When is a foreign entity eligible to file a chapter 15 petition? This question has been the subject of debate over the last few years, and Judge Martin Glenn’s recent opinion in In re Berau Capital Resources Pte Ltd. will add to this debate. Although the debtor in the case was foreign and did not have a place of business in the United States, Judge Glenn concluded that the debtor had satisfied the eligibility provisions under section 109(a) of the Bankruptcy Code because the New York choice of law and forum selection clause in the underlying bond indenture rendered the bonds “property in the United States.” No. 15-11804 (MG), 2015 WL 6507871 (Bankr. S.D.N.Y. Oct. 28, 2015).
Bankruptcy Litigation
Privacy Policies and the Sale of Corporate Assets: It pays to plan ahead to preserve the value of your data assets
Personal data is a valuable corporate asset. At times, the personal information collected from customers (such as email address, mailing address, phone number, etc.) can be a company’s most valuable asset. Unfortunately, when a company attempts to sell this asset, it can find the value of the data significantly diminished due to promises made in a privacy policy the company implemented years before it ever contemplated such a sale.
A company’s privacy policy sets forth the company’s promises to its consumers as to how it will collect, store, maintain, and share the consumers’ personal data. In an attempt to appeal to customer privacy concerns, it is common for a company to proclaim in such policies:
“We share your personal data only in the ways described in this policy,”
or
“We care about our customers and we will never sell or share your personal data.”
Most companies include these statements to highlight their promise not to capitalize on a consumer’s data by selling to third party marketers. However, many companies do not realize that statements such as these could also severely restrict the company’s ability to sell data as a corporate asset in a company sale, merger, bankruptcy, or similar corporate transaction, unless there is also a clear statement within the policy which permits data to be transferred during the course of such events.
There are steps a company can take leading up to the corporate transaction to smooth the transfer of customer data, such as updating its privacy policy, providing additional notice to consumers, requesting opt-out or opt-in consent to the revised policy and/or the data sale. Companies that fail to take these steps and attempt to transfer data in a manner that conflicts with promises made in its privacy policy may face regulatory scrutiny or litigation, both of which would ultimately diminish the value of their data assets in any eventual sale.
New York Court Rules (Sort of) on Whether Electricity is a Good or a Service
It seems only fitting that recent decisions by the United States District Court for the Southern District of New York and its bankruptcy court regarding the nature of electricity should have sent, at least initially, a jolt through the energy community. Perhaps the Southern District court would lead the charge for one side or the other in an ongoing debate over whether electricity constitutes goods or services—a controversy that has potentially far-reaching implications (in bankruptcy cases, concerning the priority of claims of electricity providers, and, in ordinary transactions, for the tort liability of electricity providers). In the end, however, the outcome of the litigation was something less than electrifying. Here’s what happened.
Solus v. Perry: Case Update
In May, we wrote about a number of recent cases addressing the enforceability of oral agreements in syndicated loan and bankruptcy claims trading. One of those cases, Solus v. Perry, is still active at the trial court level in New York. Last month, the court entered an order denying both parties’ motions for summary judgment.
At issue in Solus v. Perry is whether the parties agreed to all of the material terms of a transaction in which Solus would purchase Perry’s participation interests in claims against the bankruptcy estate of Ponzi schemester Bernie Madoff’s investment firm. Although Solus and Perry never signed a written contract, Solus argues that the parties agreed to all of the material terms necessary to create a binding oral agreement under New York law (i.e., asset, quantity, and price) in recorded telephone conversations, emails, and Bloomberg messages. Perry contends that no agreement was formed because certain other terms (which Perry characterizes as material) were left open, including how litigation risks and fees would be allocated and whether Perry would have to indemnify Solus for any potential damages resulting from Perry’s bad acts.
In its decision and order, the court concluded that the evidence submitted failed to resolve all material factual issues in favor of either party. Specifically, the following two issues must be determined before summary judgment can be entered—1) which terms were material to the trade, and 2) whether the parties agreed to all of those material terms.
A pretrial conference is scheduled for October 7, 2015. We will keep you posted.
First Circuit Rules Bankruptcy Code Preempts Puerto Rico’s Recovery Act
On Monday, July 6, the Court of Appeals for the First Circuit affirmed the February 6, 2015 order and injunction of the Puerto Rico District Court and held that section 903(1) of the Bankruptcy Code preempts the Puerto Rico Debt Enforcement and Recovery Act (the “Recovery Act”). Franklin Cal. Tax Free Trust, et al. v. Commonwealth of Puerto Rico, et al., (1st Cir. July 6, 2015) (Case No. 15-1218): On February 10, 2015, we reported on the district court’s decision holding that the Recovery Act was unconstitutional.
