Recent Developments

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Business Bankruptcy Issues Recent Developments

In New Ruling, Northwest Airlines Court Decides Whether Ad Hoc Committee Of Hedge Funds May File Details Of Their Trades Under Seal

The Northwest Airlines Disclosure Decision. In a post last week, I discussed the Bankruptcy Court’s decision in the Northwest Airlines Chapter 11 case requiring the members of an Ad Hoc Committee of Equity Security Holders to disclose detailed information about the amounts of claims or stock owned by the Committee’s members, when they acquired it, how much they paid for it, and when they sold or otherwise disposed of any of their holdings.

Rule 2019: Not So Arcane Anymore. The Bankruptcy Court based its decision on Federal Rule of Bankruptcy Procedure 2019. The rule, rarely discussed in articles or blogs, provides in part:

[E]very entity or committee representing more than one creditor or equity security holder . . .  shall file a verified statement setting forth (1) the name and address of the creditor or equity security holder; (2) the nature and amount of the claim or interest and the time of acquisition thereof unless it is alleged to have been acquired more than one year prior to the filing of the petition; (3) a recital of the pertinent facts and circumstances in connection with the employment of the entity . . . ; and (4) . . . the amounts of claims or interests owned by the entity, the members of the committee or the indenture trustee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof.

Something Of A Bombshell. As a number of articles have discussed (for example, here and here), the decision was significant because hedge funds and other investors in distressed debt and equity securities have been taking major roles in some of the largest Chapter 11 bankruptcy cases, including through ad hoc committees. Loathe to disclose their trading information, some wonder whether hedge funds will continue to be as active in bankruptcy cases. Hedge funds have been such important players in distressed situations that any retreat from their often leading role could have a big impact on Chapter 11 cases.

Decision Results In A Flurry Of Paper. The Bankruptcy Court’s decision set in motion a series of additional court filings. (You can access these pleadings by clicking on the following links.)

  • In response to the Bankruptcy Court’s decision, the Ad Hoc Committee filed a motion for permission to file the trading information under seal rather than publicly, including not disclosing it to the Debtors or the Official Committee of Unsecured Creditors. They strenuously argued that their trading information was trade secret and confidential commercial information that should be protected under Section 107(b) of the Bankruptcy Code and Bankruptcy Rule 9018, two provisions that permit the sealing of the record under certain circumstances. 
  • A number of other parties weighed in with objections or responses to the Ad Hoc Committee’s motion. These included the Debtors, the Official Committee of Unsecured Creditors, and the United States Trustee. These parties argued against sealing the Rule 2019 statement, contending that it was essential for the parties in the case to know what claims and interests the Ad Hoc Committee members held and the details of their acquisition costs.
  • In addition, Bloomberg News successfully moved to intervene in the case. Bloomberg contended that the Northwest Airlines case was of public significance and that "all aspects of it should be open to public scrutiny to the fullest extent possible." It argued that hedge funds "have become major sources of capital for distressed companies and now play a significant role in bankruptcy proceedings such as this one. The nature of the positions being taken by these key financial players, and the potentially conflicting interests they may hold in any given situation, raise the potential for precisely the types of abuse that led to adoption of Rule 2019 as a procedural device to ‘help foster fair and equitable plans free from deception and overreaching’" (quoting from the Bankruptcy Court’s prior decision).
  • The Ad Hoc Committee then filed a reply, continuing to argue for the sealing of the information, asserting that similar to real estate or car sales, the price paid is "probably the most confidential piece of information regarding the purchase of anything." 

The Court’s Ruling On The Motion To Seal. The Bankruptcy Court held a hearing on the motion on Wednesday, March 7, 2007, and announced that it would issue a ruling by Friday, March 9, 2007.  Friday afternoon, the Bankruptcy Court issued this decision, denying the motion to file the Rule 2019 disclosure under seal and requiring that it be filed within three business days. In reaching its decision, the Bankruptcy Court held as follows:

