BUSINESS RESTRUCTURING REVIEW

Transcription

1 Recent Developments in Bankruptcy and Restructuring Volume 13 l No. 5 l September-October 2014 JONES DAY BUSINESS RESTRUCTURING REVIEW TAKING A STAND WHERE FEW HAVE TRODDEN: STRUCTURED DISMISSAL HELD CLEARLY AUTHORIZED BY THE BANKRUPTCY CODE Charles M. Oellermann and Mark G. Douglas A structured dismissal of a chapter 11 case following a sale of substantially all of the debtor s assets has become increasingly common as a way to minimize cost and maximize creditor recoveries. However, only a handful of rulings have been issued on the subject, perhaps because bankruptcy courts are unclear as to whether the Bankruptcy Code authorizes the remedy. A Texas bankruptcy court recently added to this slim body of jurisprudence. In In re Buffet Partners, L.P., 2014 BL (Bankr. N.D. Tex. July 28, 2014), the court ruled that sections 105(a) and 1112(b) of the Bankruptcy Code provide authority for such a structured dismissal, noting that the remedy is clearly within the sphere of authority Congress intended to grant to bankruptcy courts in the context of dismissing chapter 11 cases. STRUCTURED DISMISSALS In a typical successful chapter 11 case, a plan of reorganization or liquidation is proposed, the plan is confirmed by the bankruptcy court, the plan becomes effective and, after the plan has been substantially consummated and the case has been fully administered, the court enters a final decree closing the case. However, because chapter 11 cases can be prolonged and costly, prepackaged or prenegotiated plans and expedited asset sales under section 363(b) of the Bankruptcy Code have been increasingly used as methods to short circuit the process, minimize expenses, and maximize creditor recoveries. After a bankruptcy court approves a sale of substantially all of a chapter 11 debtor s assets under section 363(b), a number of options are available to deal with the debtor s vestigial property and claims against the bankruptcy estate and to wind up the bankruptcy case. Namely, a debtor could propose and seek confirmation of a liquidating chapter 11 plan, the case could be converted to a chapter 7 liquidation, or the case could be dismissed. The first two options commonly require significant time and administrative costs. IN THIS ISSUE 1 Taking a Stand Where Few Have Trodden: Structured Dismissal Held Clearly Authorized by the Bankruptcy Code 5 Newsworthy 6 U.S. Causes of Action and Attorney Retainer Fund Sufficient Assets for Chapter 15 Recognition 10 Questioning the Executoriness of Trademark Licenses in Integrated Agreements 13 Proposed Bankruptcy Rule and Official Form Changes 15 Uniform Voidable Transactions Act Approved by Uniform Law Commission to Replace UFTA 16 Sovereign Debt Update 19 European Perspective In Brief 20 In Brief Recent Delaware District Court Ruling on Insufficiency of Publication Notice to Unknown Creditors

2 As a consequence, structured dismissals of chapter 11 cases following a section 363(b) sale of substantially all of the debtor s assets have become a popular exit strategy. A structured dismissal is a dismissal conditioned upon certain elements agreed to in advance by stakeholders and later approved by the court, as distinguished from an unconditional dismissal of the chapter 11 case ordered by the court under section 1112(b) of the Bankruptcy Code. Structured dismissals have typically been granted in cases where: (i) the debtor has sold, with court authority, substantially all of its assets outside a plan, but is either administratively insolvent or lacks sufficient liquidity to fund the plan confirmation process; or (ii) after approval of a section 363(b) asset sale, the debtor could confirm a liquidating chapter 11 plan, but costs associated with the confirmation process would likely eliminate or significantly reduce funds available for distribution to creditors. Buffet Partners may be viewed as a positive development both for debtors considering the structured dismissal as a possible strategy for exiting from chapter 11 and for bankruptcy courts contemplating whether they have authority to order a structured dismissal and, if so, under what circumstances. TYPICAL TERMS OF A STRUCTURED DISMISSAL Some common provisions included in bankruptcy court orders approving structured dismissals include the following: Expedited procedures to resolve claims objections. Provisions specifying the manner and amount of distributions to creditors. Releases and exculpation provisions that might ordinarily be approved as part of a confirmed chapter 11 plan. Senior creditor carve-outs and gifting provisions, whereby, as a quid pro quo for a consensual structured dismissal, a senior secured lender or creditor group agrees to carve out a portion of its collateral from the sale proceeds and then gift it to unsecured creditors. Provisions that, notwithstanding section 349 of the Bankruptcy Code (vacating certain bankruptcy court orders when a case is dismissed), prior bankruptcy court orders survive dismissal and the court retains jurisdiction to implement the structured dismissal order; to resolve certain disputes; and to adjudicate certain matters, such as professional fee applications. SOURCES OF AUTHORITY FOR STRUCTURED DISMISSALS The Bankruptcy Code does not expressly authorize or contemplate structured dismissals. Even so, sections 1112(b), 305(a)(1), and 105(a) are commonly cited as predicates for the remedy. Section 1112(b) authorizes a bankruptcy court to convert a chapter 11 case to a chapter 7 liquidation or to dismiss a chapter 11 case, whichever is in the best interests of creditors and the estate, for cause. Cause is defined in section 1112(b)(4) to include, among other things, substantial or continuing loss to or diminution of the estate and the absence of a reasonable likelihood of rehabilitation and inability to effectuate substantial consummation of a confirmed plan. Dismissal or conversion of a chapter 11 case under section 1112(b) is a two-step process. First, the court must determine whether cause exists for dismissal or conversion. Second, the court must determine whether dismissal or conversion of the case is in the best interests of creditors and the estate. See Rollex Corp. v. Associated Materials, Inc. (In re Superior Siding & Window, Inc.), 14 F.3d 240, 242 (4th Cir. 1994). Section 305(a)(1) of the Bankruptcy Code provides that a bankruptcy court can dismiss or suspend all proceedings in a bankruptcy case under any chapter if the interests of creditors and the debtor would be better served by such dismissal or suspension. Section 305(a)(1) has traditionally been used to dismiss involuntary cases where recalcitrant creditors involved in an outof-court restructuring file an involuntary bankruptcy petition to extract more favorable treatment from the debtor. However, the provision has also been applied to dismiss voluntary cases, albeit on a more limited basis. Because an order dismissing a case under section 305(a) may be reviewed on appeal only by a district court or a bankruptcy appellate panel, rather than a court of appeals or the U.S. Supreme Court (see 11 U.S.C. 305(c)), section 305(a) dismissal is an extraordinary remedy. See In re Kennedy, 504 B.R. 815, 828 (Bankr. S.D. Miss. 2014); see also Gelb v. United States (In re Gelb), 2013 BL , *6 n.13 (B.A.P. 9th Cir. Mar. 29, 2

