Us Supreme Court Holds That Structured Dismissals Cannot Deviate from the Bankruptcy Code's Priority Scheme

Recent Developments in Bankruptcy and Restructuring Volume 16 l No. 3 l May–June 2017 JONES DAY

BUSINESS RESTRUCTURING REVIEW

U.S. SUPREME COURT HOLDS THAT STRUCTURED DISMISSALS IN THIS ISSUE CANNOT DEVIATE FROM THE BANKRUPTCY CODE’S PRIORITY 1 U.S. Supreme Court Holds That Structured SCHEME Dismissals Cannot Deviate From the Dan T. Moss Bankruptcy Code’s Priority Scheme Anna M. Wetzel 5 Eleventh Circuit Addresses Difference Between Constitutional and Equitable In bankruptcy cases under chapter 11, debtors sometimes opt for a “structured dis- Mootness missal” when a consensual plan of reorganization or liquidation cannot be reached 8 From the Top: U.S. Supreme Court to Hear or conversion to chapter 7 would be too costly. In Czyzewski v. Jevic Holding Corp., Case on Scope of Section 546(e)’s Safe 137 S. Ct. 973, 2017 BL 89680 (U.S. Mar. 27, 2017), the U.S. Supreme Court held that Harbor the Bankruptcy Code does not allow bankruptcy courts to approve distributions in 9 Foreign Representative Had “Independent” structured dismissals which violate the Bankruptcy Code’s ordinary priority rules. Standing to Prosecute State Law Avoidance The Court rejected a Third Circuit decision that had allowed for such structured Claims in Chapter 15

dismissals in “rare” circumstances. As a result of Jevic, structured dismissals are 13 Newsworthy likely to become more difficult to craft. The Supreme Court’s opinion, however, 14 Singapore, U.K., Delaware, and New York leaves room for the creative use of settlements that provide only for interim (rather Courts Adopt Guidelines for Communication than final) distributions deviating from the Bankruptcy Code’s priority scheme, and and Cooperation Between Courts in Cross- Border Insolvency Matters the Court did not directly question the use of settlements that involve “gifts” from senior to junior creditors. 16 Oil and Gas Industry Update: District Court Upholds Rejection of Sabine Gas Gathering Agreements STRUCTURED DISMISSALS 18 Group Insolvency Proceedings Under the Revised EU Insolvency Regulation Chapter 11 cases are concluded in one of three ways: confirmation of a plan of reorganization or liquidation, conversion to a chapter 7 case, or dismissal of the 21 Sixth Circuit Rejects Per Se Rule Automatically Mooting Sale Appeals in the case. Dismissal usually restores the parties’ financial position to the prepetition Absence of a Stay status quo. When the financial status of debtors and creditors has been altered 24 Kiwi Defense Doesn’t Get Off the Ground in during the bankruptcy case in such a way as to make perfect restoration impos- Preference Litigation Involving Related, but sible, section 349(b) of the Bankruptcy Code allows the bankruptcy court to dis- Severable, Contracts miss a case without such complete reversion “for cause.” For example, courts have 26 In Brief: Court Rules Against Lyondell relied on this “for cause” provision to approve dismissals that provide for other Litigation Trustee on LBO Fraudulent rights and protections typically seen in a confirmation order, including distribu- Conveyance Claims

tions to creditors. Such dismissals are commonly known as “structured dismissals.” 29 Singapore Enacts New Corporate Bankruptcy Law in Bid to Become Center for International Debt Restructuring The Bankruptcy Code sets forth certain priority rules governing distributions to creditors in both chapter 11 and chapter 7 cases. Secured claims enjoy the highest priority under the Bankruptcy Code. The Bankruptcy Code May 20, 2008. Two years earlier, a subsidiary of private-equity then recognizes certain priority unsecured claims, including firm Sun Capital Partners, Inc. (“Sun Capital”) had purchased claims for administrative expenses, wages, and certain taxes. Jevic in a leveraged buyout. Sun Capital borrowed from a General unsecured claims come next in the priority scheme, group of lenders led by CIT Group Business Credit Inc. (“CIT”) followed by any subordinated claims and the interests of to finance the transaction. After the leveraged buyout, Jevic’s equity holders. financial health declined. On May 19, 2008, Jevic ceased operations and terminated its employees. The company filed In a chapter 7 case, the order of priority for the distribution for chapter 11 protection the following day in the District of of unencumbered assets is determined by section 726 of Delaware. As of the petition date, Jevic owed approximately the Bankruptcy Code. The order of distribution ranges from $53 million to its first-priority secured lenders (CIT and Sun payments on claims in the order of priority specified in sec- Capital) and more than $20 million to taxing authorities and tion 507(a), which have the highest priority, to payment of any general unsecured creditors. residual assets to the debtor, which has the lowest priority. Distributions are to be made pro rata to parties of equal prior- Two lawsuits followed from the events leading up to Jevic’s ity within each of the six categories specified in section 726. If bankruptcy. First, a group of Jevic’s terminated truck driver claimants in a higher category of distribution do not receive employees (the “Drivers”) commenced a class action against full payment of their claims, no distributions can be made to Jevic and Sun Capital, alleging that they had been given insuf- parties in lower categories. ficient notice of termination under federal and state Worker Adjustment and Retraining Notification (WARN) Acts. Second, In a chapter 11 case, the chapter 11 plan determines the treat- the official unsecured creditors’ committee (the “Committee”) ment of secured and unsecured claims (as well as equity inter- sued Sun Capital and CIT on behalf of the estate, claiming, ests), subject to the requirements of the Bankruptcy Code. If among other things, that the transfers made and the obliga- a creditor does not agree to “impairment” of its claim under tions incurred during the leveraged buyout were avoidable as the plan—such as by agreeing to receive less than payment preferential and fraudulent transfers (the “Committee Action”). in full—and votes to reject the plan, the plan can be confirmed only under certain specified conditions. Among these Eventually, in 2012, Sun Capital, CIT, Jevic, and the Committee conditions are the following: (i) the creditor must receive at reached a settlement that resolved the Committee Action least as much under the plan as it would receive in a chap- (the “Settlement”). By this time, Jevic had already liquidated ter 7 liquidation; and (ii) the plan must be “fair and equitable.” substantially all of its assets to repay the lender group led Section 1129(b)(2) of the Bankruptcy Code provides that a plan by CIT. The only remaining assets consisted of $1.7 million in is “fair and equitable” with respect to a dissenting impaired cash (encumbered by Sun Capital’s lien) and the Committee’s class of unsecured claims if the creditors in the class receive avoidance claims against CIT and Sun Capital. The Settlement or retain property of a value equal to the allowed amount of provided, among other things, that: (i) CIT would pay $2 mil- their claims or, failing that, if no creditor or equity holder of lion into an account earmarked for the payment of legal fees lesser priority receives any distribution under the plan. This is and other administrative expenses; (ii) Sun Capital would known as the “absolute priority rule.” release its lien on the remaining $1.7 million in cash, which would be distributed under a trust to tax and administrative The Bankruptcy Code does not expressly state whether these creditors, with any remaining cash to be distributed to general priority rules apply to structured dismissals, and until Jevic, unsecured creditors on a pro rata basis; (iii) the parties would precedent concerning this issue was sparse and inconsistent. exchange releases; and (iv) the Committee Action would be dismissed. Upon the consummation of these items, Jevic’s JEVIC BACKGROUND chapter 11 case would then be dismissed (the above transactions being referred to as the “Structured Dismissal”). Over the Jevic Transportation, Inc. (“Jevic”), a New Jersey-based truck- objections of the Drivers and the United States Trustee, the ing company, filed for chapter 11 protection in Delaware on bankruptcy court approved the Structured Dismissal.

2 The Drivers estimated that their claims amounted to approxi- estate assets raise justifiable concerns about collusion among mately $12.4 million, with $8.3 million entitled to priority as wage debtors, creditors, and their attorneys and other professionals.” claims under section 507(a)(4) of the Bankruptcy Code. The Drivers and the United States Trustee opposed the Structured The Third Circuit majority went on to find that structured Dismissal on two main grounds: (i) the Bankruptcy Code does dismissals can provide for distributions which conflict with not authorize structured dismissals; and (ii) the proposed dis- the priority scheme only in a “rare case.” According to the tributions violated the absolute priority rule. majority, Jevic was one of those “close call[s]” and a “rare case.” The Third Circuit majority concluded that there were The bankruptcy court agreed that the Bankruptcy Code does sufficient facts in the bankruptcy court’s record approving not expressly authorize structured dismissals. Nevertheless, the Structured Dismissal to be such a rare case. According the court noted that “the dire circumstances that are present to Judge Hardiman, “This disposition, unsatisfying as it was, in this case warrant the relief requested here.” Specifically, the remained the least bad alternative since there was ‘no pros- court found that: (a) absent approval of the settlement, there pect’ of a plan being confirmed and conversion to chapter 7 was “no realistic prospect” of a meaningful distribution to any- would have resulted in the secured creditors taking all that one other than secured creditors; (b) there was “no prospect” remained of the estate in ‘short order.’ ” of a confirmable chapter 11 plan (of either reorganization or liquidation); and (c) conversion to a chapter 7 liquidation would THE SUPREME COURT’S OPINION have been unavailing because a chapter 7 trustee would not have sufficient funds “to operate, investigate or litigate.” In a 6-2 opinion issued on March 22, 2017, the Supreme Court reversed and remanded the Third Circuit’s holding. Addressing the second argument, the bankruptcy court noted that, even though chapter 11 plans must comply with After finding that the petitioners (the Drivers) had standing, the the Bankruptcy Code’s priority scheme, settlements are not Court examined whether the bankruptcy court had authority to subject to this rule. After analyzing the Settlement under the “approve a structured dismissal that provides for distributions standard applicable to the approval of a compromise or set- that do not follow ordinary priority rules without the affected tlement under Rule 9019 of the Federal Rules of Bankruptcy creditors’ consent.” The Court outlined the importance of the Procedure (“Bankruptcy Rule 9019”)—namely, the probability creditor priority scheme embodied in the Bankruptcy Code of success in litigation, difficulties in collection, the litigation’s and ultimately held that the Bankruptcy Code does not pro- complexity, attendant expense, inconvenience and delay, and vide bankruptcy courts with the power to deviate from the the paramount interests of creditors—the bankruptcy court priority scheme when approving dismissals. Justice Breyer, approved the Structured Dismissal. writing for the majority, stated that “we would expect to see some affirmative indication of intent if Congress actually The Drivers appealed to the district court, which affirmed. The meant to make structured dismissals a backdoor means to Drivers then appealed to the Third Circuit, and a three-judge achieve the exact kind of nonconsensual priority-violating final panel affirmed the district court in a 2-to-1 decision. Writing distributions that the Code prohibits in Chapter 7 liquidations for the majority, circuit judge Thomas Hardiman stated that and Chapter 11 plans.” even though the Bankruptcy Code does not provide for structured dismissals, such dismissals are permitted in “rare” cir- The Court went on to hold that Congress did not intend to cumstances. Judge Hardiman noted that the Bankruptcy allow the “for cause” standard in section 349(b) to give bank- Code provides greater flexibility with respect to approving ruptcy courts the authority to approve structured dismissals settlements than approving a chapter 11 plan. Nevertheless, which contravene the absolute priority rule. Justice Breyer rec- the majority cautioned that compliance with the Bankruptcy ognized that creditors rely on the Bankruptcy Code’s priority Code’s creditor priority scheme is ordinarily dispositive of scheme, writing that “the word ‘cause’ is too weak a reed upon settlements presented under Bankruptcy Rule 9019 because which to rest so weighty a power” and that section 349 was “[s]ettlements that skip objecting creditors in distributing instead designed to “give courts the flexibility to ‘make the