The Committee members do not advance their position when they compare themselves to car or real estate salesmen. It bears recalling that this Committee purports to control 27 percent of the outstanding stock of the Debtors and that it has repeatedly asked the Court to give credibility to its claims that the Debtors’ equity has substantial value, that the Debtors’ management has wrongfully undervalued the equity, and that it intends to mount a contest as to the valuation of these Debtors. By acting as a group, the members of this shareholders’ Committee subordinated to the requirements of Rule 2019 their interest in keeping private the prices at which they individually purchased or sold the Debtors’ securities. This is not unfair because their negotiating decisions as a Committee should be based on the interests of the entire shareholders’ group, not their individual financial advantage. Their counsel admitted at oral argument of this motion that in negotiations between a committee and other parties in interest, the question is whether a tranche is being treated fairly, not the price at which individual members might be induced to sell. If that is so, and it should be, it cannot harm the legitimate interests of members of an ad hoc committee to put pricing information on the table.

In any event, any interest that individual Committee members may have in keeping this information confidential is overridden by the interests that Rule 2019 seeks to protect. Rule 2019 protects other members of the group – here, the shareholders – and informs them where a committee is coming from by requiring full disclosure of the securities held by members of the committee and the respective purchases and sales. This Committee contends that it did not take on any fiduciary responsibility to the shareholders as a group when it appeared in these cases. Assuming, arguendo, for purposes of this motion that the Committee does not act as a fiduciary, Rule 2019 is based on the premise that the other shareholders have a right to information as to Committee member purchases and sales so that they make an informed decision whether this Committee will represent their interests or whether they should consider forming a more broadly-based committee of their own. It also gives all parties a better ability to gauge the credibility of an important group that has chosen to appear in a bankruptcy case and play a major role.

The utility to other shareholders of information as to the purchases and sales made by members of this Committee is underscored by two facts of record. First, it has been disclosed that Committee members own a very significant amount of debt, as well as stock. Rule 2019 is based on the premise that other shareholders have a right to know whether the debt purchases were made at the same time as the purchases of stock, a fact that might raise questions as to divided loyalties. Second, each of the three representative Committee members admits in his declaration that he might decide to sell out at any time. [record references omitted] The possibility that members of an ad hoc committee will sell and leave a group without a representative is exactly why there are disclosures required under Rule 2019. Rule 2019 gives other members of the class the right to know where their champions are coming from. Granting the motion to seal would scuttle the Rule.

Hedging Your Bets. Over the past several years, hedge funds, like other creditors and equity investors, have been able to play an even more significant role in Chapter 11 cases by participating in ad hoc and official bankruptcy committees. The Bankruptcy Court’s decision will certainly give hedge funds, and perhaps claims buyers generally, pause before they agree to form unofficial committees or join official ones. Although it’s possible that these investors will become more comfortable disclosing this information over time, that seems unlikely.

  • Hedge funds with large stakes in the debt or equity of a particular company will likely still act aggressively to advance their interests, but those with smaller positions may not find the expense of individual representation justified.
  • Even those with big stakes may be more likely to act on their own, rather than through a committee, to avoid facing the prospect of full Rule 2019 disclosures. 
  • If these investors step back from participating in committees, it could in turn reduce their collective influence in bankruptcy cases — one of the reasons they formed committees in the first place.
  • While it’s still too early to tell, if followed by other courts, this decision has the potential to lead to major changes both in how hedge funds and other investors participate in Chapter 11 bankruptcy cases and in the impact they have on them.

It Might Not Be Over. In what could be a sign of things to come, the Bankruptcy Court also granted a separate motion by the Ad Hoc Committee extending its time for filing an appeal from the earlier ruling. In addition, certain members of the Ad Hoc Committee filed their own motion for reconsideration of the Bankruptcy Court’s Rule 2019 order from last week, asking for a hearing on that motion sometime after a March 19, 2007 response deadline. To add to the mix, although the Ad Hoc Committee withdrew its motion for an official equity committee, it has separately filed a motion for appointment of an examiner.

Stay Tuned. With this much going on, I plan to make additional posts on the disclosure issue as events warrant. You’re welcome to subscribe to the blog to receive updates directly via email or RSS.

 

Business Bankruptcy Issues Recent Developments

Retail Bankruptcies: New Article Examines How The 2005 Bankruptcy Code Amendments Have Impacted Retailers

I wanted to let you know about a new article recently published in the New York Law Journal by my colleagues Lawrence Gottlieb, the Chair of the Cooley Godward Kronish Bankruptcy & Restructuring Group, and Seth Van Aalten.