3 2013) (dismissal or suspension order under section 305(a) reviewable by bankruptcy appellate panel). Section 105(a) of the Bankruptcy Code provides that a bankruptcy court may issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of the Bankruptcy Code. However, section 105(a) does not allow the bankruptcy court to override explicit mandates of other sections of the Bankruptcy Code. Law v. Siegel, 134 S. Ct. 1188, 1194 (2014) (quoting 2 COLLIER ON BANKRUPTCY [2], pp (16th ed. 2013)). Most structured dismissals are consensual. The few reported and unreported decisions on the issue reflect that some courts have been willing to order structured dismissals due to the consent of stakeholders and because a structured dismissal is a more expeditious, cost-effective, and beneficial means of closing a chapter 11 case. See, e.g., In re Felda Plantation, LLC, 2012 WL (Bankr. N.D. Fla. May 29, 2012) (granting chapter 11 debtor s motion for structured dismissal in order providing that, notwithstanding dismissal, all orders entered in bankruptcy survived dismissal, court retained jurisdiction to rule on fee applications, and debtor was obligated to pay U.S. Trustee and professional fees, as well as creditors, as specified); Omaha Standing Bear Pointe, LLC v. Rew Materials (In re Omaha Standing Bear Pointe, LLC), 2011 BL (Bankr. D. Neb. Mar. 17, 2011) (noting that chapter 11 debtor s motion for structured dismissal was granted after real property was sold free and clear and proceeds were distributed to secured creditor); see also In re Fleurantin, 420 Fed. Appx. 194, 2011 BL (3d Cir. Mar. 28, 2011) (ruling that bankruptcy court did not abuse its discretion in approving structured dismissal of individual chapter 7 case, which trustee argued was in the best interests of the parties, particularly in light of the estate s continued expenditure of legal fees in response to [debtor s] motions and other efforts to obstruct its administration ). But see In re Strategic Labor, Inc., 467 B.R. 11, 11 and n.10 (Bankr. D. Mass. 2012) (stating that [t]his matter offers an object lesson in how not to run a Chapter 11 case ; denying debtor s post-asset sale motion for approval of a structured dismissal, where, among other things, debtor intentionally mischaracterized secured claim of Internal Revenue Service and used cash collateral without authority; and instead granting U.S. Trustee s motion to convert to chapter 7). Regardless of stakeholder consent, the Office of the U.S. Trustee, a division of the U.S. Department of Justice entrusted with overseeing the administration of bankruptcy cases, frequently objects to structured dismissals. Among other things, the U.S. Trustee has argued that structured dismissals: (i) distribute assets without adhering to statutory priorities; (ii) include improper and overbroad releases and exculpation clauses; (iii) violate the express requirements of section 349(b); (iv) may constitute sub rosa chapter 11 plans which seek to circumvent plan confirmation requirements and creditor protections; (v) improperly provide for retention of the bankruptcy court s jurisdiction; and (vi) fail to reinstate the remedies of creditors under applicable non-bankruptcy law. See Nan Roberts Eitel, T. Patrick Tinker & Lisa L. Lambert, Structured Dismissals, or Cases Dismissed Outside of Code s Structure?, 30 AM. BANKR. INST. J. 20 (March 2011). A RECENT CASE STUDY: IN RE BUFFET PARTNERS Buffet Partners, L.P., and its affiliates (collectively, Buffet ) owned and operated Furr s a buffet-style restaurant chain that, at its height in 2009, had 50 locations, primarily in the southwestern United States. Buffet filed for chapter 11 protection in the Northern District of Texas on February 14, Shortly afterward, Buffet sought court authority to sell substantially all of its assets under section 363(b) to stalking-horse bidder and secured lender Chatham Credit Management III, LLC ( Chatham ). The official committee of unsecured creditors performed substantial due diligence regarding Buffet s business, the liens and claims against Buffet s assets and estate, and various restructuring alternatives. After completing due diligence, the committee and Buffet jointly filed a motion for approval of a settlement that would resolve the open issues in the case, pay allowed administrative and priority claims in full, and provide a meaningful recovery for general unsecured creditors. In particular, under the proposed settlement: (i) Buffet s assets would be sold to Chatham or any qualified overbidder; (ii) the purchaser would pay $500,000 into a trust created for the benefit of unsecured creditors; (iii) the purchaser would pay administrative expenses, provided that the fees and expenses of professionals retained by Buffet and the committee would be capped, respectively, at $600,000 and $250,000; (iv) the committee would support entry of a final cash collateral order in the case; (v) Chatham would waive any unsecured deficiency claim; and (vi) Chatham, Buffet, and the committee would exchange releases. 3

4 The court approved the settlement on April 16, Chatham s $25 million bid prevailed at an auction conducted the following week. On June 19, 2014, Buffet and the committee jointly moved to dismiss the chapter 11 cases. In their motion, they proposed that the Buffet cases be dismissed upon certification that: (i) the committee has completed the claims reconciliation process; (ii) all U.S. Trustee fees have been paid; (iii) funds have been distributed to unsecured creditors; and (iv) the court has ruled on professional fee applications. In addition, the proposed dismissal order provided that: (a) any orders entered by the court during the case would remain in force, notwithstanding section 349; (b) Buffet was authorized to take appropriate action to wind up and dissolve as a corporate entity without further approval by the board of directors, shareholders, or any other entities; and (c) the court retained jurisdiction to review fee applications and to resolve disputes regarding any orders entered during the case (including the dismissal order). Only the U.S. Trustee objected to the structured dismissal motion, arguing that, after approval of the sale to Chatham, the case should be converted to chapter 7 or, in the alternative, Buffet should seek confirmation of a chapter 11 plan. THE BANKRUPTCY COURT S RULING The bankruptcy court approved the structured dismissal as being in the best interests of creditors and the estate. The court acknowledged that [n]ot much law, statutory or otherwise, exists regarding structured dismissals of this type. Even so, it reasoned that both alternatives proposed by the U.S. Trustee would add significant and unnecessary time and expense. The court also emphasized that the economic value of the Debtor in this case will be served by dismissing the case, rather than converting it and that the parties do not wish to go through the time and expense of a plan, which will cause the pool of money left to be greatly diminished. Given appropriate notice and a process that does not illegally or unfairly trample on the rights of parties, the court concluded, the structured dismissal should be approved. However, the court cautioned that parties do not have carte blanche to enter into any settlement they choose. Among other things, a proposed settlement must comply with the Bankruptcy Code s distribution rules and cannot short circuit the chapter 11 plan confirmation requirements by establishing the terms of a sub rosa plan in connection with a section 363(b) asset sale. While the proposed dismissal does have certain plan aspects, the court wrote, it does not cut off the rights of any parties without giving them the chance to voice an objection and it does not violate the absolute priority rule. Finally, the court characterized as worthy of consideration, albeit not outcome determinative, the fact that not one party with an economic stake in the case has objected to the dismissal in this manner. The court concluded its ruling by unequivocally endorsing a structured dismissal in an appropriate case: 11 U.S.C. 1112(b) and 105(a) provide this court with the requisite authority to fashion the dismissal order that the parties seek. Although this process is not explicitly spelled out in 1112(b), it is clearly within the sphere of authority Congress intended to grant to bankruptcy courts in the context of dismissing chapter 11 cases. This dismissal, which all of the economically-interested parties support, is in the best interests of the creditors and the estate. For the following reasons, the proposed dismissal is hereby GRANTED. OUTLOOK Buffet Partners does not signal a significant departure from existing bankruptcy jurisprudence or practice structured dismissals are becoming more commonplace as a way to minimize costs and maximize creditor recoveries. Still, the decision is important because it is one of the few published rulings on the issue. Moreover, the court expressly identifies the source of its authority sections 1112(b) and 105(a) to approve a structured dismissal. As such, Buffet Partners may be viewed as a positive development both for debtors considering the structured dismissal as a possible strategy for exiting from chapter 11 and for bankruptcy courts contemplating whether they have authority to order a structured dismissal and, if so, under what circumstances. 4

5 NEWSWORTHY Jones Day was included in Law 360 s Global 20, a list of the 20 law firms that had the biggest global presence and handled the largest, most significant, and most groundbreaking international and cross-border matters during Corinne Ball (New York) and Heather Lennox (New York and Cleveland) were included among The 500 Leading Lawyers in America in LawDragon. Bruce Bennett (Los Angeles) was named one of the 100 most influential lawyers in California by the Los Angeles Daily Journal and The Recorder. Scott J. Greenberg (New York), Richard L. Wynne (Los Angeles), Lisa G. Laukitis (New York), Paul D. Leake (New York), James O. Johnston (Los Angeles), Heather Lennox (New York and Cleveland), Gregory M. Gordon (Dallas), David G. Heiman (Cleveland), Corinne Ball (New York), Carl E. Black (Cleveland), Bruce Bennett (Los Angeles), Brad B. Erens (Chicago), and Aldo L. LaFiandra (Atlanta) were recognized in Best Lawyers in America (2015) in the field of Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law. Aldo L. LaFiandra (Atlanta) was named Lawyer of the Year for 2015 by Best Lawyers in the field of Bankruptcy and Creditor Debtor Rights/Insolvency and Reorganization Law. An article written by Laurent Assaya (Paris) entitled Distressed Companies Law Reform: Order of 12 March 2014 was published in Volume 11, Issue 4 (2014) of International Corporate Rescue. Carl E. Black (Cleveland) was named Lawyer of the Year for 2015 by Best Lawyers in the field of Litigation-Bankruptcy. An article featuring Bankruptcy Examiner Paul D. Leake (New York) appeared in the Bankruptcy Beat column of the July 29, 2014, edition of The Wall Street Journal. Daniel J. Merrett (Atlanta) was selected for the Next Generation Program in connection with the 2014 National Conference of Bankruptcy Judges to be held in Chicago, October The 40 program participants are attorneys with five to 10 years of experience who deserve special recognition for their professional accomplishments and who show the potential to distinguish themselves in future years as highly respected members of the bankruptcy bar. 5