3 appropriate orders to protect rights acquired in reliance on that the writ of certiorari should have been dismissed as the bankruptcy case.’ ” improvidently granted. According to him, the Court granted certiorari to decide a different question than the one answered The Court distinguished cases where courts have approved by the Court in the majority opinion. The Court had granted interim settlements that distributed estate assets in violation certiorari to decide “whether a bankruptcy court may of the priority rules, particularly In re Iridium Operating LLC, authorize the distribution of settlement proceeds in a manner 478 F.3d 452 (2d Cir. 2007), from Jevic, which involved final dis- that violates the statutory priority scheme.” While lower courts tributions pursuant to the Structured Dismissal. The Supreme of appeal are divided on this issue, Justice Thomas found Court found that Iridium “does not state or suggest that the no indication that lower courts had yet addressed whether a Code authorizes nonconsensual departures from ordinary bankruptcy court may authorize structured dismissals allow- priority rules in the context of a dismissal—which is the final ing for distributions in a manner which violates the statutory distribution of estate value—and in the absence of any fur- priority scheme. Moreover, according to Justice Thomas, the ther unresolved bankruptcy issues.” In this sense, the Court Drivers had reframed the question presented to the Court explained, the situation in Iridium is similar to certain “first-day” only after certiorari had been granted on the broader ques- orders, where courts have allowed for, among other things, tion. Without the benefit of lower courts’ consideration of, and payments ahead of secured and priority creditors to em- Jevic’s briefing on, this narrower issue, Justice Thomas argued ployees for prepetition wages or to “critical vendors” on that the appeal should have been dismissed. account of their prepetition invoices. However, the Court explained that “in such instances one can generally find signif- OUTLOOK icant Code-related objectives that the priority-violating distributions serve.” By contrast, the Structured Dismissal served no While the Court’s ruling in Jevic is significant in its own right, such objectives—it did not benefit disfavored creditors by pre- the opinion is equally significant for what it implies. First, the serving the debtor as a going concern in order for the debtor Court expressly stated that it was not providing a “view about to possibly emerge under a confirmable plan of reorganization. the legality of structured dismissals in general.” In theory, this leaves open the possibility for structured dismissals, but such Finally, the Court determined that there can be no “rare case” dismissals will likely become more difficult to craft after Jevic. exception to the general rule that structured dismissals must Second, and perhaps more important, the Court suggested follow ordinary priority rules. Justice Breyer cautioned that that bankruptcy courts have the authority to approve settle- bankruptcy and other courts will likely find “sufficient reasons” ments contemplating priority-violating interim distributions. to provide a basis for deviating from the priority rules in “rare Going forward, savvy debtors and creditors may move away cases.” Also, he noted, such a standard would prove difficult from structured dismissals and toward settlement agree- for courts to apply and “threaten to turn a ‘rare case’ exception ments that provide for interim distributions of some of a debt- into a more general rule.” Using Jevic as an example, the Court or’s assets. noted that many chapter 11 cases with structured dismissals contain some degree of uncertainty regarding what could hap- Last, Jevic serves as a caution light for debtors and creditors pen if the case were not dismissed. In Jevic, the Court appears when crafting settlements that involve “gifting” from secured to have concluded that there was reason to believe that, with- creditors to junior unsecured creditors. In those instances, out the Structured Dismissal, the parties would have returned distributions are considered “gifts” because they are pur- to the negotiating table and reached a new settlement which portedly made from secured creditors’ collateral, not estate would have honored the Bankruptcy Code’s priority scheme. assets. Although Jevic never refers to this practice, the emphasis placed on adherence to the Bankruptcy Code’s priority THE DISSENT scheme in final distributions may subject gifting provisions to attack by unhappy creditors who were passed over. Justices Thomas and Alito dissented from the majority opinion on procedural grounds. In his dissent, Justice Thomas argued

4 ELEVENTH CIRCUIT ADDRESSES DIFFERENCE actual cases or controversies and, in furtherance of the goal of conserving judicial resources, precludes adjudication of BETWEEN CONSTITUTIONAL AND EQUITABLE cases that are hypothetical or merely advisory. A case is moot MOOTNESS “when the issues presented are no longer ‘live’ or the parties Jane Rue Wittstein lack a legally cognizable interest in the outcome.” Fla. Pub. Mark G. Douglas Interest Research Grp. Citizen Lobby, Inc. v. EPA, 386 F.3d 1070, 1086 (11th Cir. 2004). A case generally becomes constitutionally moot “only when it is impossible for a court to grant any effec- In Beem v. Ferguson (In re Ferguson), 2017 BL 101650 (11th Cir. tual relief whatever to the prevailing party.” Cook v. Bennett, Mar. 30, 2017), the U.S. Court of Appeals for the Eleventh Circuit 792 F.3d 1294, 1299 (11th Cir. 2015) (internal quotation marks addressed the distinction between constitutional mootness (a and citation omitted). jurisdictional issue that precludes court review of an appeal) and equitable mootness (which allows a court to exercise In contrast, the judge-fashioned remedy of “equitable moot- its discretion to refuse to hear an appeal under certain cir- ness” bars adjudication of an appeal when a comprehen- cumstances). The Eleventh Circuit ruled that an appeal from sive change of circumstances occurs such that it would be an order confirming a chapter 11 plan was not constitution- inequitable for a reviewing court to address the merits of the ally moot because an “actual case or controversy” existed. appeal. In bankruptcy cases, appellees often invoke equitable Although the court declined to dismiss the appeal under the mootness as a basis for precluding appellate review of an doctrine of equitable mootness, it ultimately held on the merits order confirming a chapter 11 plan. See, e.g., In re LCI Holding that the district court did not err in dismissing the appeal. Company, Inc., 802 F.3d 547, 554 (3d Cir. 2015) (stating that the doctrine “comes into play in bankruptcy (so far as we know, MOOTNESS its only playground) after a plan of reorganization is approved” and ruling that equitable mootness would not cut off the “Mootness” is a doctrine that precludes a reviewing court from authority to hear an appeal outside the plan context). reaching the underlying merits of a controversy. In federal courts, an appeal can be either constitutionally, equitably, or Several circuit courts of appeal have formally adopted the statutorily moot. doctrine of equitable mootness in considering whether to hear appeals of plan confirmation orders. For example, in Search Constitutional mootness is derived from Article III of the U.S. Market Direct, Inc. v. Jubber (In re Paige), 584 F.3d 1327 (10th Constitution, which limits the jurisdiction of federal courts to

5 Cir. 2009), the Tenth Circuit considered six factors in deter- to the standard of review and the burden of proof to be mining whether the doctrine should moot appellate review of applied. In Charter, the Second Circuit held that once a chap- a confirmation order: (i) whether the appellant sought and/ ter 11 plan has been substantially consummated, an appeal or obtained a stay pending appeal; (ii) whether the plan has is presumed to be equitably moot unless the appellant can been “substantially consummated”; (iii) whether the rights of demonstrate that it has met all of the criteria delineated in its innocent third parties would be adversely affected by reversal previous ruling in Chateaugay—which are substantially similar of the confirmation order; (iv) whether the public policy need to the Tenth Circuit’s Paige factors. By appearing to abandon for reliance on confirmed bankruptcy plans—and the need for the balancing approach employed by other circuits in this con- creditors generally to be able to rely on bankruptcy court deci- text, the Second Circuit stands alone in presuming that an sions—would be undermined by reversal of the confirmation appeal is equitably moot following substantial consummation order; (v) the likely impact upon a successful reorganization of a chapter 11 plan. Accord Ahuja v. LightSquared, Inc., 644 of the debtor if the appellant’s challenge is successful; and Fed. Appx. 24, 2016 BL 86807 (2d Cir. 2016) (holding that the (vi) whether, on the basis of a brief examination of the merits appellant overcame the presumption of equitable mootness of the appeal, the appellant’s challenge is legally meritorious following substantial consummation of a plan by satisfying fac- or equitably compelling. tors under Chateaugay in that: (1) the court could still order some effective relief in the form of monetary damages “with- Substantially similar tests for equitable mootness have been out disturbing the Plan or affecting the reorganized [debtor’s] adopted by the Second, Third, Fifth, Sixth, Ninth, and Eleventh fresh start”; (2) the parties which would be adversely affected Circuits. See Frito-Lay, Inc. v. LTV Steel Co. (In re Chateaugay were parties to the appeal and participated in the bankruptcy Corp.), 10 F.3d 944 (2d Cir. 1993); Nordhoff Invs., Inc. v. Zenith proceedings; and (3) the appellant diligently pursued a stay in Elecs. Corp., 258 F.3d 180 (3d Cir. 2001); TNB Fin., Inc. v. James the bankruptcy court, in the district court, and on appeal), cert. F. Parker Interests (In re Grimland, Inc.), 243 F.3d 228 (5th Cir. denied, 137 S. Ct. 335 (2016). 2001); Ochadleus v. City of Detroit (In re City of Detroit), 838 F.3d 792 (6th Cir. 2016) (applying the doctrine in a chapter 9 An appeal can also be rendered moot by statute. For exam- case); JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest ple, in bankruptcy cases, sections 363(m) and 364(e) of the Resort Props. Inc. (In re Transwest Resort Props., Inc.), 801 F.3d Bankruptcy Code provide that the reversal or modification on 1161 (9th Cir. 2015); JMC Memphis, LLC v. Kapila (In re JMC appeal of an order authorizing a sale of assets or financing Memphis, LLC), 655 Fed. Appx. 802, 2016 BL 234000 (11th Cir. does not affect the validity of the sale or the enforceability 2016). In In re Philadelphia Newspapers, LLC, 690 F.3d 161, of any debt or lien created as part of the financing if the pur- 168–69 (3d Cir. 2012), however, a panel of the Third Circuit chaser or lender acted in “good faith” and no stay of the order adopted a more nuanced approach, holding that the foremost was obtained. See In re One2One Commc’ns, LLC, 805 F.3d consideration is “whether allowing an appeal to go forward 428, 443 (3d Cir. 2015) (noting that, by their terms, sections will undermine the plan, and not merely whether the plan has 363(m) and 364(e) do not prevent an appellate court from been substantially consummated.” hearing an appeal but simply prevent the appellate court’s remedy from affecting certain transactions); In re LCI Holding Section 1101(2) of the Bankruptcy Code provides that “sub- Co., 802 F.3d 547, 554 (3d Cir. 2015) (if a party fails to obtain a stantial consummation” of a chapter 11 plan occurs when stay of the sale order, appellate review is not limited by sec- substantially all property transfers proposed by the plan have tion 363(m) to the narrow issue of whether the property was been completed, the reorganized debtor or its successor has sold to a good-faith purchaser but can include any sale chal- assumed control of the debtor’s business and property, and lenge that does not “affect the validity of the sale”). plan distributions have commenced. In Ferguson, the Eleventh Circuit addressed the distinction The Second Circuit reaffirmed the doctrine of equitable moot- between constitutional and equitable mootness in the chap- ness in In re Charter Commc’ns, Inc., 691 F.3d 476 (2d Cir. 2012), ter 11 plan context. but its ruling deepened a split among the circuits with respect

6 FERGUSON The Eleventh Circuit declined to apply the traditional balancing test for equitable mootness, observing that “we will not under- Gary Ferguson (the “debtor”) filed for chapter 11 protection take such an analysis here because the doctrine is discretion- in the Southern District of Florida in May 2012. David Beem ary and does not divest us of jurisdiction.” Equitable mootness, (“Beem”), a creditor asserting a claim in the amount of $385,000, the court wrote, “bears only upon the proper remedy, and does filed an objection to the debtor’s chapter 11 plan and a ballot not raise a threshold question of our power to rule” (internal rejecting it one day after the objection deadline. The debtor quotation marks and citation omitted). moved to strike the objection and the ballot, contending that the objection was untimely and that Beem was not entitled to The Eleventh Circuit rejected the debtor’s argument that vote on the plan because he did not have an allowed claim. the appeal was constitutionally moot because the plan had Beem hired a suspended attorney to assist him in prepar- already been substantially consummated and it would be cum- ing the ballot. The bankruptcy court granted the motion and bersome to unwind each transaction—mortgages would have denied Beem’s request for reconsideration. to be modified, liens released, and sums of money returned. According to the court: Beem appealed the bankruptcy court’s orders to the district court, once again relying on the assistance of the suspended The very fact that it could be so imprudent to dis- attorney, and ultimately failed to timely file a memorandum turb the Plan is a testament to the fact that there is of law supporting the appeal. The district court dismissed indeed a live controversy; the pragmatic doctrine of the appeal, noting that a suspended lawyer may not assist equitable mootness exists precisely because the vin- pro se litigants, and denied Beem’s request for reconsidera- dication of a party’s rights must be balanced against tion. Beem appealed the bankruptcy and district court orders the chaos that could result from rescinding a plan to the Eleventh Circuit. The debtor moved to dismiss the of confirmation in large and complex bankruptcy appeal, arguing that it was equitably and constitutionally moot cases. . . . Beem challenges the confirmation of the because the chapter 11 plan had been substantially consum- Plan; presumably, if the Plan were unlawful as he mated, thereby precluding the court from granting any effec- claims, a different plan could have resulted in more tive relief. favorable treatment. Beem’s claims may or may not be valid, but they are not constitutionally moot. THE ELEVENTH CIRCUIT’S RULING Having concluded that the appeal was not moot, however, A three-judge panel of the Eleventh Circuit affirmed the district the Eleventh Circuit ruled that the district court did not err court’s orders—but not due to mootness. Quoting the Fourth in dismissing it due to Beem’s failure to comply with the Circuit’s ruling in Mac Panel Co. v. Va. Panel Corp., 283 F.3d court’s orders. 622, 625 (4th Cir. 2002), the Eleventh Circuit explained the difference between equitable and constitutional mootness: OUTLOOK

Unlike the constitutional doctrine of mootness, which Ferguson’s significance is twofold. First, the decision provides bars consideration of appeals because no Article guidance concerning the difference between constitutional III case or controversy remains, the doctrine of and equitable mootness. The former precludes a court from equitable mootness is a pragmatic principle, hearing an appeal because the absence of any “case or con- grounded in the notion that, with the passage of troversy” means that the court lacks constitutional jurisdiction time after a judgment in equity and implementation over the appeal. The latter is not jurisdictional. Rather, equi- of that judgment, effective relief on appeal becomes table mootness is a discretionary doctrine that permits an impractical, imprudent, and therefore inequitable appellate court, in exercising its equitable powers, to refuse to (quotation marks omitted). hear an appeal because relief, although not impossible, would knock the props out from under a confirmed and substantially

7 consummated chapter 11 plan and thwart the legitimate FROM THE TOP: U.S. SUPREME COURT TO HEAR expectations of stakeholders. CASE ON SCOPE OF SECTION 546(e)’S SAFE