Entitled "Is The Death Knell Sounding For Retail Reorganizations?," it examines how the changes made by the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (also known as BAPCPA) have significantly affected the ability of retailers to reorganize under Chapter 11 of the Bankruptcy Code. (A PDF version of the article is available here as part of a New York Law Journal special report on corporate restructuring and bankruptcy.)

The article discusses, among other issues, the impact on a retailer’s liquidity of the new 210 day limitation on the time to assume or reject commercial real estate leases, the new "20 day goods" administrative claim, amended utility deposits requirements, increased employee priority amounts, and changes involving ad valorem taxes.

It makes for very interesting, if troubling, reading for retailers and their vendors, as well as anyone else with a stake in the reorganization prospects of these businesses.

Business Bankruptcy Issues Recent Developments

Appointment Of Interim Trustee Before Section 546’s Two-Year Statute Of Limitations Expires Insufficient To Extend Period For Bringing Preference Actions

Scott Riddle over at the Georgia Bankruptcy Law Blog has an informative post on the decision by the U.S. Court of Appeals for the Third Circuit last week in the American Pad & Paper Company case. The case involved Section 546(a) of the Bankruptcy Code, which extends the standard two-year statute of limitations for bringing preference and other avoidance actions by up to one additional year if, before the two-year period expires, a trustee is appointed or elected.

The Third Circuit’s Holding. In short, the Third Circuit decided that the appointment during this two year window of an interim trustee under Section 701 of the Bankruptcy Code does not trigger the additional one year extension. Instead, the Third Circuit held that Section 546(a)(1)(B) specifically refers to Section 702 of the Bankruptcy Code and not Section 701. As a result, in a Chapter 7 case, a permanent trustee must be appointed or elected under Section 702, before the two-year period expires, for the one year extension to kick in. 

When Does This Come Up? Although not an everyday occurrence, this situation can arise when a case originally filed under Chapter 11 is converted to Chapter 7 after almost two years. In the American Pad & Paper Company case, the selection of a permanent trustee under Section 702 was delayed (the creditors decided to elect a permanent trustee instead of letting the interim trustee become the permanent trustee), resulting in the expiration of the two-year statute of limitations before it could be extended for one additional year. The impact? The court held that the permanent trustee’s preference actions were all time-barred.

What Creditors Should Watch For. Defendants in preference or other avoidance actions in cases that were converted to Chapter 7 after a couple of years in Chapter 11 should carefully review the sequence of events surrounding the trustee’s appointment to see if the statute of limitations expired. Likewise, if a Chapter 11 case converts to Chapter 7 more than two years after the case was originally filed (technically, after the "order for relief" was entered), and no preference actions were brought in the Chapter 11 case, the trustee will be barred by the statute of limitations from bringing any avoidance actions. 

Business Bankruptcy Issues Recent Developments

Do Hedge Funds Have To Disclose Their Trades If They Form A Bankruptcy Committee?

In recent years, hedge funds and other investors in distressed debt or the equity securities of bankrupt companies have taken active roles in Chapter 11 bankruptcy cases. Often, these investors form unofficial or "ad hoc" committees. This post reports on a recent decision by a New York bankruptcy court in the Northwest Airlines case which, if ultimately enforced, could have a major impact on hedge funds, ad hoc committees, and Chapter 11 cases.

Ad Hoc Committees. Unofficial or ad hoc committees, much like official committees of unsecured creditors, equity security holders, retirees, or other constituencies, typically hire counsel and file motions and other pleadings during the course of a bankruptcy case. By acting as a group, the committee’s members not only share the costs of participating in the bankruptcy case but also have the ability to wield greater influence by acting collectively instead of on an individual basis.

