Raniero D'Aversa

Partner

New York

rdaversa@orrick.com

Read full biography at www.orrick.com

Raniero D’Aversa is chair of Orrick’s Restructuring group. He is a market-leading practitioner in bankruptcies, out-of-court restructurings and creditors’ rights controversies and brings years of experience representing DIP lenders, secured lenders, bank groups and hedge funds in those capacities.

Ron is the designated restructuring counsel to many leading financial institutions such as The Royal Bank of Scotland, Bank of America, Citibank, Commerzbank, Toronto-Dominion Bank and The Bank of Nova Scotia. He has represented clients in bankruptcies, workouts, DIP loans, distressed debt transactions, bankruptcy litigation, derivatives and distressed acquisitions. Ron has represented interests of financial institutions and investors in such restructuring and bankruptcy cases as Ocean Rig, Seadrill, CHC Helicopter, Erickson, Indiana Toll Road, Pocahontas Parkway, Eagle Bulk, Spyglass Films, American Airlines, Republic Airlines, Chemtura Corporation, Quebecor, AbitibiBowater, North Las Vegas, Ritchie Risk-Linked Strategies, Star Diamond, Lehman and Mesa Airlines.

In the Restructuring (Including Bankruptcy): Corporate category of The Legal 500 US directory, Ron’s clients praise his “practical and strategic approach.” Another noted, “Each time I discuss an issue with [him], I am both amazed at his ability to understand my concerns and his complete knowledge of the subject. He puts me at ease and there is never a time that I cannot reach him.” Regarded as a leader in financial restructurings by clients and peers alike, Ron understands every phase of a bankruptcy and restructuring matter and knows how to effectively position a client to control opposition and maximize results.

Posts by: Raniero D'Aversa

Supreme Court Rules the Federal Government Must Pay Health Insurers’ Multi-Billion Dollar Risk Corridor Claims

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Insurance markets have been watching the Supreme Court’s docket for its ruling on whether the Federal Government must compensate some of health insurers’ losses. Today the Supreme Court ruled that the Federal Government must satisfy these obligations. Insurers and holders of their claims are expected to seek billions of dollars of compensation.

Section 1342 of the Patient Protection and Affordable Care Act attempted to mitigate risk for insurers who sold health insurance on federal insurance exchanges through a “risk corridor payment system” – during the first three years of the insurance exchanges’ operation, 2014 through 2016, insurers who profited from selling insurance on the exchanges transferred a share of their profits to the Federal Government, which was required to compensate other insurers whose costs exceeded the premiums they collected on the exchanges. However, in 2014 the Congress passed an appropriations bill that purported to limit these compensation payments, and a federal appeals court ruled that this and subsequent appropriation bills repealed or suspended the Federal Government’s obligation to make transfer payments to loss-making insurers. Some insurers’ losses reached billions of dollars.

Today the Supreme Court held that § 1342 imposed a direct legal obligation on the Federal Government to make risk corridor payments to loss-making insurers who had participated in the insurance exchanges, notwithstanding the Federal Government’s argument that § 1342 provided insufficient details for how the Federal Government should satisfy these obligations. The Court held that § 1342 does not require risk corridor payments to be budget-neutral, nor to permit partial satisfaction of the Federal Government’s obligations to insurers, and rejected arguments that an appropriations bill could implicitly repeal another statute’s express statutory language.

Investors who are interested in trading in insurers’ risk corridor claims should note that while the Supreme Court’s ruling appears to shelter risk corridor payments from any offsets or deductions by the Federal Government, there are further nuances they should understand concerning how the risk corridor payment program calculates claim amounts – and in how claim transfer agreements structure transferees’ rights.

Investors who want to capitalize on these developments should contact Raniero D’Aversa and Allison Citron of Orrick’s Restructuring group.

COVID-19-Related Defaults in European Leveraged Loans Could Create Opportunities for Distressed Investors

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Since the last financial crisis, borrowers and private equity sponsors have cut distressed investors out of most European leveraged loan deals. According to Reorg Debt Explained about 66% of European leveraged loans in 2019 restricted transfers to distressed investors.[1] But the recent economic turmoil created by the COVID-19 pandemic could create opportunities for distressed investors to return to the market. Fitch Ratings recently forecast a 4% default rate for European leveraged loans in 2020 and a 7% default rate in 2020.[2] In a severe downside scenario, Fitch projected that default rates could reach as high as 14% next year. In some European leveraged loan deals, the transfer restrictions that have kept distressed investors out of lending syndicates may fall away if events of default (or certain specific events of default) occur and continue. Read our key takeaways here.