As a result of amendments to the Bankruptcy Code in 1984, Puerto Rico, unlike states, may not authorize its municipalities, including its public utilities like PREPA or PRASA, to seek federal bankruptcy relief under chapter 9 of the Bankruptcy Code. In considering the appeal of the district court’s order, the Court first confirmed that it had jurisdiction to consider the bondholders’ claims of preemption, that those claims were ripe and that they had become ripe immediately upon adoption of the Recovery Act. The Court then ruled that the Commonwealth’s effort to allow its public corporations to restructure their debt by enacting the Recovery Act is expressly preempted by the federal Bankruptcy Code. Rejecting the Commonwealth’s arguments that the 1984 amendments made the preemption provisions of section 903(1) of the Bankruptcy Code inapplicable, the Court stated that “§ 903(1) has applied to Puerto Rico since the predecessor of that section’s enactment in 1946. The statute does not currently read, nor does anything about the 1984 amendment suggest, that Puerto Rico is outside the reach of § 903(1)’s prohibition. Op. at 4. Because the Court affirmed the district court’s order and injunction, the Court declined to consider the Commonwealth’s appeal of the district court’s order denying motions to dismiss the bondholders’ Contracts Clause and Takings Claims. Op. at 21.
Supreme Court Rules Against Fees For Fee Application Defense
Issuing its third bankruptcy ruling in a month, the Supreme Court held, by a 6-3 margin, that the Bankruptcy Code does not permit awarding fees to debtor’s counsel, when counsel incurred those fees defending its own fee application. The Court held that services defending fee applications were not rendered to the debtor’s estate, and therefore the fees did not constitute “actual, necessary services” payable under section 330(a)(1) of the Bankruptcy Code as reasonable compensation. This decision could increase leverage on parties seeking to rein in bankruptcy litigation by threatening to challenge attorney’s fees. Baker Botts L.L.P. et al. v. ASARCO LLC, No. 14-103, 2015 WL 2473336 (S. Ct. June 15, 2015) (hereinafter, the “Opinion”).
Supreme Court Says Underwater Junior Liens Survive Bankruptcy
On March 30, we reported on two cases pending before the U.S. Supreme Court: Bank of America v. Caulkett[1] and Bank of America v. Toledo-Cardona[2]. Each involved chapter 7 bankruptcy cases in which the debtors had no equity in their homes because the houses were worth less than the amount outstanding on the senior mortgage loans—that is, the second lien-lenders were “unsecured” or totally “underwater”.
In a chapter 7 case, an individual debtor is able to obtain a discharge of his or her debts, but the debtor’s non-exempt assets are liquidated by a bankruptcy trustee, who then distributes the proceeds to creditors. In Dewsnup v. Timm[3], the Supreme Court held that Bankruptcy Code § 506 does not permit an individual chapter 7 debtor to reduce (or “strip down”) a first-lien mortgage loan to the value of the real property where the amount owed ($119,000) is greater than the property value ($39,000). Caulkett and its companion case addressed whether the outcome should be different where the debtor seeks to void (or “strip off”) a second lien mortgage that is wholly underwater.
On its decision announced on June 1, the Supreme Court found the question effectively controlled by its prior holding in Dewsnup. Noting that the debtors had not asked it to overrule Dewsnup, the Court held by unanimous decision[4] that a debtor in a chapter 7 bankruptcy case may not void second mortgage liens under Bankruptcy Code section 506(d) when the debt owed on a senior mortgage lien exceeds the current value of the collateral. The Court rejected respondents’ attempts to limit Dewsnup’s interpretation to partially underwater mortgages, concluding that there was no principled way to distinguish those from wholly underwater mortgages within the terms of the Bankruptcy Code. In Dewsnup, the Court defined an “allowed secured claim” under section 506(d) as “claim supported by a security interest in property, regardless of whether the value of that collateral would be sufficient to cover the claim”. Thus, section 506(d) voids underwater liens only where the underlying debt is invalid under applicable law.
Orrick Ranked Among Top Ten Bankruptcy Law Firms
Orrick has been ranked a Top Ten Bankruptcy Law Firm by The Deal Pipeline. 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.
Recent highlights for Orrick’s restructuring team include advising the City of Stockton, California on the confirmation of its chapter 9 plan of adjustment and its successful exit from bankruptcy; representing the bidding lenders in a potential $400 million post-petition DIP financing for the City of Detroit; and advising several of the world’s largest banks in the $6 billion restructuring of the Indiana Toll Road—the largest toll-road debt restructuring to date. For their work on these and other matters, the Orrick team was recognized by Law360 as one of the publication’s Bankruptcy Practice Groups of the Year.
To see the full list of rankings, please click here.
Supreme Court Removes Cloud Over Bankruptcy Judges’ Powers, But Creditors Need To Remain Vigilant
On February 23, we reported on a case pending before the U.S. Supreme Court: Wellness International Network, Limited v. Sharif. On May 26, the Supreme Court in Wellness held that parties may waive their right to have certain claims decided by a court other than a Bankruptcy Court and that the waiver need not be express. It can be implied as a result of a litigant’s conduct. No. 13-935, 575 U.S. ___ (2015).
Overview and Analysis of Select Provisions of the ABI Chapter 11 Reform Commission Final Report and Recommendations
Part Three of Three
Earlier this year, Orrick’s Restructuring team began a three-part look at the American Bankruptcy Institute’s Chapter 11 Reform Report. In part one we looked at issues related to confirmation, valuation, financing and asset sales. Last month, in part two, we focused on modifications to the Bankruptcy Code’s “safe harbors” for derivatives and other complex financial transactions. This final part focuses on a variety of critical issues: third party releases, rejection of collective bargaining agreements, professional compensation issues and treatment of executory contracts in bankruptcy.
To view part three, please click here.