The Rule 2019(a) Statement. After making an appearance in a bankruptcy case, these committees, their counsel, or both will typically file what’s known as a "Rule 2019(a) Statement." This is a public filing required by Rule 2019(a) of the Federal Rules of Bankruptcy Procedure, the set of procedural rules which, together with the United States Bankruptcy Code itself, govern the conduct of bankruptcy cases. Rule 2019(a) provides, in part, as follows:

[E]very entity or committee representing more than one creditor or equity security holder . . .  shall file a verified statement setting forth (1) the name and address of the creditor or equity security holder; (2) the nature and amount of the claim or interest and the time of acquisition thereof unless it is alleged to have been acquired more than one year prior to the filing of the petition; (3) a recital of the pertinent facts and circumstances in connection with the employment of the entity . . . ; and (4) . . . the amounts of claims or interests owned by the entity, the members of the committee or the indenture trustee, the times when acquired, the amounts paid therefor, and any sales or other disposition thereof.

The Ad Hoc Committee In Northwest Airlines. While seemingly a dry and arcane bankruptcy rule, it has recently become anything but in the Northwest Airlines Corporation Chapter 11 case. In January 2007, an Ad Hoc Committee Of Equity Security Holders first made an appearance in the case. Its thirteen members include hedge funds and other investment entities that collectively own more than 19 million shares of Northwest Airlines stock and approximately $265 million in claims. The Ad Hoc Committee sought discovery in the case and asked that an official committee of equity security holders be appointed (a request it recently withdrew). 

The Debtors Seek Additional Disclosure. In the course of litigating certain disputes, Northwest Airlines filed a motion seeking, among other relief, an order under Rule 2019 requiring the Ad Hoc Committee to disclose more detailed information about the amounts of claims or stock owned by the Committee’s members, when they acquired it, how much they paid for it, and when they sold or otherwise disposed of any of their holdings. In support, Northwest Airlines made this argument:

The Ad Hoc Committee remains a mystery to the Debtors and to all the other constituencies in the Debtors’ cases, yet it seeks to make an impact at this late stage of the Debtors’ reorganization. Without the proper disclosures, the Court should refuse to allow the Ad Hoc Committee to continue to cause serious delays to the Debtors’ reorganization efforts, and operate outside of the Bankruptcy Code and the Bankruptcy Rules.

The Ad Hoc Committee Opposes The Motion. The Ad Hoc Committee opposed the motion on several grounds, including that its Rule 2019 statement was proper in form, that the purpose of the rule is only to ensure that plans of reorganization are negotiated and voted on by those authorized to act for the real parties in interest, and that this purpose was satisfied by the form of the statement already filed.

The Northwest Airlines Court’s Rule 2019 Decision. On February 26, 2007, Judge Gropper issued his decision requiring the Ad Hoc Committee to file a Rule 2019 statement that provided the detailed information the Debtors had sought in their motion. The Court ruled that Rule 2019 applies to ad hoc or unofficial committees and rejected the Ad Hoc Committee’s argument that the prior Rule 2019(a) statement, which did not give detailed information about dates of trades and prices paid, was adequate.

The Ad Hoc Committee’s Further Motion. On March 1, 2007, the Ad Hoc Committee filed a motion for an order allowing the additional Rule 2019 statement to be filed under seal but asking that the Court stay its prior order pending further hearing. The Ad Hoc Committee argued that the trading information required under the Court’s order represented trade secrets and confidential commercial information and that, to its knowledge, no other committee or party had been required to file such information publicly in any other Chapter 11 case. The Ad Hoc Committee contended that requiring its members to make that disclosure would irreparably damage them, as other investors were not required to make such disclosures but some might use that information to inform their own trades.

The Court Grants The Ad Hoc Committee’s Motion. Later that same day, the Court granted the Ad Hoc Committee’s motion. The Court set a fast briefing schedule and a further hearing for March 7, 2007. I will plan to report on the resolution of that motion after the Court makes its decision.

Why This Matters. While disputes over disclosure are not always worthy of motions, multiple hearings, and blog postings, this case is different. Hedge funds and other buyers of distressed debt or stock in bankrupt companies carefully guard their trading information, especially the price they’ve paid. If ad hoc committee members will be required to disclose this information publicly, or perhaps even privately, they may choose not to participate in unofficial committees or generally may be dissuaded from becoming active participants in Chapter 11 cases. Hedge funds and other distressed debt traders have been deploying enormous amounts of money through second lien lending in distressed situations and directly in bankruptcy cases through the purchase of claims and stock. They have also regularly taken very active roles in major Chapter 11 cases. Any ruling with the potential to reverse or impact this trend would be big news indeed.

