court and affirmed by the US Fifth Circuit Court of Appeals – confining Stanford to the US and observing that his ties to Texas were “tenuous at best.”

    It remains for Judge Godbey to determine whether – and in what way and to what degree – Davis’ plea agreement impacts on the liquidators’ request for a determination that SIB’s “center of main interests” remains in Antigua.

    For the moment, the parties await his decision.

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    The Stanford Saga – Chapter 9: “As If We Don’t Have Safes In Canada!”

    Monday, September 21st, 2009

    A brief update in the ongoing struggle between Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey over control of the financial assets previously controlled by Sir Allen Stanford, including Stanford International Bank, Ltd. (SIB):

    Readers of this blog will be aware that several recent court rulings – including a detention order for Sir Allen issued by the US District Court and recognition orders issued in England and Canada – have threatened to undermine Mr. Janvey’s position in a Dallas receivership before US District Judge David Godbey, where Stanford’s financial assets are under court control.  For details on each of these orders and on other aspects of the Stanford matters, see prior posts located here, here, here, here, here, here, here, and here.

    Recently, however, Mr. Janvey may have gotten a little help . . . from North of the border.

    In related rulings issued Friday, September 11, Mr. Justice Claude Auclair of the Quebec Superior Court found that Vantis Business Recovery Services – a division of British accounting, tax, and advisory firm Vantis plc, and the firm through which Messr’s. Wastell and Nigel Hamilton-Smith were appointed liquidators for SIB – should be removed from receivership of SIB’s Canadian operations.

    According to a report by Toronto’s Globe and Mail, Mr. Justice Auclair found that Wastell and Hamilton-Smith’s firm acted improperly in destroying original computer evidence from SIB’s Montreal branch office and “stonewalled efforts by Quebec’s financial authority – the Autorité des marchés financiers [the Financial Market Authority] – to get access to the copied information.”

    In verbal rulings that will cost the liquidators control of the Canadian receiverhsip (which will now go to Ernst & Young Canada), Mr. Justice Auclair reportedly “derided” Vantis’ “high-handed” behavior after an Antiguan court made appointments to wind down SIB – and its Montreal office – and recover funds for alleged Canadian victims.

    Reacting to arguments that Antiguan banking privacy laws prevented direct disclosure of information to the Canadian authorities and that destruction of SIB’s Montreal computer databases was necessary to keep them out of the hands of creditors seeking to repossess SIB’s Montreal office, Mr. Justice Auclair is said to have retorted, “As if we don’t have any safes in Canada to protect and preserve” such materials.

    As if, indeed.

    In pleadings filed with the US District Court, Mr. Janvey previously complained that the liquidators “erased all SIB electronic data from SIB servers in Montreal, removed data to Antigua, and attempted to seize over US$21 million in SIB funds through an ex parte legal proceeding in which they failed to disclose to the Canadian court the existence of [the receivereship] and the appointment of the US Receiver”  Messr’s. Wastell and Hamilton-Smith have, of course, indignantly disclaimed Mr. Janvey’s “scurrilous and specious accusations of misconduct” regarding their administration of Canadian assets.

    Whether or not it is “scurrilous” or “specious,” the liquidators’ conduct has apparently created controversy with more than Mr. Janvey alone, if the Globe and Mail‘s account is accurate.

    Meanwhile, the parties await Judge Godbey’s ruling in Dallas.

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    The Stanford Saga – Chapter 8: Home Is Where The Corporate Jet Is . . . But Where Is COMI?

    Tuesday, September 8th, 2009

    Several weeks have passed since Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey briefed US District Judge David Godbey on the liquidators’ request for US recognition of their proposed Antiguan liquidation of Stanford International Bank, Ltd. (SIB).

