On June 28, 2014, the Commonwealth of Puerto Rico adopted the Puerto Rico Corporations Debt Enforcement & Recovery Act, Act 71-2014 (the “Debt Enforcement Act”), enabling certain Commonwealth public corporations in financial distress to restructure their debt obligations. The Debt Enforcement Act establishes a debt enforcement, recovery and restructuring regime for public corporations and other instrumentalities of the Commonwealth economic emergency. The goal of the new law is to balance the interests of creditors and other stakeholders with the interest of the Commonwealth to protect its citizens and to enable the financially distressed public corporations to continue to provide essential government services such as the delivery of electricity, gas and clean water. Read More.
Bankruptcy Litigation
Law360: Rakoff’s Foreign Fund Clawback Ruling Has Limitations
On July 6, 2014, Jed S. Rakoff, U.S. district judge for the Southern District of New York, declined to extend the reaches of Section 550(a) of the Bankruptcy Code abroad to permit the recovery of funds that were alleged to be fraudulently obtained from Bernard L. Madoff Investment Securities LLC in connection with Bernard Madoff’s Ponzi scheme. Securities Investor Protection Corp. v. Bernard L. Madoff Investment Securities LLC (In re Madoff Securities), No. 12-mc-115 (JSR) (SDNY Jul. 6, 2014).
The decision involves the attempted extraterritorial application of Section 550(a), which allows a trustee to recover “property transferred … to the extent that a transfer is avoided” under bankruptcy law. In essence, Irving Picard, the trustee, sought to not only seek recovery from feeder funds that invested directly into Madoff funds, but also sought to recover from subsequent transferees. The Madoff decision should give comfort to foreign investors that there is a reduced risk that proceeds of their indirect investments in U.S. companies will be clawed back under bankruptcy law — even if such proceeds were obtained fraudulently. There are, however, important limitations to consider. Read More.
European Revolution vs. English Evolution
This client alert will focus on three of the key recent cases of the past six months, each of which features the use of English law restructuring tools for non-English companies. Whilst the wave of recent restructurings has slowed in recent times given the uptick in the European economy, these cases are likely to be cited as precedents in the future and the case law developments will be of assistance in the event there is rise in the number of restructurings which may be expected as interest rates rise in the next few years.
In the decade leading up to the Great Recession which commenced in 2008, many European jurisdictions took significant measures to update their antiquated insolvency regimes. The Spanish updated their 1898 insolvency laws in 2003, the Italians updated their 1942 bankruptcy laws in 2005, the French updated their 1984 laws in 2005, the Germans amended their regime in 1999, and finally the UK made radical changes in 2002. The effectiveness of the reforms were mixed and when the stresses of the Great Recession collided with the new regimes, a second wave of reforms, forged by the reality of experience, occurred in every major European country save the UK. In recent years a dichotomy has arisen between European radical change and English gradualism when it comes to restructuring law practice. Read More.
Oregon Bankruptcy Court Denies Administrative Priority Status to Potential DIP Lender for Breakup Fee Claim
On April 8, 2014, Chief Bankruptcy Judge Frank R. Alley, III for the United States Bankruptcy Court for the District of Oregon found that Sunstone Business Finance, LLC’s claim against debtor C&K Market, Inc. did not constitute an administrative expense claim. The claim arose from a breakup fee for proposed DIP financing after C&K selected an alternative DIP lender.
The Court denied Sunstone’s request for an administrative claim for two reasons. First, the Court found that the breakup fee did not arise from a transaction with a debtor in possession because the parties executed the DIP term sheet prepetition. Second, the Court found that Sunstone, as a potential lender, did not provide a direct and substantial benefit to the estate because the alleged benefits either occurred prepetition or were too indirect and intangible to qualify for priority treatment. If this opinion were to gain acceptance beyond this case, it could chill prepetition offers to serve as new DIP lenders, or possibly even affect the market for stalking horse bidders in a section 363 sale. In re C&K Market, Inc., No. 13-64561-fra11 (Bankr. D. Or. Apr. 8, 2014) [Dkt. No. 786]. Read More.