Business Bankruptcy Issues Recent Developments

The Supreme Court’s Recent Decision In Marrama: Any Insight Into Business Bankruptcy Issues?

On Wednesday the U.S. Supreme Court issued its decision in Marrama v. Citizens Bank of Massachusetts. The Supreme Court answered the question of whether an individual has an absolute right to convert a Chapter 7 bankruptcy case to a Chapter 13 "wage earner" bankruptcy case or whether that right can be conditioned on the absence of bad faith. This blog is focused on business bankruptcy issues, but knowing how the Supreme Court interprets the Bankruptcy Code on one issue can sometimes help in understanding how the Court may approach other issues.

The Core Issue. In Marrama, the Supreme Court interpreted the following language in Section 706(a) of the Bankruptcy Code:

The debtor may convert a case under this chapter to a case under chapter 11, 12, or 13 of this title at any time, if the case has not be converted under section 1112, 1208, or 1307 of this title. Any waiver of the right to convert a case under this subsection is unenforceable.

Many courts had read this language to give a debtor an absolute right to convert a case from Chapter 7 to another bankruptcy chapter, even if the case might thereafter be reconverted back to Chapter 7. (Grounds for such reconversion could include previous bad faith or other misconduct of the debtor while in Chapter 7.)  The ability to convert can make a big difference to debtors because Chapter 7 cases always involve the appointment of a trustee to take possession of the debtor’s non-exempt assets for liquidation, unlike cases under Chapters 11, 12, and 13 in which the debtor can often retain property and pay creditors over time.  

The Court’s Reasoning. The Supreme Court decided that another provision, Section 706(d), limited this right to convert by requiring that the debtor must be able to be a debtor under the other chapter of choice. Section 706(d) provides: "Notwithstanding any other provision of this section, a case may not be converted to a case under another chapter of this title unless the debtor may be a debtor under such chapter.” In Marrama, the Supreme Court held that a debtor who had acted in bad faith by concealing assets while in Chapter 7 could not qualify as a debtor under Chapter 13 because the Chapter 13 case would be dismissed "for cause" under Section 1307 of the Bankruptcy Code. The Supreme Court summarized its reasoning this way:

In practical effect, a ruling that an individual’s Chapter 13 case should be dismissed or converted to Chapter 7 because of prepetition bad-faith conduct, including fraudulent acts committed in an earlier Chapter 7 proceeding, is tantamount to a ruling that the individual does not qualify as a debtor under Chapter 13. That individual, in other words, is not a member of the class of ‘honest but unfortunate debtor[s]’ that the bankruptcy laws were enacted to protect. See Grogan v. Garner, 498 U. S., at 287. The text of §706(d) therefore provides adequate authority for the denial of his motion to convert.

A "Plain Language" Dissent. Interestingly, Justice Alito, joined by Chief Justice Roberts and Justices Scalia and Thomas, dissented. He found the majority’s interpretation of these sections to be strained and inconsistent with the plain meaning of the statutory language. As such, he believed that a debtor had an absolute right to convert out of Chapter 7 even if the case were subject to being reconverted after further proceedings.

Impact On Business Bankruptcy? It’s hard to see much direct impact on business bankruptcy cases from the decision, except perhaps in the very rare circumstance when a corporate debtor files a Chapter 7 but later seeks to convert the case to Chapter 11. However, the fact that four justices dissented on a "plain language" basis may be noteworthy. Many of the changes made by the recent Bankruptcy Abuse Prevention and Consumer Protection Act (also known as BAPCPA), including to business provisions, added language that appears to limit the exercise of discretion by bankruptcy judges. Perhaps the more interesting question, then, is whether the Marrama decision signals that the Supreme Court might consider loosening, if only slightly, the prevailing "plain language" interpretation of the Bankruptcy Code and allow judges to exercise more discretion than might otherwise be indicated by the language of the statute alone. Given that BAPCPA is less than 18 months old, we’ll probably have to wait a few years for an answer to that one.

