Recent Developments

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Recent Developments

Merrill Lynch Comments On The Current U.S. Economy’s Striking Similarities To The Late 1980s

Merrill Lynch economists David Rosenberg and Neil Dutta have prepared a fascinating analysis comparing a number of current economic indicators with those from the late 1980s. (Hat tip to Brad Feld and Seth Levine.) You can view the report, entitled 1980s Redux?, by clicking on its title in this sentence.

Here are a few of their observations, which when combined with their startling side-by-side charts comparing the two cycles, make their point:

  • Inverted Yield Curve. "At the peak of the tightening cycle in the late 1980s, the Fed inverted the yield curve. It did the very same thing this time around. The yield curve leads by 5-6 quarters and was flashing economic stress signals a year-ago just as it did in the late 1980s."

  • Increase In Unemployment. "This expansion and the one in the late 1980s witness a dramatic tightening in labor markets and chronic shortages of skilled labor. [O]nce the unemployment rate hooks up from its low, a recession was not far behind."

  • Housing Market Deflation. "This cycle is also hauntingly similar to the 1980s because of what happened to the housing market. Years of massive credit extension, overbuilding and "new paradigm" thinking of housing as an asset class ultimately morphed into a massive excess inventory overhang, eroding credit quality and house price deflation. We are reliving that today, except the deflation is much broader and the credit issues far more complex and global in nature."

They also point out further similarities between the two periods, including that both had an LBO-financed M&A boom, a falling dollar, and a strong Asian stock market (then Japan, now China). These observations take on even more force when looking at their charts.

For companies, credit managers, and bankruptcy professionals trying to determine where the economy is headed, a look back to the economy of the late 1980s — which was followed by the recession of the early 1990s and a spike in Chapter 11 filings — might be a good starting point.

Business Bankruptcy Issues Recent Developments

A Fly In The Ointment: Sale Of Property May Cut Off Landlord’s Section 502(b)(6) Lease Rejection Claim For Future Rent

Here’s a scenario frequently seen in Chapter 11 cases. A tenant files bankruptcy and rejects a commercial real estate lease. The landlord files an unsecured lease rejection claim seeking to recover the lost future rent under the rejected lease. The claim amount is capped by Bankruptcy Code Section 502(b)(6) but may still be one of the larger unsecured claims in the case. Now let’s add a small, but relatively common, twist. Sometime later, but before distributions are made on the claim, the landlord sells the real estate that the debtor had occupied under the rejected lease.

The FLYi Chapter 11 Case. That, complete with the twist, was the situation in the In re FLYi, Inc. Chapter 11 case pending in the Delaware Bankruptcy Court. After the landlord sold the property, the liquidation trust established under the debtor’s Chapter 11 plan of reorganization objected to the landlord’s claim, arguing that after the sale of the property the debtor had no further obligations under the lease. Virginia law applied because the property was located in Dulles, Virginia. As described by the Bankruptcy Court, the landlord had three options under Virginia law:

[D]o nothing and sue for the rent remaining under the Lease; reenter the Premises for the sole purpose of re-letting it without terminating the Lease; or re-enter the Premises and exercise full dominion over the premises thereby terminating the Lease and eliminating FLYi’s obligation to pay any future rent.

The landlord argued that this interpretation of the law was wrong but asserted that provisions in the lease protected the landlord’s claim anyway. The Bankruptcy Court rejected those arguments and held that the landlord’s sale of the property terminated both the lease and the landlord’s right to future rent after the date of the sale. A copy of the Bankruptcy Court’s decision is available here.

Be sure to read the Delaware Business Bankruptcy Report’s interesting discussion for more details on the decision, including the arguments advanced and the Bankruptcy Court’s treatment of them.

What Does This Mean For Landlords? A landlord contemplating a sale of the real property will have to consider what impact that sale might have on its lease rejection claim.

  • In states like Virginia where, according to the Bankruptcy Court in the FLYi case, termination of a lease cuts off a landlord’s claim for future rent, landlords will have to be prepared to lose all or a portion of a lease rejection claim if they sell the real property. 
  • The outcome may be different in other states. Section 1951.2 of the California Civil Code, for example, expressly permits a landlord, upon termination of a lease, to recover the present value of the difference between the unpaid future rent under the lease and the amount of rent that could reasonably be avoided through mitigation efforts. This may permit a landlord to sell the property and still retain a lease rejection claim.
  • When state law allows it, landlords may seek to include provisions in a lease to preserve contractually the right to a post-sale lease damages claim.