6 U.S. CAUSES OF ACTION AND ATTORNEY RETAINER FUND SUFFICIENT ASSETS FOR CHAPTER 15 RECOGNITION Pedro A. Jimenez and Mark G. Douglas In December 2013, the U.S. Court of Appeals for the Second Circuit held as a matter of first impression in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), that section 109(a) of the Bankruptcy Code, which requires a debtor under this title to have a domicile, a place of business, or property in the U.S., applies in cases under chapter 15 of the Bankruptcy Code. The Second Circuit accordingly vacated a bankruptcy court order granting recognition under chapter 15 to a debtor s Australian liquidation proceeding, concluding that the bankruptcy court erred in ruling that section 109(a) does not apply in chapter 15 cases and that it improperly recognized the debtor s Australian liquidation proceeding in the absence of any evidence that the debtor had a domicile, a place of business, or property in the U.S. However, the Second Circuit did not provide any guidance as to how extensive a foreign debtor s property holdings in the U.S. must be to qualify for chapter 15 relief. The bankruptcy court recently answered that question on remand from the Second Circuit s ruling in Barnet. In In re Octaviar Administration Pty Ltd., 511 B.R. 361 (Bankr. S.D.N.Y. 2014), the bankruptcy court found that, consistent with case law analyzing the scope of section 109 for the purpose of determining who is eligible to commence a case under chapter 11, the requirement of property in the U.S. should be interpreted broadly. In this case, the fact that the Australian debtor had causes of action governed under U.S. law against parties in the U.S. and also had an undrawn retainer maintained in the U.S. satisfied the requirement for the debtor to have property located in the U.S. RECOGNITION OF FOREIGN INSOLVENCY PROCEEDINGS BY U.S. BANKRUPTCY COURTS Enacted in 2005, chapter 15 of the Bankruptcy Code is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the Model Law ), which was designed to provide effective mechanisms for dealing with cross-border insolvency cases. The basic requirements for recognition of a foreign proceeding in the U.S. under chapter 15 are outlined in section 1517(a) of the Bankruptcy Code: (i) the proceeding must be a foreign main proceeding or foreign nonmain proceeding within the meaning of section 1502; (ii) the foreign representative applying for recognition must be a person or body ; and (iii) the petition must be supported by the documentary evidence specified in section Foreign proceeding is defined in section 101(23) of the Bankruptcy Code as: a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation. More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a foreign main proceeding a proceeding pending in the country where the debtor s center of main interests is located and foreign nonmain proceedings, which may have been commenced in countries where the debtor merely has an establishment, i.e., any place of operations where the debtor carries out a nontransitory economic activity. WHO MAY BE A DEBTOR UNDER CHAPTER 15? Section 109(a) of the Bankruptcy Code provides that, [n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title. Section 103(a) provides that this chapter i.e., chapter 1, including section 109(a) appl[ies] in a case under chapter 15. Even so, chapter 15, unlike chapters 7, 9, 11, 12, and 13, contains its own definition of debtor. Section 1502(1) of the Bankruptcy Code defines debtor, [f]or the purposes of [chapter 15], as an entity that is the subject of a foreign proceeding. The Second Circuit addressed the apparent inconsistency between sections 109(a) and 1502(1) in Barnet. BARNET In July 2009, Octaviar Administration Pty Ltd. ( OA ), a company incorporated in Queensland, Australia, was ordered to liquidate by an Australian court. As part of an investigation into 6

7 OA s affairs, various Australian affiliates of Drawbridge Special Opportunities Fund LP ( Drawbridge ) were sued in Australia. Drawbridge itself refused to consent to the jurisdiction of the Australian courts. By holding that relatively minimal U.S. assets are required to qualify for chapter 15 recognition of a foreign bankruptcy or insolvency proceeding, Octaviar sets a low bar for recognition. However, this low threshold is arguably consistent with the goals of chapter 15 in, among other things, providing an effective vehicle for foreign debtors to collect assets outside the jurisdiction where their primary bankruptcy or insolvency proceedings are pending. In August 2012, the OA liquidators, as foreign representatives, sought recognition of the Australian liquidation proceeding as a foreign main proceeding under chapter 15 in a New York bankruptcy court. Drawbridge objected on the basis that OA did not meet the requirements to be a debtor under section 109(a) of the Bankruptcy Code. The bankruptcy court entered an order recognizing OA s Australian liquidation proceeding on September 6, It overruled Drawbridge s objection, holding that the definition of debtor in section 1502(1) determines whether a foreign debtor can be granted relief under chapter 15 and that the debtor need not have a domicile, a place of business, or property in the U.S. In response to a joint request by Drawbridge and OA s foreign representatives, the bankruptcy court certified a direct appeal of the recognition order to the Second Circuit, which agreed to review the case. THE SECOND CIRCUIT S RULING The Second Circuit ruled as a matter of first impression that section 109(a) applies in a chapter 15 case, on the basis of a straightforward interpretation of the statute. According to the court, section 103(a) expressly provides that chapter 1 of which section 109(a) is a part applies in a case under chapter 15. Section 109, of course, the Second Circuit wrote, is within Chapter 1 of Title 11 and so, by the plain terms of the statute, it applies in a case under chapter 15. The court emphasized that [s]ection 109(a)... creates a requirement that must be met by any debtor. Because OA s foreign representatives had made no attempt to establish that OA had a domicile, a place of business, or property in the U.S., the Second Circuit held that the bankruptcy court should not have granted recognition to OA s Australian liquidation proceeding. The Second Circuit rejected the foreign representatives argument that section 109(a) does not apply because OA is a debtor under the Australian Corporations Act (rather than under the Bankruptcy Code) and because the foreign representatives (rather than the debtor) were seeking recognition of the foreign proceeding. According to the court: [T]he presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding... [and] [i]t stretches credulity to argue that the ubiquitous references to a debtor in both Chapter 15 and the relevant definitions of Chapter 1 do not refer to a debtor under the title [title 11] that contains both chapters. The Second Circuit also flatly rejected the foreign representatives argument that, even if OA were required to qualify as a debtor under the Bankruptcy Code, it need satisfy only the chapter 15-specific definition of debtor in section 1502(1), rather than the section 109 requirements. This argument also fails, the court wrote, as we cannot see how such a preclusive reading of Section 1502 is reconcilable with the explicit instruction in Section 103(a) to apply Chapter 1 to Chapter 15. According to the Second Circuit, not only a plain meaning analysis but also the context and purpose of chapter 15 support the application of section 109(a) to chapter 15. The court explained that Congress amended section 103 to state that chapter 1 applies in cases under chapter 15 at the same time it enacted chapter 15, which strongly supports the conclusion that lawmakers intended section 103(a) to mean what it says namely, that chapter 1 applies in cases under chapter 15. The court acknowledged that the strongest support for the foreign representatives arguments lies in 28 U.S.C. 1410, which provides a U.S. venue for chapter 15 cases even when the debtor does not have a place of business or assets in the United States. However, the Second Circuit explained that this venue statute is purely procedural and that, [g]iven the unambiguous nature of 7