Second, although the Eleventh Circuit did not expressly say HARBOR so in its opinion, Ferguson could be viewed as emblematic Bruce Bennett Brad B. Erens of the growing concern among courts regarding overbroad Dan T. Moss application of the equitable mootness doctrine, with recent calls to limit the doctrine and, in some cases, eliminate it alto- gether, particularly where the parties affected by the appeal On May 1, 2017, the U.S. Supreme Court agreed to hear Merit are well aware of the potential for reversal. See, e.g., First S. Management Group v. FTI Consulting, No. 16-784, on appeal Nat’l Bank v. Sunnyslope Hous. LP (In re Sunnyslope Hous. LP), from the U.S. Court of Appeals from the Seventh Circuit. See 818 F.3d 937 (9th Cir. 2016) (refusing to dismiss the appeal of an FTI Consulting, Inc. v. Merit Management Group, LP, 830 F.3d order confirming a chapter 13 plan under the doctrine despite 690 (7th Cir. 2016). The Court’s decision could resolve a cir- the substantial consummation of the plan where the appel- cuit split as to whether section 546(e) of the Bankruptcy Code lant unsuccessfully sought a stay pending an appeal from the can shield from fraudulent conveyance attack transfers made bankruptcy and district courts and where the unraveling of the through financial institutions where such financial institutions plan would not have a negative effect on innocent third par- are merely “conduits” in the relevant transaction. The Court’s ties not before the court); JPMCC 2007-C1 Grasslawn Lodging, decision could resolve a question of great significance for LLC v. Transwest Resort Props. Inc. (In re Transwest Resort financial institutions and those who use their services in trans- Props., Inc.), 801 F.3d 1161 (9th Cir. 2015) (refusing to apply the actions: Whether the safe-harbor provision in section 546(e) doctrine where the appellant took all reasonable steps to seek protects transfers made through a financial institution to a a stay of the confirmation order and where the plan was not third party regardless of whether the financial institution had so complex that uninvolved third parties would be harmed); a beneficial interest in the transferred property. JPMCC 2006-LDP7 Miami Beach Lodging, LLC v. Sagamore Partners, Ltd. (In re Sagamore Partners, Ltd.), 610 Fed. Appx. Section 546(e) provides that pre-bankruptcy transfers made 922, 2015 BL 280922, *7 (11th Cir. Aug. 31, 2015) (stating that by or to a “financial institution,” among other entities, may not equitable mootness applies only when “effective relief is no be avoided as a fraudulent transfer, unless the transfer was longer available” and ruling that requiring the debtor to pay made with the actual intent to hinder, delay, or defraud credi- default-rate interest under a substantially consummated plan tors. The general purpose of section 546(e) is to prevent “the was effective relief); One2One Commc’ns, LLC, 805 F.3d at 432 insolvency of one commodity or security firm from spreading (declining to hold that the doctrine is unconstitutional or “con- to other firms and possibly threatening the collapse of the trary to the Bankruptcy Code,” but ruling that the doctrine must affected market.” H.R. Rep. No. 97-420, at 1 (1982), reprinted be construed narrowly and should be applied only in complex in 1982 U.S.C.C.A.N. 583, 583, 1982 WL 25042. With the enact- reorganizations when the appellant should have acted before ment of section 546(e), Congress sought to promote customer the plan became “extremely difficult to retract” (quoting In re confidence in the markets by protecting market stability. See Phila. Newspapers, LLC, 690 F.3d 161, 169 (3d Cir. 2012)); United Kaiser Steel Corp. v. Charles Schwab & Co., 913 F.2d 846 (10th States v. Buchman, 646 F.3d 409, 411 (7th Cir. 2011) (noting that Cir. 1990) (citing Sen. Rep. No. 989, at 8 (1978)). the Seventh Circuit does not follow the doctrine of equitable mootness in bankruptcy law); Bank of N.Y. Trust Co. v. Official The Seventh and Eleventh Circuits have held that sec- Unsecured Creditors’ Comm. (In re Pac. Lumber Co.), 584 F.3d tion 546(e) does not apply to transfers with financial institu- 229, 240 (5th Cir. 2009) (a court should apply doctrine “with a tions which receive no beneficial interest in the property scalpel rather than an axe” and may “fashion whatever relief transferred. By contrast, the Second, Third, Sixth, Eighth, and is practicable” instead of declining review simply because full Tenth Circuits have found that section 546(e) applies even if relief is not available). the financial institution involved is merely a “conduit” for the transfer of funds from the debtor to another party.

8 FOREIGN REPRESENTATIVE HAD “INDEPENDENT” under chapter 15 of the Bankruptcy Code, in which a U.S. bank- STANDING TO PROSECUTE STATE LAW ruptcy court can “recognize” the debtor’s foreign bankruptcy proceeding(s), or under another chapter, such as chapter 7 or AVOIDANCE CLAIMS IN CHAPTER 15 chapter 11. A Florida bankruptcy court addressed those restric- Pedro A. Jimenez tions in Laspro Consultores LTDA. v. Alinia Corp. (In re Massa Mark G. Douglas Falida do Banco Cruzeiro do Sul S.A.), 2017 BL 94281 (Bankr. S.D. Fla. Mar. 23, 2017). The court ruled that section 1521(a)(7) of the Bankruptcy Code did not preclude a foreign representa- If a foreign debtor is eligible to file for bankruptcy protection tive in a chapter 15 case from prosecuting fraudulent transfer in the U.S., the debtor’s foreign representative (e.g., a liquidator claims arising under New York law because the representative or administrator) may, under certain circumstances, have the had “independent” standing to prosecute such claims under power to avoid and recover pre-bankruptcy transfers of the Brazilian law. debtor’s assets, a feature of U.S. bankruptcy law that can serve to materially augment the value of a foreign bankruptcy estate. PROCEDURES AND RELIEF UNDER CHAPTER 15 The Bankruptcy Code includes certain restrictions on that ability, depending on whether the representative files a case Chapter 15 of the Bankruptcy Code is patterned on the UNCITRAL Model Law on Cross-Border Insolvency (the “Model

9 Law”), a framework of legal principles designed to harmonize commence a full-fledged bankruptcy case under any other and coordinate cross-border bankruptcies that has now been chapter of the Bankruptcy Code, so long as the foreign debtor adopted in 43 nations or territories. is eligible to file for bankruptcy in the U.S. and the debtor has U.S. assets. The foreign representative may intervene in any Under chapter 15, the “foreign representative” of a non-U.S. court proceedings in the U.S. in which the foreign debtor is a debtor may file a petition in a U.S. bankruptcy court seeking party (section 1524) and can sue and be sued in the U.S. on “recognition” of a “foreign proceeding.” A “foreign represen- the foreign debtor’s behalf (section 1509(b)(1)). Section 1509(b) tative” is defined in section 101(24) of the Bankruptcy Code (2) provides that the foreign representative may also “apply as “a person or body, including a person or body appointed directly to a court in the United States for appropriate relief in on an interim basis, authorized in a foreign proceeding to that court,” which is obligated to grant “comity or cooperation” administer the reorganization or the liquidation of the debtor’s to the foreign representative. assets or affairs or to act as a representative of such foreign proceeding.” If the bankruptcy court denies recognition of a foreign proceeding, section 1509(d) provides that the court may issue “Foreign proceeding” is defined in section 101(23) of the any appropriate order necessary to prevent the foreign rep- Bankruptcy Code as “a collective judicial or administrative resentative from obtaining comity or cooperation from other proceeding in a foreign country . . . under a law relating to U.S. courts. insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or super- However, section 1509(f) provides that the failure of a foreign vision by a foreign court, for the purpose of reorganization or representative “to commence a case or to obtain recognition liquidation.” under [chapter 15] does not affect any right the foreign representative may have to sue in a court in the United States to Because more than one bankruptcy or insolvency proceed- collect or recover a claim which is the property of the debtor.” ing may be pending against the same foreign debtor in different countries, chapter 15 contemplates recognition in the If a foreign proceeding is recognized as either a main or “non- U.S. of both a “main” proceeding—a case pending in whatever main” proceeding, section 1521(a) authorizes the bankruptcy country contains the debtor’s “center of main interests”—and court to grant a broad range of provisional and other relief “nonmain” proceedings, which may have been commenced in designed to preserve the foreign debtor’s assets or otherwise countries where the debtor merely has an “establishment.” provide assistance to the court or other entity presiding over the debtor’s main proceeding. Upon recognition of a foreign “main” proceeding, section 1520(a) provides that certain provisions of the Bankruptcy FOREIGN REPRESENTATIVE’S POWER TO AVOID TRANSFERS Code automatically come into force, including section 362, which imposes an automatic stay preventing creditor collec- Under section 1521(a)(7), the court may also “grant[] any addition efforts with respect to the debtor or its U.S. assets; sec- tional relief that may be available to a trustee, except for relief tion 361, which entitles any entity asserting an interest in the available under sections 522, 544, 545, 547, 548, 550, and debtor’s U.S. assets to “adequate protection” of that interest; 724(a)” (emphasis added). These provisions authorize the section 363, which restricts the debtor’s ability to use, sell, or “trustee” to, among other things, avoid and recover transfers lease its U.S. property outside the ordinary course of its busi- that are fraudulent under the Bankruptcy Code and/or, under ness; and section 549, which gives a “trustee” the power to certain circumstances, “applicable” law (generally state law). avoid unauthorized postpetition asset transfers. However, these avoidance powers are expressly conferred The foreign representative in a recognized main proceeding is upon a foreign representative if the debtor files for protection authorized to operate the debtor’s business in much the same under another chapter of the Bankruptcy Code. Section 1523 way that a chapter 11 debtor-in-possession is. Pursuant to sec- authorizes the bankruptcy court to order relief necessary to tions 1520(c) and 1528, the foreign representative can also avoid acts that are “detrimental to creditors,” providing that

10 upon recognition of a foreign proceeding, a foreign represen- in the words of the district court, sections 1521(a)(7) and 1523 tative has “standing in a case concerning the debtor under “are intended to exclude all of the avoidance powers specified, another chapter of this title to initiate actions under sections under either United States or foreign law, unless a Chapter 7 522, 544, 545, 547, 548, 550, 553, and 724(a).” or 11 bankruptcy proceeding is instituted.”

The legislative history of sections 1521 and 1523 provides According to the Fifth Circuit, the avoidance-power excep- as follows: tions to “any appropriate relief” delineated in section 1521(a) (7) do not exist in the Model Law, and “[w]hile it is plain that [Section 1521] follows article 21 of the Model Law, relief under the listed sections is excluded, the statute is silent with detailed changes to conform to United States regarding proceedings that apply foreign law, including any law. The exceptions in subsection (a)(7) relate to rights of avoidance such law may offer.” The court wrote, “If avoiding powers. The foreign representative’s status Congress wished to bar all avoidance actions whatever their as to such powers is governed by section 1523 below. source, it could have stated so; it did not.” * * * * [Section 1523] follows article 23 of the Model Law, Looking to the legislative history of the Model Law and chap- with wording to fit it within procedure under this title. ter 15, the Fifth Circuit noted drafters’ concerns regarding con- It confers standing on a recognized foreign repre- flicts of law and choice of law issues: sentative to assert an avoidance action but only in a pending case under another chapter of this title. The The drafters of Chapter 15, responsive to the con- Model Law is not clear about whether it would grant cerns raised at the UNCITRAL debates, confined standing in a recognized foreign proceeding if no full actions based on U.S. avoidance law to full Chapter 7 case were pending. This limitation reflects concerns and 11 bankruptcy proceedings—where the court raised by the United States delegation during the would also decide the law to be applied to the dis- UNCITRAL debates that a simple grant of standing tribution of the estate. The application of foreign to bring avoidance actions neglects to address very avoidance law in a Chapter 15 ancillary proceeding difficult choice of law and forum issues. This limited raises fewer choice of law concerns as the court is grant of standing in section 1523 does not create or not required to create a separate bankruptcy estate. establish any legal right of avoidance nor does it cre- It accepts the helpful marriage of avoidance and dis- ate or imply any legal rules with respect to the choice tribution whether the proceeding is ancillary applying of applicable law as to the avoidance of any transfer foreign law or a full proceeding applying domestic of obligation. The courts will determine the nature law—a marriage that avoids the more difficult de- and extent of any such action and what national law pecage rules of conflict law presented by avoidance may be applicable to such action. and distribution decisions governed by different sources of law. H.R. Rep. 109-31(I), at 178–79 (2005) (footnotes omitted). In Banco Cruzeiro, the bankruptcy court examined the power In In re Condor Ins. Ltd., 601 F.3d 319 (5th Cir. 2010), the U.S. of a foreign representative to bring an avoidance action under Court of Appeals for the Fifth Circuit considered whether sec- U.S. state law in a chapter 15 case. tions 1521 and 1523 preclude a foreign representative in a chapter 15 case from seeking to avoid transfers under non-U.S. BANCO CRUZEIRO law without first commencing a chapter 7 or 11 case on behalf of the debtor. The Fifth Circuit reversed lower court orders Brazilian bank Banco Cruzeiro do Sul S.A. (“BC”) was placed dismissing a proceeding brought by a foreign representa- into extrajudicial liquidation by the Central Bank of Brazil in tive in a chapter 15 case seeking to avoid fraudulent trans- September 2012. On June 14, 2014, BC’s liquidator filed a peti- fers under foreign law. The lower courts took the position that, tion in the U.S. Bankruptcy Court for the Southern District of