What Does This Mean For Bankruptcy Estates? Debtors, liquidation trusts, and other estate representatives may have an incentive to determine whether the landlord still owns the property. In states where a post-rejection sale of the property operates to cut off the landlord’s future rent claim, this fact could provide a new ground for an objection to the landlord’s Section 502(b)(6) claim.

Conclusion. Time will tell how frequently this scenario will play out in future cases, but landlords should expect to see the "did you sell the property" question asked more often going forward.

Business Bankruptcy Issues Recent Developments

New Article Tackles Whether Unsecured Creditors Should Be Able To Recover Post-Petition Attorney’s Fees, The Question Left Open By The Travelers Decision

When the U.S. Supreme Court overruled the Ninth Circuit’s so-called Fobian rule in the Travelers Casualty & Surety Co. of America v. Pacific Gas & Electric Co. decision (available here) in March 2007, it left for another day the question of whether unsecured creditors could recover, as part of their unsecured claims, post-petition attorney’s fees incurred during the course of the bankruptcy case.

Early Decisions Take Different Views. Since the Travelers decision, two bankruptcy courts have issued decisions but have come to different conclusions on that question. 

  • In May 2007, in the In re Qmect, Inc. decision (available here), the U.S. Bankruptcy Court for the Northern District of California held that unsecured creditors could recover post-petition attorney’s fees. For more on that decision, see this earlier post on the case and its analysis. 
  • In July 2007, in the In re Electric Machinery Enterprises, Inc. case (available here), the U.S. Bankruptcy Court for the Middle District of Florida came to the opposite conclusion, following a majority of courts that had addressed this issue unrestrained by the Ninth Circuit’s Fobian decision. See this previous post for more on the Florida decision.

New Article Sides With Majority View. A new article to be published in the Winter 2007 issue of the American Bankruptcy Institute Law Review, gives context for these differing views and argues that the majority position is the correct one. The article, entitled "Interpreting Bankruptcy Code Sections 502 and 506: Post-Petition Attorneys’ Fees in a Post-Travelers World," was written by Professor Mark S. Scarberry, Professor of Law at the Pepperdine University School of Law. Professor Scarberry is the current Robert M. Zinman Scholar in Residence at the American Bankruptcy Institute. A copy of the article is available for download from the Social Science Research Network website by following this link.

A Textual Argument. The centerpiece of the article is Professor Scarberry’s interesting analysis of the interplay between Sections 502(b) and 506 of the Bankruptcy Code and the textual argument he advances to support the majority view.

  • A key building block of this argument is his conclusion that the language in Section 502(b), which provides that a claim is to be allowed in an amount "as of the date of the filing of the petition," precludes inclusion of post-petition amounts as part of the Section 502(b) claim allowance. 
  • He then argues that Section 506(b)’s function is to add post-petition interest and "reasonable fees, costs, and charges" to this Section 502(b) allowed amount but only for secured claims (determined under Section 506(a)) and only when the value of a secured creditor’s collateral exceeds the allowed amount of the claim, determined under Section 506(a).
  • He contends that Section 506(b)’s use of the phrase "there shall be allowed" demonstrates that its purpose is to allow amounts not otherwise allowable under Section 502(b).

The Debate Continues. Professor Scarberry’s article is an excellent resource for those seeking to understand the history and background of this issue. It also provides debtors, creditors committees, and their attorneys with arguments to oppose an unsecured creditor’s attempt to recover post-petition attorney’s fees. The issue, however, remains far from settled in the courts. 

  • The majority view, now bolstered by the arguments in Professor Scarberry’s article, will probably prevail in many cases.
  • Still, the In re Qmect decision shows that at least some courts may allow these fees.

Until this issue is resolved by the Supreme Court, or at least by more Courts of Appeals, unsecured creditors with a contractual or nonbankruptcy statutory right to attorney’s fees may try their luck and seek allowance of post-petition attorney’s fees in bankruptcy cases as part of their unsecured claims.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

The Bull Rips A Hole In The Matador’s Cape: New Ninth Circuit Decision Limits Reach Of Section 502(b)(6)’s Landlord Cap

A commercial real estate lease often represents the largest single liability of many debtors. For retailers, which typically have scores or even hundreds of store leases, the liability involved is orders of magnitude larger. It’s fair to say that the management of lease obligations can be of enormous consequence to debtors, landlords, and other creditors in Chapter 11 bankruptcy cases.