8 the substantive and restrictive language used in Sections 103 and 109 of Chapter 15 [sic], to allow the venue statute to control the outcome would be to allow the tail to wag the dog. Finally, the Second Circuit found that the purpose of chapter 15 is not undermined by making section 109(a) applicable in chapter 15 cases. Section 1501(a) of the Bankruptcy Code provides that the purpose of chapter 15 is to incorporate the Model Law... so as to provide effective mechanisms for dealing with cases of cross-border insolvency. Although section 109(a), or its equivalent, is not included in the Model Law, the Second Circuit emphasized, the Model Law allows a country enacting it to modify or leave out some of its provisions. In any case, the court concluded, the omission of a provision similar to section 109(a) from the Model Law does not suffice to outweigh the express language Congress used in adopting sections 103(a) and 109(a). The Second Circuit accordingly vacated the recognition order and remanded the case to the bankruptcy court for further proceedings consistent with its ruling. ON REMAND: OCTAVIAR Shortly after the Second Circuit handed down its ruling in Barnet, OA s foreign representatives, having determined not to pursue their initial petition, filed a second chapter 15 petition alleging that OA satisfies the requirements of section 109(a) in accordance with the Second Circuit s ruling. According to the new chapter 15 petition, OA has property in the U.S. consisting of: (i) claims or causes of action against Drawbridge and other U.S. entities; and (ii) an undrawn retainer in the possession of the foreign representatives U.S. counsel. Drawbridge objected to the second chapter 15 petition, arguing that: (i) Octaviar failed to satisfy the requirements of section 109(a) as of the filing of the initial chapter 15 petition; (ii) the second petition should be dismissed as an abuse of process; and (iii) even if recognition of the second petition is granted, the court should immediately dismiss the case pursuant to section 305(a)(2) of the Bankruptcy Code (authorizing the court to dismiss or suspend all proceedings in a chapter 15 case if the purposes of chapter would be best served by such dismissal or suspension ) to further the objectives of chapter 15. The bankruptcy court rejected each of these arguments. The court acknowledged that OA s claims against Drawbridge and the other U.S. entities may have been merely potential causes of action at the time of the filing of the first chapter 15 petition. However, it explained, such causes of action predated the first filing, and OA s foreign representatives, after being granted discovery, commenced litigation in New York state and federal court on the causes of action prior to the second chapter 15 filing. The court wrote that Drawbridge s arguments, including its abuse of process claim: amount to a procedural Catch-22 in which the Foreign Representatives do not deserve to be caught, to wit: since the Foreign Representatives did not identify existing causes of action or other property in the First Chapter 15 Petition, now that the Foreign Representatives have properly obtained discovery and alleged the existence of causes of action in the Second Chapter 15 Petition, this Court should refuse to grant recognition. The court rejected Drawbridge s assertion, relying on In re Fairfield Sentry Ltd., 484 B.R. 615 (Bankr. S.D.N.Y. 2013), that OA s causes of action should be deemed located in Australia, rather than the U.S., because causes of action, as intangible assets, are located where the plaintiff, rather than the defendant, is domiciled. In Fairfield Sentry, the court wrote, the bankruptcy court emphasized that the situs of intangibles depends on a common sense appraisal of the requirements of justice and convenience in the particular circumstance at issue. Unlike in Fairfield, the court explained, the foreign representatives in Octaviar have asserted claims under U.S. law that involve defendants located in the United States and include allegations that certain funds were wrongfully transferred by Drawbridge and other U.S. entities to the United States. According to the court, although these claims may be related to transactions and issues that are the subject of the Australian litigation, they do not involve the same parties, and [a]s a general matter, where a court has both subject matter and personal jurisdiction, the claim subject to the litigation is present in that court. 8

9 In dicta, the bankruptcy court found that OA also has property in the U.S. in the form of an undrawn retainer in the possession of the foreign representatives U.S. counsel. Because the funds were deposited after the first chapter 15 filing but prior to the second, Drawbridge argued that the creation of the account was an improper or bad-faith attempt to manufacture eligibility for chapter 15 recognition and to evade the consequences of Barnet. The Octaviar court rejected this argument, finding that the foreign representatives acted in good faith in transferring the funds to the retainer account. Section 109(a), the court wrote, says nothing about the amount of... [U.S.] property nor does it direct that there be an inquiry into the circumstances surrounding the debtor s acquisition of the property. It is thus consistent with other provisions of the Code that reject lengthy and contentious examination of the grounds for a bankruptcy filing. Finally, the bankruptcy court concluded that the policy and purposes of chapter 15 would be undermined if the foreign representatives were deprived of an opportunity to prosecute causes of action in the U.S. on behalf of Octaviar for the benefit of its creditors. Recognition of the Australian liquidation proceeding, the court wrote, will not prejudice Drawbridge or abridge its rights to assert all available defenses it has in the state and federal court litigation, including a defense on the basis of forum non conveniens. Moreover, it noted, [c]ourts have frequently expressed concern that the recognition provisions of chapter 15 not be used by a defendant who is attempting to evade its legitimate foreign creditors. According to the court, where, as here, Drawbridge refused to consent to the jurisdiction of the Australian courts, granting recognition of OA s Australian liquidation proceeding would promote cooperation between U.S. and Australian courts and would foster the fair, efficient, and timely adjudication of the Australian liquidation as well as assist in protecting the interests of both OA and its creditors. OUTLOOK By holding that relatively minimal U.S. assets are required to qualify for chapter 15 recognition of a foreign bankruptcy or insolvency proceeding, Octaviar sets a low bar for recognition. However, this low threshold is arguably consistent with the goals of chapter 15 in, among other things, providing an effective vehicle for foreign debtors to collect assets outside the jurisdiction where their primary bankruptcy or insolvency proceedings are pending. Barnet does not represent the only view on whether U.S. assets are required before a foreign proceeding can be recognized under chapter 15. A Delaware bankruptcy court (which is in the Third Circuit) issued a bench ruling to the contrary in In re Bemarmara Consulting A.S., Case No (KG) (Bankr. D. Del. Dec. 17, 2013). The court ruled that section 109(a) does not apply in chapter 15 because it is the foreign representative, rather than the debtor in the foreign proceeding, who petitions the court. Moreover, the court wrote, there is nothing in [the] definition [of debtor ] in Section 1502 which reflects upon a requirement that [a] Debtor have assets. See Transcript of Hearing at 9, l , In re Bemarmara Consulting A.S., Case No (KG) (Bankr. D. Del. Dec. 17, 2013) [Document No. 39]. A Debtor, the court noted, is an entity that is involved in a foreign proceeding. Given Octaviar s pronouncement that minimal U.S. property is adequate to satisfy the requirements of chapter 15, however, the distinction between the two courts approaches may be of little consequence in the vast majority of cases. 9

10 QUESTIONING THE EXECUTORINESS OF TRADEMARK LICENSES IN INTEGRATED AGREEMENTS Laura L. Swanson and Mark G. Douglas Protections added to the Bankruptcy Code in 1988 that give some intellectual property ( IP ) licensees the right to continued use of licensed property notwithstanding rejection of the underlying license agreement do not expressly apply to trademark licenses. As a consequence, a trademark licensee faces a great deal of uncertainty concerning its ability to continue using a licensed trademark if the licensor files for bankruptcy. This uncertainty has been compounded by inconsistent court rulings addressing the ramifications of rejection of an executory trademark license by a chapter 11 debtor-in-possession ( DIP ) or a bankruptcy trustee. Another layer of confusion has been added by recent court decisions suggesting that certain prebankruptcy trademark licenses may not be either assumed or rejected by a DIP or trustee because they are no longer executory at the time the debtor files for bankruptcy protection. This was the issue recently confronted by the Eighth Circuit Court of Appeals in Lewis Bros. Bakeries, Inc. v. Interstate Brands Corp. (In re Interstate Bakeries Corp.), 751 F.3d 955 (8th Cir. 2014). The court held that a license agreement was not executory and thus could not be assumed or rejected because the license was part of a larger, integrated agreement which had been substantially performed by the debtor prior to filing for bankruptcy. ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS AND UNEXPIRED LEASES Section 365 of the Bankruptcy Code authorizes a DIP or trustee to assume or reject most kinds of executory contracts and unexpired leases. When a contract or lease is assumed, the debtor must cure existing defaults (with certain exceptions), compensate the other party to the agreement for actual pecuniary loss resulting from any default, and provide adequate assurance of future performance under the agreement. Therefore, when a contract or lease is assumed, the parties ongoing obligations under the assumed contract or lease are effectively reinstated. When a contract or lease is rejected, however, the rejection is treated as a court-authorized breach of the agreement arising immediately prior to the bankruptcy filing date, and any damages suffered by the creditor will typically be treated as a general unsecured claim against the debtor s estate. In general terms, an executory contract is defined as a contract with material obligations remaining on both sides as of the bankruptcy petition date. Most courts rely on the late Harvard Law School professor Vern Countryman s well-known definition of an executory contract: a contract under which the obligation of both the bankrupt and the other party to the contract are so far unperformed that a failure of either to complete performance would constitute a material breach excusing performance of the other. SPECIAL RULES FOR CERTAIN IP LICENSES Prior to 1988, the rejection of an IP license, particularly a license of IP that was critical to a licensee s business operations, could have a severe impact on the licensee s business and leave the licensee scrambling to procure other IP to keep its business afloat. This concern was heightened by the Fourth Circuit s ruling in Lubrizol Enters., Inc. v. Richmond Metal Finishers, Inc., 756 F.2d 1043 (4th Cir. 1985), that if a debtor rejects an executory IP license, the licensee loses the right to use any licensed copyrights, trademarks, and patents. In order to better protect such licensees, Congress amended the Bankruptcy Code in 1988 to add section 365(n). Under section 365(n), licensees of some (but not all) IP licenses have two options when a DIP or trustee rejects the license. The licensee may either: (i) treat the agreement as terminated and assert a claim for damages; or (ii) retain the right to use the licensed IP for the duration of the license (with certain limitations). By adding section 365(n), Congress intended to make clear that the rights of an IP licensee to use licensed property cannot be unilaterally cut off as a result of the rejection of the license. However, notwithstanding the addition of section 365(n) to the Bankruptcy Code, the legacy of Lubrizol endures since by its terms, section 365(n) does not apply to trademark licenses and other kinds of intellectual property outside the Bankruptcy Code s definition of the term. In particular, trademarks, trade names, and service marks are not included in the definition of intellectual property under section 101(35A) of the Bankruptcy Code. Due to this omission, courts continue to struggle when determining the proper treatment of trademark licenses in bankruptcy. 10