11 Florida that sought recognition of the Brazilian liquidation pro- under Brazilian law.” The court reasoned that, unlike a bank- ceeding as a foreign main proceeding under chapter 15. The ruptcy trustee in the U.S., who has standing to bring state law court entered an order recognizing the proceeding on July 14, fraudulent transfer claims only by virtue of section 544 of the 2014. The Brazilian bankruptcy court declared BC bankrupt Bankruptcy Code, a Brazilian judicial administrator has stand- on August 12, 2014, after which the liquidator was formally ing under Brazilian law to pursue such claims independently appointed as the bank’s trustee (the “trustee”). on behalf of the debtor and its creditors (the massa falida). The court wrote: In July 2016, the trustee commenced an adversary proceeding in the U.S. bankruptcy court against two British Virgin Islands There is absolutely nothing in any part of chapter 15 affiliates of BC (collectively, the “defendants”) which alleged, that remotely suggests that a foreign representative among other things, that certain BC insiders had caused the may never bring an avoidance claim that the foreign bank to fraudulently transfer funds used to purchase various representative has the direct right to bring in his or U.S. assets which were later transferred to the defendants in her capacity as the foreign representative (or as sec- violation of the New York Debtor and Creditor Law. The trustee tion 1509(f) makes clear—in his or her independent did not rely on section 544 or any other provision of the capacity otherwise). Bankruptcy Code in the adversary complaint. The defendants moved to dismiss, arguing that, as a foreign representative in The court found the Fifth Circuit’s ruling in Condor to be both a chapter 15 case, the trustee was precluded by section 1521(a) “instructive” and supportive: (7) from pursuing avoidance claims. The court held that there is nothing in chapter 15 in THE BANKRUPTCY COURT’S RULING general, or section 1521(a)(7) specifically, that prohibits a foreign representative from prosecuting an The bankruptcy court denied the motion. In doing so, the court avoidance action that arises under the laws of the concluded that it need look no further than the express lan- country governing the main proceeding. While the guage of sections 1521(a)(7) and 1509(f). According to the court, court unfortunately seems to refer sometimes to “U.S. although section 1521(a)(7) does preclude a court from grant- Laws” and other times to claims arising under the ing a foreign representative relief under “certain enumerated Bankruptcy Code, the crux of the opinion is clear—if sections pursuant to which a bankruptcy trustee may bring the foreign representative has a cause of action that avoidance actions,” the provision does not “prohibit a foreign is not dependent on the claims that he or she could representative from bringing avoidance claims that are avail- only raise as a U.S. bankruptcy trustee, the foreign able to the foreign representative generally under non-bank- representative may pursue those claims. ruptcy law.” OUTLOOK Moreover, the court explained, section 1509(f) “makes clear” that “the failure of a foreign representative to commence a Banco Cruzeiro may be a welcome development for foreign case or to obtain recognition under [chapter 15] does not representatives in chapter 15 cases wishing to assert avoid- affect any right the foreign representative may have to sue in ance actions under U.S. state law or foreign law without having a court in the United States to collect or recover a claim which to file a chapter 7 or chapter 11 case on behalf of a foreign is the property of the debtor.” debtor. However, it remains to be seen whether other courts will adopt the Banco Cruzeiro court’s reading of sections 1509 The court found that the trustee’s ability to seek relief under and 1521. the New York fraudulent conveyance law stemmed not from his capacity as a “foreign representative” under chapter 15, but rather, from his capacity as a Brazilian bankruptcy judicial administrator “who represents the creditors of the estate

12 NEWSWORTHY

Citing the successful resolution he secured in the in Chapter 11 Cases” as part of the Business Bankruptcy chapter 11 case of Caesars Entertainment Operating Committee Joint Chapter 11/Secured Creditors Company, The American Lawyer named Bruce Bennett Luncheon Program at the ABA Business Law Section (Los Angeles and New York) a 2017 “Dealmaker of the 2017 Spring Meeting in New Orleans. Year.” Mr. Bennett led a team representing the Caesars On April 2, 2017, Corinne Ball (New York) moder- second-priority noteholders and negotiated a settle- ated a “Distressed Investing” panel at the Harvard ment of 65.5 cents on the dollar, more than seven times Business School Investment Conference in Cambridge, the nine cents on the dollar initially offered by the com- Massachusetts. pany. The negotiations resulted in $3 billion of additional On May 4, 2017, Thomas M. Wearsch (Cleveland) partici- value for the noteholders. pated in a panel discussion on distressed investing at Kevyn D. Orr (Washington), Pedro A. Jimenez (Miami), the William J. O’Neill Great Lakes Regional Bankruptcy Scott J. Greenberg (New York), Thomas M. Wearsch Institute in Cleveland. (Cleveland), Amy Edgy (Washington), Thomas A. On March 21, 2017, Richard L. Wynne (Los Angeles) gave Howley (Houston), David G. Heiman (Cleveland), James a presentation concerning “The Section 546(e) Safe O. Johnston (Los Angeles), Brad B. Erens (Chicago), Harbor” as part of the Shark Tank Panel at the American Heather Lennox (Cleveland and New York), Jeffrey B. Bankruptcy Institute’s 2017 Bankruptcy Battleground Ellman (Atlanta), Carl E. Black (Cleveland), Bennett L. West conference in Los Angeles. Spiegel (Los Angeles), Corinne Ball (New York), Bruce Gregory M. Gordon (Dallas) has been designated Bennett (Los Angeles and New York), Charles M. among the 2017 “Best Lawyers in Dallas” by D Magazine. Oellermann (Columbus), Gregory M. Gordon (Dallas), and Richard L. Wynne (Los Angeles) were designated Heather Lennox (Cleveland and New York), Amy Edgy “Leaders in their Field” in the area of Bankruptcy/ (Washington), Dan T. Moss (Washington), Thomas M. Restructuring in Chambers USA 2017. Wearsch (Cleveland), Mark A. Cody (Chicago), Timothy Hoffmann (Chicago), Robert W. Hamilton (Columbus), Jasper Berkenbosch (Amsterdam), Juan Ferré (Madrid), Matthew C. Corcoran (Columbus), and George R. Laurent Assaya (Paris), and Ben Larkin (London) Howard (New York) represented Peabody Energy were named “Leaders in their Field” in Restructuring/ Corporation, the world’s largest private-sector coal com- Insolvency in Chambers Europe 2017. pany, and 153 of its affiliates (collectively, “Peabody”) in Roger Dobson (Sydney) was nominated as one of the connection with chapter 11 cases filed by the compa- world’s leading practitioners in the field of Restructuring nies in the Eastern District of Missouri on April 13, 2016. & Insolvency for 2017 by Who’s Who Legal. On March 17, 2017—only 11 months after the bankruptcy Kay V. Morley (London) gave a presentation on April 1, filing—the bankruptcy court confirmed a chapter 11 plan 2017, entitled “Cross-border recognition of insolvency for Peabody that reduced its debt burden by more than proceedings post-Brexit” at the ILA Academic Forum $5.2 billion. Key features of the plan included $1.5 billion and Annual Conference in London. in new equity by means of a $750 million rights offer- On May 17, 2017, in Houston, Thomas A. Howley (Houston) ing and a $750 million private placement; a $1.5 billion gave a presentation entitled “To the Abyss & Back: exit facility; and—the cornerstone of the plan—a global A review of the volatile energy landscape from a restruc- settlement among Peabody and various stakehold- turing/investment banking perspective” at the spring ers. Peabody emerged from bankruptcy after the plan programs of the CFA Society Houston. became effective on April 3, 2017. On April 6, 2017, Erin N. Brady (Los Angeles) gave a presentation entitled “What’s Mine Is Mine and What’s Yours Is Mine: PACA, PASA, and Consignment Rights

13 SINGAPORE, U.K., DELAWARE, AND NEW The Guidelines were developed by judges from several juris- YORK COURTS ADOPT GUIDELINES FOR dictions, including Australia, Bermuda, the British Virgin Islands, Canada, the Cayman Islands, England and Wales, Singapore, COMMUNICATION AND COOPERATION and the U.S., all of which participated in discussions at the BETWEEN COURTS IN CROSS-BORDER initial meeting of the Judicial Insolvency Network convened INSOLVENCY MATTERS in Singapore in October 2016. The Guidelines are noteworthy not only because they provide a framework for cooperation Corinne Ball Sushma Jobanputra and communication in cross-border bankruptcy and insol- Ben Larkin vency proceedings, but because the initiative represents the first time that such a common framework has been adopted (and now implemented) by courts for that purpose. Previously, On February 1, 2017, the Supreme Court of Singapore and communication between courts involved in “parallel” bank- the U.S. Bankruptcy Court for the District of Delaware ruptcy or insolvency proceedings was often nonexistent announced that they had formally implemented Guidelines or poorly coordinated, in many cases achieved by means for Communication and Cooperation between Courts in of ad hoc protocols. This created significant delay and uncer- Cross-Border Insolvency Matters (the “Guidelines”). The tainty and sometimes resulted in conflicting rulings from the U.S. Bankruptcy Court for the Southern District of New York courts involved. adopted the Guidelines on February 17, 2017. In the U.K., the Chancery Guide, which applies to chapter 25 (“The Bankruptcy In Singapore, the adoption of the Guidelines was part of an ini- and Companies Courts”), was amended on May 4, 2017, to tiative designed to transform the country into a hub for interna- include the Guidelines. They are set forth in Local Bankruptcy tional restructuring. Part of that initiative involves Singapore’s Rule 9029-2 in Delaware and General Order M-511 in New York. enactment of a new corporate bankruptcy law. It is anticipated that the Guidelines will be implemented in other key jurisdic- The stated purpose of the Guidelines is “to improve the effi- tions, including the U.K., Australia, and the British Virgin Islands. ciency and effectiveness of cross-border insolvency proceedings and to enhance coordination and cooperation among The Guidelines are briefly summarized below: courts under whose supervision such proceedings are being conducted.” Their overarching objective is to improve effi- Guideline 1—Courts should encourage administra- ciency in complex cases, which ideally will minimize litigation, tors in parallel bankruptcy or insolvency proceed- time, and expense for the benefit of all stakeholders. ings (e.g., liquidators, trustees, judicial managers,

14 debtors-in-possession in reorganizations or schemes Guideline 8—In connection with substantive com- of arrangement, or any fiduciaries of the estate) to munications between courts, unless directed other- cooperate in all aspects of the cases. wise by a court, parties may ordinarily be present, in which case advance notice of a communication Guideline 2—The Guidelines may be made applica- shall be provided according to applicable rules. ble to a particular parallel proceeding (in whole or in Communications shall be recorded and transcribed, part) if the court enters an order or protocol to that with the transcription, which shall be available to the effect either upon the application of a party or on its parties, serving as the official record. own initiative. Guideline 9—A court may direct that notice of its Guideline 3—A protocol or order making the proceedings be given to parties in proceedings in Guidelines applicable in a parallel proceeding should another jurisdiction. promote the efficient and timely administration of the proceedings. Guideline 10—A court may authorize a party, or an appropriate person, to appear before and be heard Guideline 4—The Guidelines are not intended to: by a foreign court, subject to approval of the for- (i) interfere with the courts’ jurisdiction over a pro- eign court. ceeding; (ii) prevent a court from refusing to take an action that would be manifestly contrary to public Guideline 11—A court may authorize a party to a for- policy or that would not sufficiently protect the inter- eign proceeding, or an appropriate person, to appear ests of stakeholders; or (iii) alter substantive rights, and be heard on a specific matter without thereby interfere with any function or duty arising out of any becoming subject to its jurisdiction for any purpose applicable law, or encroach upon any applicable law. other than the specific matter in question.

Guideline 5—A protocol or order under the Guideline 12—With certain exceptions, a court shall Guidelines is procedural and should not constitute recognize and accept as authentic the provisions of a limitation on or waiver by the court of any powers, statutes, regulations, and rules of court applicable responsibilities, or authority, or a substantive deter- to the proceedings in other jurisdictions without fur- mination of any matter in controversy, except to the ther proof. extent specifically provided in such protocol or order. Guideline 13—With certain exceptions, a court shall Guideline 6—In interpreting the Guidelines or any accept that orders made in the proceedings in other related protocol or order, due regard shall be given jurisdictions were duly and properly entered and to their international origin and the need to promote shall accept that such orders require no further proof good faith and uniformity in their application. for purposes of the proceedings before it.

Guideline 7—Courts presiding over parallel proceed- Guideline 14—Any protocol or order made under the ings may communicate for the purpose of, among Guidelines is subject to such amendments, modifica- other things, rendering decisions and coordinat- tions, and extensions as may be considered appro- ing and resolving any procedural, administrative, or priate by the court consistent with the Guidelines and preliminary matters relating to joint hearings. Such developments in the parallel proceedings. communications may be in various forms, as may be agreed to by the courts. Annex A—Setting forth guidelines on the conduct of joint hearings.