Rejected Leases And The Capped Claim. As explained in an earlier post on how commercial real estate leases are treated in bankruptcy, one of a debtor’s options in a Chapter 11 case is to reject uneconomic or otherwise burdensome leases, terminating the debtor’s obligation to pay rent and turning the landlord’s claim for termination of the lease into a prepetition claim. Section 502(b)(6) of the Bankruptcy Code goes further and caps the landlord’s prepetition rejection claim at an amount equal to the greater of (1) one year’s rent or (2) fifteen percent of the remaining lease term, up to a maximum of three years’ worth of rent. The starting date for calculating the claim is the earlier of the date when the bankruptcy petition was filed or when the landlord recovered possession of, or the tenant surrendered, the premises. A landlord with six years left on a rejected lease, for example, would have its claim capped at one year’s worth of rent.

What’s Covered By The Cap? This ability to cap a landlord’s claim in bankruptcy can be a major benefit to debtor tenants. Ever since a 1995 decision by the Bankruptcy Appellate Panel (BAP) of the Ninth Circuit in In re McSheridan, 184 B.R. 91 (B.A.P. 9th Cir. 1995), debtors have been successful in many cases in capping a variety of claims by landlords. In McSheridan, the BAP held that the cap applied to all damages for the lessee’s nonperformance of the lease, not just to claims based on future rent. Landlords have challenged that analysis but, at least in the Ninth Circuit, have had little success — until this week.

The Ninth Circuit’s El Toro Decision. In an eight-page opinion (available here) issued on October 1, 2007 in the In re El Toro Materials Company, Inc. Chapter 11 case,, the U.S. Court of Appeals for the Ninth Circuit took a very different view of the landlord cap under Section 502(b)(6). In the El Toro case, the debtor was a mining company that leased property from the Saddleback Community Church, paying $28,000 per month in rent. After the lease was rejected, Saddleback brought an adversary proceeding against El Toro for $23 million in damages alleging that El Toro left a million tons of wet clay "goo," mining equipment, and other materials on the property.

  • The bankruptcy court held that Saddleback’s claim, which asserted waste, nuisance, and other tort theories, would not be limited by the Section 502(b)(6) cap. 
  • Following its McSheridan precedent, the BAP reversed and held that any damages would be subject to the cap. 
  • Interestingly, two of the three judges on the BAP panel filed concurring opinions, voicing doubts about the wisdom of the McSheridan case. A copy of the BAP’s unpublished El Toro decision from July 2005 is available here.

Judge Kozinski’s Analysis. On appeal, the Ninth Circuit reversed the BAP’s decision, holding that the cap did not apply to the landlord’s tort claims. Judge Alex Kozinski authored the opinion and analyzed the key issues this way:

The structure of the cap—measured as a fraction of the remaining term—suggests that damages other than those based on a loss of future rental income are not subject to the cap. It makes sense to cap damages for lost rental income based on the amount of expected rent: Landlords may have the ability to mitigate their damages by re-leasing or selling the premises, but will suffer injury in proportion to the value of their lost rent in the meantime. In contrast, collateral damages are likely to bear only a weak correlation to the amount of rent: A tenant may cause a lot of damage to a premises leased cheaply, or cause little damage to premises underlying an expensive leasehold.

One major purpose of bankruptcy law is to allow creditors to receive an aliquot share of the estate to settle their debts. Metering these collateral damages by the amount of the rent would be inconsistent with the goal of providing compensation to each creditor in proportion with what it is owed. Landlords in future cases may have significant claims for both lost rental income and for breach of other provisions of the lease. To limit their recovery for collateral damages only to a portion of their lost rent would leave landlords in a materially worse position than other creditors. In contrast, capping rent claims but allowing uncapped claims for collateral damage to the rented premises will follow congressional intent by preventing a potentially overwhelming claim for lost rent from draining the estate, while putting landlords on equal footing with other creditors for their collateral claims.

The statutory language supports this interpretation. The cap applies to damages “resulting from” the rejection of the lease. 11 U.S.C. § 502(b)(6). Saddleback’s claims for waste, nuisance and trespass do not result from the rejection of the lease—they result from the pile of dirt allegedly left on the property. Rejection of the lease may or may not have triggered Saddleback’s ability to sue for the alleged damages.But the harm to Saddleback’s property existed whether or not the lease was rejected. A simple test reveals whether the damages result from the rejection of the lease: Assuming all other conditions remain constant, would the landlord have the same claim against the tenant if the tenant were to assume the lease rather than rejecting it? Here, Saddleback would still have the same claim it brings today had El Toro accepted the lease and committed to finish its term: The pile of dirt would still be allegedly trespassing on Saddleback’s land and Saddleback still would have the same basis for its theories of nuisance, waste and breach of contract. The million-ton heap of dirt was not put there by the rejection of the lease—it was put there by the actions and inactions of El Toro in preparing to turn over the site.