    Readers will recall that Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, a federal receiver appointed in Dallas’ U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford (links to prior posts can be found here).  Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

    One of the preliminary questions in these proceedings is which of them will receive deference from the others.  Of particular interest is which proceeding – and which court-appointed representative – will control the administration of SIB.  The Eastern Caribbean Surpeme Court (Antigua and Barbuda) has found, perhaps predictably, that SIB’s liquidation is to be adminsitered in Antigua.  It also has found that Mr. Janvey has no standing to appear as a “foreign representative” or otherwise on behalf of SIB or other Stanford entities.

    In London, the English High Court of Justice, Chancery Division’s Mr. Justice Lewison reached a similar conclusion in early July.  Based on a determination under English law that SIB’s “Center of Main Interests” (COMI) is in Antigua, he designated Messr’s. Wastell and Hamilton-Smith as “foreign representatives” of SIB for purposes of Stanford’s English insolvency proceedings.

    In Dallas, meanwhile, Judge Godbey has permitted the Antiguan liquidators to commence a Chapter 15 proceeding under the US Bankruptcy Code and to make application for similar recognition of SIB’s Antiguan liquidation in the US.  Messr’s. Wastell and Hamilton-Smith and Mr. Janvey have each briefed the question of whether, under US cross-border insolvency law, that liquidation ought to be recognized here as a “foreign main proceeding” – and, more specifically, whether Antigua or the US is the properly designated COMI for SIB.

    In briefs submitted over six weeks ago, the liquidators urged a finding consistent with that of the English and Antiguan courts.  They argued essentially that a debtor’s “principal place of business” is essentially the location of its “business operations,” and referred repeatedly to SIB’s undeniably extensive physical and administrative operations in Antigua.

    In opposition, Mr. Janvey argued strenuously for a finding that SIB’s COMI is, in fact, the US.  He did so relying largely on the contention that, despite SIB’s physical location and operations in Antigua, Sir Allen allegedly “spent little time in Antigua” – and that Sir Allen effectively managed and controlled SIB from the US.  Mr. Little, the examiner appointed by Judge Godbey to assist him in overseeing the receivership, generally concurred with Mr. Janvey.

    Last week, Mr. Janvey’s contention may have received a set-back.

    The United States Fifth Circuit Court of Appeals recently upheld a detention order confining Sir Allen to the US pursuant to a separate federal indictment issued against him – and in so doing, concurred in the lower court’s conclusion that Sir Allen’s ties to the State of Texas were “tenuous at best.”  The Fifth Circuit’s 3-judge panel recognized that Stanford “is both an American citizen and a citizen of Antigua and Barbuda, and has resided in that island nation for some fifteen years,” and further noted:

    Stanford admitted that he established a new residence in Houston in preparation for his required presence during the pendency of the case against him.  Several of his children have recently moved to Houston to be closer to him during the proceedings.  While Stanford did grow up in Texas, he has spent the past fifiteen years abroad.  His international travels have been so extensive that, in recent years, he has spent little or no time in the United States . . . .  [O]ne of Stanford’s former pilots [testified] that Stanford . . . engaged in almost non-stop travel on the fleet of six private jets and one helicopter belonging to [Stanford Financial Group] and its affiliates . . . .

    On September 1, Messr’s. Wastell and Hamilton-Smith sought leave to file the Fifth Circuit’s order in support of their prior application for recognition, and over Mr. Janvey’s anticipated objection.

    It appears that where Sir Allen’s indictment is concerned, home is where the corporate jet is.

    But where SIB’s liquidation is concerned . . . where is COMI?

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    Who’s Gonna Clean Up This Mess?!!

    Monday, August 31st, 2009

    Chrysler’s and GM’s recent sales through the Bankruptcy Courts of New York’s Southern District have raised the question of whether some jurisdictions provide more receptive forums than others for getting a “distressed M&A” transaction accomplished.  This sort of “forum shopping” is both a well-established concept in commercial insolvency practice and an integral part of reorganization planning.

    Last week, a 7th Circuit decision highlighted another area where geography – at least as it concerns the choice of a Bankruptcy Court – can have an important effect on the outcome of a Chapter 11 case, as well as on a reorganized debtor’s post-confirmation operations: The resolution of environmental liabilities.