15 OIL AND GAS INDUSTRY UPDATE: DISTRICT gathering and handling agreements with Nordheim Eagle Ford COURT UPHOLDS REJECTION OF SABINE GAS Gathering, LLC (“Nordheim”) and HPIP Gonzales Holdings, LLC GATHERING AGREEMENTS (“HPIP”). All of the agreements were governed by Texas law. Thomas A. Howley In connection with its efforts to restructure in chapter 11, Andrew R. Van Noord Sabine filed a motion to reject the gathering agreements. Omar Samji Sabine argued that it could not deliver the required minimum Paul M. Green amounts of gas and condensate and that rejection would save In a highly anticipated decision—HPIP Gonzales Holdings, LLC it as much as $115 million. In addition, Sabine had the abil- v. Sabine Oil & Gas Corp. (In re Sabine Oil & Gas Corp.), 2017 ity to deliver the gas through other avenues, an option that BL 83510 (S.D.N.Y. Mar. 9, 2017)—Judge Jed S. Rakoff of the U.S. is not always available to producers. Nordheim opposed the District Court for the Southern District of New York affirmed motion to reject, arguing that rejection was not a proper exer- 2016 bankruptcy court rulings authorizing chapter 11 debtor cise of Sabine’s business judgment because the agreements Sabine Oil & Gas Corp. (“Sabine”) to reject certain gas gather- included dedications that Nordheim alleged were covenants ing and handling agreements. According to Judge Rakoff, the running with the land, which would continue to burden the bankruptcy court did not err in finding that the agreements debtor’s interests following rejection. could be rejected under section 365 of the Bankruptcy Code because, under applicable nonbankruptcy law, the agree- Although HPIP did not oppose rejection, it too argued that the ments contained neither real covenants which run with the relevant hydrocarbon dedications were covenants running land nor equitable servitudes. with the land which would survive rejection. Sabine countered that the purported dedications lacked the requisite intent and Prior to filing for chapter 11 protection in the Southern District privity to establish covenants running with the land and were of New York in July 2015, Sabine entered into three gas not consistent with real property conveyances under Texas

16 law, since they lacked traditional real property terms and were that horizontal privity is created by “the conveyance of an instead more consistent with services agreements. interest in property that itself is being burdened with the relevant covenant, not the conveyance of an interest in In In re Sabine Oil & Gas Corp., 547 B.R. 66 (Bankr. S.D.N.Y. property that is distinct from (even if somewhat related to) 2016), bankruptcy judge Shelley C. Chapman held that Sabine’s the property burdened by the covenant.” rejection of the midstream agreements was a proper exercise of Sabine’s business judgment, but she determined that the Finally, Judge Chapman ruled that the covenants at issue did questions of Texas real property law were not properly before not limit the use of or burden Sabine’s mineral estate such that the court because those issues could not be adjudicated in they could run with the land as equitable servitudes, because the context of a motion to reject an executory contract. In a the agreements with Nordheim and HPIP “are fundamentally nonbinding portion of her ruling, however, Judge Chapman service contracts relating to personal property of Sabine.” noted that the agreements failed to meet Texas’s five-part test for covenants running with the land, stating that “none of the On May 17, 2016, Judge Chapman entered an order authorizing covenants run with the land either as a real covenant or as Sabine to enter into an alternative gas gathering agreement an equitable servitude.” In particular, she explained that the with DCP South Central Texas LLC. She later denied Nordheim’s covenants merely identified the rights and obligations related motion seeking a stay of that order pending appeal as well as to the services to be provided under the agreements and did permission to appeal her rulings directly to the U.S. Court of not convey interests in the underlying real property. Appeals for the Second Circuit. Nordheim and HPIP appealed Judge Chapman’s rulings authorizing rejection of the gas gath- Sabine later commenced adversary proceedings against ering agreements to the district court. Nordheim and HPIP seeking a declaratory judgment that the covenants included in the agreements did not run with The district court affirmed those rulings on March 9, 2017. the land. District judge Rakoff explained that, under Texas law, four conditions must be met for a covenant to run with the land: “it In Sabine Oil & Gas Corp. v. HPIP Gonzales Holdings, LLC (In touches and concerns the land; relates to a thing in existence re Sabine Oil & Gas Corp.), 550 B.R. 59 (Bankr. S.D.N.Y. 2016), or specifically binds the parties and their assigns; is intended Judge Chapman granted Sabine’s motion for summary judg- by the original parties to run with the land; and when the suc- ment in those adversary proceedings, ruling, for substantially cessor to the burden has notice.” Focusing on the initial el- the same reasons articulated in her earlier opinion, that the ement, he further noted that, according to two tests applied covenants in the rejected midstream gathering agreements in relevant case law, a covenant “touches and concerns” land “do not run with the land either as real covenants or as equi- if: (i) it lessens the promisor’s legal relations or increases the table servitudes.” promisee’s legal relations with respect to the land; or (ii) it affects the nature, quality, or value of the subject of the cov- She concluded, among other things, that in accordance with enant or affects the mode of enjoying it. Texas law, the covenants in the agreements do not “touch and concern” Sabine’s real property. “By the plain terms of the Judge Rakoff ruled that the gas gathering agreements satis- [agreements],” Judge Chapman wrote, “the mineral dedica- fied neither test. He concluded that HPIP and Nordheim failed tions concern only minerals extracted from the ground, which to show that the agreements “either increased their legal indisputably constitute personal property, not real property, relations to the real property interests at issue or decreased under Texas law.” Sabine’s.” Among other things, the judge rejected Nordheim’s assertion that Sabine’s “dedication” of the gas and condensate The judge also concluded that, even if “horizontal privity of which was produced and saved in the Nordheim dedicated estate” were a requirement under Texas law for a covenant to areas for gathering conveyed an interest in minerals in the run with the land, such privity did not exist between Sabine ground, which under Texas law is a property interest. “[T]he and Nordheim or between Sabine and HPIP. She explained nature of the interest that Nordheim received,” he wrote, “is

17 different from a royalty interest” because Nordheim did not GROUP INSOLVENCY PROCEEDINGS UNDER THE receive the right to any share of the gas that came from the REVISED EU INSOLVENCY REGULATION designated areas, but merely the right to process the gas and Jasper Berkenbosch redeliver it to Sabine in exchange for a fee. Judge Rakoff also Sid Pepels found that Sabine did not convey any real property interests to Nordheim or HPIP by dedicating leases to performance of the agreements. Jasper Berkenbosch, an Amsterdam-based partner in Jones Day’s Business Restructuring & Judge Rakoff concluded that the agreements did not decrease Reorganization Practice, and Sid Pepels, an associate Sabine’s legal relation to its real property interests. Sabine’s in the Amsterdam Office, discuss the Revised EU obligation under the agreements, he wrote, “is simply to use Insolvency Regulation that comes into effect on June Nordheim’s and HPIP’s respective gathering and processing 26, 2017, and its anticipated impact on cross-border services when it does not produce and deliver gas and con- restructurings of EU group companies. densate, and that restriction does not limit Sabine’s enjoyment of the land itself.” Restructuring an international group of companies in Europe Addressing the second test, Judge Rakoff concluded that continues to be challenging. While companies can trans- the covenants in the agreements did not “affect[] the nature, act business freely across European borders, coordination quality or value of the thing demised, independently of col- between the stakeholders involved in a cross-border restruc- lateral circumstances” or affect the mode of enjoying it. He turing has proved to be difficult. The cross-border restructur- found, among other things, that the agreements did not ing of a corporate group is often complicated by a multitude reduce Sabine’s ability to make use of its real property inter- of individual liquidation proceedings spread throughout the ests. Given his finding that the covenants did not satisfy the various countries in which the group is active. This is often the “touch and concern” requirement, Judge Rakoff declined to result of differing legislation enacted by various EU Member address whether a real covenant under Texas law requires States in which debtors may be active; conflicting interests horizontal privity and, if so, whether such privity existed in the between debtors and/or court-appointed “insolvency practi- case before him. tioners” (generally, accountants licensed to render services in connection with, among other things, liquidations, company Finally, Judge Rakoff ruled that the bankruptcy court did voluntary arrangements, administration, receiverships, and not err in concluding that the gas gathering agreements bankruptcies) in group insolvency proceedings; or a lack of did not contain equitable servitudes as a matter of Texas law. communication among stakeholders. He explained that the gas gathering agreements “do not limit Sabine’s use of its property interests in the Dedicated Areas” The EU legislature has responded to these concerns with and that the agreements themselves “do not render more valu- a revised version of the EU Insolvency Regulation (Regulation able the land on which appellants have located their process- (EU) 2015/848 on insolvency proceedings; the “Revised IR”), ing facilities.” which enters into force on June 26, 2017. After 15 years of service, the European Commission thought it time to retire the Having concluded that the bankruptcy court did not err in original EU Insolvency Regulation (Regulation (EC) 1346/2000 ruling that the gathering agreements do not include cov- on insolvency proceedings; the “Original IR”) and mark a new enants which run with the land, Judge Rakoff affirmed Judge chapter in integrating its Member States’ procedural insolvency Chapman’s ruling authorizing Sabine to reject the agreements. frameworks. One of the main features of the Revised IR is new Chapter V on “Insolvency Proceedings of Members of a Group Nordheim and HPIP appealed Judge Rakoff’s ruling to the U.S. of Companies.” This chapter contains new rules designed to Court of Appeals for the Second Circuit on April 11, 2017. promote cross-border cooperation and coordination between

18 courts and insolvency practitioners in insolvency proceedings with the appointment of a group “coordinator.” We briefly concerning group companies in Europe. address these provisions below.

Below we summarize the provisions of Chapter V and briefly Cooperation and Coordination Between Insolvency explain why we believe they will enhance the ability to restruc- Practitioners and Courts ture groups successfully. Cooperation and coordination are mandatory not only between insolvency practitioners of group companies CHANGES REGARDING CORPORATE GROUPS UNDER THE and between the courts that have opened the respective REVISED IR insolvency proceedings separately, but also collectively between insolvency practitioners and the courts. From At the outset, it is important to recognize that—as was the June 26, 2017, onward, insolvency practitioners and courts must case with the Original IR—the Revised IR: (i) regulates only share information and try to agree on protocols regarding a intra-community matters; and (ii) does not impact the indi- coordinated approach to the insolvency proceedings. In vidual EU Member States’ national (material) insolvency laws. addition, insolvency practitioners of group companies are Like the Original IR, the Revised IR governs the legal implica- obligated to consider whether it is possible to coordinate the tions of insolvency proceedings only within the EU. This intra- administration and supervision of the group companies’ affairs. community effect has two main consequences: (a) the Revised If so, they must implement such coordination. IR applies only if the debtor’s center of main interests (“COMI”) is located in a Member State; and (b) the Revised IR gener- The Revised IR also imposes an obligation on insolvency prac- ally does not provide for the legal implications of insolvency titioners to consider at the outset whether the group mem- proceedings regarding parties from non-EU Member States. bers (or the group members’ debts) can be restructured and to coordinate the proposal and negotiation of a cross-border The Revised IR continues to provide rules governing jurisdic- restructuring plan if possible. Insolvency practitioners may tion, applicable law, recognition, and disclosure of information appear before foreign courts that have opened insolvency to creditors. As mentioned above, newly added Chapter V sets proceedings regarding group companies. forth rules governing cooperation and coordination in group insolvency proceedings. Requesting a Stay Regarding Assets of Another Group Company A fundamental principle underpinning the provisions of An insolvency practitioner of a group company may request Chapter V is that cooperation and coordination should not run the stay of any act to realize assets in an insolvency proceed- counter to the interests of creditors in each of the insolvency ing of another group company if the insolvency practitioners proceedings involved. Cooperation and coordination should of the group companies have collectively proposed a cross- be aimed at finding a solution that will leverage synergies border restructuring plan for the benefit of the group’s credi- across the group, to the benefit of all stakeholders. tors and if a stay is required to ensure the implementation of the plan. The new provisions: (i) obligate insolvency practitioners of individual group companies, as well as courts presiding over Group Coordination Proceedings group company insolvency proceedings, to cooperate and The Revised IR also provides for the commencement of “group coordinate with each other; (ii) permit an insolvency prac- coordination proceedings” in which a coordinator is appointed titioner, under certain circumstances, to request the stay for group insolvency proceedings. The coordinator cannot be of any act in furtherance of the realization of a group one of the insolvency practitioners of the group companies, company’s assets in an insolvency proceeding with since he or she represents the interests of the group as a respect to another group company; and (iii) provide whole. The coordinator’s mandate is to coordinate the insol- for the commencement of group coordination proceedings, vency proceedings of the group companies and to propose an integrated approach to the resolution of the group members’

