Orrick Wins S.D.N.Y. Dismissal of Chapter 15 Appeal by Purported Shareholder on Standing and Equitable Mootness Grounds

In an April 6, 2018 memorandum opinion and order, U.S. District Judge John G. Koeltl dismissed an appeal challenging the Chapter 15 recognition of a Cayman Islands restructuring of an offshore drilling contractor, holding that the appellant lacked standing and that the appeal was equitably moot. See In re Ocean Rig UDW Inc., No. 17-cv-7222 (JGK), 2018 WL 1725223 (S.D.N.Y. Apr. 6, 2018).

The appeal was brought by a purported shareholder of debtor Ocean Rig UDW Inc. (“UDW”). The purported shareholder sought review of an order issued by U.S. Bankruptcy Judge Martin Glenn granting recognition of provisional liquidation and scheme of arrangement proceedings in the Cayman Islands of UDW and three of its subsidiaries (Drill Rigs Holdings Inc. (“DRH”), Drillships Financing Holding Inc. (“DFH”), and Drillships Ocean Ventures Inc. (“DOV”), collectively the “Debtors”) as “foreign main proceedings” under section 1517 of the Bankruptcy Code.

In the ancillary proceedings in the Bankruptcy Court, the appellant had opposed the Debtors’ petition for recognition on numerous grounds, including on the basis that venue was improper in the Southern District of New York, that the Debtors failed to meet their burden of proving that their center of main interests (“CoMI”) was in the Cayman Islands, that the Debtors improperly manipulated their CoMI, and that granting recognition would violate the public policy objectives of Chapter 15. The Bankruptcy Court overruled the objections of the purported shareholder and granted recognition and other related relief under sections 1520 and 1521 of the Bankruptcy Code. See In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017).

Appellant noticed an appeal but did not seek a stay of the recognition order. Thus, the Debtors moved forward with their restructuring via four interrelated schemes of arrangement under Cayman Islands law (the “Schemes”). The Schemes involved the exchange of more than $3.7 billion of existing financial indebtedness for $450 million in new secured debt, approximately $288 million in cash payments, and new equity in UDW. Under the Schemes, existing shareholders of UDW retained a nominal amount of equity in the reorganized UDW (0.02%), but this token amount was provided solely to facilitate UDW’s ability to maintain its NASDAQ listing and was not an indication of UDW’s solvency; in fact, the indicative value of the consideration distributed to the scheme creditors was significantly less than the face amount of their claims.

Appellant did not object to the provisional liquidation proceedings or the Schemes, which were later sanctioned (i.e., approved) by the Grand Court of the Cayman Islands. Similarly, appellant did not object to the request in the Chapter 15 proceedings for entry of an enforcement order, and the Bankruptcy Court ultimately issued an order giving full force and effect to the Schemes in the United States. Promptly upon the Bankruptcy Court’s issuance of the enforcement order, the Debtors consummated the restructuring in accordance with the Schemes.

Meanwhile, in the District Court, the Debtors and their authorized foreign representative moved to dismiss the appeal, arguing that the appellant’s purported shareholder status was insufficient to give her appellate standing, and that in any event, her appeal had been rendered equitably moot by the consummation of the restructuring. The District Court granted the motion on both grounds.

Standing

As to standing, the District Court reiterated the two-pronged standard that the appellant in a bankruptcy case (1) must be an “aggrieved person” whose pecuniary interests are directly affected by the order at issue; and (2) must have “prudential standing,” in that he or she is asserting his or her “own legal rights and interests and not those of third parties.” Ocean Rig, 2018 WL 1725223, at *3. In discussing the latter prong, the District Court observed that “[p]rudential standing is particularly important in a bankruptcy context where one party may seek to challenge the plan based on the rights of third parties who favor the plan.” Id.

The District Court held that the appellant, a purported shareholder, was not an “aggrieved person” because she “did not stand to lose anything” from UDW’s restructuring. Id. The District Court reasoned that UDW was insolvent prior to initiating restructuring proceedings in the Cayman Islands, and that UDW’s Cayman Scheme had the effect of sending the “total value of UDW, represented by the new equity” to “UDW’s creditors pro rata, with no value left for its pre-restructuring shareholders.” Id. Thus, the appellant lacked the requisite pecuniary interest. Id.