(Footnotes omitted.)

McSheridan Holding Overruled. The Ninth Circuit opinion noted the two concurrences from the BAP decision questioning McSheridan and suggested that the BAP consider adopting an en banc procedure to reconsider such doubtful precedents. Given the Ninth Circuit’s holding, it will come as no surprise that the Court of Appeals also explicitly overruled McSheridan:

To the extent that McSheridan holds section 502(b)(6) to be a limit on tort claims other than those based on lost rent, rent-like payments or other damages directly arising from a tenant’s failure to complete a lease term, it is overruled.

The Ninth Circuit noted that McSheridan also holds that "damages flowing from the failure of a party that has rejected a lease to perform future routine repairs or pay utility bills are capped," but declined to address — or overrule — that holding.

Post-El Toro Ramifications.  At least in the Ninth Circuit, with McSheridan overruled landlords will work hard to characterize their damage claims as arising from tort theories or otherwise not being based on "lost rent, rent-like payments or other damages directly arising from a tenant’s failure to complete the lease term." At the negotiation stage, when the market permits landlords may demand larger security deposits and letters of credit on the view that the Section 502(b)(6) cap no longer limits every type of damage recoverable against such security. They may also structure leases to separate claims for items such as clean-up costs, hazardous waste removal, property damage, and even tenant improvement repayments from rent claims, in an attempt to bolster the argument that these claims fall outside of the cap.

Conclusion. Like a bull charging a matador, the El Toro decision has ripped a hole in the Section 502(b)(6) cape previously used to turn away cap-busting landlord claims. Time will tell just how significant the decision turns out to be, but at first blush it seems that debtors and non-landlord creditors may be the ones who end up seeing red. 

Recent Developments

PIMCO’s Bill Gross On Home Prices, Changes In the Credit Markets, And Their Impact On The Fed’s Future Rate Decisions

Bill Gross, Managing Director at Pacific Investment Management Company LLC, known as PIMCO, has some interesting comments on the credit markets, housing prices, the economy, and how the Federal Reserve should respond. In his October 2007 Investment Outlook newsletter, he offers several cogent observations:

  • "The modern financial complex has morphed into something unrecognizable to many astute market veterans and academics."
  • National housing prices are expected to decline 10% to 15% over the next several years.
  • Home prices have a more significant impact on consumer spending habits and confidence than do stock prices.
  • Fed policy should move rates up like an escalator (25 basis point increases) but down like an elevator (50 basis point cuts).
  • "A U.S. Fed easing cycle historically has required a destination of 1% real short rates or lower. Under a conservative assumption of 2½% inflation, that implies Fed Funds at 3¾% or so over the next 6-12 months."
  • Rate cuts "will likely be interrupted by false hopes of a housing bottom, fears of a dollar crisis, or misinterpreted one month’s signs of employment gains and faux economic strength."
  • "The downward path of home prices, however, will dominate Fed policy over the next several years as will the lingering unwind of related financial structures and derivatives that have yet to be discovered by the public, and marked to market by their conduit holders."

Those tracking how the direction of the economy may impact the level of future Chapter 11 bankruptcy filings will find the entire Investment Outlook well worth reading.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

Ordinary Course Preference Case Takes Extraordinary Turn: Ninth Circuit Strikes Down Local Bankruptcy Rule On Jury Trials

Preference lawsuits are filed all the time in bankruptcy cases and the ordinary course of business defense is frequently asserted. Still, it’s the rare case that ends up with a federal court of appeals decision addressing jury trial rights and invalidating a bankruptcy court’s local rule. This post is about just such a case.

The Bankruptcy Preference. As a quick refresher, preferences are payments or other transfers made in the 90 days prior to a bankruptcy filing, on account of antecedent or pre-existing debt, at a time when the debtor was insolvent, that allow the transferee (the preference defendant) to be "preferred" by recovering more than it would have had the transfer not been made and the defendant instead had simply filed a proof of claim for the amount involved. The 90-day reachback period is extended to a full year prior to the bankruptcy petition for insiders such as officers, directors, and affiliates.

