Basis Points

Alberta Don’t You Treat Me Unkind – Gonna Change My Way of Thinking

frgblog — Tue, 05 Feb 2019 15:15:45 +0000

Alberta Don’t You Treat Me Unkind – Gonna Change My Way of Thinking

In 2017, the Alberta Court of Appeal upheld the lower court’s decision that the BIA prevailed over a conflicting provision in the provincial regulations promulgated by the Alberta Energy Regulator (AER). In our blog posts about the appellate ruling and the lower court’s decision, we announced that the decision was a boon for Canadian oil and gas lenders, but our optimism was tempered by an *asterisk* because the issue might not be settled “until the Canadian Supremes ultimately sing.”

We were right to “feel a change comin’ on” because, in this case, “there’s only one authority and that’s the authority on high” (the Supreme Court of Canada). On January 31, 2019, the Canadian Supremes sang with the conciseness of Dylan. The Court’s decision in Orphan Well Association closes the curtain on the final act, placing the liability on the bankruptcy estate of Alberta’s Redwater Energy Corporation (“Redwater”) for the decommissioning and cleanup of abandoned drilling sites.

The core issue on consideration was whether section 14.06(4) of the Canadian Bankruptcy and Insolvency Act (“BIA”), permitting the trustee to disclaim abandoned wells to protect itself from personal liability, conflicted with AER provincial regulations imposing environmental liabilities on the estate in connection with such assets. Unlike the courts below, the Court found no conflict existed between the BIA’s priority scheme and limitation of the court-appointed trustee’s personal liability from public obligations of the bankrupt estate under provincial law.

AER sought to enforce provincial regulations requiring Redwater to pay remediation liabilities associated with abandoned wells to prevent the public from shouldering the costs. In so doing, AER acted in its bona fide regulatory capacity and “not [as] a creditor of the . . . corporation.” Redwater’s environmental obligations were a public “duty” and not dischargeable as claims under the BIA. Accordingly, such duties lie outside the BIA’s priority scheme and have no effect on trustee protections. Although the trustee could not be held personally liable for such expenses under the BIA, such regulatory obligations must be satisfied from the estate before distributions to creditors.

“After so much oppression,” AER finally prevailed. The “authority on high” “changed its way of thinking” and made “a different set of rules.” Contrary to the prior decisions of the lower courts, the final Redwater decision makes clear that the liability for managing and remediating abandoned wells remains with the insolvent enterprise and, effectively, its secured lenders. The Court cautioned that “[b]ankruptcy is not a license to ignore rules, and insolvency professionals are bound by and must comply with valid provincial laws during bankruptcy.”

Accordingly, lenders currently secured by Canadian O&G assets should take into account any provincial environmental liabilities in calculating asset value. Moreover, potential secured lenders documenting new facilities should consider regulatory obligations when drafting asset coverage ratios and other collateral- or reserve-based covenants and requirements. Finally, given the Supreme Court made it clear that the regulatory requirements did not force Redwater to satisfy obligations with assets unrelated to the “end-of-life obligations,” debtors and creditors may consider structures that would ring-fence unrelated assets from such liabilities, either retrospectively or prospectively.

frgblog Tue, 02/05/2019 - 09:15

By:

Categories

Court Cases

Retail Bankruptcies: Threading the Needle in a Tattered Industry

frgblog — Tue, 27 Nov 2018 20:01:07 +0000

Retail Bankruptcies: Threading the Needle in a Tattered Industry

Journal of Corporate Renewal | November/December 2018

Does bankruptcy have to spell liquidation for struggling retailers in the post-Amazon world? Bracewell lawyers Jennifer Feldsher, Mark Dendinger and Logan Kotler discuss the options for US retailers in the Nov./Dec. issue of Journal of Corporate Renewal.

