Business Bankruptcy Issues

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Business Bankruptcy Issues Recent Developments

Northern District of California Bankruptcy Court Local Rule Amendments Take Effect May 1, 2008

As previously reported, in August 2007 the Bankruptcy Court for the Northern District of California proposed amendments to the Bankruptcy Local Rules designed to implement the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (known as BAPCPA). After taking comments, the final amendments are scheduled to take effect on May 1, 2008.

  • Follow the links for a clean set of the final amended Bankruptcy Local Rules and a redline version showing changes from the current local rules.

Business Bankruptcy Changes. Certain of the amended local rules will affect Chapter 11 corporate bankruptcy cases. These include changes to the rules governing the investment of estate funds, the replacement of a "responsible individual" for a Chapter 11 debtor or debtor in possession, entry of a final decree closing a case, the procedures for bankruptcy appeals, and the general electronic case filing (ECF) procedures. A number of the other revisions are aimed primarily at consumer bankruptcy cases.

Jury Trial Rule Amended. In addition, however, the Bankruptcy Court took this opportunity to modify Bankruptcy Local Rule 9015-2(b), governing jury trials, which the U.S. Court of Appeals for the Ninth Circuit struck down in its September 2007 decision in the In re HealthCentral.com case. An earlier post entitled "Ordinary Course Preference Case Takes Extraordinary Turn: Ninth Circuit Strikes Down Local Bankruptcy Rule On Jury Trials" gives more details on the decision and its impact.

Conclusion. The changes to the Northern District of California Bankruptcy Local Rules may not be as significant for Chapter 11 cases as those recently proposed in the Southern District of New York or adopted in Delaware, but attorneys practicing in the Northern District of California, and businesses with cases or adversary proceedings pending in that court, should be sure to follow them when they take effect on May 1, 2008.

Business Bankruptcy Issues Recent Developments

What Happened At The Supreme Court Oral Argument In The Section 1146(a) Bankruptcy Transfer Tax Exemption Case?

On Wednesday, March 26, 2008, the United States Supreme Court heard oral argument in the case of Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc. A link to the transcript of the oral argument can be found below. The case presents the following question:

Whether section 1146(a) of the Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer “under a plan confirmed under section 1129 of the Code,” applies to transfers of assets occurring prior to the actual confirmation of such a plan?

With so many asset transfers in Chapter 11 cases taking place through Section 363 asset sales before plan confirmation, rather than when plans are consummated after confirmation, how the Supreme Court answers the question presented will have a significant impact on the extent to which debtors end up paying stamp and other transfer taxes as a practical matter.

The Eleventh Circuit’s Decision And Aftermath. The Supreme Court case results from a decision by the U.S. Court of Appeals for the Eleventh Circuit holding that pre-confirmation sales can be subject to the exemption under Section 1146(a) if followed by plan confirmation later in the case. Use the link in this sentence to read the Eleventh Circuit’s decision in Piccadilly.

The Language of Section 1146(a). The one-sentence section, Section 1146(a), was previously numbered Section 1146(c) but its language has not changed. (Many court orders and opinions still use the old designation.) The statute provides as follows:

The issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.

As discussed below, much of the dispute over the scope of this exemption is based on interpretation of the phrase "under a plan confirmed."

Section 363 Sales And Transfer Taxes. As bankruptcy professionals know, Section 363 asset sales often precede confirmation of a plan by months. When confirmed, the plan may simply distribute the cash generated from prior sales of the debtor’s assets or may enable a reorganized but smaller debtor to emerge from bankruptcy. Courts around the country have taken very different views on whether Section 1146(a)’s exemption should apply to these pre-confirmation transfers.

Some courts will include findings in Section 363 sale orders that the sale, even though prior to plan confirmation, is exempt from stamp and similar taxes. This sale order from the Southern District of New York illustrates that approach:

The sale of the Purchased Assets . . . is a prerequisite to the Debtors’ ability to confirm and consummate a plan or plans. The Sale Transaction is therefore an integral part of a plan or plans to be confirmed in the Debtors’ cases and, thereby, constitutes a transfer pursuant to section 1146(c) of the Bankruptcy Code, which shall not be taxed under any law imposing a transfer tax, a stamp tax or any similar tax.