11 CIRCUIT COURTS WEIGH IN ON TRADEMARK LICENSES AFTER LUBRIZOL During the last few years, several federal courts of appeal have had the opportunity to weigh in on how rejection in bankruptcy of a trademark license impacts the rights of the non-debtor licensee. For example, in In re Exide Technologies, 607 F.3d 957 (3d Cir. 2010), the Third Circuit concluded that a trademark license agreement was not executory because the non-debtor licensee had materially completed its performance under the agreement prior to the debtor s bankruptcy filing. Thus, the court held that the agreement could not be assumed or rejected at all. As a consequence, the Third Circuit never addressed whether rejection of the agreement (had it been found to be executory) would have terminated the licensee s right to use the debtor s trademarks. In Sunbeam Prods., Inc. v. Chicago Am. Manuf., LLC, 686 F.3d 372 (7th Cir. 2012), cert. denied, 133 S. Ct. 790 (2012), the Seventh Circuit held as a matter of first impression that when a trademark license is rejected in bankruptcy, the licensee does not lose the ability to use the licensed IP. In so ruling, the Seventh Circuit expressly rejected Lubrizol. The Seventh Circuit reasoned that lawmakers failure to include trademark licenses within the ambit of section 365(n) should not be viewed as an endorsement of any particular approach regarding rejection of a trademark license agreement, observing that an omission is just an omission. The Eighth Circuit recently had the opportunity to address this issue in Interstate Bakeries. INTERSTATE BAKERIES Pursuant to an antitrust judgment, Interstate Brands Corporation ( Interstate Brands ), a subsidiary of Interstate Bakeries Corp. ( IBC ), entered into an agreement to sell certain bread operations and assets to Lewis Brothers Bakeries, Inc. ( Lewis Brothers ). To effectuate the transfer, Interstate Brands and Lewis Brothers entered into two agreements: an Asset Purchase Agreement ( APA ) and a License Agreement. The APA provided for the transfer to Lewis Brothers of tangible assets and the perpetual, royalty-free, assignable, transferable exclusive license to use the trademarks... pursuant to the terms of the License Agreement. Of the $20 million purchase price, the parties agreed to allocate $8.12 million to the intangible assets, including the 13 trademarks covered by the License Agreement. Nearly eight years following the completion of the sale to Lewis Brothers, Interstate Brands filed for chapter 11 protection in the Western District of Missouri. Interstate Brands identified the License Agreement as an executory contract that it intended to assume as part of its chapter 11 plan. Lewis Brothers responded by commencing an adversary proceeding seeking a declaration that the License Agreement was not an executory contract and thus not subject to assumption or rejection. The bankruptcy court, looking solely to the License Agreement and relying on Exide Technologies, held that the License Agreement was executory because both Interstate Brands and Lewis Brothers had material, outstanding obligations under the agreement as of the bankruptcy petition date. A district court affirmed on appeal, reasoning that the failure of Lewis Brothers to maintain the character and quality of goods sold under the [t]rademarks would constitute a material breach of the License Agreement, thus a material obligation remains under the License Agreement, and it is an executory contract. Lewis Brothers appealed to the Eighth Circuit. While the appeal was pending, IBC changed its name to Hostess Brands, Inc., which in January 2012 filed for chapter 11 protection in the Southern District of New York. The New York bankruptcy court later authorized IBC to wind down its business. In August 2012, a divided panel of the Eighth Circuit affirmed the lower courts rulings that the License Agreement was executory and therefore subject to assumption or rejection. See In re Interstate Bakeries Corp., 690 F.3d 1069 (8th Cir. 2012). In reaching this conclusion, the majority of the panel focused solely on the License Agreement itself, but the dissenting judge argued that [t]he APA and the License Agreement should be considered together in assessing whether the integrated contract was executory. After soliciting the views of the Federal Trade Commission and the Antitrust Division of the U.S. Department of Justice, the Eighth Circuit granted Lewis Brothers petition for rehearing en banc. THE EIGHTH CIRCUIT S RULING ON REHEARING On rehearing, the Eighth Circuit began its inquiry by identifying what constituted the agreement at issue, relying on the general rule under Illinois law that in the absence of evidence of a contrary intention, where two or more instruments are executed by the same contracting parties in the course of the same 11

12 transaction, the instruments will be considered together... because they are, in the eyes of the law, one contract. Applying this rule to the APA and the License Agreement, the court determined that the lower courts did not analyze the documents at issue properly. According to the Eighth Circuit, the proper inquiry for the courts was whether the integrated agreement as distinguished from the License Agreement alone was executory. The ruling in Interstate Bakeries provides useful guidance in assessing whether a trademark license granted as part of an integrated transaction involving other related agreements is executory and may therefore be assumed or rejected in a bankruptcy case. However, like Exide Technologies, it falls short of addressing the issues raised by Lubrizol and Sunbeam. Applying the Countryman definition of executoriness, the court concluded that the integrated contract at issue was not executory. The Eighth Circuit explained that the doctrine of substantial performance is inherent in the Countryman definition of an executory contract, stressing that substantial performance is the antithesis of material breach. According to the court, the essence of the integrated agreement was the sale of Interstate Brands bread business and operations, not merely the licensing of the company s trademarks. Distinguishing the case before it from Exide Technologies, the Eighth Circuit explained that Interstate Brands remaining obligations under the APA and the License Agreement (e.g., notice and forbearance, maintenance and defense, and other infringement-related obligations) concerned only one of the many assets included in the sale the trademark license. The Eighth Circuit considered such obligations, when considered in the context of the integrated agreement as a whole, to be relatively minor and unrelated to the central purpose of the agreement to sell the bread operations and assets. It also found that, because Interstate Brands had substantially performed its obligations under the APA and the License Agreement, its failure to perform any remaining obligations would not be a material breach of the integrated agreement. Thus, the court ruled, the integrated agreement was not executory and could not be assumed or rejected. Three judges issued an opinion in which they concurred in part and dissented in part. Among other things, these judges stated that the license and the attendant ongoing obligations were of primary importance to the parties and their integrated agreement and that the importance of those obligations should be considered when assessing whether the parties have substantially performed their obligations to determine whether the contract is executory. OUTLOOK The ruling in Interstate Bakeries provides useful guidance in assessing whether a trademark license granted as part of an integrated transaction involving other related agreements is executory and may therefore be assumed or rejected in a bankruptcy case. However, like Exide Technologies, it falls short of addressing the issues raised by Lubrizol and Sunbeam. Indeed, in a footnote, the Eighth Circuit remarked that [b]ecause the agreement is not executory, we need not address whether rejection of a trademark-licensing agreement terminates the licensee s rights to use the trademark. As such, at least in the Eighth Circuit, trademark licensees remain caught in a limbo of uncertainty concerning this important question. 12