Update to Madoff

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Following our post on the district court’s extraterritoriality decision, the bankruptcy court dismissed the actions against several defendants on the grounds that the presumption against extraterritoriality and international comity principles limit the scope of § 550(a)(2) such that the trustee of a domestic debtor cannot use it to recover property that the debtor transferred to a foreign entity that subsequently transferred it to another foreign entity. However, on February 25, 2019, the Second Circuit disagreed with the bankruptcy court’s decision and vacated the judgement and remanded the matter back to the bankruptcy court for further proceedings. More to come.

 

Mutuality – Irrefutable Requirement for Setoff Under Section 553

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Another decision has been issued that reinforces that section 553 does not allow setoff without mutuality, or “triangular setoff.” On November 13, 2018, Judge Gross of the United States Bankruptcy Court for the District of Delaware denied a motion in In re Orexigen Therapeutics, Inc. to affect a triangular setoff under section 553 of the Bankruptcy Code due to the lack of mutuality.[1] The Court found that even though a contractual right allowing McKesson Corporation and its subsidiary corporation to affect a prepetition triangular setoff was enforceable under state law, the arrangement did not comport with the strict mutuality required under the Bankruptcy Code.

Section 553

Section 553 of the Bankruptcy Code provides, subject to certain exceptions, that the Bankruptcy Code “does not affect any right of a creditor to offset a mutual debt owing by such creditor to the debtor that arose before the commencement of the case under this title against a claim of such creditor against the debtor that arose before the commencement of the case.” The setoff provision of the Bankruptcy Code does not create right of setoff; it preserves for creditor’s benefit any setoff right that it may have under applicable non-bankruptcy law and imposes additional restrictions that must be met in order for the creditor to impose a setoff against a debtor in bankruptcy.[2] Specifically, the Bankruptcy Code requires that the debts and credits must both have arisen before bankruptcy and that there would be “mutuality” between the debiting and crediting parties.[3] While the Bankruptcy Code does not define “mutuality,”[4] courts interpreting this provision find debts to be mutual only where the debts exist between the “same parties” in the “same capacity.”[5] Mutuality is strictly construed against the party seeking setoff.

Analysis

Here, McKesson sought to effectuate a triangular setoff by offsetting it’s almost $7 million debt to the Debtor against the Debtor’s approximately $9 million debt to McKesson’s subsidiary. McKesson argued that because the Debtor owed its subsidiary in excess of the amount owed to McKesson, section 553(a) enables McKesson to set off the subsidiary’s claim against McKesson’s payment.

The Court’s review of the relevant case law and underlying policies behind section 553 made it clear that “[m]utuality is the lynchpin of setoff under section 553(a).”[6] McKesson did not have a mutual debt under section 553(a) because the debt was owed to its subsidiary – a separate and distinct legal entity. Judge Gross found that McKesson ran into “fatal contrary bankruptcy precedent” that found triangular setoffs to be impermissible under section 553(a) without mutuality.[7] Without such mutuality between McKesson and the Debtor, the Court could not allow the setoff.

Judge Gross further explained that “section 553(a) aligns with the fundamental bankruptcy policy of ensuring similarly-situated creditors receive an equal distribution from the debtor’s estate.” The Court refused to read a contractual exception to the strict mutuality requirement of section 553 because that would create the situation where creditors could receive a greater distribution than other equal-footed creditors and thus dilute the bankruptcy estate to the detriment of all creditors.[8]

McKesson also tried to argue that the subsidiary was a third-party beneficiary under the contract between McKesson and the Debtor, and that the contractual third-party beneficiary doctrine provides the required mutuality.[9] The Court found this argument to be another attempt by McKesson to validate a contractual exception to mutuality. The Court found this “unavailing” because “if there w[as] a contractual third-party beneficiary status exception, parties would merely add language intending that a third-party be a third-party beneficiary of a contract allowing for triangular setoff.” The Court refused to provide an avenue for deliberate circumvention of the Bankruptcy Code.