Cases filed in Delaware will likely receive a very different response. In 2003, the Third Circuit in In re Hechinger Inv. Co. of Del., Inc., 335 F.3d 243 (3d Cir. 2003) — unlike the Eleventh Circuit in Piccadilly — held that the Section 1146(a) exemption does not apply to pre-confirmation transfers. (The Third Circuit’s opinion was authored by then Circuit Judge, and now Associate Justice, Samuel Alito.) Delaware’s new local rule governing Section 363 sales requires sale motions to make express disclosure of an effort to obtain such a provision in a sale order:

Tax Exemption. The Sale Motion must highlight any provision seeking to have the sale declared exempt from taxes under section 1146(a) of the Bankruptcy Code, the type of tax (e.g., recording tax, stamp tax, use tax, capital gains tax) for which the exemption is sought. It is not sufficient to refer simply to "transfer" taxes and the state or states in which the affected property is located.

Other courts have taken a similar view. The Section 363 sale guidelines adopted by the Bankruptcy Court for the Northern District of California call out various provisions that the Bankruptcy Court generally will not approve in a sale order, including the following:

Any provision that purports to exempt the transaction from transfer taxes under section 1146(c). By its own terms, that section applies only to a sale pursuant to a plan of reorganization, not a sale outside of a plan under section 363(b).

The Supreme Court Oral Argument And Transcript. Against this background, the Supreme Court heard oral argument in the Piccadilly case on March 26, 2008. A copy of the transcript of the oral argument is available by clicking on the link in this sentence.

It’s difficult to tell how the decision will come out based on the questions asked by the various Justices, but the questions are themselves quite interesting. Some focused on why Congress would want to exempt post-confirmation but not pre-confirmation transfers. Others implied that the plain language of the statute limited the reach of the exemption only to transfers made, literally, "under" a confirmed Chapter 11 plan of reorganization. Still others inquired about the administrative impact on states if pre-confirmation transfers were initially exempt but subsequently could be taxed in the event that no plan was ever confirmed. An additional topic raised was whether, if the statute were held to exempt pre-confirmation transfers, the exemption should cover only those transfers "necessary" for a later plan confirmation or also transfers merely "instrumental" to a later plan confirmation. 

The State’s Arguments. During the argument, the State of Florida contended that the statute was unambiguous and that the word "under" meant a transfer made at or following confirmation of plan. Arguing for this bright-line rule, the State asserted that if pre-confirmation transfers could also be exempt taxing authorities would not know, at the time a transfer was recorded, whether a Chapter 11 plan would in fact later be confirmed to validate the exemption. From a policy perspective, the State argued that tax exemptions should be narrowly construed, that stamp and other transfer taxes generate millions of dollars in revenues, and that it would be an administrative burden to require states to monitor Chapter 11 cases to see if plans were later confirmed to validate exemptions claimed on earlier asset transfers.

The Debtor’s Arguments. The debtor made both policy and statutory interpretation arguments. On the policy side, Piccadilly argued that a debtor cannot get a Chapter 11 plan confirmed without cash, debtors often make Section 363 asset sales to preserve value and raise funds needed to confirm a Chapter 11 plan later in the case, the exemption was designed to save cash for the benefit of creditors, and these pre-confirmation sales should receive the same benefit from the exemption. The debtor also asserted that the key phrase in Section 1146(a), "under a plan confirmed" appears in Section 365(g)(1). Section 365 was interpreted by the Supreme Court in N.L.R.B. v. Bildisco &. Bildisco, 465 U.S. 513 (1984), to require pre-confirmation, not post-confirmation, decisions on executory contracts. The debtor contended that because the phrase "under a plan confirmed" means before confirmation when used in Section 365(g)(1), it must mean before confirmation in Section 1146(a) as well. In contrast, the debtor argued, Congress used the different phrase "confirmed plan" in Sections 1142(b) or 511(b) when it intended to refer to a point after plan confirmation.