Additionally, the District Court rejected the appellant’s argument that she had a pecuniary interest in the restructuring because UDW’s Scheme gave 0.02% of UDW’s newly issued equity to pre-restructuring shareholders. Id. at *4. Upon observing that UDW’s Scheme was constructed in that manner “in an effort to avoid having to re-register UDW’s shares on the NASDAQ, which would have ‘adversely affected’ the newly issued shares”—rather than because the pre-restructuring shareholders were actually entitled to the newly issued shares on account of their pre-restructuring holdings—the District Court held that the shares were merely “gifts” from UDW’s creditors. Id. The District Court then concluded that the nominal distribution of new equity to preexisting shareholders did not suggest that the Debtors were solvent, and did “not change the fact that the appellant was not entitled to receive anything as part of the debtors’ restructuring because the debtors’ creditors had not received the full portion of their claims.” Id.

The District Court further observed that while under the Second Circuit’s decision in In re DBSD N. Am., Inc., 634 F.3d 79, 95 (2d Cir. 2011), a dissenting class of unsecured creditors in a Chapter 11 case “may have standing to challenge such ‘gifts’ to shareholders,” appellant had provided no authority that the receipt of such a gift “provide[d] the recipient shareholders with standing to contest the restructuring.” Ocean Rig, 2018 WL 1725223, at *4.

Equitable Mootness

The District Court also held that dismissal was warranted on equitable mootness grounds, which it considered an independent and “additional reason” for dismissal. Id. Although the District Court recognized that the doctrine of equitable mootness originated in Chapter 11 of the Bankruptcy Code, it noted that the doctrine had since been imported and applied in cases under Chapters 7, 9, and 13, as well as in a case involving former Bankruptcy Code section 304, the predecessor statute to Chapter 15. Id. (citing, e.g., Allstate Ins. Co. v. Hughes, 174 B.R. 884 (S.D.N.Y. 1994) (Sotomayor, J.)). The District Court found “unpersuasive” appellant’s argument that equitable mootness cases under Chapter 11 former Bankruptcy Code section 304 have no force in the Chapter 15 context, reasoning that the same “principles of finality and fairness” that pertain to “domestic organizations” and the same “concerns of comity” that animated former section 304 apply in the chapter 15 context. Id. at *6.

The District Court thus applied Second Circuit’s established equitable mootness standard to this Chapter 15 appeal. Id. at *5. Under that standard, “when a reorganization has been substantially consummated, there is a ‘strong presumption’ that an appeal of an unstayed order is moot.” Id. (collecting cases). Such presumption may only be overcome if five circumstances are present:

(a) the court can still order some effective relief; (b) such relief will not affect the re-emergence of the debtor as a revitalized corporate entity; (c) such relief will not unravel intricate transactions so as to knock the props out from under the authorization for every transaction that has taken place and create an unmanageable, uncontrollable situation for the Bankruptcy Court; (d) the parties who would be adversely affected by the modification have notice of the appeal and an opportunity to participate in the proceedings; and (e) the appellant pursue with diligence all available remedies to obtain a stay of execution of the objectionable order . . . if the failure to do so creates a situation rendering it inequitable to reverse the orders appealed from.

Id. (quoting Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay, Corp.), 10 F.3d 944, 952-53 (2d Cir. 1993)).

In setting forth the Chateaugay standard, the District Court emphasized the importance of the appellant seeking a stay of the order at issue, citing “fairness concerns” that arise from attempts to undo a reorganization that has already been substantially completed. Id.

In applying this standard, the District Court first observed that the appellant did not seek a stay of the Bankruptcy Court’s recognition order. Id. It then found that appellees had “argue[d] persuasively” that, on their restructuring effective date, their positions “comprehensively changed” and their “Cayman reorganization ha[d] been substantially completed.” Id. In particular, the District Court noted that the Debtors had “issued new equity and made cash distributions to creditors and entered into a new secured debt facility, as well as a long-term management services agreement.” Id. Given this change of circumstances, the District Court held there was a “strong presumption” that the appeal was moot on the ground that “the debtors’ reorganization has already been substantially completed.” Id. As the appellant failed to persuade the District Court that this “strong presumption” was overcome, the District Court dismissed her appeal as equitably moot. Id. at *6.