Click here to read.

frgblog Tue, 11/27/2018 - 14:01

By:

Categories

Trends

I Scream, You Scream, We All Scream at Preference Claims

frgblog — Tue, 02 Oct 2018 22:16:05 +0000

I Scream, You Scream, We All Scream at Preference Claims

IN BRIEF:

Must new value “remain unpaid” for a creditor to defeat a trustee’s avoidance action?
The Eleventh Circuit joined other circuits in concluding that new value need not remain unpaid.
The holding increases protection for short-term creditors that extend credit to distressed businesses.

READ FULL ARTICLE

frgblog Tue, 10/02/2018 - 17:16

By:

Jason Cohen

Categories

Court Cases

The Tail of a Dog with Two Hats: Fifth Circuit Upholds “Golden Share” Held by Creditor Affiliate

frgblog — Fri, 01 Jun 2018 18:18:08 +0000

The Tail of a Dog with Two Hats: Fifth Circuit Upholds “Golden Share” Held by Creditor Affiliate

On May 22, 2018, the United States Court of Appeals for the Fifth Circuit issued its decision in Franchise Services of North America v. United States Trustees (In re Franchise Services of North America), 2018 U.S. App. LEXIS 13332 (5th Cir. May 22, 2018). That decision affirms the lower court’s holding that a “golden share” is valid and necessary to filing when held by a true investor, even if such investor is controlled by a creditor.

The backdrop of mergers and acquisitions leading up to this case need not be retold in detail to understand the holding’s significance, but some context is helpful. Franchise Services of North America, Inc. (“FSNA”), one of North America’s largest car rental companies, filed for chapter 11 bankruptcy without the required consent of its sole holder of preferred stock, Boketo, LLC (“Boketo”). Boketo was a minority shareholder that had invested $15 million in FSNA making it FSNA’s single largest investor. Boketo is a wholly-owned subsidiary of investment bank Macquarie Capital (U.S.A.) (“Macquarie”), an unsecured creditor of FSNA’s by virtue of an alleged $3 million claim for fees incurred in connection with the aforementioned transactions. When Boketo invested $15 million in FSNA, it required FSNA to re-incorporate in Delaware and add a “golden share” provision to its corporate documents, i.e. Boketo’s affirmative vote of its preferred share was required for certain corporate events, such as filing bankruptcy. Nonetheless, FSNA eventually filed for chapter 11 in the Southern District of Mississippi without seeking Boketo’s consent, fearing that shareholder Boketo—controlled by creditor Macquarie—would not consent to filing.

Macquarie and Boketo filed motions to dismiss the case for a lack of corporate authority under FSNA’s amended corporate charter. In doing so, Macquarie donned two hats—that of a shareholder through Boketo and that of an unsecured creditor with a $3 million claim. FSNA asserted that Macquarie used Boketo as a “wolf in a sheep’s clothing” to equip a creditor with shareholders’ blocking rights under an allegedly unenforceable “blocking provision” or “golden share.” FSNA implied the tail had been wagging the dog—that Macquarie made the $15 million investment through Boketo to avoid the cost and inconvenience of trying to collect some portion of its $3 million claim in FSNA’s bankruptcy. The bankruptcy court denied Macquarie’s motion because case law and public policy forbid a creditor from preventing a debtor’s bankruptcy filing. However, it granted Boketo’s motion, given its status as a voting shareholder. The Fifth Circuit affirmed, and found FSNA’s theory that Macquarie chased $3 million with $15 million “strain[ed] credulity.”