Jury Trials In Bankruptcy Cases? Preference defendants who do not file proofs of claim in the main bankruptcy case have the option to demand a trial by jury in the preference lawsuit. This is a right protected by the Seventh Amendment to the Constitution. The parties in the lawsuit can consent to having the bankruptcy court conduct the jury trial but this doesn’t happen very often. Why would a preference defendant make a jury demand? Here are three common reasons:

  • The defendant believes a jury would be more inclined to find in its favor than a bankruptcy judge;
  • The defendant wants the case moved to federal district court from the bankruptcy court, which some defendants perceive as more debtor-friendly; and
  • Jury trials are more expensive and complex, a fact the preference defendant may hope will translate into settlement leverage.

The HealthCentral.com Case. In a recent case, Sigma Micro Corporation, a company sued for an alleged preference by debtor HealthCentral.com, made just such a jury trial demand. It then filed a motion for certification before the bankruptcy court seeking to have its case moved to the district court, in accordance with Local Rule 9015-2(b) of the United States Bankruptcy Court for the Northern District of California. That Local Rule, entitled "Certification to District Court," provides:

If the Bankruptcy Judge determines that [a] demand was timely made and the party has a right to a jury trial, and if all parties have not filed written consent to a jury trial before the Bankruptcy Judge, the Bankruptcy Judge shall certify to the District Court that the proceeding is to be tried by a jury and that the parties have not consented to a jury trial in the Bankruptcy Court. Upon such certification, [the jurisdictional] reference of the proceeding shall be automatically withdrawn, and the proceeding assigned to a Judge of the District . . . .

The Bankruptcy Court held that Sigma had a right to a jury trial but then stayed its order to retain jurisdiction for pre-trial matters. It later granted the debtor’s motion for summary judgment in the preference case, finding no genuine issue of material fact and rejecting Sigma’s ordinary course of business defense. On appeal, Sigma argued that the Bankruptcy Court did not have jurisdiction to enter summary judgment because it should have transferred the case to the District Court upon finding that Sigma was entitled to a jury trial. It also argued that it had raised genuine issues of material fact on its ordinary course of business defense, precluding summary judgment.

The Ninth Circuit’s Decision. On September 21, 2007, the Ninth Circuit issued its opinion in the case (available here).  In addressing the jurisdiction question, the Ninth Circuit confronted "an issue of first impression in this circuit, that is, the validity of Local Rule 9015-2(b)." After reviewing the right of courts to promulgate local rules, it came to the core of the issue:

Considering these rules we hold Local Rule 9015-2(b) to be invalid as it establishes a procedure for withdrawing the district court’s jurisdictional reference inconsistent with the Acts of  Congress and Federal Rules of Bankruptcy Procedure. Cf. Coffey v. Marina Management Servs. (In re Kool, Mann, Coffee), 23 F.3d 66, 67-69 (3rd Cir. 1994) (finding local rule invalid because of inconsistency with Bankruptcy Code); In re Morrissey, 717 F.2d 100, 104-05 (3rd Cir. 1983) (same).

The Ninth Circuit noted that 28 U.S.C. § 157(d) provides that a "district court" may withdraw the reference of all or a part of a case or proceeding and that Federal Rule of Bankruptcy Procedure 5011(a) expressly states that a "motion for withdrawal of a case or proceeding shall be heard by a district judge." Putting these two provisions together, the Court of Appeals held:

After careful review we find the procedure established by Local Rule 9105-2(b) cannot be squared with the procedure established by 28 U.S.C. § 157(d), an “Act of Congress,” and Rule 5011(a), a “Federal Rule of Bankruptcy Procedure.” Fed. R. Bankr. Proc. 9029. At least two inconsistencies bear mentioning. First, Local Rule 9015-2(b) allows for the bankruptcy court to “withdraw[ ]” the jurisdictional reference, whereas 28 U.S.C. § 157(d) and Rule 5011(a) make it explicit that only a district court may “withdraw” the jurisdictional reference. See FTC v. First Alliance Mortg. Co. (In re First Alliance Mortg. Co.), 282 B.R. 894, 901 (C.D. Cal. 2001) (holding that “a motion [to withdrawal] is heard by the district court”) (emphasis added). Second, Local Rule 9015-2(b) permits a party to obtain a withdrawal of the reference upon a “Motion for Certification,” while 28 U.S.C. § 157(d) and Rule 5011(a) make it clear that a party may only obtain a withdrawal of the reference upon a “Motion for Withdrawal.” See Hawaiian Airlines, Inc. v. Mesa Air Group, Inc., 355 B.R. 214, 218 (D. Hi. 2006) (holding that “a litigant who believes that a certain [action] or portion of a [action] pending in the bankruptcy court should be litigated in the district court may make a motion to withdraw the reference”) (emphasis added).