Other Commentators On The Decision. Finally, when the Supreme Court issues a bankruptcy decision, a number of commentators write to share their perspectives. Scott Riddle of the Georgia Bankruptcy Law Blog was one of the first to report on the decision. Steve Jakubowski of The Bankruptcy Litigation Blog has an interesting post. In addition, John Pottow, a professor at the University of Michigan Law School, has an insightful post on the Credit Slips blog, as does Todd Zywicki, a professor at the George Mason University School of Law, over on The Volokh Conspiracy.

Business Bankruptcy Issues Recent Developments The Financially Troubled Company

The New Section 503(b)(9) Administrative Claim: The Latest On What Courts And Debtors Have Been Doing

A couple of months ago I posted on the new "20 day goods" administrative claim enacted as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 ("BAPCPA"). BAPCPA, which took effect in October 2005, added Section 503(b)(9) to the Bankruptcy Code giving vendors an administrative priority claim for "the value of any goods received by the debtor within 20 days before" the date the bankruptcy petition was filed, as long as "the goods have been sold to the debtor in the ordinary course of such debtor’s business." 

In my earlier post, I posed a number of unresolved questions about this new section and predicted that courts would soon start to address those issues. Well, in the past couple of months we have in fact seen decisions answering at least a few of the questions raised by Section 503(b)(9).

The First Court Decisions. In late December 2006, bankruptcy courts in the District of Delaware and the Eastern District of Pennsylvania issued what appear to be the first two decisions on when and under what circumstances Section 503(b)(9) administrative claims must or should be paid. As explained below, in both decisions the bankruptcy court held that the administrative claimant was not necessarily entitled to payment prior to, in a Chapter 11 case, confirmation of a plan of reorganization.

  • In the first decision, issued December 21, 2006, Judge Kevin Gross of the U.S. Bankruptcy Court for the District of Delaware denied a creditor’s motion for payment of a Section 503(b)(9) administrative claim in the In re Global Home Products, LLC Chapter 11 bankruptcy case. The court held that the timing of payment of administrative claims is left to the discretion of the court. In so doing the court quoted with approval from an article that described Section 503(b)(9) as a "rule of priority, rather than payment." The court relied on a non-Section 503(b)(9) decision for the three factors to assess when considering when an administrative claim should be paid, chiefly, (a) the prejudice to the debtor, (b) hardship to the claimant, and (c) potential detriment to other creditors. The court applied those factors and denied the creditor’s request for immediate payment.
  • In the second decision, issued a week later on December 28, 2006, Judge Eric Frank of the U.S. Bankruptcy Court for the Eastern District of Pennsylvania denied a motion for immediate payment of Section 503(b)(9) claims filed by several creditors in the In re Bookbinders’ Restaurant, Inc. Chapter 11 bankruptcy case. Although the debtor agreed that the creditors were entitled to allowance of a "20 day goods" administrative claim, it opposed the immediate payment of those claims. The court held that the timing of payment was a matter of the court’s discretion but agreed to hold an evidentiary hearing to consider evidence to guide the exercise of that discretion.

A Few Early Take-Aways. In both of these decisions, the courts held that they have discretion to defer payment until the end of a Chapter 11 bankruptcy case, when a plan of reorganization is confirmed.

  • Creditors who can establish that failing to pay their Section 503(b)(9) claim would cause them hardship, but not prejudice the debtor or other creditors, may still be able to obtain immediate payment. As these cases show, however, creditors will find it challenging to meet that standard.
  • Interestingly, the Bookbinders court rejected what it called an "equal protection" argument by the creditors, who asserted that they should be paid immediately because vendors delivering goods to the debtor post-petition were being paid on their administrative claims. The court drew a distinction between the two claims, explaining that the creditors delivering goods post-petition were paid not under Section 503(b) but instead under Section 363(c)(1) of the Bankruptcy Code. That latter section allows a debtor in possession or trustee to enter into post-petition ordinary course of business transactions, and to pay for them, without court approval.
  • Finally, DIP financing orders can impact the timing of paying Section 503(b)(9) claims. In some cases the DIP budget may not include funds to pay these claims and in others the DIP order may expressly prohibit their payment. Section 503(b)(9) creditors may want to review proposed DIP financing motions carefully with this in mind.