13 PROPOSED BANKRUPTCY RULE AND OFFICIAL FORM CHANGES The Judicial Conference Advisory Committees on Appellate, Bankruptcy, Civil, and Criminal Rules have proposed amendments to their respective rules and forms and have requested that the proposals be circulated to the bench, bar, and public for comment. The public comment period closes on Tuesday, February 17, 2015, at 11:59 p.m. Procedures for submitting comments and information regarding public hearings on the proposed changes, as well as the text of the proposed changes to the Federal Rules of Bankruptcy Procedure (the Bankruptcy Rules ) and the Official Forms, are available at RulesAndPolicies/rules/proposed-amendments.aspx. The proposed changes to the Bankruptcy Rules and the Official Forms of particular pertinence in commercial bankruptcy cases include the following: Bankruptcy Rule 1012 would be restored (as amended) to provide that the debtor or any party-in-interest may contest a petition for recognition of a foreign proceeding under chapter 15 of the Bankruptcy Code, and if the entity responding to the petition is a corporation, then the entity shall file a corporate ownership statement containing the information described in Rule with its first appearance, pleading, motion, response, or other request addressed to the court. Bankruptcy Rule 2002 would be amended to: (i) direct the court to schedule and hold a hearing on a chapter 15 petition for recognition promptly ; and (ii) allow the court to combine a hearing on the petition with a request for provisional relief and to convene the combined hearing with a notice period shorter than the 21-day period required by Rule Official Form 401 would be created for a petition for recognition of a foreign proceeding under chapter 15. Interestingly, the Official Form (question 12) does not mandate in all cases that the foreign debtor have assets, a place of business, or causes of action in the U.S. as a basis for venue in a particular district (in accordance with the Second Circuit Court of Appeals ruling in Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013)), providing as an alternative that venue is consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative. Bankruptcy Rule 3002 (Filing of Proof of Claim or Interest) would be amended to provide, among other things, that [a] lien that secures a claim against the debtor is not void due only to the failure of any entity to file a proof of claim. The Committee Note explains as follows: Subdivision (a) is amended to clarify that a creditor, including a secured creditor, must file a proof of claim in order to have an allowed claim. The amendment also clarifies, in accordance with 506(d), that the failure of a secured creditor to file a proof of claim does not render the creditor s lien void. The inclusion of language from 506(d) is not intended to effect any change of law with respect to claims subject to setoff under 553. The amendment preserves the existing exceptions to this rule under Rules 1019(3), 3003, 3004, and Bankruptcy Rule 3007(a) (Objections to Claims) would be amended to specify the manner in which a claim objection and notice thereof must be served. Bankruptcy Rule 3012 (Valuation of Security) would be retitled Determining the Amount of Secured and Priority Claims and amended to provide, among other things, that, upon the request of a party-in-interest and after appropriate notice, the court may determine the amount of a secured claim under section 506(a) of the Bankruptcy Code or the amount of a claim entitled to priority under section 507 of the Bankruptcy Code. Subsection (f) of Bankruptcy Rule 9006 (Computing and Extending Time; Time for Motion Papers) would be amended to remove service by electronic means under Fed. R. Civ. P. 5(b)(2) (E) from the modes of service that allow three added days to act after being served. Bankruptcy Rule 9009 would be amended to provide, among other things, that [t]he Official Forms prescribed by the Judicial Conference of the United States shall be used without alteration, except as otherwise provided in these rules, in a particular Official Form, or in the national instructions for a particular Official Form. 13

14 The substantial amendment, reconfiguration, or addition of numerous Official Forms is also included as part of the Forms Modernization Project to make them easier to read and understand, including: The addition of Official Form 201, entitled Voluntary Petition for Non-Individuals Filing for Bankruptcy, to replace Official Form 1 (Voluntary Petition) and the creation of Official Form 201A, entitled Attachment to Voluntary Petition for Non-Individuals Filing for Bankruptcy Under Chapter 11, to replace Exhibit A. The addition of Official Form 206E/F, entitled Schedule E/F: Creditors Who Hold Unsecured Claims, to combine Official Form 6E (Schedule E Creditors Holding Unsecured Priority Claims) and Official Form 6F (Schedule F Creditors Holding Unsecured Nonpriority Claims) for non-individual debtors. The addition of Official Form 206G, entitled Schedule G: Executory Contracts and Unexpired Leases, to replace Official Form 6G (Executory Contracts and Unexpired Leases) for nonindividual debtors. The addition of Official Form 202, entitled Declaration Under Penalty of Perjury for Non-Individual Debtors, to replace Official Form 2 (Declaration Under Penalty of Perjury on Behalf of a Corporation or Partnership) and the section of Official Form 6 Declaration (Declaration Concerning Debtor s Schedules) containing a corporation s or partnership s declaration. The addition of Official Form 204, entitled Chapter 11 or Chapter 9 Cases: List of Creditors Who Have the 20 Largest Unsecured Claims and Are Not Insiders, to replace Official Form 4 (List of Creditors Holding 20 Largest Unsecured Claims) for nonindividual debtors. The addition of Official Form 205, entitled Involuntary Petition Against a Non-Individual, to replace Official Form 5 (Involuntary Petition) for non-individual debtors. The addition of Official Form 206Sum, entitled Summary of Assets and Liabilities for Non-Individuals, to replace Official Form 6 (Summary of Schedules and Statistical Summary of Certain Liability and Related Data). The addition of Official Form 206A/B, entitled Schedule A/B: Assets Real and Personal Property, which consolidates information about a non-individual debtor s real and personal property into a single form and replaces Official Form 6A (Real Property) and Official Form 6B (Personal Property), in cases of non-individual debtors. The addition of Official Form 207, entitled Statement of Financial Affairs for Non-Individuals Filing for Bankruptcy, to replace Official Form 7 (Statement of Financial Affairs) for nonindividual debtors. The addition of Official Form 312, entitled Order and Notice for Hearing on Disclosure Statement, to replace Official Form 12 (Order and Notice for Hearing on Disclosure Statement). The addition of Official Form 313, entitled Order Approving Disclosure Statement and Fixing Time for Filing Acceptances or Rejections of Plan, Combined with Notice Thereof, to replace Official Form 13 (Order Approving Disclosure Statement and Fixing Time for Filing Acceptances or Rejections of Plan, Combined with Notice Thereof). The addition of Official Form 314, entitled Ballot for Accepting or Rejecting Plan of Reorganization, to replace Official Form 14 (Ballot for Accepting or Rejecting Plan). The addition of Official Form 315, entitled Order Confirming Plan, to replace Official Form 15 (Order Confirming Plan). The addition of Official Form 410, entitled Proof of Claim, which replaces and substantially reorganizes Official Form 10 (Proof of Claim). The addition of Official Form 206D, entitled Schedule D: Creditors Who Hold Claims Secured by Property, to replace Official Form 6D (Creditors Holding Secured Claims) for nonindividual debtors. 14

15 UNIFORM VOIDABLE TRANSACTIONS ACT APPROVED BY UNIFORM LAW COMMISSION TO REPLACE UFTA On July 16, 2014, the Uniform Law Commission (the Commission ) approved a series of amendments to the Uniform Fraudulent Transfer Act (the UFTA ), which is currently in force in 43 states (all states except Alaska, Kentucky, Louisiana, Maryland, New York, South Carolina, and Virginia). The substance of the principal amendments is aptly described in the change of the name of the uniform law from the UFTA to the Uniform Voidable Transactions Act (the UVTA ), which is intended to: (i) address judicial inconsistency in applying the law; (ii) better harmonize with the Bankruptcy Code and the Uniform Commercial Code (the UCC ); and (iii) provide litigants with greater certainty in its application. The driving force behind the change is the concept of constructive fraud, which permits the avoidance of transfers made or of obligations incurred by an insolvent debtor in exchange for less than reasonably equivalent value. Although denominated as fraud, a constructively fraudulent transfer involves neither fraud nor improper intent, creating confusion among some courts that have issued rulings improperly limiting the scope of the avoidance remedy. To address these concerns, the word fraud has been supplanted by the term voidable in nearly every portion of the UVTA and the Commission s official comments. Moreover, the UVTA adopts the more aggressive view that even actually fraudulent transfers do not require fraud. In lieu of the traditional standard applied to transfers made with the intent to hinder, delay or defraud creditors, the comments to the UVTA shift the inquiry to hinder or delay and substitute the idea of unacceptably contraven[ing] norms of creditors rights as the measure for when efforts to hinder or delay render a transaction voidable. In addition, the UVTA makes other key changes, including the following: The UVTA explicitly states that a creditor challenging a transfer bears the burden of establishing the elements of its claim by a preponderance of the evidence, rather than the higher clear and convincing evidence standard applied by some courts under the UFTA. Furthermore, the official comments caution that courts should not alter the allocation of the burdens or apply any nonstatutory presumptions to avoid upsetting the uniformity of the UVTA. The UFTA provided a rebuttable presumption that a debtor is insolvent if it fails to pay debts as they mature. The UVTA refines this presumption by: (i) clarifying, consistent with section 303(h)(1) of the Bankruptcy Code, that any nonpayment of debts subject to bona fide dispute is not presumptive of insolvency; and (ii) expressly providing that the burden to rebut this presumption falls on the party against whom the presumption is directed, conforming to the treatment of rebuttable presumptions in the Uniform Rules of Evidence. The UFTA shields from avoidance transfers that resulted from the enforcement of a security interest in accordance with Article 9 of the UCC. The UVTA, however, carves out strict foreclosures in which a debtor consents to the secured creditor s acceptance of collateral in full or partial satisfaction of the obligation, without a public sale or judicial foreclosure from this defense to an avoidance action. Even so, the secured creditor may still ward off avoidance under the UVTA by demonstrating that a foreclosure sale was conducted in good faith and in a commercially reasonable manner. The UVTA defuses potential choice of law disputes by including a governing law rule consistent with that of Article 9 of the UCC. The UVTA provides that the law of a business debtor s place of business or, if business is conducted in more than one state, the place in which the business had its chief executive office, at the time that a transfer was made, applies to claims under the UVTA. An important difference between the UVTA and the UCC, however, is that under the UCC, the location of a business that is a registered organization is always its state of organization, which may not be the state in which its business is conducted or the site of its chief executive office. It is anticipated that the UVTA will be presented to individual states for approval, beginning in the fall of The full text of the final draft of the UVTA is available at Transfer/2013AM_AUFTA_Draft.pdf. 15

