The Supreme Court, in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), recently resolved a circuit split in the interpretation of the Bankruptcy Code’s safe harbor provision. The Court held that section 546(e) does not protect transfers made through a financial institution to a third party regardless of whether the financial institution had a beneficial interest in the transferred property. Instead, “the only relevant transfer for purposes of the safe harbor is the transfer that the trustee seeks to avoid.” This decision will have implications for companies pursing leveraged buyout transactions.
On February 27, 2018, the U.S. Supreme Court resolved a circuit split under the Bankruptcy Code and determined that where funds passed through financial institutions acting as payment conduits, where the ultimate transfer sought to be avoided was not the type of transaction protected by the safe harbor provisions of the Bankruptcy Code, the safe harbor provisions of Bankruptcy Code Section 546(e), shielding transfers through financial institutions from avoidance actions by bankruptcy trustees, was inapplicable.
The Supreme Court found that prior circuit decisions applying the safe harbor simply because financial institutions were intermediaries in the transfer is not consistent with the language or intent of the safe harbor provisions. Continue Reading Supreme Court Narrows Scope of Safe Harbor Exception for Securities Clawbacks
On January 8, 2018, Senators John Cornyn (R-TX) and Elizabeth Warren (D-MA) introduced the Bankruptcy Venue Reform Act of 2017. The bill would require that individual debtors file in the district where their domicile, residence, or principal assets are located, and would require corporate debtors to file in the district in which their principal assets or their principal place of business is located.
Currently, corporations are permitted to file in their places of incorporation or in districts where their affiliates have pending bankruptcy cases. This means that many cases are filed in the District of Delaware, where more than half of U.S. publicly-traded companies are chartered, or in the Southern District of New York, which “benefits from [New York City’s] status as a dominant financial center,” according to Reuters. Statistics released by USCourts.gov indicate that in the one year period ending September 30, 2017, the Southern District of New York saw 587 chapter 11 filings, making up 8% of total filings nationwide. Similarly, the District of Delaware saw 435 chapter 11 filings, or 6% of total filings over the same period.
In a joint press release, Senator Cornyn noted that the bill is meant to “clos[e] the loophole that allows corporations to ‘forum shop’ for districts sympathetic to their interests.” Bankruptcy Courts would be required to transfer or dismiss cases filed in the wrong district, which would prevent debtors from “cherry-picking courts that they think will rule in their favor,” according to Senator Warren. Delaware Governor John Carney (D), Representative Lisa Blunt Rochester (D-Del.), and Senators Chris Coons (D-Del.) and Tom Carper (D-Del.) have released a joint statement in opposition to the bill.
The bankruptcy court in In re Ocean Rig UDW Inc., 17-10736 (Bankr. S.D.N.Y. Aug. 24, 2017) determined that a decision by an offshore drilling company from the Republic of the Marshall Islands (RMI) to shift its Center of Main Interest (COMI) to the Cayman Islands prior to defaulting on bonds and initiating reorganization proceedings there and in the U.S., was “prudent.” The Court held that the change offered the debtors the best opportunity for successful restructuring and survival under difficult financial conditions and did not preclude U.S. recognition of the Cayman Island scheme of arrangement as the foreign main proceeding.
Foreign Debtors’ Decision to Restructure
The foreign debtors in these proceedings had significant debt payments due during 2017. They did not expect to have sufficient cash available to make these payments and failure to make any of these payments when due would trigger cross-default provisions under the Credit Agreements. Faced with expected payment defaults and cross-defaults, the debtors explored their restructuring alternatives.
The Republic of the Marshall Islands, where the debtors previously had their COMI, has no statutory laws or procedures for reorganization, making liquidation the only possible outcome. Meanwhile, the Cayman Islands provide statutory authority for schemes of arrangement as a way of permitting companies in financial distress to restructure their financial debt. Accordingly, the debtors concluded that transfer of their COMIs to the Cayman Islands offered the company the best chance of survival and they proceeded to do so.
To determine if the U.S. bankruptcy court could recognize the foreign proceeding as such, it performed a COMI analysis of the debtors’ operations and current connections with the RMI and Cayman Islands. The court determined that the debtors conducted their management and operations in the Cayman Islands, had offices in the Cayman Islands, held their board meetings in the Cayman Islands, had officers with residences in the Cayman Islands, had bank accounts in the Cayman Islands and maintained their books and records in the Cayman Islands, and thus each of the foreign debtors had established by a preponderance of the evidence that each of their COMIs as of the filing of the chapter 15 petitions, was the Cayman Islands.
In conclusion, the Chapter 15 court held that the Cayman Islands provisional liquidation proceedings were “foreign proceedings”, that the center of main interests (COMI) of the foreign debtors had been properly and prudently changed to the Cayman Islands, and thus Chapter 15 recognition was appropriate.
On September 18, 2017, the iconic US-based retailer Toys “R” Us filed for Chapter 11 in the US Bankruptcy Court for the Eastern District of Virginia in front of Judge Keith L. Phillips. The company filed twenty-five entities, explaining that its $5.3 billion debt obligations and operational issues had led to the need for reorganization.
The company’s Canadian subsidiary also began parallel proceedings under the Companies’ Creditors Arrangement Act (CCAA) in Canada. Meanwhile, the Company’s operations outside of the U.S. and Canada, including its approximately 255 licensed stores and joint venture partnership in Asia, which are separate entities, are not part of the Chapter 11 filing or CCAA proceedings.
Since the company went private in 2005 it has had approximately $400M of annual debt service payments- these obligations have inhibited reinvestment in the core operations of the business.
The company is optimistic that Chapter 11 offers an opportunity for Toys “R” Us to deleverage, relieve itself of unprofitable lease obligations, and invest back into their business in the U.S. and Canada. At present the company has a total of $3.1 billion of DIP financing, including two $450 million term loans and a $1.85 billion revolver.
The Company intends to pay vendors in full under normal terms for goods and services delivered on or after the filing date. As the Company’s international subsidiaries are not part of the Chapter 11 filings and CCAA proceedings, Toys “R” Us’ international subsidiaries will pay vendors for all goods and services in the normal course.
Hogan Lovells business restructuring and insolvency practice partners Ron Silverman, Robin Keller, and Shaun Langhorne recently joined Debtwire senior legal content specialist Richard Goldman to discuss some “game-changing” revisions to Singapore’s insolvency regime. During the discussion, the panel addresses how Singapore, in an effort to market itself as an international forum for debt restructurings, transformed its restructuring laws from a creditor-based tool premised on English insolvency statutes into a debtor-friendly system more akin to Chapter 11 of the U.S. Bankruptcy Code. The panel also breaks down some key concepts that, while common to U.S. restructurings, were completely foreign to Singapore insolvency proceedings, including automatic moratoriums against creditor self-help, postpetition DIP or rescue financing, cramdown availability, and enhanced disclosure requirements. Finally, the panel provides notable considerations that practitioners and investors should take into account when navigating this yet-to-be tested regime.
These days, the threat of counterparty insolvency looms over the energy sector: whether it is a natural disaster or precipitous decline in the price of oil, perhaps no industry is more susceptible to the financial decline and potential default of contracting parties. Continue Reading Energy disputes: Countering counterparty insolvency
Addressing licensing agreements in bankruptcy presents unique issues. End-User License Agreements (“EULAs”) are specific software license agreements in which the licensor provides the end-user/licensee—under the guise of a sale—a personal and non-transferable license to use the purchased software. Given the unique nature of a EULA, how is such a license treated in bankruptcy?