FSNA’s various legal arguments each fell flat. First, FSNA sought a ruling that “blocking provisions” or “golden shares” (similar, but not identical, concepts), in general, are unenforceable under Delaware law. The Fifth Circuit declined to offer such an advisory opinion. Second, FSNA contended that even if Delaware law allowed these types of provisions, federal policy forbids them. This, too, failed to move the court, since the corporate charter did not eliminate FSNA’s ability to file bankruptcy. Instead, it specified which parties’ consent was necessary to authorize a bankruptcy filing, placing the decision with shareholders. Third, because authority to file bankruptcy is a matter of state law, FSNA argued that Boketo could not exercise its blocking right under Delaware law, and that Boketo had owed a fiduciary duty to facilitate the filing. The Fifth Circuit held that Delaware law, flexible by nature, allows a corporate charter to assign rights to shareholders that would ordinarily be assigned to directors/management, but declined to go so far as to determine whether such provision was valid under Delaware law. In addition, the court refuted FSNA’s fiduciary duty argument because only controlling minority shareholders owe fiduciary duties, and here, Boketo was a non-controlling minority shareholder. The court explained that the standard for minority control is a “steep one,” and that courts focus on control of the board—i.e., whether the minority shareholder can exert actual control over the company. While Boketo made a sizeable investment in FSNA, it only had the right to appoint 2 out of 5 directors and therefore could not exert actual control over the board. FSNA pointed to Boketo’s hypothetical ability to prevent bankruptcy as evidence of actual control, but the court distinguished such theoretical control from actual exertion thereof. The court keenly noted that FSNA defeated its own control argument when it filed bankruptcy without Boketo’s consent—if Boketo was a controlling shareholder, then once again the tail must have been wagging the dog.

Franchise Services highlights the potential for a creditor to essentially step into a shareholder’s shoes and assert shareholder rights pursuant to a corporate charter’s blocking provision or “golden share” by virtue of wearing two hats through a parent and subsidiary.

frgblog Fri, 06/01/2018 - 13:18

By:

Categories

Court Cases

Not So Safe Anymore: SCOTUS Narrowly Construes Safe Harbor for Avoidable Transfers

frgblog — Tue, 27 Feb 2018 22:04:35 +0000

Not So Safe Anymore: SCOTUS Narrowly Construes Safe Harbor for Avoidable Transfers

The Circuit Courts of Appeal have split on whether a prepetition transfer made by a debtor is avoidable if the transfer was made through a financial intermediary that was a mere conduit. Today, the Supreme Court unanimously resolved the split by deciding that transfers through “mere conduits” are not protected. This is a major (and adverse) decision for lenders, bondholders and noteholders who receive payments through an intermediary such as a disbursing agent.

Merit Management Group, LP v. FTI Consulting, Inc., No. 16-784 (Feb. 27, 2018) involved a potential fraudulent transfer of a securities payment from party A to party D. However, before reaching D, the transfer went through parties B and C, both of whom were “financial institution” intermediaries protected from fraudulent transfer actions related to certain securities payments by the safe harbor provision of section 546(e) of the Bankruptcy Code. In a decision sure to have long-reaching effects, the Supreme Court held that the only relevant transfer for purposes of determining the applicability of section 546(e) is the ultimate transfer that the trustee seeks to avoid. For example, where A transfers property to D through the use of intermediary financial institutions B and C, and the trustee seeks to avoid the transfer from A to D, the transfer from A to D acts as the only relevant transfer and is therefore not protected absent an independent right under a safe harbor.

In Merit Management, Valley View Downs LP (“Valley View”) and Bedford Downs Management Corp. (“Bedford Downs”) entered into an agreement under which Valley View, subject to obtaining the last available harness-racing license in Pennsylvania, would purchase all of Bedford Downs’ stock for $55 million. Valley View was granted the license and arranged for the Cayman Islands branch of Credit Suisse to wire $55 million to a third-party escrow agent, Citizens Bank of Pennsylvania (“Citizens Bank”). Bedford Downs’ shareholders also deposited their stock certificates with Citizens Bank to be held in escrow, and Citizens Bank disbursed the $55 million over two installments, of which Bedford Downs shareholder Merit Management Group LP (“Merit”) received $16.5 million. The closing statement for the transaction reflected Valley View as the “Buyer,” the Bedford Downs shareholders as the “Sellers,” and $55 million as the “Purchase Price.” Ultimately, Valley View was unable to achieve its goal of opening a racetrack casino, or “racino”, and with its parent company Centaur, LLC, filed for chapter 11 bankruptcy. After confirmation of a chapter 11 reorganization plan, FTI Consulting, Inc. (“FTI”) was appointed to serve as litigation trustee, and in its capacity as such, filed suit against Merit in the Northern District of Illinois to avoid the $16.5 million transfer from Valley View, alleging the transfer to be constructively fraudulent under section 548(a)(1)(B) of the Bankruptcy Code. Notably, FTI did not seek to avoid the intermediate transfers, from Valley View to Credit Suisse (i.e. A to B), Credit Suisse to Citizens Bank (B to C), or from Citizens Bank to Merit (C to D).