16 SOVEREIGN DEBT UPDATE Argentina The long-running dispute over the payment of Argentina s sovereign debt has been particularly active in recent weeks and months. EVENTS LEADING UP TO ARGENTINA S DEFAULT On June 30, 2014, Latin America s third-largest economy failed to make a scheduled $539 million payment to bondholders after U.S. District Court judge Thomas Griesa ruled that the payment could not be made unless holdout bondholders from restructurings in 2005 and 2010 were also paid. Under the governing documents, Argentina which has about $200 billion in foreigncurrency debt, including $30 billion of restructured ( exchange ) bonds had a 30-day grace period after the June 30 default to make the payment. On July 28, 2014, Judge Griesa authorized Argentina to make a one-time payment on Argentine law-governed exchange bonds because those securities cannot be distinguished from Argentine bonds issued to Spanish oil company Repsol SA earlier in 2014 in compensation for the expropriation of its local subsidiary. The Repsol settlement bonds are not part of the long-running dispute between Argentina and the holdout bondholders. The court cannot enjoin payment on the dollar-denominated exchange bonds without also upsetting the Repsol settlement, Judge Griesa wrote in his ruling. However, the judge directed the parties to find a way to distinguish between the Repsol and exchange bonds before the next interest payment. On July 29, 2014, holders of Argentina s euro-denominated exchange bonds urged Judge Griesa to issue a last-minute stay of his June 30 debt ruling, which risked toppling the South American country into default. According to the exchange bondholders, A default would undo much of the work this Court has accomplished over the last ten years and extend litigation here and around the world for years on end. The bondholders also disclosed that they had been in touch with other bondholders who, like them, would be willing to waive the rights upon future offers (RUFO) clause that prevents Argentina from settling with holdout investors on terms better than those accepted by the exchange bondholders. On July 30, 2014, Argentina defaulted on its sovereign debt for the second time in approximately 13 years when the 30-day grace period expired following the payment default that occurred on June 30. Earlier that day, Standard & Poor s Ratings Services downgraded Argentina s foreign-currency credit rating to selective default, meaning that the country is meeting its obligations on some bonds but not others, as the clock ran out on efforts to craft a last-minute deal to avert the country s second default. RAMIFICATIONS AND AFTERMATH On July 31, 2014, Argentina s government, asserting that the collapse of negotiations with the holdout bondholders was due to the malpractice of the U.S. judiciary, denied that it had defaulted on its sovereign debt. At a news conference in Buenos Aires, Jorge Capitanich, Argentina s Chief of the Cabinet of Ministers, blasted the U.S. courts for a lack of impartiality and criticized the performance of court-appointed mediator Daniel A. Pollack for failing to facilitate reasonable deal conditions that could be agreed to by both Argentina, as a sovereign nation with legal and constitutional restrictions, and hedge funds holding bonds worth $1.5 billion. On August 1, 2014, the International Swaps and Derivatives Association, Inc. ( ISDA ) announced that its Americas Credit Derivatives Determinations Committee (the Determinations Committee ) resolved that a failure to pay credit event had occurred with respect to Argentina. This means that sellers of credit default swaps ( CDSs ) with a net exposure of around $1 billion must now pay out to investors who hedged against Argentina s sovereign debt default. ISDA announced on August 14, 2014, that it would organize an auction on August 21 to settle CDSs that reference nearly $1 billion in Argentine debt. However, on August 19, the 15-member Determinations Committee voted unanimously to postpone the auction until some time in September According to the Determinations Committee, the auction will cover only CDSs related to 11 Argentine debt issues with maturities in 2017, 2033, and Further information regarding the auction is posted on ISDA s website, On August 1, 2014, Argentina informed Judge Griesa that the nation had lost faith in the mediator appointed to resolve the dispute, claiming that the mediator s pre-default statement that Argentina was in imminent default was harmful and prejudicial 16

17 and asking that he be replaced. Judge Griesa rejected the request and said talks would have to continue. The judge also upbraided Argentina at the hearing, saying that the country s obligations to pay holdout bondholders must be resolved. According to the judge, Argentina s pronouncements ignoring the facts amount to half-truths that are false and misleading and do not comply with the law, which requires disclosure of facts. On August 6, 2014, Judge Griesa issued an order barring Argentina from making payments on euro-denominated exchange bonds as part of a larger decision that forbade Argentina from paying holders of dollar-denominated debt. Certain holders of euro-denominated bonds, claiming that their debt is not covered by U.S. law and that Judge Griesa exceeded his authority in blocking their payments, appealed the order to the U.S. Court of Appeals for the Second Circuit on August 19. On August 7, 2014, Argentina asked the International Court of Justice ( ICJ ) in The Hague to hear a lawsuit it wants to commence against the U.S., claiming that decisions by U.S. courts in the dispute over payment of its restructured and nonrestructured debt have violated its sovereignty. However, in order for a lawsuit to move forward, the U.S. would have to consent to the ICJ s jurisdiction, and since the tribunal began operating in 1946, permission has been granted by the U.S. in only 22 cases. The U.S. is unlikely to grant the request in the absence of any bilateral treaty that would require the U.S. to accept the ICJ as a venue to resolve disputes with Argentina. At a hastily convened hearing on August 8, 2014, Judge Griesa again chastised Argentina for publicly denying that it had defaulted on its debt, threatening a contempt order if more false and misleading pronouncements follow. On August 19, 2014, President Fernández de Kirchner announced in a nationwide address that, in an effort to sidestep the U.S. court ruling which blocked payments on restructured debt and caused the nation to default for the second time in 13 years, the government will submit a bill to the Argentine Congress that lets overseas debt holders swap into new bonds governed by Argentine law with the same terms. Payments will be made into accounts at the central bank instead of through Bank of New York Mellon Corp. ( BNY Mellon ), the current trustee. At a hearing held on August 21, Judge Griesa sharply criticized the proposal, stating that it violates prior court orders and is therefore illegal. He also said he was absolutely appalled that Argentina had not notified its lawyers about the proposal before it was made public. However, the judge denied an emergency request by holdout bondholders to hold Argentina in contempt, emphasizing that imposing such a sanction would not push the parties any closer to a settlement. Argentina s government on August 22, 2014, accused Judge Griesa of making imperialist comments against the nation. At a press conference in Buenos Aires, Argentine Cabinet Chief Capitanich stated that the judge s unfortunate and even imperialist statements constitute an undue interference with Argentina s sovereignty. On August 26, 2014, Argentina s exchange bondholders sued BNY Mellon in London Chancery Court, seeking to gain access to interest payments owed to them. Later the same day, Argentina revoked BNY Mellon s permission to operate a local representative office in Argentina after the bank refused to make interest payments owed to participating bondholders in July due to Judge Griesa s order prohibiting the payments. On August 11, 2014, a U.S. magistrate judge granted the request of holdout bondholder NML Capital Ltd. ( NML ) to obtain information from numerous companies that the hedge fund claims are hiding $65 million embezzled from Argentina s coffers, ruling against 123 Nevada entities the judge described as shell companies. The judge directed the companies to provide information concerning their finances, or to provide a deponent, so that NML can attempt to locate funds which were allegedly embezzled by the current Argentine President, Cristina Fernández de Kirchner; her late husband; and associate Lázaro Báez. On August 29, 2014, the International Capital Market Association ( ICMA ), a group of banks and investors, announced a proposal designed to reduce the ability of holdout bondholders to undermine sovereign debt restructurings. The plan was created after meetings convened by the U.S. Treasury Department in the aftermath of Greece s debt restructuring and comes on the heels of the second Argentine debt default. Under ICMA s proposal, pari passu, or equal treatment, clauses would be interpreted to bind all bondholders to the terms of any debt restructuring agreement approved by at least 75 percent of the bondholders. The International Monetary Fund was set to propose similar guidelines in late September. 17