    U.S. v. Apex Oil Company involved an environmental injunction obtained against Apex Oil, successor-by-merger to Clark Oil and Refining Corporation.

    Clark Oil, its corporate parent, and a number of affiliates filed related Chapter 11 cases 12 years ago, in 1987.  Clark was subsequently merged into Apex, and a Chapter 11 Plan confirmed in the debtors’ related Chapter 11 cases.  Nearly two decades later, in 2005, the Environmental Protection Agency sought an injunction requiring Apex to clean up a contaminated site in Hartford, Illinois, which housed an oil refinery once owned by Clark.

    Chief US District Court Judge David Herndon of Illinois’ Southern District conducted a 17-day bench trial in early 2008 and, in July 2008, issued a 178-page decision finding that, in fact, contamination was present at the site and that it was Apex’s responsibility to clean it up.

    Apex appealed, arguing that confirmation of the Chapter 11 Plan and discharge obtained in Clark Oil’s Chapter 11 case 2 decades earlier precluded enforcement of the more recent federal injunction.  In essence, Apex argued that Section 101 of the Bankruptcy Code defines a “claim” as a “right to an equitable remedy for breach of performance if such breach gives rise to a right to payment.”  Since cleaning up the contaminated Hartford, Ill. refinery site in response to the federal injunction would obviously require the significant expenditure of money, Apex reasoned that this obligation was effectively a “claim” subject to the earlier Chapter 11 discharge, and could not be enforced.

    Judges Posner, Cudahy, and Kanne of the 7th Circuit were not persuaded.  Judge Posner’s comparatively brief, 12-page decision issued last week held that the EPA’s federal injunction at issue did not give rise to a “claim” as that term is defined by the Bankruptcy Code . . . and, therefore, could not be discharged by means of Clark Oil’s Chapter 11 Plan.

    Consequently, Apex now holds the clean-up tab for the old Clark refinery.

    In order to hand Apex that tab, Judge Posner and his colleagues distinguished Apex’s case from a 1985 Supreme Court decision – Ohio v. Kovacs, 469 U.S. 274 – which involved Ohio’s appointment of a receiver to remediate environmental claims after the debtor failed to abide by a state court consent decree requiring him to do so.  The Supreme Court found that these enforcement efforts constituted a dischargeable “claim” in Kovacs’ bankruptcy.

    The result in Apex was different because, in Judge Posner’s view, the receiver in Kovacs sought money for clean-up, whereas the EPA in Apex merely sought clean-up . . . from Apex.  And, in fact, the federal statute under which the EPA sought remediation (the federal Resource Conservation and Recovery Act – “RCRA”) affords only this relief – and nothing more.

    Juge Posner’s analysis of RCRA relies in part on earlier 7th Circuit precedent (AM Int’l. v. Datacard Corp., 106 F.3d 1342) – which itself relies on other Supreme Court precedent (Meghrig v. KFC W., Inc., 516 U.S. 479) – to hold that RCRA doesn’t allow a party obtaining a “clean-up” order to clean up a contaminated site itself, then sue for response costs in lieu of seeking an injunction.  For this reason, he held, RCRA cannot “give rise to a right to payment” for purposes of a bankruptcy discharge.

    The 7th Circuit panel acknowledged that Apex’s case is similar to U.S. v. Whizco, 841 F.2d 147 – in which the 6th Circuit reached a conclusion opposite from Judge Posner and his 7th Circuit colleagues.   But where Apex is concerned, that is no matter.  As Judge Posner sees it, the 6th Circuit’s rationale “cannot be squared with . . . [7th Circuit] decisions [such as Datacard] which hold that cost incurred [to comply with an equitable order] is not equivalent to the ‘right to payment’ . . . .”