19 insolvencies (e.g., a plan regarding the sale of the entire timing is crucial. Because the insolvency practitioners of group group). The coordinator may participate in the insolvency pro- companies are obligated to examine a coordinated restructur- ceedings of the group companies by, for example, attending ing at group level and to implement the restructuring if pos- creditors’ meetings. The coordinator may also request a stay sible, having a restructuring plan prepared when insolvency or of insolvency proceedings commenced for any of the group pre-insolvency proceedings are commenced should expedite companies, provided that he or she has proposed a group the insolvency practitioners’ consideration of a group level coordination plan and that a stay is required to ensure its restructuring. implementation. Second, if one of the group members’ insolvency practi- A group coordination proceeding is a voluntary proceeding tioners is unwilling to cooperate on a group level and/or on a commenced upon the request of an insolvency practitioner of going concern sale of the assets, the stakeholders now have one of the group companies. Insolvency practitioners of other several options. These include: (i) commencing group coordi- group companies may opt out. Moreover, even if they agree to nation proceedings, although a recalcitrant insolvency prac- group coordination proceedings, insolvency practitioners may titioner cannot be forced to take part in such proceedings; refuse to follow, in full or in part, any recommendation made or (ii) requesting the stay of a sale of group company assets by the group coordinator or in the group coordination plan. located in one or more jurisdictions. Stakeholders may also petition a foreign court to instruct a foreign insolvency prac- Other Procedures Designed to Simplify Group titioner to act in the group’s interest, provided that the laws of Restructurings the Member State in question permit this remedy and that it is Other procedures promoting effective group insolvency pro- in the interest of local creditors. ceedings have also been developed in cross-border restructuring practice. For instance, in some countries, the courts Third, the courts’ obligation to cooperate and coordinate may allow substantive consolidation of companies within a group, streamline creditor voting, voting procedures, and other pro- allowing one insolvency practitioner and/or the debtor to cedural issues across all jurisdictions concerned, allowing, for liquidate or restructure all of the group’s assets and liabili- example, group companies to harmonize, and may coordinate ties as though only one entity existed. Moreover, some courts the timing of key events in a groupwide debt restructuring by have sanctioned a “group COMI”—a single jurisdiction desig- means of a creditors’ composition. nated by the court for all of the group companies’ insolvency proceedings—even when some of the group companies are A STEP FORWARD established in another country. The EU legislature has stated that stakeholders can still utilize such procedures in cross- We anticipate that new Chapter V will have a positive impact border restructurings if permitted in any particular case. on the success rate of EU cross-border restructurings. Whenever possible, insolvency practitioners and courts will BENEFITS OF THE REVISED IR be obligated to coordinate group insolvency proceedings and focus on group restructurings, rather than on fragmented local We anticipate that stakeholders in cross-border restructurings liquidations. If insolvency practitioners are reluctant to co- of EU groups will benefit from the provisions of new Chapter operate in a group restructuring, their foreign counterparts V in several ways. have the ability to intervene in the interests of the group’s creditors. The ability of insolvency practitioners to appear First, in preparing for cross-border restructuring proceedings, before the courts of other EU Member States in which group the courts’ obligation to cooperate can assist the debtor in insolvency proceedings have been commenced will likely coordinating the commencement of insolvency or pre-insol- encourage insolvency practitioners to be more engaging with vency proceedings. This could prove useful, for instance, in a their foreign counterparts than was previously the practice cross-border prepackaged sale of the group’s assets, where under the Original IR regime.

20 SIXTH CIRCUIT REJECTS PER SE RULE AUTOMATICALLY MOOTING SALE APPEALS IN THE ABSENCE OF A STAY George R. Howard

Debtors beware: The Sixth Circuit Court of Appeals has recently expanded the ability of parties to appeal a bankruptcy court’s approval of a sale of assets notwithstanding the statutory mootness rule set forth in section 363(m) of the Bankruptcy Code. While a majority of courts have adopted a per se rule automatically mooting such appeals where there is no stay of the order approving the sale, the Sixth Circuit has now joined the Third and Tenth Circuits in requiring proof that the reviewing court is unable to “grant effective relief without impacting the validity of the sale.” Brown v. Ellmann (In re Brown), 851 F.3d 619 (6th Cir. 2017). Although the Brown case involved a chapter 7 debtor and the extent of exemptions for an individual under section 522 of the Bankruptcy Code, the mootness test adopted by the Sixth Circuit has potentially important implications for corporate chapter 11 debtors pursuing a sale of assets in the Sixth Circuit.

A REVIEW OF SECTION 363(m) OF THE BANKRUPTCY CODE

Under Article III of the U.S. Constitution, federal courts have jurisdiction to consider only actual cases or controversies. U.S. Const. Art. III, § 2, cl. 1. When it becomes impossible for a court to grant effective relief, such as after a change in circumstances during a pending appeal, a live controversy ceases to or leased such property in good faith, whether or exist and the case becomes constitutionally moot. See Mills v. not such entity knew of the pendency of the appeal, Green, 159 U.S. 651, 653 (1895). unless such authorization and such sale or lease were stayed pending appeal. Section 363(m) of the Bankruptcy Code provides for a further statutory mootness rule beyond the general mootness rule Pursuant to section 363(m), if an appellant is unable to obtain under Article III of the U.S. Constitution. Section 363(m) applies a stay pending appeal of a section 363 sale to a good-faith to the sale of a debtor’s assets to a good-faith purchaser purchaser, the appeal should be mooted. See Official Comm. under section 363 of the Bankruptcy Code and provides that: of Unsecured Creditors v. Anderson Senior Living Prop., LLC (In re Nashville Senior Living, LLC), 620 F.3d 584, 591 (6th Cir. [t]he reversal or modification on appeal of an au- 2010). Section 363(m) is a powerful protection for good-faith thorization under subsection (b) or (c) of [section 363 purchasers because it limits the appellate review of a consum- of the Bankruptcy Code] of a sale or lease of prop- mated sale irrespective of the legal merits of the appeal. See erty does not affect the validity of a sale or lease Made in Detroit, Inc. v. Official Comm. of Unsecured Creditors under such authorization to an entity that purchased of Made in Detroit, Inc. (In re Made in Detroit, Inc.), 414 F.3d 576,

21 581 (6th Cir. 2005) (citing Licensing by Paolo v. Sinatra (In Re each would affect the validity of the sale); Osborn v. Durant Gucci), 126 F.3d 380, 392 (2d Cir. 1997)). Bank & Trust Co. (In re Osborn), 24 F.3d 1199, 1210 (10th Cir. 1994) (holding that the appeal of the sale was not mooted by Courts have noted that the statutory mootness provided by section 363(m) when Texas state law provided potential for a section 363(m) serves important public policy considerations. constructive trust on sale proceeds notwithstanding the distri- Maximization of value is a fundamental goal of the Bankruptcy bution and commingling of sale proceeds). Code. Toibb v. Radloff, 501 U.S. 157, 163 (1991). By protecting the finality of bankruptcy sales, section 363(m) maximizes the The Third Circuit stated that its conclusion in Krebs was based value of a debtor’s estate by encouraging the participation in large part on its desire to maintain consistency between its of buyers who are assured that a deal consummated with a interpretation of section 363(m) and a “parallel provision” in debtor or bankruptcy trustee will not be modified by an appel- section 364(e) of the Bankruptcy Code. Section 364(e) pro- late court after a sale transaction closes. Weingarten Nostat, vides that the reversal or modification on appeal of an order Inc. v. Serv. Merch. Co., 396 F.3d 737, 741 (6th Cir. 2005) (citing approving a postpetition loan or extension of credit does not Anheuser-Busch, Inc. v. Miller (In re Stadium Mgmt. Corp.), 895 affect the validity of debts or liens granted to a good-faith F.2d 845, 847 (1st Cir. 1990)). lender, unless the order approving the loan or extension of credit was stayed pending appeal. THE EXISTING CIRCUIT SPLIT In In re Swedeland Dev. Group, Inc., 16 F.3d 552, 559 (3d Cir. The majority of U.S. courts of appeal, including the First, 1994) (en banc), the Third Circuit reasoned that “inasmuch as Second, Fifth, Seventh, Eleventh, and D.C. Circuits, have gen- section 364(e) provides for the consequences of the rever- erally adopted a per se rule that the appeal of a sale order is sal or modification of an order under 364(d) when the order automatically mooted if the closing of the sale is not stayed has not been stayed pending appeal, it is impossible to con- pending appeal. See Ginther v. Ginther Trusts (In re Ginther clude that section 364(e) in itself requires that an appeal be Trusts), 238 F.3d 686, 689 (5th Cir. 2001); U.S. v. Salerno, 932 F.2d dismissed if a stay is not obtained.” Instead, where “it was 117, 122–23 (2d Cir. 1991); In re Stadium Mgmt. Corp., 895 F.2d possible to fashion some meaningful, if only partial, relief,” the 845, 847 (1st Cir. 1990); In re Charter Co., 829 F.2d 1054, 1056 Third Circuit concluded, an appeal would not automatically be (11th Cir. 1987); In re Sax, 796 F.2d 994, 997–98 (7th Cir. 1986); In moot under section 364(e). Id. at 560–61. re Magwood, 785 F.2d 1077, 1080 (D.C. Cir. 1986). Similarly, in Krebs, the Third Circuit reasoned that sec- These courts have based the per se rule on the language tion 363(m) would not automatically moot an appeal of an of section 363(m) and the associated public policy consid- unstayed sale order where reversal or modification would not erations discussed above—in particular, maximizing value affect the validity of the sale. Krebs, 141 F.3d at 499. As a result, by protecting the finality of bankruptcy sales. See U.S. v. the Third Circuit evaluated each form of relief requested by the Salerno, 932 F.2d at 123 (discussing the public policy behind appellant and its potential impact on the validity of the sale in the finality of bankruptcy sales in its discussion of the per se question. After concluding that each requested remedy would rule); In re Stadium Mgmt. Corp., 895 F.2d at 847 (same); In re affect the validity of the underlying sale, the Third Circuit dis- Sax, 796 F.2d at 998 (same). missed the appeal as moot.

By contrast, the Third and Tenth Circuits have held that sec- Under the Tenth Circuit’s interpretation of section 363(m), the tion 363(m) does not automatically moot an appeal so long appellee has the burden to “affirmatively demonstrate” that as it is possible to grant effective relief without impacting the there is no relief available to the appellant. See C.O.P. Coal Dev. validity of the sale. See Krebs Chrysler-Plymouth, Inc. v. Valley Co. v. C.W. Mining Co. (In re C.W. Mining Co.), 641 F.3d 1235, 1239 Motors, 141 F.3d 490, 498–99 (3d Cir. 1997) (holding that the (10th Cir. 2011) (quoting Suter v. Goedert, 504 F.3d 982, 986 (9th appeal was moot under section 363(m) only after examining Cir. 2007)). Thus, in Osborn, even though the sale proceeds each remedy requested by the appellant and determining that had already been distributed pursuant to various orders of the

22 bankruptcy court, the Tenth Circuit concluded that the mere of the Third and Tenth Circuits, declaring that “parties alleg- possibility of equitable relief which might be provided by a ing statutory mootness under § 363(m) [must] prove that the flexible constructive trust remedy under Texas state law was reviewing court is unable to grant effective relief.” The Sixth sufficient to allow the appeal to proceed. Circuit considered this to be the “superior interpretation” of section 363(m) because it “accommodates the provision’s As a result, under Osborn, notwithstanding section 363(m), clear preference in favor of upholding the validity of bank- an appeal of a sale order will be allowed to proceed unless ruptcy sales without unduly restricting the appellant’s right the bankruptcy court or other trial court has previously deter- to contest errors of law made by the bankruptcy court.” The mined that no remedy is available which will not impact the Sixth Circuit also stated that its interpretation was “in line with validity of the sale itself. See Osborn, 24 F.3d at 1210 (declining the plain language of § 363(m)” because the statute “prohib- to decide whether the appellants had a “definite entitlement to its reviewing courts from modifying or setting aside a sale of a particular equitable or other relief” and suggesting that the property purchased in good faith” but does not explicitly “pre- bankruptcy court or another trial court in a collateral action vent a reviewing court from redistributing the proceeds from was the better forum to make such a determination). Therefore, such a sale.” in the Tenth Circuit, it appears that an appeal of a sale will be mooted pursuant to section 363(m) only when it is clear from The court explained that, because the party seeking to have the undisputed facts that an equitable remedy is unavailable. an appeal declared moot under section 363(m) bears the bur- See Rushton v. ANR Co. (In re C.W. Mining Co.), 740 F.3d 548, 561 den of proof, it was up to the bankruptcy trustee to inform the (10th Cir. 2014) (holding that an appeal was moot under sec- court whether any sale proceeds remained accessible and tion 363(m) where it was “clear from the undisputed facts” that to address whether there was any equitable relief available the appellant could not prevail on its constructive trust theory). to the debtor under Michigan state law. As the bankruptcy trustee did not address either issue in its briefing, the Sixth THE SIXTH CIRCUIT’S DECISION IN BROWN Circuit held that the trustee had “not carried his burden to demonstrate mootness under § 363(m).” Accordingly, the Sixth In Brown, an individual debtor voluntarily commenced a chap- Circuit went on to address the merits of the appeal and upheld ter 7 case in the Eastern District of Michigan. In her petition, the bankruptcy court’s approval of the sale and denial of the the debtor stated her intent to surrender her residence to the debtor’s requested exemptions. bankruptcy estate and did not claim any exemptions for the value of her redemption rights under Michigan law. The chap- IMPLICATIONS AND CONSIDERATIONS FOR DEBTORS IN THE ter 7 trustee sought permission during the case to sell the SIXTH CIRCUIT residence and distribute the proceeds. The debtor objected to the sale and sought to amend her initial disclosures to In bankruptcy cases within the Sixth Circuit, debtors will no lon- claim exemptions for the value of her redemption rights under ger be able to rely on the closing of a section 363 sale trans- sections 522(d)(1) and 522(d)(5) of the Bankruptcy Code. The action to definitively moot all possible appeals. Instead, careful bankruptcy court entered orders approving the sale and attention should be paid to the potential remedies that may be denying the debtor’s requested exemptions. The sale sub- available to the appellant under nonbankruptcy law. If a rem- sequently closed while the appeal was pending because the edy can be fashioned without impacting the purchaser of the sale approval order had not been stayed. After the district assets, an appeal is likely to proceed. Moreover, because the court affirmed the orders on appeal, the debtor appealed to Sixth Circuit requires the appellee to demonstrate the lack of the Sixth Circuit. any available remedy, those arguing mootness of the appeal of a sale order under section 363(m) must carefully address The trustee argued that the appeal was moot under sec- the lack of available remedies in their briefing to meet their tion 363(m) because the debtor had not sought a stay pend- burden of proof. ing appeal and the sale had closed. The Sixth Circuit, after recognizing the circuit split, adopted the minority approach