18 ISDA on September 3, 2014, announced the completion of an auction to settle CDSs referencing Argentine debt. The auction established a final price of 39.5 cents on the dollar for the Argentine debt, meaning CDS sellers will have to pay 60.5 percent on approximately $1 billion in wagers made by investors who hedged against Argentina s sovereign debt default. On September 4, 2014, in an effort to end-run Judge Griesa s orders prohibiting Argentina from making interest payments on exchange bonds without also paying amounts owed to holdout bondholders, Argentina s Senate passed a bill authorizing its government to bypass U.S. courts and pay its bondholders through local channels. The proposal was approved by Argentina s lower legislative body, the Chamber of Deputies, on September 11, The legislation also authorizes the removal of BNY Mellon as the trustee under the bond indentures, with bond payments being made instead through state-backed Banco de la Nación Argentina. On September 9, 2014, the United Nations General Assembly passed a resolution to begin an intergovernmental negotiation process aimed at increasing the efficiency, stability and predictability of the international financial system. That process would include negotiations toward the implementation of a global bankruptcy process for sovereign debtors. The resolution passed by a super-majority vote of with 41 abstentions. The U.S. voted no, along with 10 other countries. Such a bankruptcy process could make it more difficult for holdout bondholders to prevent countries from successfully restructuring their debts and could limit future defaults. Puerto Rico Although Puerto Rico is an unincorporated territory of the United States rather than a sovereign, the financial troubles of the beleaguered Caribbean commonwealth have received a great deal of attention lately. Under the Puerto Rico Public Corporation Debt Enforcement and Recovery Act, an eligible public corporation may pursue two alternatives, simultaneously or in sequence. The first is a consensual debt relief transaction akin to a prepackaged or prenegotiated chapter 11 case. To commence such a proceeding, an eligible entity must file a notice of a suspension period, which stays collection actions by all identified creditors for up to 360 days, unless the entity elects not to seek court approval for specified debt relief. If such approval is requested, the stay remains in place until either: (i) any court order approving debt relief becomes final; or (ii) 60 days after denial of such relief. Debt relief may be approved by the court only if: (a) creditors holding at least 50 percent of the amount of debt within a class of substantially similar obligations participate in a vote or a consent solicitation for a proposed amendment, modification, waiver, or debt exchange; and (b) the proposed relief is approved by creditors in the class holding at least 75 percent of the amount of the debt represented. Upon approval by a class of creditors, the applicable debt relief would be binding on all creditors within the applicable class. The second avenue for debt relief involves the filing of a petition with the court by or on behalf of an eligible public corporation, which triggers an automatic stay banning creditor collection efforts. This avenue, similar to the rules for chapter 11 plans, provides that the court may approve a debt adjustment plan if at least one class of impaired debt votes to accept the plan. A class is deemed to approve a plan if: (i) creditors in the class holding at least two-thirds of the amount of the debt involved vote on the plan; and (ii) of the class members who actually vote, the holders of more than one-half of the debt in the class approve the plan. On June 28, 2014, Puerto Rican governor Alejandro García Padilla gave his imprimatur to legislation that creates a judicial debt relief process for certain public corporations, including the Puerto Rico Electric Power Authority (PREPA), the Puerto Rico Aqueduct and Sewer Authority (PRASA), and the Puerto Rico Highways and Transportation Authority (PRHTA). The new law is modeled on chapters 9 and 11 of the U.S. Bankruptcy Code (with certain important distinctions) and is in all practical respects a non-federal bankruptcy law. All impaired creditors must receive at least as much under a debt adjustment plan as they would have received if all creditors had been allowed to enforce their claims on the filing date of the petition. Also, each impaired creditor must receive its pro rata share of 50 percent of the debtor s positive free cash flow, if any, after payment of certain specified expenses, during the 10 fiscal years following the first anniversary of the plan s effective date, until creditors are paid in full. 18

19 The new law s obvious similarities to chapter 9 and chapter 11 or the Bankruptcy Code, as well as the fact that the legislation was not enacted in accordance with Article I, Section 8, of the U.S. Constitution, immediately provoked attacks on its constitutionality. Bond funds (collectively, the Bond Funds ) affiliated with Franklin Resources Inc. and Oppenheimer Rochester Funds, which collectively hold approximately $1.7 billion in Puerto Rico debt, filed a lawsuit on June 30, 2014, alleging that the legislation is unconstitutional, even though no debtor has actually attempted to restructure its debt under the law. The Bond Funds filed a summary judgment motion in early August, arguing that the undisputed facts require the court to declare the law void, regardless of the specific circumstances under which it might be applied. The court directed Puerto Rico to submit by September 12 pleadings supporting its claim that the law is constitutional. Due to its status as an unincorporated territory of the U.S., Puerto Rico is barred from seeking either protection under the Bankruptcy Code or international financial assistance. Puerto Rico has claimed that section 903 of the Bankruptcy Code, which arguably preempts any attempt by Puerto Rico to enact its own debt relief law, does not apply to the commonwealth because it is barred from filing for chapter 9 protection or, in the alternative, that the section is unconstitutional because it unfairly discriminates against the island territory. On August 15, 2014, PREPA announced that it had reached an agreement with creditors to delay repayment of bank loans until March It remains to be seen whether the court will be inclined to issue what would amount to an advisory opinion on the Bond Funds claims that the new debt relief law is unconstitutional. EUROPEAN PERSPECTIVE IN BRIEF Europe has struggled mightily during the last several years to triage a long series of critical blows to the economies of the 28 countries that comprise the European Union, as well as the collective viability of eurozone economies. Here we provide a snapshot of some recent developments regarding insolvency, restructuring, and related issues in the EU. Portugal Banco Espírito Santo SA ( BES ), Portugal s secondlargest lender, will split up under a rescue plan backstopped by 4.9 billion ($6.6 billion) in state money after the bank sustained devastating losses on its exposure to the troubled Espírito Santo financial group ( Espírito Santo ). Under the resolution measure, the healthy assets and businesses of BES will be spun off into a new bank ( Novo Banco, provisionally), while problem assets will remain with the vestigial entity and losses will be borne by shareholders and subordinated creditors. Novo Banco will be recapitalized by Portugal s central bank and rebranded. The collapse comes just weeks after the central bank expressed confidence that BES had adequate capital reserves to weather its exposure to Espírito Santo, which filed for protection from its creditors last month after a central bank audit turned up accounting irregularities. The European Commission quickly determined that the resolution plan complies with bloc rules governing State aid, which do not require contributions from depositors or senior debt holders in bank failure cases. According to the EC, a disorderly resolution of BES could create a serious disturbance in the Portuguese economy and... the creation of the bridge bank is suitable to remedy that disturbance. The eurozone is in the process of finalizing a single resolution mechanism pursuant to which the European Central Bank would take charge of dismantling and winding down failed financial institutions, but the procedures will not be implemented until Spain On September 5, 2014, Spain enacted urgent measures ( RDl 11/2014 ) to facilitate restructurings and avoid the insolvency of companies that, under the previous legislative regime, might have been forced to file an insolvency proceeding. RDl 11/2014 modifies several provisions of the Spanish Insolvency Act. The objective of the reform is to improve the legal framework that governs voluntary arrangements between creditors and the sale of distressed businesses outside insolvency by removing obstacles which have previously impeded the successful reorganization of insolvent companies. In addition, RDl 11/2014 establishes rules to deal with the ongoing insolvency proceedings of certain concession holders for Spain s toll highways, with the aim of preventing such concession holders from being placed into liquidation. A detailed discussion of RDl 11/2014 is available at Other recent European developments can be tracked in Jones Day s EuroResource, available at euroresource-deals-and-debt /. 19