Following Chapter 9 Plan, Monoline Insurer Must Continue to Make Payments on Old Bonds
Earlier this month, Judge Judith J. Gische of the Appellate Division of the Supreme Court of New York, First Judicial Department found that ACA Financial Guaranty Corporation, as bond insurer, must make future, post-confirmation principal and interest payments on municipal bonds issued pre-bankruptcy. The Court required these payments despite the fact that the bonds were exchanged for new bonds and cancelled under the municipality’s chapter 9 plan. The Court held that “neither the plan of debt adjustment nor the discharge of the bond debt in the bankruptcy proceeding changed the obligations under the parties’ contracts of insurance.” This decision is an unequivocal win for holders of distressed municipal bonds wrapped by monoline insurance policies and makes clear that insurers must continue to extend coverage to bondholders after a municipal issuer files for chapter 9 and obtains a discharge of the bond debt in bankruptcy. This outcome may impact negotiations and potential resolutions in Detroit’s chapter 9 case and other recent municipal bankruptcies and distressed scenarios, such as Puerto Rico. See Oppenheimer Amt-Free Municipals v. ACA Fin. Guar. Corp., 2013 N.Y. App. Div. LEXIS 5688, at *4 (N.Y. App. Div. 1st Dep’t Sept. 3, 2013).
Second Circuit Rules That Payments Made To Purchase Notes Are Exempt from Avoidance Under Section 546(e) of the Bankruptcy Code
The United States Court of Appeals for the Second Circuit held, on June 10, 2013, that payments made by a company to purchase notes issued by an affiliate were transfers made in connection with a “securities contract,” and therefore, pursuant to Section 546(e) of the Bankruptcy Code, could not be avoided as preferential transfers. In re Quebecor World (USA) Inc., No. 12-4270-bk. Read More.
General Motors Bankruptcy Court Applies the Brakes to Unauthorized Termination Statements
Last week, the United States Bankruptcy Court for the Southern District of New York held that a UCC-3 termination statement is effective to terminate a financing statement under the Uniform Commercial Code only if the filing of the termination statement was authorized by the secured party whose security interest was terminated.1 This decision raises the bar on the level of diligence by potential creditors to confirm that any prior liens covering their prospective collateral were effectively terminated. As stated by the Court, “the fact that a termination statement has been filed does not by itself mean that the initial statement came to an end.” Read More.
Tousa Roller Coaster
The bankruptcy case of TOUSA, Inc. and its various subsidiaries (collectively “Tousa”) is one where lenders have seen their fortunes rise and fall. On March 15, 2012, they fell again when the Eleventh Circuit1 (the “Circuit Court”) reversed the District Court’s opinion and reinstated the Bankruptcy Court’s order, which had disgorged over $400 million from Tousa’s senior lenders and avoided certain guarantees and liens granted to them by the Conveying Subsidiaries (defined below). Specifically, the Circuit Court found: (i) the Tousa Bankruptcy Court did not err when it found the Conveying Subsidiaries did not receive reasonably equivalent value in exchange for the new liens provided to the New Lenders; and (ii) the Transeastern Lenders were the direct beneficiaries of the new liens and as such subject to the avoidance powers of section 550(a). Read More.
Questioning Prepetition Bankruptcy Bans
While courts have generally held that provisions in prepetition agreements prohibiting bankruptcy filings are void as against public policy, a recent unpublished decision by the Tenth Circuit Bankruptcy Appellate Panel in In re DB Capital Holdings LLC, No. 10-046, 2010 WL 4925811 (B.A.P. 10th Cir., Dec. 6, 2010), calls this principle into question. Read More.
Southern District of New York Enjoins Bank from Selling Loan Participation
On January 28, 2010, the United States Court for the Southern District of New York issued a decision in the case of Empresas Cablevisión, S.Z.B. de C.V. v. JPMorgan Chase Bank, N.A. The District Court enjoined JPMorgan Chase Bank N.A. and J.P. Morgan Securities Inc. (collectively, “JPMorgan”) from selling a participation interest to Banco Inbursa of loans made to Empresas Cablevisión, S.Z.B. de C.V. (“Cablevisión”). This decision has implications for parties that purchase and sell loans and for borrowers. Read More.