What Debtors Have Been Doing. In an attempt to exert a degree of control over Section 503(b)(9) claims, some debtors have filed motions seeking to establish procedures to handle these claims, not unlike the procedures used in past cases for reclamation claims. In the Seattle case of In re Brown & Cole Stores, LLC, for example, the debtor filed a motion for an order establishing procedures for Section 503(b)(9) claims. The court granted the motion and entered a Section 503(b)(9) procedures order which, among other things:

  • Required creditors to file Section 503(b)(9) claims by a special bar date;
  • Required the debtor to file a report evaluating such claims 21 days after the special bar date;
  • Gave creditors 15 days thereafter to file a reply to the debtor’s position;
  • Made the debtor’s position binding in the event a creditor did not timely respond; and 
  • Reserved to the court the right to resolve any disputes. 

The order effectively reserved the issue of when valid Section 503(b)(9) claims would be paid but made the procedures the exclusive method for determining the validity and amount of such claims. I expect that other debtors will pursue similar procedures for handling these "20 day goods" claims.

Don’t Touch That Dial. These early decisions are the first in what should be many future rulings on the questions posed by Section 503(b)(9). I’ll continue to update you on how courts are interpreting this new administrative claim and, over time, we should begin to see more clarity on how debtors, vendors, and courts will address this new BAPCPA provision.

Business Bankruptcy Issues Recent Developments

Chapter 15: The Bankruptcy Code’s New Cross-Border Insolvency Rules

Chris Laughton, a UK insolvency practitioner and publisher of InsolvencyBlog.com, has a number of recent posts on the adoption in the UK of the Model Law on Cross-Border Insolvency (“Model Law”), a 1997 effort by the United Nations Commission on International Trade Law (“UNCITRAL”). That got me thinking that I should post something on the recent changes to the U.S. Bankruptcy Code on cross-border insolvencies.

Chapter What? On October 17, 2005, as part of the Bankruptcy Abuse Prevention and Consumer Protection Act (known as "BAPCPA"), a new Chapter 15 of the Bankruptcy Code went into effect governing ancillary and other cross-border cases. (For those already familiar with ancillary proceedings, Section 304 of the Bankruptcy Code, which previously governed those proceedings, was repealed although many of its concepts have been retained in Chapter 15.)

Where Did Chapter 15 Come From? The main purpose of enacting Chapter 15 was to incorporate the Model Law as part of the Bankruptcy Code. 11 U.S.C. § 1501(a). My partner Adam Rogoff, who has had significant experience with international insolvency matters, has prepared a very helpful chart comparing Chapter 15 and the Model Law’s provisions. Also, because Chapter 15 so closely follows the Model Law, the Legislative Guide to Enactment of the UNCITRAL Model Law on Cross-Border Insolvency, prepared by the Model Law’s authors, is one of the most helpful guides to understanding the meaning of Chapter 15’s provisions.

Given that Chapter 15 is such a creature of statute, I’ve included more citations to the Bankruptcy Code than usual in this post. They are all in the format 11 U.S.C. § ___, which refers to Title 11 of the United States Code (the title of U.S. law that sets out the Bankruptcy Code) and then a particular section number. 

Who Uses Chapter 15? Chapter 15 is used principally by representatives of or creditors in foreign insolvency proceedings to obtain assistance in the United States, by a debtor or others seeking to obtain assistance in a foreign country regarding a bankruptcy case in the United States, or when both a foreign proceeding and a bankruptcy case in the United States are pending with respect to the same debtor. 11 U.S.C. § 1501(b). 

Learning A "Foreign" Language. Several important terms involving different types of foreign proceedings are key to understanding the scope of Chapter 15. 

  • A “foreign proceeding” means “a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debts in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.” 11 U.S.C. § 101(23). 
  • For purposes of Chapter 15, “debtor” means “an entity that is the subject of a foreign proceeding.” 11 U.S.C. § 1502(1). 
  • A "foreign main proceeding" means a foreign proceeding pending in the country where the debtor has the center of its main interests which, in the absence of contrary evidence, is presumed to be the location of the debtor’s registered office. 11 U.S.C. §§ 1502(4) and 1516(c). 
  • A "foreign nonmain proceeding" means a foreign proceeding, other than a foreign main proceeding, pending in a country in which the debtor has an “establishment,” defined as a place of operations where the debtor carries out a nontransitory economic activity. 11 U.S.C. §§ 1502(2) and (4). 

