Bankruptcy Litigation

Update to Madoff

 

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.

 

Second Circuit Affirms Sabine: New Focus on Horizontal Privity Requirement May Affect Oil and Gas Gathering Agreement Terms

The Sabine Oil & Gas Corp. chapter 11 bankruptcy has been closely watched by many for guidance on how to structure midstream gathering agreements between upstream producers and midstream gatherers (who gather, transport and process oil and gas after it has been extracted from the land). On May 25, 2018, the U.S. Court of Appeals for the Second Circuit held that the debtor, Sabine, had the right to reject gathering agreements with two midstream companies. In re Sabine, 2018 WL 2386902 (2d. Cir. May 25, 2018). In the Sabine agreements, Sabine had agreed to dedicate all of the gas produced from a designated area for processing by one of the midstream gatherers.

Looking to Texas law, the Second Circuit ruled that for the agreements to be treated as covenants “running with the land” immune from such rejection by the debtor, there would have to be horizontal privity relating to the land. For horizontal privity to exist, there must be a common interest in the land in addition to the applicable covenant at the time of the agreement. For example, horizontal privity exists where Party A conveys a fee interest in real property in fee to Party B, if as part of the same transaction Party B grants Party A a leasehold interest over the conveyed real property. Because, in the view of the Second Circuit, there was no such privity in the Sabine case, the agreements were subject to rejection.

The Second Circuit’s rationale surprised some because the district court had relied on a different theory in allowing the rejection of the agreement. Because the Second Circuit’s ruling was made by summary order and was not intended to have precedential effect, and because it speaks to Texas law, the decision will have limited, if any, precedential value. Nonetheless, this Second Circuit ruling will be looked at by other courts facing similar issues, and may have some persuasive value. As a result, practitioners may want to examine their approach to midstream gathering and services agreements and whether their agreements should be structured to ensure that horizontal privity exists between the parties.

Case History and Differing Grounds for Decisions 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

Sixth Circuit Finds Bankruptcy Court Cannot Force City to Provide Services in Chapter 9

On November 14, 2016, the United States Court of Appeals for the Sixth Circuit held that courts in chapter 9 cases lack authority to order a municipal debtor to provide services to its constituents. Affirming the bankruptcy court’s dismissal of customers’ claims arising from the termination of their water service by the Detroit Water and Sewerage Department, the Sixth Circuit held that section 904 of the Bankruptcy Code prohibits a chapter 9 court from entering orders that “interfere” with a municipality’s “political [and] governmental powers.” In re City of Detroit, Mich., No. 15-2236, 2016 WL 6677715 (6th Cir. Nov. 14, 2016). READ MORE

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

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

Orrick’s Marc Levinson Publishes Chapter 11 v. Chapter 9 Checklist in Practical Law

 

In a recent article for Practical Law Bankruptcy, Restructuring Senior Counsel Marc Levinson prepared a comparison chart providing an overview of the major facets of a Chapter 9 municipal bankruptcy and comparing them to those of a traditional Chapter 11 bankruptcy. The Chart examines, among other crucial issues, commencement of the case, eligibility requirements, case administration, preference actions and plans. To read the full chart, please click here.

Supreme Court to Resolve Circuit Split Over Structured Dismissals

 

The Supreme Court again will be addressing the powers of bankruptcy courts. At the end of the term, the Court granted certiorari in Czyzewski v. Jevic Holding Corp. to decide whether a bankruptcy court may authorize the distribution of settlement proceeds in a way that violates the statutory priority scheme in the Bankruptcy Code.  No. 15-649, 2016 WL 3496769 (S. Ct. June 28, 2016).  The Supreme Court is expected to address this fundamental bankruptcy issue sometime early next year. READ MORE

Indah Kiat – A Scheme Pulped

On 12 February 2016 Snowden J handed down his judgment in Indah Kiat International Finance Company B.V. [2016] EWHC 246 (Ch). Indah Kiat International Finance Company B.V. (“Indah Kiat”), part of the global Asia Pulp & Paper Group (one of the world’s largest pulp and paper manufacturers), applied for an order convening a meeting of scheme creditors to consider and, if thought fit, approve a proposed scheme of arrangement (the “Scheme”) under Part 26 of the Companies Act 2006. One creditor, APPIO, opposed the Scheme on various grounds and in this hearing sought an adjournment on the basis that insufficient notice was given to the creditors of the convening hearing.

The Indah Kiat judgment neatly follows a similar judgment of Snowden J in Van Gansewinkel Groep BV [2015] EWCG 2151 (Ch) only a few months earlier. In this case Snowden J took the opportunity to review the current law on jurisdiction relating to schemes of arrangement, and, arguably, to raise the jurisdictional hurdle. He noted that in recent years, schemes of arrangement have been increasingly used to restructure the financial obligations of overseas companies that do not have their centre of main interest or an establishment or any significant assets in England, and stated that companies seeking approval of a scheme would be well advised “to ensure that greater detail is provided, both in the explanatory statement and in the evidence before the court”. Additionally, and more importantly for Indah Kiat, he commented on the judgment in re Telewest Communications plc (No 2) [2005] 1 BCLC 772 that the court will not generally sanction a scheme if it finds a “blot” in the scheme such that the scheme will not have the effect that the company and creditors intend. This is key in the underlying message of Snowden J’s Indah Kiat judgment.

Whilst schemes of arrangement have become increasingly popular to compromise creditors’ claims in a pragmatic manner which may not be available in the jurisdiction of incorporation of the relevant debtor, the judgments in Van Gansewinkel and, more specifically, in Indah Kiat, make it clear that the English courts will not compromise the integrity of this highly effective restructuring tool where the parties invoking the court’s jurisdiction act other than with the “utmost candour”.

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