    Though the 7th Circuit’s understanding of RCRA is based in part on Supreme Court precedent, few decisions outside either the 6th or 7th Circuit appear to discuss its application in the bankruptcy context.  Moreover, other Supreme Court precedent (such as Kovacs) holds that, at least in certain circumstances, equitable remedies (such as appointment of a receiver) are, in reality, “claims” within the meaning of the Bankruptcy Code – and, therefore, can be discharged.

    As a result, the resolution of environmental claims in bankruptcy appears to turn not only on the “clean-up” statute at issue – or, more specifically, its remedies – but also on the jurisdiciton where the debtor’s bankruptcy case is filed.

    So who’s gonna clean up this environmental mess?

    That depends, at least in part, on which court first decides the claims resolution mess.

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    The Stanford Saga – Chapter 7: Sir Allen Weighs In . . . Sort Of

    Monday, August 10th, 2009

    Since mid-July, Antiguan liquidators Peter Wastell and Nigel Hamilton-Smith and federal receiver Ralph Janvey have awaited Judge David Godbey’s decision on the liquidators’ request for recognition of their liquidation of Stanford International Bank, Ltd. (SIB), now pending in Antigua.

    As discussed in a number of previously-published posts (here, here, here, here, here, and . . . here), Messr’s. Wastell and Hamilton-Smith have been at odds with Mr. Janvey, who was appointed in Dallas’ U.S. District Court for the purpose of administering assets previously controlled by Sir Allen Stanford – including, presumably, SIB.  Stanford’s assets and creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.  Despite the apparent breadth of Judge Godbey’s original receivership order, the liquidators previously requested – and Judge Godbey (over Mr. Janvey’s strenuous objection) granted – a modification to that order for the purpose of commencing a case under Chapter 15 of the Bankruptcy Code on SIB’s behalf.

    While the parties await a ruling on recognition of the Chapter 15 case, Mr. Janvey’s receivership continues forward, with pleadings filed almost daily on a variety of issues.  Among the matters awaiting resolution in the receivership is a request by Sir Allen that raises issues which themselves may impact Judge Godbey’s decision on recognition.

    In early July, Sir Allen filed a seemingly innocuous request for permission to certify tax returns for a number of Antiguan corporations.  He argued that the Antiguan court already had held these companies outside the U.S. District Court’s jurisdiction – and, therefore, outside the jurisdiction of the receivership.  Nevertheless, respect for the U.S. District Court and a preference for consistency between courts regarding the extent of the District Court’s jurisdiction made prudent a request further amendment of the receivership order to permit Stanford’s exercise of these corporate formalities.  A failure to exercise such formalities in short order would, according to Sir Allen, subject the corporations to being stricken from the Antiguan Companies Register.

    About 2 weeks ago, Mr. Janvey fired back with an 8-page opposition.  In it, he argued that (i) the Antiguan court’s refusal to recognize his American receivership remains on appeal; (ii) Mr. Janvey himself never has been provided copies of the returns Sir Allen seeks to certify; (iii) Sir Allen has declined Mr. Janvey’s requests for these returns, apparently, on the basis that doing so would violate his 5th Amendment rights against self-incrimination under the US Constitution; and (iv) should Judge Godbey wish to preserve the Antiguan corporations in question from sanction, he need merely designate Mr. Janvey or his agent to certify the returns.  Janvey’s arguments are based on his fundamental contention that corporate separateness should be disregarded where the corporate form has been used for a fraudulent purpose – and where the corporations in question have been used for this purpose, they ought to be treated as “alter egos” of Stanford himself and therefore are within the ambt of the District Court’s jurisdiction.

    Last Thursday, Sir Allen replied.  Relying once again on the Antiguan court’s prior denial of American jurisdiction over the corporations, Sir Allen insists that Mr. Janvey has no greater jurisdiction than the U.S. Court which appointed him – and that Judge Godbey cannot simply ignore the prior Antiguan ruling.  Further, Sir Allen insists that his prior general assertion of 5th Amendment rights doesn’t justify an inference of fraudulent activity regarding these corporations – and that Mr. Janvey has never provided any other evidence in support of these allegations.

