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 Second Circuit recently issued its decision on an appeal to the Momentive Performance Materials Inc. (“MPM”) bankruptcy case. Amongst other issues, the Court found that when determining the appropriate interest rate in a Chapter 11 cramdown, courts should consider market factors rather than strictly apply the Till formula. The Court’s decision will benefit secured creditors when a market rate is ascertainable, as they will no longer have to accept below-market take-back debt.

Continue Reading Impact of Second Circuit’s Momentive decision on interest rates under Chapter 11

Another step towards a lender-friendly environment, but the new form of pledge is being delayed

The Italian Parliament passed law No. 155 of 19 October 2017 to delegate the Government to reform the rules on insolvency and financial distress. This has been commented widely in the press and between commentantors, as it is expected to bring about significant developments (we have previously reported here).

What has received less attention, is that the law also mandates Government to reorganise the system of legal priorities (privilegi), i.e. the rights of preference set out at law for given claims to have preference over other creditors. Further, the delegation includes the authority to introduce a form of non-possessory security over moveable assets. Continue Reading Italy to revamp the system of legal priorities, and introduce non-possessory security

On 9 November 2017, in a rare example of a contested recognition hearing, His Honour Judge Paul Matthews granted recognition of Agrokor’s extraordinary administration (EA) as a foreign main proceeding under the Cross-Border Insolvency Regulations 2006 (CBIR).

Agrokor d.d. is the holding company for a group of companies specialising in agriculture, food production and related activities in Croatia.  Before its financial difficulties, the group’s annual revenue was estimated to amount to around 15% of Croatia’s GDP.  On 6 April 2017, the Law on Extraordinary Administration Proceeding of Companies of Systemic Importance for the Republic of Croatia (the Law, also known as Lex Agrokor) became effective.  On 10 April 2017, following an application by Agrokor, an order for extraordinary administration (EA) was made in respect of Agrokor itself and 50 of its affiliates. In July 2017, Agrokor applied to the English court for recognition of the EA as a foreign proceeding under the CBIR.  A proceeding will be a foreign proceeding if it is “…a collective judicial or administrative proceeding in a foreign State…pursuant to a law relating to insolvency in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganisation or liquidation”  The recognition application was challenged by one of Agrokor’s largest creditors, who had also brought arbitration proceedings in the English courts, on a number of grounds, all of which were dismissed by the court.

A Hogan Lovells team led by partner Tom Astle is acting for an adhoc committee of bondholders, and providers of a c€1bn super senior DIP facility to the Agrokor Group.

Continue Reading English recognition for Agrokor insolvency: not a tick-box exercise

Continue Reading Shaun Langhorne: 40 under 40

What has the U.S. Fish and Wildlife Service got in common with the U.S. banking agencies?  Simple: the U.S. Government Accountability Office (the “GAO“), which investigates financial matters on behalf of Congress, has opined that both have wrongly published general statements of policy which are in fact rules under the Congressional Review Act (the “CRA“). The GAO issued an opinion on 19 October 2017 that the Leveraged Lending Guidance (being the final interagency guidance on Leveraged Lending issued on 22 March 2013 jointly by the US banking agencies) (“LLG”) is a rule subject to the requirements of the CRA, meaning that it should have been submitted to each House of Congress before it was implemented, and opening the door for the possibility of it being overturned. This is notwithstanding that the LLG explicitly states that it is not a rule – the GAO has reiterated that an agency’s characterization is not determinative of whether it is a rule under the CRA, and the LLG does not meet any of the CRA exceptions.

What does this mean? Read our full bulletin to find out!

On 24 October 2017 the Court of Appeal handed down its decision in what has become known as the Waterfall IIA and B litigation (Burlington Loan Management Limited and others v Lomas and others [2017] EWCA Civ 1462).  The decision also covered an appeal of one point from the High Court Waterfall IIC decision.  A number of the issues originally intended to be covered in the appeal fell away following the earlier Supreme Court decision in Waterfall I (see the joint administrators of LB Holdings Intermediate 2 Ltd v the joint administrators of Lehman Brothers International (Europe) [2017] UKSC 38).  The remaining  issues concerned the calculation of, and the entitlement of creditors to, statutory interest, in accordance with Rule 2.88 under the Insolvency Rules 1986.  By way of background, as it relevant for a number of the issues forming the subject of the appeal, under Rule 2.88(9) statutory interest accrues either at the rate specified in s.17 Judgments Act 1838 or the “rate applicable to the debt apart from the administration”, whichever is the higher.

Litigation over statutory interest is rare because statutory interest is only payable once all provable debts have been paid in full.  However, following the payment in full of all provable debts, there remains in the LBIE estate a surplus of c.£7.9bn.  There are, accordingly, significant amounts at stake in the litigation.

Continue Reading The latest in the Lehman Waterfall litigation

On 4 October 2017 the ECB published an addendum to its Guidance to Banks on non-performing loans (click here to read our earlier report on the guidance).  On 5 October 2017, the EBA published its work programme for 2018 which included further work to assist in the resolution of non-performing loans. Both of these documents show the level of importance placed by EU authorities on the reduction of NPL levels held by European institutions.  Expect more “encouragement” for banks to deal, one way or another, with their NPLs in 2018.

Continue Reading Further guidance expected for NPLs in Europe

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.