Takeaways

The decision is another upset for the accessibility of triangular setoffs in bankruptcy. Setoff under section 553 of the Bankruptcy Code requires real mutuality; the Court’s decision makes it abundantly clear that mutuality requires the “same parties” in the “same capacity.” This case supports the trend that parent companies cannot simply argue triangular setoff to mix and match the debits and credits arising from discrete contracts held by the individual entities within its organizational structure.

[1] No. 18-10518 (KG), 2018 Bankr. LEXIS 3579, at *1 (Bankr. D. Del. Nov. 13, 2018).

[2] In re SemCrude, L.P., 399 B.R. 388, 393 (Bankr. D. Del. 2009), aff’d, 428 B.R. 590 (D. Del. 2010).

[3] The Court also discussed how section 553(a) requires the party seeking setoff to be a “creditor.” In re Orexigen Therapeutics, Inc., 2018 Bankr. LEXIS 3579, at *9. The Court found that McKesson was a creditor only because the parties treated McKesson as a creditor in its’ stipulations; the Court noted that it would not have otherwise deemed McKesson as a creditor because McKesson had paid off its debt to the Debtor, extinguishing its claim. Id.

[4] 5 Collier on Bankr. ¶ 553.03 (16th 2018).

[5] See In re SemCrude, 399 B.R. at 393 (“[T]he authorities are also clear that debts are considered ‘mutual’ only when ‘they are due to and from the same persons in the same capacity.’” (quoting Westinghouse Credit Corp. v. D’Urso, 278 F.3d. 138, 149 (2d Cir. 2002)).

[6] Id. at *24.

[7] In re Orexigen Therapeutics, Inc., 2018 Bankr. LEXIS 3579, at *9 (citing In re SemCrude, L.P., 399 B.R. 388, 393 (Bankr. D. Del. 2009) and In re Lehman Bros. Inc., 458 B.R. 134, 139 (Bankr. S.D.N.Y. 2011)).

[8] Id.

[9] A third-party beneficiary to a contract is a party who directly or incidentally benefits from a contract between two other parties.

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

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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.

Third Circuit Departs from Momentive and Reinstates EFIH Noteholder Make-Whole Claims Causing Uncertainty over EFH’s Ability to Exit Bankruptcy

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Recently, the Third Circuit reversed decisions issued by the Delaware Bankruptcy and District Courts and permitted first and second lien noteholders of Energy Future Intermediate Holding Company LLC and EFIH Finance Inc. to receive payment of a make-whole premium. In re Energy Future Holdings Corp., No. 16-1351 (3d Cir. Nov. 17, 2016).  The decision, which is largely grounded in New York law, departs from recent controversial decisions issued by the Bankruptcy Court and District Court for the Southern District of New York in the Momentive bankruptcy, which we have previously discussed here and here.  In Momentive, the courts reached the opposite conclusion on substantially similar facts.  In Momentive, the courts reached the opposite conclusion on substantially similar facts.  In addition to creating a split between the Third Circuit and the Southern District of New York, the ruling creates uncertainty regarding the ability for the debtors in the long-running EFH bankruptcy to confirm their proposed chapter 11 plan. READ MORE →

New LSTA Par Confirm Penalizes Buyers for Settlement Delays

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In an effort to reduce settlement times, the Loan Syndications and Trading Association (the “LSTA”) recently revised its standard par loan trading documents to penalize buyers who take too long to settle. Beginning September 1, 2016, buyers who fail to fulfill their obligations to timely settle par loan trades will forfeit the right to receive interest that accrues prior to the settlement date. The changes do not apply to loans trading on distressed documents.

The LSTA’s revisions represent the trade group’s most aggressive step to combat settlement delays. The revisions are also the most consequential changes to the LSTA’s standard par trading documents in years.