Merit filed a motion for judgment on the pleadings, arguing that the safe harbor of 546(e) protected the transfer because it was a “settlement payment . . . made by or to (or for the benefit of)” a covered “financial institution”—i.e., the intermediaries Credit Suisse and Citizens Bank. The District Court granted the motion, but the Seventh Circuit reversed. The Supreme Court affirmed, finding that neither Valley View nor Merit constituted covered “financial institutions,” and the language and context of section 546(e) support the view that the only relevant transfer for purposes of determining the applicability of the section 546(e) safe harbor is the transfer that the trustee seeks to avoid. Transfers where “financial institutions” (or other section 546(e) entities) act as “mere conduits” for an ultimate transferee that is not a “financial institution” (or other section 546(e) entity) are not exempt from avoidance actions.

Merit Management is certain to have profound implications for firms that provide loans, purchase public or private notes, or receive distributions through a third-party such as a facilities agent, indenture trustee, or disbursement agent. The decision drastically narrows the protections of the section 546(e) safe harbor as to transfers involving section 546(e)-covered entities only in an intermediate capacity (and not as an initial transferor or ultimate transferee), leaving each seriatim transferee vulnerable to the effects of avoidance. Any ostensible finality of closed deals that involved a section 546(e)-covered intermediary and might therefore have seemed safeguarded from avoidance, may yet be jeopardized by the prospect of significant clawbacks long after the dust has settled.

frgblog Tue, 02/27/2018 - 16:04

By:

Categories

Court Cases

Mark Dendinger Elected to Bracewell Partnership

frgblog — Wed, 07 Feb 2018 18:20:36 +0000

Mark Dendinger Elected to Bracewell Partnership

Newest Financial Restructuring Partner, Mark Dendinger realizes that the ability to excel in golf certainly lends itself to the ability to excel in other technically complex pursuits—like the practice of law. Why? According to golf guru Jim Flick, “Golf is 90 percent mental,…and the other 10 percent is mental.” It should come as no surprise then that financial restructuring and private investment practice team member Mark Dendinger is an avid golfer who, in college, also performed as part of an internationally-acclaimed choral ensemble. Today, Mark excels in a challenging practice focusing on the representation of institutional investors, fund managers and lenders in complex workouts, and insolvency proceedings in US and international corporate restructurings. He also assists private investment funds, investors and advisers on litigation, regulatory and transactional matters. To learn more about Mark, check out his firm bio.

frgblog Wed, 02/07/2018 - 12:20

Categories

Breaking News

Comity Hour: Staying “Nonexistent” Russian Claims in New York under Chapter 15

frgblog — Tue, 09 Jan 2018 15:31:56 +0000

Comity Hour: Staying “Nonexistent” Russian Claims in New York under Chapter 15

In a previous article, The Eagle and the Bear: Russian Proceedings Recognized Under Chapter 15, we discussed In re Poymanov, in which the Bankruptcy Court (SDNY) recognized a Russian foreign proceeding under chapter 15 of the Bankruptcy Code even though the debtor had only nominal assets in the United States (the “Recognition Order”). The Bankruptcy Court had declined to rule upon recognition whether the automatic stay under 11 U.S.C. §§ 362 and 1520 applied to the corporate raiding claims of Sergey Poymanov and his former wife, Irina Podgornaya, purportedly assigned by them to PPF Management LLC (a U.S. fund) and being litigated in the District Court (SDNY) (the “Raider Claims”). Now, in its latest opinion, In re Sergey Petrovich Poymanov, 2017 WL 6607392, No. 17-10516 (MKV) (Bankr. S.D.N.Y. Dec. 27, 2017) (available here), the Bankruptcy Court applied the automatic stay to property within the territorial jurisdiction of the United States in accordance with Russian law as determined by a Russian appellate court (the “Appellate Court”).