*          *          *

If you have any questions about any of the topics discussed in this opinion, please contact your Orrick attorney or any of the following attorneys:

Evan Hollander, Daniel Rubens, and Emmanuel Fua.

Orrick Continues to be Ranked a Top Bankruptcy and Restructuring Firm by The Deal

 

The Deal has published its 2017 bankruptcy and out-of-court restructuring league tables and again ranked Orrick as a top bankruptcy and restructuring law firm. The firm ranked:

Orrick’s Restructuring group has consistently earned an inclusion in the top ten bankruptcy legal advisor rankings in each quarter since 2015.

“We’re proud of Orrick’s continued top rankings in the Deal, which places us among the top tier bankruptcy firms internationally. Our rankings reflect the global nature of our work on some of the most complex bankruptcies and out of court restructurings of the year for both debtors and creditors”, said Raniero D’Aversa, Orrick’s Restructuring Practice Group Leader.  The group handled several high profile restructurings and bankruptcies in 2017, including the precedent setting $3.7 bn international restructuring for drill ship operator Ocean Rig, which included a Chapter 15 filing in New York and schemes of arrangement under Cayman Island law. Orrick also advised Toyota Motor Corporation in connection with its exposure in the highly publicized restructuring of airbag manufacturer Takata. The group also handled a unique bankruptcy proceeding involving tech start-up Lily Robotics, and advised lender groups and boards in the CHC and Seadrill bankruptcy cases. Other key matters have included advising creditors or trustees in major international restructurings for South Africa’s largest retailer, Edcon, French digital media group SoLocal, as well as French retailer Vivarte, among others.

The Deal’s Bankruptcy League Tables are the industry’s only league tables focused solely on active bankruptcy and out-of-court-restructuring cases. These rankings are compiled on a quarterly basis through comprehensive deal intelligence to identify the top law, crisis management, investment, and non-investment firms and professionals involved in bankruptcy transactions throughout the United States.  Firms are ranked based on advice provided to creditors, debtors and out-of-court restructurings.

The Rule in Gibbs: Safeguarding Creditors’ Rights or Aiding and Abetting “Hold Out” in Foreign Insolvencies?

There is an English common law rule that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. This rule is derived from a Court of Appeal case: Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

The rule has been heavily criticised. Many do not consider it to be relevant in modern day cross-border insolvency proceedings following the continuing trend towards recognition of foreign insolvency proceedings (and their effects). As explained further below, some commentators see the rule as assisting creditors to “hold out” from participating in collective insolvency measures which are designed to benefit the creditor class as a whole.

The English court recently had the opportunity to review whether Gibbs still applied in Bakhshiyeva v Sberbank of Russia [2018] EWHC 59 (Ch). The court considered an application by a foreign representative to the English court on behalf of a debtor, International Bank of Azerbaijan, for a permanent stay on a creditors’ enforcement of claims in England under an English law governed contract contrary to the terms of the foreign insolvency proceeding. Under local law, the English creditors were purportedly bound. The Azerbaijani proceedings were not “terminal” liquidation proceedings and therefore, any stay would need to apply beyond the duration of the proceedings to properly bind the English creditors and to permanently give effect to the insolvency proceedings.

The foreign proceedings were conducted in Azerbaijan and had been recognised in England under the Cross-Border Insolvency Regulations 2006 (the “CBIR“) (implementing UNCITRAL Model Law). The CBIR are a procedural mechanism whereby foreign insolvency proceedings (conducted outside the EU) can be recognised and foreign representatives can seek “assistance” from courts in other jurisdictions to effect the insolvency proceedings (subject to any restrictions on the exercise of such power under local law).

The English High Court found that the rule in Gibbs did apply to prevent the court granting a permanent (or indefinite) stay on the enforcement of creditors’ English law governed contractual claims. Any stay granted by the court would be more than simply procedural and would go to the substance of creditors’ claims – the court would, in effect, be ordering the discharge of the creditor’s claim and was prohibited from doing this, following the rule in Gibbs.