Under the current version of the LSTA’s Standard Terms and Conditions for Par/Near Par Trade Confirmations (the “Standard Terms”), buyers are automatically compensated for interest that accrues on a loan during the period beginning on the seventh business day after the trade date up through the settlement date (“Delayed Compensation”). Starting on September 1, 2016, this provision will no longer be automatic. Instead, par loan buyers will only be entitled to Delayed Compensation if they satisfy several new requirements, including paying the purchase price to the Seller in accordance with specific timing requirements (the “Delayed Compensation Prerequisites”). The LSTA believes that the Delayed Compensation Prerequisites will create a new sense of urgency for buyers to close trades and discourage buyers from tying up sellers’ balance sheets. READ MORE →

Not So Fast – Supreme Court Holds Prepetition Fraudulent Transfer Precludes Post-Petition Discharge in Husky International

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One of the goals of the Bankruptcy Code is to provide a debtor with a fresh start. The discharge of prepetition debts at the conclusion of a bankruptcy case is one of the most important ways to attain this fresh start.  On May 16, 2016, the Supreme Court made it harder for debtors to obtain a fresh start by broadening an exception to discharge.

Section 523(a)(2)(A) of the Bankruptcy Code provides that an individual debtor is not discharged from any debt “for money, property [or] services … to the extent obtained by false pretenses, a false representation, or actual fraud[.]” Circuits split as to whether actual fraud under Section 523(a)(2)(A) requires an affirmative misrepresentation; the Fifth Circuit had held that this was a necessary element to prevent discharge, but the Seventh Circuit had held that “actual fraud” encompassed a broader range of behaviors.

The Supreme Court resolved this split, rejecting the Fifth Circuit’s narrow interpretation and finding that the term “actual fraud” does not need to include an affirmative misrepresentation by the debtor. With this broader reading, debtors will be unable to discharge prepetition debts where there is evidence that they inappropriately siphoned of their assets prior to filing for bankruptcy. Husky Int’l Elecs., Inc. v. Ritz, No. 15-145, 2016 WL 2842452 (U.S. May 16, 2016). READ MORE →

Burst Again: Sabine Bankruptcy Court Issues Binding Ruling Finding No Covenants Running with Land

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Earlier this year, we covered Judge Shelley Chapman’s ruling in the Sabine bankruptcy, permitting the Debtors to reject a handful of gathering and other midstream agreements. Previously, Judge Chapman permitted rejection on the grounds that the Debtors exercised their reasonable business judgement in doing so.  At that time, the Court issued a “non-binding” ruling on whether the agreements were (or contained) “covenants running with the land” that would have rendered rejection impossible or useless.

On May 3, 2016, approximately six weeks later, Judge Chapman reached a final “binding” ruling on this open issue – holding that the contracts do not constitute (or include) covenants running with the land, and can be rejected in full. The Court largely reiterated its prior analysis – and even attached the prior opinion to the new opinion.  The Court also noted for the first time that, if the contracts had contained covenants affecting the value and use of the real property, they likely would have defaulted the Debtors’ credit facility.  Mem. Decision on Motions of Nordheim Eagle Ford Gathering, LLC et al. at 11, In re Sabine Oil & Gas Corp., No. 15-11835 (Bankr. S.D.N.Y., May 3, 2016).

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Burst Pipeline? Bankruptcy Court Rules Sabine Can Reject Midstream Contracts

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Bankruptcy Judge Shelley Chapman held that Sabine Oil & Gas Corp. has satisfied the standards for rejection of several gathering and handling agreements between Sabine and its midstream counter-parties, Nordheim Eagle Ford Gathering, LLC and HPIP Gonzales Holdings, LLC. The ruling has limits.  The matter ultimately turns on whether certain covenants “run with the land” under Texas law.  While the Court held that Sabine exercised reasonable business judgment in rejecting the agreements, the Court declined to decide “in a binding way the underlying legal dispute with respect to whether the covenants at issue run with the land,” and instead offered a “non-binding” analysis to determine the reasonableness of Sabine’s rejection.  Thus, if the counter-parties can demonstrate that the covenants do run with the land in an adversary proceeding, Sabine may not be able to terminate those covenants. In re Sabine Oil & Gas Corp., No. 15011835 (SCC) (Bankr. S.D.N.Y. Mar. 8, 2016).

How did Judge Chapman come to this ruling and how will it affect agreements between upstream and midstream providers? See below for background on this case, the two main arguments and an analysis of potential implications this case may have, particularly on midstream counter-parties who may have thought they were protected from upstream credit risk.

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