    Distilled to their essence, the parties’ positions closely parallel similar issues relevant to the Antiguan liquidators’ pending recognition request.  They also highlight a number of the complicated questions underlying that request, such as:

    - What should be the effect of the Antiguan court’s prior order regarding Janvey’s receivership?  Should the liquidators’ request for recognition of SIB’s liquidation be treated differently than Stanford’s request to certify returns for the Antiguan companies?  Or should a similar analysis apply to both orders?  How should the U.S. case law doctrine of comity (i.e., American courts’ respect for the rulings of foreign courts) – which informed many prior requests for ancillary relief under the US Bankruptcy Code and which even today informs much of the policy behind Chapter 15 – apply in either case?

    - To what extent, if any, should allegations of fraudulent intent be relevant to determining the Stanford companies’ applicable “center of main interests” (COMI) – a decision critical to the relief that the liquidators seek?  And if the allegations of fraud were relevant, what would be the level of evidence ncessary to establish the requisite fraud?

    - To what extent, if any, must an equitable receivership commenced in aid of a governmental enforcement action arising from alleged violations of US securities laws bend to the statutory provisions of cross-border commercial insolvency law?  And to what extent, if any, is a US Court able to uphold such enforcement in the face of a foreign court’s order (or, as here, multiple orders) apparently limiting its jurisdiction?

    As with the recognition request, the parties now await Judge Godbey’s ruling.

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    The Stanford Saga – Chapter 6: Mr. Justice Lewison Steals the Show

    Sunday, July 12th, 2009

    A flurry of pleadings this week precede Judge David Godbey’s anticipated ruling on Peter Wastell’s and Nigel Hamilton-Smith’s request for recognition of their liquidation of Stanford International Bank, Ltd. (SIB), now pending in Antigua.

    As readers of this blog are aware, Messr’s. Wastell and Hamilton-Smith have been at odds with Ralph Janvey, a federal receiver appointed in U.S. District Court for the purpose of administering not only SIB, but all of the assets previously controlled by Sir Allen Stanford.  Those assets and their creditors span at least three continents – North America, South America, and Europe – and have spawned insolvency proceedings in several countries.

    The Antiguan liquidators previously obtained permission from Judge Godbey – over Mr. Janvey’s opposition – to commence a Chapter 15 case in Dallas.  The liquidators then sought recognition for their Antiguan liquidiation pursuant to the provisions of Chapter 15 – which Mr. Janvey has again opposed.  A recent post on this blog summarized the Antiguan liquidators’ reply to these objections.

    This week, as scheduled, John Little – an examiner appointed by Judge Godbey to assist the Court in overseeing the receivership – filed papers summarizing his position on the liquidators’ request.

    Before he did so, however, yet another court – this one in England – weighed in on the Stanford matters.  In a decision rendered on the eve of America’s July 4 holiday, the English Hight Court of Justice, Chancery Division (London)’s Justice Lewison found that Antigua – and not the US – should be SIB’s “Center of Main Interests” (COMI) under the UK’s 2006 Cross-Border Insolvency Regulations (the general equivalent of the US’s Chapter 15).

    The crux of Mr. Justice Lewison’s 29-page decision, at least as it regards SIB’s COMI, rests both on the burden of proof to demonstrate COMI and on the nature of the evidence required to carry that burden.

    The English decision holds, first, that once certain prima facie evidence is introduced to establish COMI in a particular jurisdiction, the presumption of COMI in that jurisdiction arises in favor of the foreign representative and it is the burden of a contesting party to defeat the presumption.  Second, the decision holds that the only evidence that counts in rebutting the decision is that which would be objectively ascertainable to third parties – specifically, creditors.

    Mr. Justice Lewison’s analytical framework leads to an emphasis on the outward, physical aspects of SIB’s business operations, which the parties generally agree were centered in Antigua.