Conclusion. Whether Section 1146(a)’s exemption from transfer taxes applies to pre-confirmation transfers has split circuit and bankruptcy courts alike over the years. The questions asked during the Supreme Court’s oral argument in the Piccadilly case suggest a similar split among the Justices over how the statute should be interpreted. With the Supreme Court’s term ending in the next few months, however, debtors, creditors, and taxing authorities should not have to wait much longer for a definitive answer to this open issue.  

Business Bankruptcy Issues Recent Developments

Trademark Licenses In Bankruptcy: New Developments In The N.C.P. Marketing Case

Last November I reported on the status of the Ninth Circuit appeal in In re: N.C.P. Marketing Group, Inc., a case addressing whether a debtor can assume a trademark license over the trademark owner’s objection. Back in 2005 the U.S. District Court for the District of Nevada issued its first of a kind decision, In re: N.C.P. Marketing Group, Inc., 337 B.R. 230 (D.Nev. 2005), holding that trademark licenses are personal and nonassignable in bankruptcy absent a provision in the trademark license to the contrary. Click here for a copy of the N.C.P Marketing Group decision and here to read an earlier post on the case.

The N.C.P. Marketing Court’s Analysis. In reaching its conclusion, the District Court held that under the Lanham Act, the federal trademark statute, a trademark owner has a right and duty to control the quality of goods sold under the mark:

Because the owner of the trademark has an interest in the party to whom the trademark is assigned so that it can maintain the good will, quality, and value of its products and thereby its trademark, trademark rights are personal to the assignee and not freely assignable to a third party.  

The trademark owner in that case, Billy Blanks of the Billy Blanks® Tae Bo® fitness program, successfully moved the court to compel rejection of the trademark license because under the "hypothetical test" analysis of Section 365(c)(1) of the Bankruptcy Code adopted by the U.S. Court of Appeals for the Ninth Circuit, contracts that cannot be assigned by the debtor without the nondebtor party’s consent cannot be assumed by the debtor either. (For a full discussion of these issues, take a look at this earlier post entitled "Assumption of Intellectual Property Licenses In Bankruptcy: Are Recent Cases Tilting Toward Debtors?")  

The Ninth Circuit Appeal. N.C.P. Marketing appealed the decision to the Ninth Circuit, the appeal was fully briefed, and oral argument had been scheduled for November 5, 2007. Prior to the oral argument, the Chapter 7 trustee for N.C.P. Marketing reached a settlement in the case. At the trustee’s request, the Ninth Circuit took the oral argument off calendar and directed the parties to move to dismiss the appeal if the settlement was approved by the Bankruptcy Court. At the time, I commented that it appeared that no Ninth Circuit decision would be issued in the case due to the settlement.

The Settlement Is Rejected. Back in the Bankruptcy Court, the Chapter 7 trustee filed a motion for approval of the settlement, but N.C.P. Marketing and certain other parties filed an objection and offered a competing bid for the appeal rights. In something of a surprise, on February 28, 2008, the Bankruptcy Court issued a brief order denying the trustee’s motion for approval of the settlement and instead approved a sale of the appeal rights and certain other assets to the objecting parties. The objecting parties thereafter posted the undertaking required by the Bankruptcy Court’s order.

Appeal May Go Forward. As a result, the Ninth Circuit appeal may be revived, although no new oral argument has been scheduled yet. Barring further developments, trademark licensors and licensees may end up seeing a Ninth Circuit decision after all on the important issue of whether trademark licenses can be assumed in bankruptcy. Stay tuned.

 

Business Bankruptcy Issues Recent Developments

Southern District Of New York Bankruptcy Court Proposes Amendments To Local Rules

The United States Bankruptcy Court for the Southern District of New York has announced proposed changes to its Local Bankruptcy Rules in light of the recent amendments to the Federal Rules of Bankruptcy Procedure that took effect on December 1, 2007. Many of the largest business bankruptcy cases are filed in the Southern District of New York, which includes Manhattan, making these proposed amendments to the Local Bankruptcy Rules of particular interest.