23 KIWI DEFENSE DOESN’T GET OFF THE GROUND cure obligations and any subsequent claims for breach of the IN PREFERENCE LITIGATION INVOLVING assumed agreement are entitled to priority as administrative expenses. By contrast, if the DIP or trustee debtor rejects a RELATED, BUT SEVERABLE, CONTRACTS contract, claims arising from the rejection will generally be Peter S. Saba treated as prepetition unsecured claims. Mark G. Douglas

AVOIDANCE OF PREFERENTIAL TRANSFERS: THE KIWI Among the required elements of a claim to avoid a preferential DEFENSE transfer under section 547(b) of the Bankruptcy Code is that, if the creditor-transferee were permitted to retain a pre-bank- Section 547 of the Bankruptcy Code permits a trustee or DIP ruptcy payment, it would end up being paid more than it would to avoid preferential transfers. A transfer made by a debtor to receive in a hypothetical liquidation of the debtor under chap- or for the benefit of a creditor on account of an antecedent ter 7, assuming the transfer did not occur. This requirement debt within 90 days of a bankruptcy filing (or one year, if the and a defense to preference liability predicated on it—the transferee is an “insider”) can be avoided if the debtor was “Kiwi defense”—were the subject of a ruling handed down by insolvent at the time of the transfer and if the transfer allows a Delaware bankruptcy court. In Pirinate Consulting Grp., LLC the creditor to receive more than it would have received in v. C. R. Meyer & Sons Co. (In re NewPage Corp.), 2017 BL 44198 a hypothetical liquidation under chapter 7 of the Bankruptcy (Bankr. D. Del. Feb. 13, 2017), the court ruled that, although the Code had the transfer not occurred. Kiwi defense can preclude avoidance of prepetition payments under a series of integrated agreements assumed under a If a DIP or trustee assumes an executory contract or un- chapter 11 plan, the agreements before it were severable, expired lease, assumption may preclude avoidance of other- rather than a single, integrated contract. Because there was wise preferential transfers received under the contract by the no evidence that each individual agreement was executory nondebtor party. This is sometimes referred to as the “Kiwi and thus eligible for assumption, the court denied a motion for defense” because it is derived from a ruling by the U.S. Court summary judgment that the Kiwi defense insulated the trans- of Appeals for the Third Circuit in Kimmelman v. Port Auth. of fers from avoidance. N.Y. & N.J. (In re Kiwi Int’l Airlines, Inc.), 344 F.3d 311 (3d Cir. 2003). In Kiwi, a chapter 7 trustee sued certain creditors to avoid and ASSUMPTION AND REJECTION OF EXECUTORY CONTRACTS recover $3.9 million in payments made within 90 days of the AND UNEXPIRED LEASES debtor’s chapter 11 filing. Before the case was converted to a chapter 7 liquidation, the debtor assumed contracts with each With certain exceptions and subject to various conditions, sec- of the creditors and, as required by section 365(b) and by section 365(a) of the Bankruptcy Code authorizes a bankruptcy tion 1110 (which applies to executory aircraft leases), cured all trustee or chapter 11 debtor-in-possession (“DIP”) to assume, outstanding defaults and provided adequate assurance of its assume and assign, or reject most “executory” contracts or future performance. unexpired leases. A contract is generally deemed to be “executory” if material obligations remain to be performed by both The bankruptcy court ruled that because payment defaults parties as of the bankruptcy petition date. under the contracts had to be cured as a condition to assumption, the prepetition payments to the defendants did not A contract can be assumed only if the DIP or trustee “cures” improve their position and were therefore not preferential. In existing defaults and provides adequate assurance of its other words, the payments would not allow the defendants to future performance or, in the case of assumption and assign- receive more than they would have received in a hypothetical ment, that of the proposed assignee. If the bankruptcy court chapter 7 liquidation had the payments not been made. authorizes the assumption of a contract or lease, both the The district court and the Third Circuit affirmed on appeal. Assumption of the defendants’ contracts, the Third Circuit

24 explained, transformed their prepetition claims into priority constituted separate, severable, and distinct agreements and administrative expenses. As such, none of the defendants that the Kiwi defense could not apply to all prepetition pay- received more than they would have received in a chap- ments absent a showing that each individual purchase order ter 7 liquidation. See also generally COLLIER ON BANKRUPTCY was executory and had been assumed under the plan. ¶ 547.03[7] (16th ed. 2017) (“[P]referential payments made pursuant to a contract that was assumed during the sub- THE BANKRUPTCY COURT’S RULING sequent bankruptcy case are immune from preference attack. If the payments had not been made, the amount necessary The bankruptcy court looked to state law—here, that of to assume the contract would have been commensurately Michigan and Wisconsin—to determine whether the MCA and increased. The transferee received no more than it would have the purchase orders constituted a single agreement. It noted received under chapter 7.”). that, under the laws of both states, the intent of the parties is the “first and foremost consideration in analyzing the divis- In Pirinate Consulting, the court considered whether the Kiwi ibility of contracts.” The court further explained that, under defense insulated from avoidance under section 547(b) pre- state law, the parties’ assignment of separate prices for sep- bankruptcy payments under a series of related purchase arate phases of work generally evinces an intent to create orders governed by a master construction agreement. separate contracts.

PIRINATE CONSULTING The court found that, because the right to payment arose under each separate purchase order, which itself related to NewPage Corporation (“NewPage”), a producer of printing and a separate work order, the intent of the parties was to create specialty papers in North America, filed for chapter 11 protec- separate, severable contracts. Moreover, the MCA expressly tion in September 2011 in the District of Delaware. NewPage’s provided that each new purchase order would constitute a confirmed chapter 11 plan provided that any executory con- separate contract. Thus, the court concluded that the parties’ tract which had not been assumed or rejected during the intent in entering into each purchase order was to form an case, or which had expired prior to plan confirmation, would agreement separate from the MCA and the other outstanding be assumed. The plan also created a litigation trust for estate purchase orders. avoidance claims. Next, the court ruled that CRM had not met its burden of dem- Prior to filing for bankruptcy, NewPage entered into a master onstrating that all of the purchase orders were executory con- construction agreement (the “MCA”) with C. R. Meyer & Sons tracts, such that the Kiwi defense would shield the transfers Co. (“CRM”), pursuant to which CRM provided general con- from avoidance as preferences. In the Third Circuit, the court tracting services for large construction projects. The MCA pro- explained, whether a contract is executory turns on whether vided that work projects would be assigned to CRM under there remain “ ‘obligations of both the bankrupt and the other separate purchase orders, each of which constituted a sepa- party to the contract so far unperformed that the failure of rate contract. either to complete performance would constitute a material breach excusing performance of the other’ ” (quoting In re LG In October 2013, the litigation trustee sued CRM to avoid Philips Displays USA, Inc., 2006 BL 71563, at *3 (Bankr. D. Del. as preferential transfers approximately $3.2 million paid by June 21, 2006)). NewPage to CRM under the purchase orders prior to filing for bankruptcy. On cross motions for summary judgment, CRM CRM’s entire argument, the court stated, rested on the erro- argued that the transfers were insulated from avoidance under neous premise that the MCA and the purchase orders con- the Kiwi defense because the MCA and each of the purchase stituted an integrated agreement. As a consequence, neither orders constituted a single, integrated contract which had CRM nor the trustee presented any evidence regarding the been assumed under NewPage’s confirmed chapter 11 plan. executoriness of each individual purchase order. Accordingly, The trustee countered that the MCA and the purchase orders the court concluded that it could not rule on whether the

25 purchase orders were immune from avoidance under the Kiwi defense because the parties had yet to establish whether the individual purchase orders were executory and could therefore be assumed.

However, the court held that the MCA was an executory contract which had been assumed under the plan. In this regard, the court found mutual unperformed obligations of both parties, including: (i) CRM’s obligation to provide all necessary engi- neering and servicing items in order to complete the purchase orders, as well as to complete the work on schedule; (ii) CRM’s obligation to comply with certain insurance provisions during the pendency of its work for NewPage; (iii) NewPage’s obligation to reimburse CRM for certain expenses and comply with the payment terms in each purchase order; and (iv) the obligation of both parties to maintain confidentiality.

OUTLOOK

Pirinate adds a wrinkle to the Kiwi defense in cases involving IN BRIEF: COURT RULES AGAINST LYONDELL a master agreement with ancillary, stand-alone agreements. If LITIGATION TRUSTEE ON LBO FRAUDULENT such a group of agreements is not deemed a single contract CONVEYANCE CLAIMS under applicable nonbankruptcy law, the assumption of one or more of the agreements, but not the others, may mean that In Weisfelner v. Blavatnik (In re Lyondell Chemical Company), transfers under agreements which are not assumed will not 2017 BL 131876 (Bankr. S.D.N.Y. Apr. 21, 2017), the bankruptcy be insulated from avoidance as preferential transfers. Thus, court presiding over the chapter 11 case of Lyondell Chemical a thorough understanding of applicable state law is para- Company (“Lyondell”) handed down a long-anticipated opinion mount in assessing potential avoidance exposure. Given the in the protracted litigation concerning the failed 2007 merger importance of discerning the parties’ intent in such an inquiry, of Lyondell with Basell AF S.C.A. (“Basell”), a Netherlands-based master and ancillary agreements should be drafted to provide petrochemical company. After a three-week trial ending in clearly that they are intended to be a single, integrated agree- November 2016, the court ruled that the Lyondell estate litiga- ment, or the parties will face the risk that the agreements will tion trustee (the “trustee”) failed to meet his burden on, among be deemed severable under state law. other things, claims that: (i) $6.3 billion in payments made to the former stockholders of Lyondell as part of the merger Pirinate also highlights the importance of carefully coordinat- were avoidable as actual or constructive fraudulent transfers; ing each component of a chapter 11 debtor’s reorganization (ii) $300 million in loan repayments made by the post-merger strategy. Because section 365(b) of the Bankruptcy Code company, LyondellBasell Industries AF S.C.A. (“LBI”), were effectively transforms a pre-bankruptcy default claim into an avoidable as preferential transfers; and (iii) Basell’s ultimate administrative expense claim, the consequences of assuming owner, Len Blavatnik (“Blavatnik”), as well as certain compa- a contract can be significant. Given the consequences, any nies he controlled (including Access Industries, Inc. (“Access”)) DIP or trustee should assess whether any assumed agree- and various insiders, had breached their fiduciary duties and ment is required for reorganization. In addition, the effect of committed various torts, or aided and abetted such infractions, assumption on any causes of action against the counterparty under Luxembourg and Texas law. to an executory contract should be thoroughly evaluated.

26 However, the trustee prevailed on a claim under New York law According to the court, the crux of the intentional fraudulent that Access affiliate AI International Chemicals, S.A.R.L. (“AI transfer claim was that “refreshed” projections prepared at International”), a lender under an unsecured revolving line of the behest of Lyondell’s CEO were “completely bogus, and credit, improperly denied LBI’s December 30, 2008, request prepared with the intent to defraud creditors.” However, the to draw $750 million because the company’s impending evidence showed that there was “no basis” for concluding that bankruptcy allegedly triggered the material adverse change the projections or any other aspect of the merger had been (“MAC”) clause in the credit agreement. The court awarded the carried out with the intent to hinder, delay, or defraud creditors. trustee $7.2 million in restitution damages on this claim. The court was not persuaded that Lyondell’s former CEO (or anyone else) intentionally sabotaged the post-merger com- The “cornerstone” of the trustee’s causes of action was that the pany with illusory financial projections. The court explained, defendants relied on inflated and unreasonable projections, among other things, that it was telling that the trustee prof- prepared shortly after Access and Blavatnik had acquired a fered no legitimate reason why the CEO, who asked to stay “toehold” position in Lyondell in 2007, in connection with the on after the merger, “would volunteer to captain a ship he merger. According to the trustee, the post-merger company had engineered to sink.” The court also found incredible the was “predestined” to fail, leading to LBI’s chapter 11 filing in allegation that the financing banks invested billions of dollars 2009. The defendants countered that the logic of the merger in a company they believed would fail. was sound, the transaction was supported by reasonable projections, and the bankruptcy filing was caused by a “perfect Constructive Fraud storm” of intervening events. The trustee initially sought to avoid constructive fraudu- THE BANKRUPTCY COURT’S RULING lent transfers allegedly made in connection with the merger under both section 548(a)(1)(B) of the Bankruptcy Code, which Intentional Fraud provides for the avoidance of such transfers under federal In Weisfelner v. Hofmann (In re Lyondell Chem. Co.), 544 B.R. law, and section 544(b), which empowers a trustee to avoid 635 (S.D.N.Y. 2016), the U.S. District Court for the Southern transfers that can be avoided by creditors under “applicable District of New York reversed a 2015 ruling by the bank- law” (generally, state law). The defendants moved to dismiss ruptcy court dismissing the trustee’s claims that the $6.3 bil- the state law claims, claiming that they were barred by sec- lion in payments to Lyondell’s shareholders were avoidable tion 546(e), which expressly precludes avoidance by “the under section 548(a)(1)(A) of the Bankruptcy Code because [bankruptcy] trustee” of constructive fraudulent transfers they were made with the intent to hinder, delay, or defraud made in connection with the settlement of securities contracts. Lyondell’s creditors. The district court ruled that the knowledge of Lyondell’s CEO and board chairman, Dan Smith, of allegedly The bankruptcy court ruled in 2014 and 2015 that the sec- grossly inflated pre-merger projections could be imputed to tion 546(e) “safe harbor” does not preclude constructive Lyondell for the purpose of establishing fraudulent intent. fraud claims under state law brought by a litigation trustee on behalf of creditors. However, the court retracted those rul- After trial on the reinstated claims, the bankruptcy court con- ings in Weisfelner v. Fund 1 (In re Lyondell Chem. Co.), 554 B.R. cluded that the trustee failed to demonstrate that the CEO had 655 (Bankr. S.D.N.Y. 2016), after the U.S. Court of Appeals for the requisite fraudulent intent. The trustee relied on a novel the Second Circuit held unequivocally in Deutsche Bank Trust “collapsing doctrine” theory, whereby the CEO’s fraudulent Co. Ams. v. Large Private Beneficial Owners (In re Tribune Co. intent, once proved, could be imputed horizontally to Basell Fraudulent Conveyance Litig.), 818 F.3d 98, 105 (2d Cir. 2016), and its ultimate owner, Blavatnik. However, the court held, this that “creditors’ state law, constructive fraudulent conveyance theory faltered because the trustee failed to prove fraudu- claims are preempted by Bankruptcy Code Section 546(e).” lent intent. After trial of the claims that survived—constructive fraudulent transfer under section 548(a)(1)(B)—the court found that