In Russia . . .

While the U.S. proceedings were pending, the estate administrator (and Raider Claims defendant) petitioned a Russian commercial court to invalidate the purported assignments of the Raider Claims, which included the rights to pecuniary damages and moral harm inflicted on Poymanov and Podgornaya as a result of the alleged corporate raiding. On the same day the Recognition Order was entered, the Russian commercial court ruled that Podgornaya had validly assigned her claims but that Poymanov had not. Poymanov appealed the decision to the Appellate Court, which concluded that, under Russian law (1) Podgornaya’s claims were validly assigned because they were not marital property and thus not property of Poymanov’s estate, and (2) the assignment of Poymanov’s claims was void because (a) the claims lacked merit and therefore “never existed as legally recognized items” and could not be transferred under Russian law, and (b) even if the claims had merit, they were property of the estate because the purported assignment occurred after Poymanov petitioned for insolvency relief. Under Russian insolvency law, property of the estate is determined as of the date the court declares an individual bankrupt, thereby commencing liquidation of the individual’s assets.

In New York . . .

Meanwhile, in New York, the estate administrator had filed a motion to enforce the automatic stay based on the lower Russian court’s assignment decision. However, the Appellate Court issued its opinion the day before the New York hearing. Compelled by section 1525(a) of the Bankruptcy Code to “cooperate to the maximum extent possible with a foreign court or a foreign representative,” and in the interests of promoting international comity, the New York court adjourned the hearing and requested revised briefing. Consistent with the Russian appellate opinion, the Bankruptcy Court applied the automatic stay to the Poymanov Raider Claims—but not those of Podgornaya.

While claims under various U.S. state laws may be widely assigned without regard to their underlying merits, in Poymanov, despite the fact that the Raider Claims were being litigated in New York, the Bankruptcy Court recognized the Appellate Court’s application of Russian law based on the Poymanov Raider Claims’ merits by partially enforcing a stay of the Raider Claims. Again, the application of chapter 15 by the U.S. bankruptcy courts reaffirms its universalist roots.

frgblog Tue, 01/09/2018 - 09:31

By:

Categories

Court Cases

Momentive U-turn: Efficient Market Cramdown Rate Gains Momentum with Second Circuit Decision

frgblog — Mon, 23 Oct 2017 14:42:13 +0000

Momentive U-turn: Efficient Market Cramdown Rate Gains Momentum with Second Circuit Decision

In a previous article, Losing Momentive: A Roadmap to Higher Cramdown Interest Rates, we explored how the judicial cramdown interest rate cap was not gaining widespread traction as feared by many in response to the 2014 Momentive bench ruling upheld in a 2015 decision by the District Court for the Southern District of New York. Advancing the “efficient market” approach beyond the Ninth Circuit roadmap for higher interest rates, the Second Circuit has now reversed the District Court order and joined the Sixth Circuit in adopting the “efficient market” approach to setting cramdown interest rates. Its decision in Momentive Performance Materials Inc. v. BOKF, NA (In re MPM Silicones, LLC) is available here.

Momentive noteholders argued in bankruptcy court that that the formula approach adopted by the Supreme Court in Till (concerning an individual debtor’s debt adjustment plan under chapter 13) was not axiomatically appropriate in a chapter 11 cramdown. They asserted that cramdown rates should be market rates where there exists an “efficient, readily available, and highly instructive market.” Specifically, they argued that the negotiated exit financing interest rates were evidence of such a market and that such higher rates should likewise apply to the secured replacement notes under the plan. Despite evidence of an efficient market, the bankruptcy court confirmed the plan over noteholder objections—and the District Court for the Southern District of New York affirmed the bankruptcy court’s confirmation ruling, concluding that, although Till left open the possibility that the efficient market approach could apply to chapter 11 cases, the Second Circuit had only endorsed the formulaic Till rate.