Cash Collateral And DIP Financing Disclosures. The most significant proposed changes for Chapter 11 bankruptcy cases address cash collateral and DIP financing motions and, if adopted, the local rule amendments would supplement the disclosures required by amended Federal Rule of Bankruptcy Procedure 4001. Proposed Local Bankruptcy Rule 4001-2 would require at least fifteen material provisions to be disclosed in cash collateral and DIP financing motions. These include the following:

  • the amount of cash to be used or borrowed, including any borrowing base formula and availability;
  • material conditions to closing, including budget provisions;
  • pricing and economic terms, including various fees;
  • any effect on existing liens;
  • any carve-outs from liens or superpriorities;
  • any cross-collateralization;
  • any roll-up provisions;
  • any provisions that would materially limit the Court’s power or discretion or the fiduciary duties of a trustee, debtor in possession, or committee;
  • any limitation on the lender’s obligation to fund activities of a trustee, debtor in possession, or committee;
  • termination or default provisions;
  • any change of control provisions;
  • any deadline for sale of property;
  • any prepayment penalty or other restriction on repayment;
  • terms governing joint liability of debtors; and
  • any funding of non-debtor affiliates.

Additional Proposed Financing Changes. Other provisions would require (1) disclosure regarding efforts to obtain financing, (2) adequate notice after an event of default and before a lender could exercise remedies, (3) disclosure regarding carve-outs and allocations of carve-outs, (4) investigation periods for committees, and (5) appearances at preliminary and final hearings. In addition, the proposed local rule would mandate certain provisions in proposed orders, including a reservation of the Court’s right to unwind roll-ups if a successful challenge is later made. 

Other Proposed Amendments. The remaining proposed amendments are mainly technical. They would repeal local rules that have become unnecessary, drop the requirement that attorneys use an identifier that includes the last four digits of their social security number, conform attorney signature rules to current practice, and dispense with the need for a separate memorandum of law if a discussion of the law is included in the motion itself.

Opportunity For Comments. The Bankruptcy Court has not yet promulgated these local rule amendments and it is accepting comments on the proposed changes until April 23, 2008. Information on how to submit comments is available on the Court’s website at the Local Rule page.

Business Bankruptcy Issues The Financially Troubled Company

Assignments For The Benefit Of Creditors: Simple As ABC?

Companies in financial trouble are often forced to liquidate their assets to pay creditors. While a Chapter 11 bankruptcy sometimes makes the most sense, other times a Chapter 7 bankruptcy is required, and in still other situations a corporate dissolution may be best. This post examines another of the options, the assignment for the benefit of creditors, commonly known as an "ABC."

A Few Caveats. It’s important to remember that determining which path an insolvent company should take depends on the specific facts and circumstances involved. As in many areas of the law, one size most definitely does not fit all for financially troubled companies. With those caveats in mind, let’s consider one scenario sometimes seen when a venture-backed or other investor-funded company runs out of money.

One Scenario. After a number of rounds of investment, the investors of a privately held corporation have decided not to put in more money to fund the company’s operations. The company will be out of cash within a few months and borrowing from the company’s lender is no longer an option. The accounts payable list is growing (and aging) and some creditors have started to demand payment. A sale of the business may be possible, however, and a term sheet from a potential buyer is anticipated soon. The company’s real property lease will expire in nine months, but it’s possible that a buyer might want to take over the lease.

  • A Chapter 11 bankruptcy filing is problematic because there is insufficient cash to fund operations going forward, no significant revenues are being generated, and debtor in possession financing seems highly unlikely unless the buyer itself would make a loan. 
  • The board prefers to avoid a Chapter 7 bankruptcy because it’s concerned that a bankruptcy trustee, unfamiliar with the company’s technology, would not be able to generate the best recovery for creditors.