Getting Some Recognition:The Chapter 15 Process. Chapter 15’s basic procedure is straightforward. A case is commenced when a foreign representative files a petition for recognition of a foreign proceeding. 11 U.S.C. §§ 1504 and 1515(a). If properly filed, the bankruptcy court is entitled to presume that the facts stated in the petition are correct and the attached documents are authentic. 11 U.S.C. §§ 1516(a) and (b). As long as recognition would not be manifestly contrary to the public policy of the United States, the court must enter an order recognizing the foreign proceeding (here’s an example order). 11 U.S.C. §§ 1506 and 1517(a). 

Formal recognition is the key step that triggers the benefits of Chapter 15. If recognition is granted as a foreign main proceeding, the debtor receives important protections and rights similar to those available to U.S.-based debtors. Chief among these are the automatic stay provisions of Section 1520(a) of the Code, which invoke the automatic stay of Section 362 with respect to the debtor and its property within the territorial jurisdiction of the United States. 11 U.S.C. § 1520(a). Other sections invoked by Section 1520 (including Sections 363, 549, and 552) apply to transfers of interests of the debtor in property within the territorial jurisdiction of the United States. 11 U.S.C. § 1520(a)(2). Unless the court orders otherwise, the foreign representative may also operate the debtor’s business consistent with Section 363 and 552. 11 U.S.C. § 1520(a)(3). 

A Matter Of Discretion. Section 1521 gives the court discretion to grant other appropriate relief at the request of the foreign representative, including in foreign nonmain proceedings which, unlike foreign main proceedings, do not invoke Section 1520’s automatic stay. 11 U.S.C. § 1521(a). Under Section 1521(a), the court may, among other things, stay actions or proceedings concerning the debtor’s assets, rights, obligations or liabilities, stay execution against the debtor’s assets, and suspend the right to transfer or dispose of assets of the debtor. 11 U.S.C. §§ 1521(a)(1), (2), and (3). However, Chapter 15 contains certain limitations on the ability of a court to grant the discretionary relief provided by Section 1521:

  • Relief is available only “where necessary to effectuate the purpose of this chapter and to protect the assets of the debtor or the interests of the creditors.” 11 U.S.C. § 1521(a). 
  • Congress made such relief expressly subject to the “standards, procedures, and limitations applicable to an injunction.” 11 U.S.C. § 1521(e). The court has discretion to make any relief granted subject “to conditions it considers appropriate, including the giving of security or the filing of a bond.” 11 U.S.C. § 1522(b).
  • Section 1507 requires the court, in determining whether to give additional assistance to a foreign representative, to consider “whether such additional assistance, consistent with the principles of comity, will reasonably assure” achievement of five specific objectives retained nearly verbatim from former Section 304(c). 
  • These objectives include “just treatment of all holders of claims,” “protection of claim holders in the United States against prejudice and inconvenience,” “prevention of preferential or fraudulent dispositions of property,” “distributions of proceeds” substantially according to the Bankruptcy Code, and, where appropriate, the opportunity for a fresh start for an individual. 

Over There: Protection For U.S. Creditors And Debtors. The Model Law has been adopted in a number of other countries, including Japan, Mexico, Poland, Romania, South Africa, and the UK. According to this recent post on the InsolvencyBlog.com, foreign creditors (including U.S. creditors) are fully recognized in UK insolvency proceedings. Representatives of U.S. based debtors may also obtain protection in countries that have adopted the Model Law. The European Union, which has not yet adopted the Model Law, has its own cross-border insolvency regulation that applies to all EU countries except Denmark.

Check Your Local Listings. Although Chapter 15 and the Model Law have been designed to help coordinate cross-border bankruptcy and insolvency proceedings, these restructurings and liquidations are complex and often require parties to navigate through multiple country-specific insolvency schemes. If you find yourself involved in a cross-border bankruptcy, whether as a debtor, creditor, or a member of a committee, it’s usually critical to get legal advice from U.S. and appropriate foreign insolvency counsel.