Despite the 2015 Momentive detour, the District Court is no longer bound by Till. On Friday, the Second Circuit agreed with the Momentive noteholders and reversed the District Court’s 2015 order. In its decision, the Second Circuit observed that, “where, as here, an efficient market may exist that generates an interest rate that is apparently acceptable to sophisticated parties dealing at arms-length, we conclude . . . that such a rate is preferable to a formula improvised by a court.” Therefore, the formula approach advanced in Till is now only applicable in the Second Circuit in the absence of an efficient market.

The Second Circuit decision is welcome news for secured lenders. It indicates that the “efficient market” approach has gained significant momentum toward more universal acceptance under chapter 11 as other circuits will likely be rerouted in that direction--even if such final destination is still a “Waze” off.

frgblog Mon, 10/23/2017 - 09:42

By:

Categories

Court Cases

Bracewell’s Basis Points Blog Has Been Nominated

frgblog — Thu, 28 Sep 2017 21:19:00 +0000

Bracewell’s Basis Points Blog Has Been Nominated

Bracewell’s Basis Points Blog has been selected to compete in The Expert Institute’s Best Legal Blog Competition. From a field of hundreds of potential nominees, Basis Points has received enough nominations to join one of the largest competitions for legal blog writing online today. It is now up to our followers to select Basis Points as the very best in its category. The competition will run from now until the close of voting at 12:00 AM on November 3rd, at which point the votes will be tallied and the winners announced. In true Basis Points Style, we leave you this haiku:

Bracewell’s Basis Points
Posts, Poetry, and People
Always a winner

Please vote for Basis Points here: https://www.theexpertinstitute.com/blog-category/amlaw/

frgblog Thu, 09/28/2017 - 16:19

Categories

Trends

Australian Insolvency Reforms – A Bill Becomes Law

frgblog — Thu, 21 Sep 2017 19:11:18 +0000

Australian Insolvency Reforms – A Bill Becomes Law

Last year, we reported that Australia had proposed significant insolvency reforms that, in our view, are long overdue ("A Major Leap Forward for Australian Insolvency Laws"). Earlier this year, we reported here that the Australian government had released a revised draft of its insolvency legislation providing a safe harbor from director insolvent trading liability and limitations on the enforceability of ipso facto clauses upon the occurrence of certain insolvency-related events. But it was still “just a bill.” At long last, we are pleased to announce that the Treasury Laws Amendment (2017 Enterprise Incentives No. 2) Bill 2017 passed through the Senate (with minor last-minute amendments) and received Royal Assent on September 18, 2017, so that the safe harbor provisions are finally effective and the new ipso facto provisions will become effective July 1, 2018.

The Reforms, Briefly

The new safe harbor provision shields directors from personal liability for debts incurred while the company is insolvent, if the company incurs such debts in connection with a course of action that is reasonably likely to lead to a better outcome for the company. As of July 1, 2018, a the new legislation will impose a stay on the enforcement of “ipso facto” clauses against a company under administration or a company that has announced, or actually applied to enter into, a scheme of arrangement to avoid being wound up in insolvency.

Positive Changes for US Investors

Adding a safe harbor provision and restricting ipso facto clause enforcement will benefit US investors by reducing barriers to successful restructurings and thereby preserving the going concern value of distressed Australian borrowers. Now, directors have greater leeway to consider and implement a range of restructuring options, even if the company is already insolvent. And the coming ipso facto protections will provide additional stability to maintain its business relationships during such implementation. We applaud our Aussie friends for creating an environment that favors value-preserving solutions and making Australian companies more attractive borrowers.

frgblog Thu, 09/21/2017 - 14:11

By:

David Lawton

Categories

Trends