Having invalidated the Local Rule, the Ninth Circuit found no error in the Bankruptcy Court’s decision not to adhere to it or to withdraw the reference. The Court of Appeal then considered whether the Seventh Amendment jury trial right itself required immediate transfer to the District Court, even for pre-trial proceedings. The Ninth Circuit agreed with courts outside the circuit that, it stated, had universally agreed that a jury trial right "does not mean that the bankruptcy court must instantly give up jurisdiction and that the case must be transferred to the district court."

Concluding that the Bankruptcy Court properly retained the case for pre-trial matters, the Ninth Circuit did ultimately reverse its grant of summary judgment. It found that Sigma had raised genuine issues of material fact on its ordinary course of business defense under the version of Section 547(c)(2) of the Bankruptcy Code in force prior to the amendments made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.

What About Local Rules In Other Courts? It appears that the Northern District of California’s local bankruptcy rule on certification of a jury trial right and transfer to the District Court is unusual. Some bankruptcy courts, including the District of Delaware and the Southern District of New York, have no specific rule addressing withdrawal of the reference based on a jury demand. Others require a prompt motion for withdrawal of the reference to be filed with the District Court, as provided in Central District of California Local Bankruptcy Rule 9015-2(g). 

Conclusion. Although it appears that the decision’s direct impact is limited to the Northern District of California and its jury demand procedures, this case proves that even well-established local rules will be struck down if inconsistent with governing statutes. That’s a pretty extraordinary outcome for an ordinary course of business preference case. 

Business Bankruptcy Issues Recent Developments

New Developments In The Cayman Islands Hedge Fund Chapter 15 Case

In a post earlier this month, I reported on the August 30, 2007 decision by Judge Burton R. Lifland of the U.S. Bankruptcy Court for the Southern District of New York denying Chapter 15 recognition to foreign proceedings pending in the Cayman Islands for two Bear Stearns hedge funds. In the August decision (available here), the Bankruptcy Court held that although the two hedge funds were organized under the laws of the Cayman Islands, their business operations were in New York and not in the Cayman Islands, which essentially served as a "letter box."

The Involuntary Bankruptcy Option. After denying recognition, the Bankruptcy Court indicated that an alternative path would be for the foreign representatives to file an involuntary bankruptcy petition. The Bankruptcy Court noted that Section 303(b)(4) of the Bankruptcy Code, permitting a foreign representative to file an involuntary bankruptcy petition, had not been repealed when Chapter 15 was enacted. The foreign representatives were given time to pursue that option.

An Amended Opinion To Note An Inconsistency. A few days later, on September 5, 2007, Judge Lifland issued an amended opinion (available here) adding an interesting footnote on that very issue. In it, he suggested that the failure to repeal the involuntary bankruptcy provision may have been a mistake. Here’s the new footnote 15 to the amended opinion:

It would appear that the failure to repeal section 303(b)(4) along with section 304 may be a drafting error in view of the newly enacted section 1511(b) which likewise addresses the commencement of a case under sections 301 and 303. The inconsistencies of the two statutes have not been conformed.

The footnote did not change the decision but it raises a question whether the filing of an involuntary case after denial of Chapter 15 recognition is consistent with the intent of Chapter 15’s changes to the Bankruptcy Code. If the failure to repeal that section was truly a mistake, fixing it would mean that without Chapter 15 recognition, a foreign representative couldn’t obtain any bankruptcy protection in the United States.

The Foreign Representatives File A Motion For Stay Pending Appeal. On September 21, 2007, the foreign representatives for the two hedge funds filed an appeal from the decision and also a motion for stay pending appeal (click on link for a copy). The motion sought to have the order dissolving the stay of litigation against the two funds itself stayed until the appeal is resolved. In addition to arguing that the Bankruptcy Court’s decision was in error, the motion stated that the involuntary bankruptcy option was too expensive and could subject the hedge funds to competing main proceedings, one in the United States and one in the Cayman Islands, each with their own legal obligations.

Conditional Stay Granted Pending Appeal. According to media reports, at a hearing held on September 24, 2007, the Bankruptcy Court granted the motion to stay subject to the return to the United States of funds that had been transferred to the Cayman Islands in connection with the foreign proceedings. Stay tuned.