The ABC Option. In many states, another option that may be available to companies in financial trouble is an assignment for the benefit of creditors (or "general assignment for the benefit of creditors" as it is sometimes called). The ABC is an insolvency proceeding governed by state law rather than federal bankruptcy law.

California ABCs. In California, where ABCs have been done for years, the primary governing law is found in California Code of Civil Procedure sections 493.010 to 493.060 and sections 1800 to 1802, among other provisions of California law. California Code of Civil Procedure section 1802 sets forth, in remarkably brief terms, the main procedural requirements for a company (or individual) making, and an assignee accepting, a general assignment for the benefit of creditors:

1802.  (a) In any general assignment for the benefit of creditors, as defined in Section 493.010, the assignee shall, within 30 days after the assignment has been accepted in writing, give written notice of the assignment to the assignor’s creditors, equityholders, and other parties in interest as set forth on the list provided by the assignor pursuant to subdivision (c).
   (b) In the notice given pursuant to subdivision (a), the assignee shall establish a date by which creditors must file their claims to be able to share in the distribution of proceeds of the liquidation of the assignor’s assets.  That date shall be not less than 150 days and not greater than 180 days after the date of the first giving of the written notice to creditors and parties in interest.
   (c) The assignor shall provide to the assignee at the time of the making of the assignment a list of creditors, equityholders, and other parties in interest, signed under penalty of  perjury, which shall include the names, addresses, cities, states, and ZIP Codes for each person together with the amount of that person’s anticipated claim in the assignment proceedings.

In California, the company and the assignee enter into a formal "Assignment Agreement." The company must also provide the assignee with a list of creditors, equityholders, and other interested parties (names, addresses, and claim amounts). The assignee is required to give notice to creditors of the assignment, setting a bar date for filing claims with the assignee that is between five to six months later.

ABCs In Other States. Many other states have ABC statutes although in practice they have been used to varying degrees. For example, ABCs have been more common in California than in states on the East Coast, but important exceptions exist. Delaware corporations can generally avail themselves of Delaware’s voluntary assignment statutes, and its procedures have both similarities and important differences from the approach taken in California. Scott Riddle of the Georgia Bankruptcy Law Blog has an interesting post discussing ABC’s under Georgia law. Florida is another state in which ABCs are done under specific statutory procedures. For an excellent book that has information on how ABCs are conducted in various states, see Geoffrey Berman’s General Assignments for the Benefit of Creditors: The ABCs of ABCs, published by the American Bankruptcy Institute.

Important Features Of ABCs. A full analysis of how ABCs function in a particular state and how one might affect a specific company requires legal advice from insolvency counsel. The following highlights some (but by no means all) of the key features of ABCs:

  • Court Filing Issue. In California, making an ABC does not require a public court filing. Some other states, however, do require a court filing to initiate or complete an ABC.
  • Select The Assignee. Unlike a Chapter 7 bankruptcy trustee, who is randomly appointed from those on an approved panel, a corporation making an assignment is generally able to choose the assignee.
  • Shareholder Approval. Most corporations require both board and shareholder approval for an ABC because it involves the transfer to the assignee of substantially all of the corporation’s assets. This makes ABCs impractical for most publicly held corporations.
  • Liquidator As Fiduciary. The assignee is a fiduciary to the creditors and is typically a professional liquidator.
  • Assignee Fees. The fees charged by assignees often involve an upfront payment and a percentage based on the assets liquidated.
  • No Automatic Stay. In many states, including California, an ABC does not give rise to an automatic stay like bankruptcy, although an assignee can often block judgment creditors from attaching assets.
  • Event Of Default. The making of a general assignment for the benefit of creditors is typically a default under most contracts. As a result, contracts may be terminated upon the assignment under an ipso facto clause.
  • Proof Of Claim. For creditors, an ABC process generally involves the submission to the assignee of a proof of claim by a stated deadline or bar date, similar to bankruptcy. (Click on the link for an example of an ABC proof of claim form.)
  • Employee Priority. Employee and other claim priorities are governed by state law and may involve different amounts than apply under the Bankruptcy Code. In California, for example, the employee wage and salary priority is $4,300, not the $10,950 amount currently in force under the Bankruptcy Code.
  • 20 Day Goods. Generally, ABC statutes do not have a provision similar to that under Bankruptcy Code Section 503(b)(9), which gives an administrative claim priority to vendors who sold goods in the ordinary course of business to a debtor during the 20 days before a bankruptcy filing. As a result, these vendors may recover less in an ABC than in a bankruptcy case, subject to assertion of their reclamation rights.
  • Landlord Claim. Unlike bankruptcy, there generally is no cap imposed on a landlord’s claim for breach of a real property lease in an ABC.
  • Sale Of Assets. In many states, including California, sales by the assignee of the company’s assets are completed as a private transaction without approval of a court. However, unlike a bankruptcy Section 363 sale, there is usually no ability to sell assets "free and clear" of liens and security interests without the consent or full payoff of lienholders. Likewise, leases or executory contracts cannot be assigned without required consents from the other contracting party.
  • Avoidance Actions. Most states allow assignees to pursue preferences and fraudulent transfers. However, the U.S. Court of Appeals for the Ninth Circuit has held that the Bankruptcy Code pre-empts California’s preference statute, California Code of Civil Procedure section 1800. Nevertheless, to date the California state courts have refused to follow the Ninth Circuit’s decision and still permit assignees to sue for preferences in California state court. In February 2008, a Delaware state court followed the California state court decisions, refusing either to follow the Ninth Circuit position or to hold that the California preference statute was pre-empted by the Bankruptcy Code. The Delaware court was required to apply California’s ABC preference statute because the avoidance action arose out of an earlier California ABC.

The Scenario Revisited. With this overview in mind, let’s return to our company in distress.

  • The prospect of a term sheet from a potential buyer may influence whether our hypothetical company should choose an ABC or another approach. Some buyers will refuse to purchase assets outside of a Chapter 11 bankruptcy or a Chapter 7 case. Others are comfortable with the ABC process and believe it provides an added level of protection from fraudulent transfer claims compared to purchasing the assets directly from the insolvent company. Depending on the value to be generated by a sale, these considerations may lead the company to select one approach over the other available options.
  • In states like California where no court approval is required for a sale, the ABC can also mean a much faster closing — often within a day or two of the ABC itself provided that the assignee has had time to perform due diligence on the sale and any alternatives — instead of the more typical 30-60 days required for bankruptcy court approval of a Section 363 sale. Given the speed at which they can be done, in the right situation an ABC can permit a "going concern" sale to be achieved.
  • Secured creditors with liens against the assets to be sold will either need to be paid off through the sale or will have to consent to release their liens; forced "free and clear" sales generally are not possible in an ABC.
  • If the buyer decides to take the real property lease, the landlord will need to consent to the lease assignment. Unlike bankruptcy, the ABC process generally cannot force a landlord or other third party to accept assignment of a lease or executory contract.
  • If the buyer decides not to take the lease, or no sale occurs, the fact that only nine months remains on the lease means that this company would not benefit from bankruptcy’s cap on landlord claims. If the company’s lease had years remaining, and if the landlord were unwilling to agree to a lease termination approximating the result under bankruptcy’s landlord claim cap, the company would need to consider whether a bankruptcy filing was necessary to avoid substantial dilution to other unsecured creditor claims that a large, uncapped landlord claim would produce in an ABC.
  • If the potential buyer walks away, the assignee would be responsible for determining whether a sale of all or a part of the assets was still possible. In any event, assets would be liquidated by the assignee to the extent feasible and any proceeds would be distributed to creditors in order of their priority through the ABC’s claims process.
  • While other options are available and should be explored, an ABC may make sense for this company depending upon the buyer’s views, the value to creditors and other constituencies that a sale would produce, and a clear-eyed assessment of alternative insolvency methods. 