The message for creditors with English law claims which are purportedly extinguished under a foreign (non-EU) insolvency process is therefore, to adopt a “hold out” position. Following the expiry of the foreign proceedings (and any related stay on creditor action), objecting creditors may then take steps to enforce English law governed contractual claims provided however, that they have not participated in the foreign insolvency proceedings (they may otherwise be deemed to have accepted the jurisdiction of the foreign proceeding).

We note many holders of English law governed bonds issued by the Greek government adopted a “hold-out” strategy knowing that the English courts would not recognise any provision of Greek law extinguishing or amending the sovereign debt.

The “territorial” nature of the rule in Gibbs is, arguably, “out of step” with trends in modern insolvency law. In the US, for example, in proceedings under Chapter 15 of the Bankruptcy Code (the US statute adopting UNCITRAL Model Law) (“Chapter 15“), US courts have enforced foreign court judgements made in foreign proceedings, including judgements which alter or vary US law governed debts or claims. Chapter 15 does however, include important public policy protections for creditors designed to forestall recognition of clearly abusive procedures.

The US has a longstanding policy of recognising restructurings of US law governed financings of foreign companies. The Supreme Court’s 1883 decision in the famous Gebhard case (Canada Southern Railway Co v Gebhard [1883] 109 US 527) set the precedent for US recognition of foreign restructuring processes in which Chief Justice Waite endorsed the recognition of the implementation of a Canadian scheme of arrangement with the words “under these circumstances the true spirit of international comity requires that schemes of this character, legalised at home, should be recognised in other countries“.

The “public policy” exception to recognition under Chapter 15 only applies in “exceptional circumstances” and includes, for example, circumstances where a creditor was denied due process and notice of the foreign insolvency proceedings of the debtor; and the denial of privacy rights. The fact that a creditor may make a more limited recovery, and the fact that the substantive law of the insolvency proceeding was not the same as US law, were not held to be “manifestly contrary” to public policy.

We note the Gibbs rule has been disapplied in the context of EU insolvency proceedings, on the basis that English courts recognise the jurisdiction of courts in respect of insolvency proceedings in Member States under the European Insolvency Regulation (“EIR“); and similar “public policy” exceptions apply. It is difficult to justify the radically different approach English courts take to non-EU insolvency proceedings particularly given the UK’s recent decision to leave the EU.

Our view is that as part of any withdrawal treaty of the UK from the EU, the parties should look to negotiate a process for mutual recognition of insolvency proceedings based on the EIR “recognition” approach. Looking outside of its relationship with the EU, it would also seem sensible for the UK to look to adopt an approach similar to US Chapter 15, for the UK courts to recognise foreign insolvency proceedings with safeguards for creditors to avoid the application of such rules only if limited public policy reasons exist to void the application of the foreign insolvency proceedings. The English court will want to avoid “re-litigating” issues dealt with under foreign insolvency proceedings, and should not examine actual recoveries made by creditors. However, a carve out on “public policy” grounds could protect English creditors if it captured circumstances where the process was evidently “discriminatory” to foreign (English) creditors.

We acknowledge there are strong arguments to retain the Gibbs rule. By entering an English law contract, creditors may feel strongly that they wish to retain the impartiality, commerciality and due process English courts are well known for.

As we near BREXIT, in this issue as in so many others, the UK has a decision to make: adopt English “exceptionalism” or take a more ‘universalist’ view implied by the recognition of foreign insolvency proceedings exemplified by the current arrangements under the EIR? The choice is looming.