    Mr. Little, the examiner whose 19-page brief was filed last Wednesday, respectfully disagrees with Mr. Justice Lewison.  The essence of Mr. Little’s analysis is that it is the location of the management of an enterprise that determines its COMI.  According to Mr. Little:

    Banks are not just groups of tellers and form checkers, but institutions that gather money, pool it and invest it in the hopes of keeping the funds secure and making a profit.  Banks are more than the street corner branch offices or drive-through windows at which people make deposits, cash checks, pay bills and verify balances.  The weightiest activities of a “bank” are the activities involved in what a bank does with the money it gathers and manages.  To determine the locale of SIB’s COMI, the Court must determine where that activity was primarily carried out.  (Emphasis supplied).

    Mr. Little also argues that the English Court’s decision ought not to guide Judge Godbey’s determination of COMI.

    In particular, he argues that Mr. Justice Lewison’s assignment of the burden of proof regarding COMI – to the Receiver who, under English law, must overcome a presumption of COMI in the foreign representative’s favor – is at odds with American case law.  American law, explains Mr. Little, renders the COMI presumption of little weight and further assigns the burden of proof to the foreign representative seeking recogntion of a “main case” – and not to the foreign representative’s opponent.  Mr. Little argues that the “objective” evidence “ascertainable by a third party” is far different than that which an American court would consider, as borne out by relevant US decisions.  He suggests that a ruling made on such factors may, in fact, provide a “roadmap” of sorts to parties who plan to defraud the public by permitting them to construct an “objectively ascertainable” – but sham – business in a jurisdiction of their choosing.

    Finally, Mr. Little acknowledges that the “public policy exception” to Chapter 15 – set forth at Section 1506 of the Code – is a very narrow one, but offers the observation that to the extent it may apply in this case, the SEC’s position in the matter should be construed as US policy.

    On Friday, Mr. Janvey requested leave to file a supplemental brief addressing various aspects of Mr. Justice Lewison’s decision.

    Though Judge Godbey has yet to provide leave to file them, Mr. Janvey’s papers echo much of the same observations made by Mr. Little.  They also add some of Mr. Janvey’s own, additional arguments – one of which is that Mr. Justice Lewison’s reliance on an “objectively ascertainable” standard is a unique creature of the EU Insolvency Regulation, and finds no basis either in the UK Regulations (which should have controlled Mr. Justice Lewison’s decision) or in US law.  In particular, Mr. Janvey argues that the Eurofoods decision – a seminal decision on COMI rendered by the European Court of Justice, and which formed the primary basis for Mr. Justice Lewison’s decision – imposes an unnecessary restriction on the evidence which ought to be reviewed by an American court (or, for that matter, by an English court) for this purpose.

    In fact, Section 1508 itself provides that in interpreting phrases such as “center of main interests,” “the court shall consider” how those phrases have been construed in other jurisdictions which have adopted similar statutes.  As a result, considerable ink already has been spilled in the US over the EU Regulation, Eurofoods, and foreign decisions generally and their interpretive effect on determing COMI in a US Chapter 15 case.   In a recent and extensive discussion of the interpretatation of “COMI” as it appears in Chapter 15, Judge Bruce Markell discusses both the EU Regulation and Eurofoods, and observes that

    a commonality of [US] cases analyzing debtors’ COMI demonstrates that courts do not apply any rigid formula or consistently find one factor dispositive; instead, courts analyze a variety of factors to discern, objectively, where a particular debtor has its principal place of business. This inquiry examines the debtor’s administration, management, and operations along with whether reasonable and ordinary third parties can discern or perceive where the debtor is conducting these various functions.

    See In re Betcorp, 400 B.R. 266, 290 (Bankr. D. Nev. 2009) (emphasis supplied).

    Perhaps unfortunately for Mr. Janvey, Nevada’s Judge Markell sounds a bit like London’s Mr. Justice Lewison.

    Stay tuned.

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