Conclusion. When weighing all of the relevant issues, an insolvent company’s management and board would be well-served to seek the advice of counsel and other insolvency professionals as early as possible in the process. The old song may say that ABC is as "easy as 1-2-3," but assessing whether an assignment for the benefit of creditors is best for an insolvent company involves the analysis of a myriad of complex factors.

Business Bankruptcy Issues

North Of The Border: Reorganization Under Canada’s Companies’ Creditors Arrangement Act

With the enormous amount of business between the United States and Canada these days, it’s little wonder that from time to time U.S. companies find themselves affected by a Canadian insolvency proceeding. A better understanding of Canada’s approach to bankruptcy and insolvency law can be helpful when sizing up how such a filing might affect your rights.

The Lay Of The Land. Canada has two primary federal insolvency acts, the Bankruptcy and Insolvency Act, known as the BIA, and the Companies’ Creditors Arrangement Act, known as the CCAA. (A third statute, the Winding-up and Restructuring Act, is less frequently invoked.) You can access the text of each of three acts by clicking on the preceding links. These national statutes also operate in conjunction with applicable provincial law.

Canada’s Reorganization Law. When larger Canadian companies need protection from creditors they often seek relief under Canada’s CCAA. The CCAA is the Canadian insolvency law most analogous to Chapter 11 of the U.S. Bankruptcy Code. Company management generally remains in charge as a debtor in possession, although a monitor is appointed and has certain oversight authority. Unlike the much longer U.S. Bankruptcy Code, the CCAA currently has only 22 sections, leaving it to the courts to fill in the gaps. Courts generally do so, including issuance of an early "initial order" that commonly implements a stay similar to the automatic stay of U.S. bankruptcy  law. (Click on the link for an example of an initial order.) Other court orders permit contracts and leases to be disclaimed (rejected), assets to be sold, and a restructuring to be implemented through a plan of arrangement after voting by creditors.

Cross-Border Issues. Canada has not yet adopted the Model Law on Cross-Border Insolvency, which the U.S. did in 2005 as Chapter 15 of the U.S. Bankruptcy Code. At least for now, Canada continues to use its own cross-border procedures under Section 18.6 of the CCAA and cross-border protocols used to coordinate proceedings in different countries. (For more on Chapter 15, you may find this prior post entitled "Chapter 15: The Bankruptcy Code’s New Cross-Border Insolvency Rules," of interest.)

Important Changes May Be Coming. Canada is currently working on adoption of significant revisions to its bankruptcy and insolvency laws. The legislation was originally proposed in 2005 as Bill C-55, and more recently was approved in legislation known as Bill C-12.  If it comes into force, this law would make a number of changes, including one of interest to licensees of intellectual property. The legislation would add to the CCAA a formal provision akin to Section 365(n) of the U.S. Bankruptcy Code, protecting the rights of licensees to continue to use licensed intellectual property if the underlying license agreement is disclaimed (rejected) in the CCAA proceeding.

Conclusion. Navigating Canadian insolvency law can be complex, especially when proceedings are pending in both the U.S. and Canada. Getting advice from U.S. and Canadian bankruptcy counsel can prove invaluable if your business becomes involved in an insolvency proceeding north of the border.   

Business Bankruptcy Issues Recent Developments

Bankruptcy Rule Amendments: New Article Reviews The Important Changes

An article my partner Adam Rogoff, associate Seth Van Aalten, and I wrote was recently published in the January 2008 issue of Pratt’s Journal of Bankruptcy Law. The article discusses the significant amendments to the Federal Rules of Bankruptcy Procedure that took effect on December 1, 2007. Those amendments covered a range of procedures from omnibus claims objections to motions to assume executory contracts and real property leases to "first day" motions in Chapter 11 cases. 

If you don’t have a copy of the Journal, you can read the article, entitled "Important Changes To Bankruptcy Rules Take Effect," by clicking on its title in this sentence. For more details on the rule changes, use the links that follow for a copy of the full, "clean" set of rule amendments as well as the redline set showing changes made by the amendments to the existing rules, together with the Advisory Committee’s comments.