Second Circuit Overturns Ruling on Cram-Down Interest Rates in Momentive

 

 

  • Adopts Sixth Circuit Test for Selecting Interest Rate
  • Affirms District and Bankruptcy Court Determinations Regarding Senior Debt Status and Disallowing Make-Whole Payments
  • Rejects Debtor’s Equitable Mootness Argument

On October 20, 2017, the Second Circuit issued its long awaited ruling[1] on several appeals from a U.S. District Court (Bricetti, J.) determination affirming the United States Bankruptcy Court (Drain, J.) in the MPM Silicones, L.L.C. (“Momentive”) bankruptcy case.[2]   The Second Circuit rejected the lower court rulings applying a “formula rate” of interest to cram-down paper issued to senior secured lenders under the Momentive plan of reorganization and remanded the case to the bankruptcy court with instructions to apply an “efficient market rate” of interest if one could be ascertained.  READ MORE

Recast EU Insolvency Regulation Comes into Force

 

On 26 June 2017, the Recast EU Insolvency Regulation (Council Regulation (EC) No. 2015/848) came into force. It will apply to all relevant insolvency proceedings (although existing and ongoing proceedings will continue to be bound by the EU Insolvency Regulation (Council Regulation (EC) No. 1346/2000) (the “EIR”)). The Recast EU Insolvency Regulation will have direct effect in all EU member states (except Denmark).”

The Recast EU Insolvency Regulation is an update of the EIR following ten years of insolvency practice and experience since the EIR’s implementation. Largely, it represents a codification of well-established insolvency practice developed across the EU under the EIR however, it also introduces new innovative steps which, it is hoped, mark a step forward in light of learnings under the EIR to address perceived issues or “gaps” in existing legislation. READ MORE

Orrick Assists in the Restructuring of Leading French Digital Media Group SoLocal

Orrick assisted GLAS Trust Corporation Limited in the recent financial restructuring of SoLocal Group S.A., the leading French provider of digital local media and marketing.

The main creditors involved were the lenders of around €835 million in senior secured bank debt and the holders of €350,000,000 8.875% senior secured notes due 2018 (the “Notes”). The restructuring agreed between the company, its shareholders and its creditors involved a partial cash prepayment of debt and a swap for new notes, warrants, convertible notes and equity. Shareholders received three free shares for every two existing ones held. Overall the restructuring resulted in a two-thirds reduction in debt (from €1.158 billion to €398 million) and greatly reduced leverage ratio. READ MORE

Debtwire European Distressed Debt Market Outlook 2017

 

The 2017 Debtwire European Distressed Debt Outlook report surveyed 100 distressed investors and 30 private equity funds to establish the outlook for 2017.  Jointly sponsored by Orrick and Greenhill, the report predicts that European restructurings will hit their next peak in 2017, with respondents citing interest rate rises (22%), geopolitical conflict (21%) and Brexit (16%) as the most important macroeconomic factors driving this trend.  READ MORE

The Gorsuch Nomination: The Return of the Business Friendly Court?

 

President Donald Trump nominated Judge Neil Gorsuch, a federal appellate judge on the Tenth Circuit Court of Appeals, to fill the Supreme Court seat of Justice Antonin Scalia. Our Supreme Court and appellate team, led by partner Bob Loeb, took a look at Judge Gorsuch’s track record as a judge on key business issues like securities litigation, arbitration and bankruptcy, to speculate on his future as a potential justice. To read the full article, please click here.

Orrick’s Marc Levinson Compares Chapter 9 to Chapter 11 for the Federal Judicial Center Website

 

Orrick Restructuring Senior Counsel Marc Levinson is one of the chapter 9 experts assisting in the preparation of a chapter 9 manual for bankruptcy judges and court clerks that has been posted on the website of the Federal Judicial Center, an arm of the United States Courts which educates federal judges.  Among other things, the manual will discuss the differences between chapter 9 and chapter 11 bankruptcies. The below video comparing chapter 9 v. chapter 11 was prepared at the FJC’s request that Marc draw upon his experience representing the cities of Stockton and Vallejo, California, in their chapter 9 cases. It has been posted on the FJC’s website, but note that access to the video on that website is restricted to judges. READ MORE

Supreme Court Hears Oral Argument in Jevic on Whether Distribution of Settlement Proceeds May Depart From Statutory Priority Scheme

 

The United States Supreme Court heard oral arguments on December 7, 2016 in Czyzewski v. Jevic Holding Corp. The case poses a question that has divided the Second, Third, and Fifth Circuits: Whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that departs from the statutory priority scheme in the Bankruptcy Code, including through a so-called “structured settlement.” READ MORE