27 the trustee failed to establish, among other things, that LBI Breach of Contract (or Lyondell) was insolvent on December 20, 2007, the closing date of the merger, under any of the Bankruptcy Code’s The trustee prevailed on the breach of contract claim. The alternative financial condition tests—balance sheet insolvency, court rejected the argument that LBI’s impending chapter 11 unreasonably small capital, or the inability to pay debts as filing was a MAC which excused AI International’s performance they become due. According to the court, the testimony of under the revolving credit agreement’s MAC clause. The court the trustee’s expert was “largely unreliable,” unlike that of the explained that the credit agreement required LBI to represent defendants’ experts, who presented credible testimony and and warrant that it was solvent as of March 27, 2008—the financial projections consistent with the views of the banks closing date of the agreement—but did not require a simi- that financed the merger. Noting that each bank considered lar representation on solvency “as a condition precedent to the merger to be worthy of investment after conducting thor- loan draws.” The court declined to “infer a solvency require- ough due diligence, the court wrote that: ment where none was drafted by the parties” and ruled that AI International breached its contractual obligation to LBI to fund the views of these sophisticated investors provided the December 2008 draw request. perhaps the clearest indication that the combined company was left with sufficient capital upon the However, the court held that the trustee was entitled only to merger closing, given that the financial projections restitution damages on account of the breach of contract prepared by both Lyondell management and the claim. According to the court, “[T]he most equitable way to banks all reasonably showed LBI to be solvent on calculate restitutionary damages in this case is to estimate the the closing of the merger. benefits paid for but not received by LBI.” LBI paid a $12 million commitment fee under the credit agreement. The court found The court acknowledged that LBI “ultimately failed in a colos- that 60 percent of that fee, or $7.2 million, was the fair value of sal manner” just one year after the merger. Even so, the court the benefits which LBI did not receive and should therefore be observed, this does not mandate a finding that LBI was insol- awarded to the trustee as restitution. vent at the merger closing or afterward. A number of intervening events, including an accident at the Houston refinery, two Other Claims hurricanes, and plunging demand and liquidity issues related to the Great Recession, combined to propel LBI into bank- Finally, the court ruled that the trustee’s remaining claims were ruptcy. Because the trustee failed to show that Lyondell or LBI without merit, including claims against Blavatnik, Access, and was insolvent on the relevant transfer dates, the court ruled various other defendants for tort and breach of fiduciary duty that it need not extensively discuss the other element of a arising under the Luxembourg Civil Code and the Companies constructive fraudulent transfer claim under section 548(a)(1) Act of 1915, as well as an aiding and abetting claim under (B)—“reasonably equivalent value.” Texas law.

Preferential Transfer The trustee announced on May 5, 2017, that the Lyondell creditor and litigation trusts intend to “appeal certain aspects” of The court ruled that the preferential transfer claim under the ruling. section 547 of the Bankruptcy Code failed because the trustee could not show that LBI was balance sheet insolvent after it made the $300 million loan repayment to Access in October 2008. The court noted, among other things, that the trustee repeatedly invoked internal LBI emails which refer- enced the possibility of bankruptcy in late 2008. However, the court wrote that “[a] few emails mentioning the abstract possibility of bankruptcy do not an insolvent balance sheet make.”

28 The Act is a groundbreaking development in Singapore’s corporate rescue laws and includes major changes to the rules governing schemes of arrangement, judicial management, and cross-border insolvency. The Act also incorporates several features of chapter 11 of the U.S. Bankruptcy Code, including super-priority rescue financing, cram-down powers, and prepackaged restructuring plans. The legislation may portend Singapore’s emergence as a center for international debt restructuring. Its enactment is the initial phase in a series of law reforms intended to implement recommendations made by the Insolvency Law Review Committee and the Committee to Strengthen Singapore as an International Centre for Debt Restructuring.

Key provisions of the Act include the following:

Easier Access to Judicial Management. Singapore’s judicial management procedure is similar to the administration regimes enacted in the U.K. and Australia, which provide for the appointment of an independent manager to operate and run the company instead of a liquidator to wind it up. In Singapore, a judicial manager’s mandates are rescu- ing the company, obtaining approval of a scheme of arrangement, and achieving a realization of the company’s assets more advantageous than what would have been realized in a winding-up proceeding.

The Act makes it easier for companies (other than certain excluded entities, such as banks) or credi- SINGAPORE ENACTS NEW CORPORATE tors to obtain a judicial management order by low- BANKRUPTCY LAW IN BID TO BECOME CENTER ering the threshold requirements for court approval. Previously, a company could apply for a judicial man- FOR INTERNATIONAL DEBT RESTRUCTURING agement order if it “is or will be” unable to pay its Corinne Ball debts. Under the Act, the standard has been modi- Sushma Jobanputra fied to require that the company “is or is likely to Ben Larkin become” unable to pay its debts. In addition, under previous law, a party with the ability to appoint a On March 10, 2017, Singapore’s Parliament approved the receiver for the company had the absolute power to Companies (Amendment) Bill 2017 (the “Act”) to enhance the prevent the appointment of a judicial manager. The country’s corporate debt restructuring framework. The Act was Act now obligates any such party to demonstrate assented to by President Tony Tan Keng Yam on March 29, that the appointment of a judicial administrator would 2017, and is expected to become effective later this year. cause prejudice disproportionately greater than that to the unsecured creditors if judicial management were denied.

29 Schemes of Arrangement. The Act modifies the rules the requirement that a dissenting creditor must and procedures governing schemes of arrange- receive at least as much under a scheme of arrangement proposed by the judicial manager of a debtor- ment as it would have received had the scheme not company pursuant to section 210 of the Singapore been approved). The Act does not explain unfair dis- Companies Act (the “CA”) to incorporate many of the crimination. Both concepts, however, are based upon features of chapter 11, including super-priority debtor- the cram-down provisions set forth in section 1129(b) in-possession financing, a “world-wide” moratorium of the U.S. Bankruptcy Code, for which there is a on debt collection efforts akin to the U.S. Bankruptcy wealth of interpretive jurisprudence that can offer Code’s automatic stay, a mechanism permitting guidance as to their meaning and application. approval of nonconsensual (“cram-down”) schemes of arrangement, and procedures for court approval The Act includes procedures to govern prepack- of prepackaged schemes. aged schemes of arrangement, but only in cases involving consensual, as distinguished from cram- The Act introduces rescue financing provisions for down, schemes. The court may approve a scheme schemes of arrangement similar to “debtor-in-pos- of arrangement without any meeting of creditors if, session” financing under section 364 of the U.S. among other things: (i) the debtor-company has pro- Bankruptcy Code. The court may, under certain vided creditors with a statement, accompanied by conditions, including the unavailability of credit on adequate information, explaining the effects of the less favorable terms and adequate protection of scheme, the impact of the scheme on any material the interests of existing secured creditors, authorize interest of the directors or indenture trustees, and the debtor to incur priority unsecured, secured, or the effect of the scheme on such interests; (ii) notice super-priority secured financing, provided that such of the application seeking approval of the scheme financing is deemed necessary to enable the debtor is provided to every affected creditor and properly to continue as a going concern. The rescue financing published; and (iii) the court is satisfied that, had a provisions do not preclude a debtor from obtaining meeting of creditors been convened, the scheme secured or unsecured financing or credit in the ordi- would have been approved by the required majori- nary course of business. ties at the meeting.

The Act introduces provisions authorizing the court Enhanced Moratoriums. The Act introduces a series to approve a scheme of arrangement over the objec- of “enhanced moratorium” provisions to augment tion of a class of dissenting creditors, provided that: the limited moratorium provisions contained in sec- (i) creditors representing a majority in number and tion 210(10) of the CA. Upon application of the debtor holding at least 75 percent in value of the claims in or a creditor and notice to, among others, each a class for which votes are actually cast vote in favor known creditor to be bound, the court may order a of a proposed scheme; (ii) creditors representing a moratorium, provided that the debtor has filed an majority in number and holding at least 75 percent application for court authority to call a meeting of in value of the total claims against the debtor for creditors or represents that it intends to do so as which votes are actually cast vote in favor of a pro- soon as practicable. The application must be sup- posed scheme; and (iii) the court is satisfied that the ported by evidence that a proposed compromise or scheme is “fair and equitable” to dissenting creditors arrangement is supported by: (i) affected creditors and does not “discriminate unfairly” between two or holding not less than one-third in value of claims more classes of creditors. The Act provides guidance against the debtor; or (ii) creditors whose support for as to the meaning of “fair and equitable” (including the proposed compromise or arrangement is important for its prospects for successful implementation.

30 A moratorium order may be entered by the court to of creditor debts; (ii) permission for creditors who preclude, among other things: (i) commencement or have filed proof of their debts to inspect and object continuation of proceedings against the company to claims filed by other creditors; (iii) the appoint- or its assets; (ii) appointment of a receiver or man- ment of an adjudicator nominated by the company ager; (iii) repossession of goods under leases, hire to adjudicate the validity of every proof of debt; and purchases, or retention of title arrangements; (iv) re- (iv) the adjudication of disputes relating to claims by entry or forfeiture under any lease; or (v) the winding an independent assessor agreed to by the parties or up of the company. The moratorium can apply extra- appointed by the court following the application of a territorially, provided that the court has jurisdiction party to the dispute. over affected creditors or their assets. A moratorium order may be extended to include a debtor- Cross-Border Insolvencies. Under previous law, only company’s domestic and foreign subsidiaries as well a company incorporated under Singapore law could as holding companies if they play a “necessary and apply for judicial management proceedings. The Act integral role” in the debtor’s scheme of arrangement. provides that “any corporation liable to be wound up Certain financial market transactions (e.g., certain under this Act” may apply for judicial management setoff and netting arrangements) are also excluded and expands the scope of the “liable to be wound from the scope of the moratorium. up” test to include foreign companies with a “substantial connection” to Singapore because, among Upon the filing of an application for a moratorium other things, the company in question: (i) has its cen- order, an automatic 30-day interim moratorium ter of main interests (COMI) in Singapore; (ii) carries comes into effect with respect to creditor collection on business in Singapore or has a place of business actions in Singapore. The automatic moratorium is there; (iii) has substantial assets in Singapore; or available only once in a 12-month period, to prevent (iv) has a Singapore choice of law provision or forum abuse through repeated filings. selection clause in a loan agreement or contract.

If the court grants a moratorium order, the Act pro- The Act formally adopts the UNCITRAL Model Law on vides that the debtor-company must provide cer- Cross-Border Insolvency, a framework of rules and tain financial information to creditors to allow them procedures governing cross-border bankruptcy and to assess the feasibility of a proposed scheme. A insolvency cases that has now been enacted in 43 creditor may seek an order of the court modifying countries. Its implementation is expected to make it the scope of a moratorium order. A creditor may also significantly easier for foreign companies subject to apply to the court during the pendency of the mora- bankruptcy or insolvency proceedings in other coun- torium for an order preventing the company from: tries that have assets or operations in Singapore to (i) disposing of assets other than in good faith and obtain the assistance and cooperation of Singapore inside the ordinary course of business; (ii) engaging courts in administering their assets. in conduct in the ordinary course of business that materially prejudices creditors or significantly dimin- The Act abolishes the “ring-fencing rule,” whereby ishes the company’s assets; or (iii) changing the the Singapore liquidator of a foreign company with composition of the debtor-company’s shareholders assets in Singapore was obligated to pay the claims or members. of local creditors before any of the debtor’s assets could be turned over to be administered in the debt- Claims Resolution Procedures. The Act establishes or’s foreign bankruptcy or insolvency proceeding. procedures governing the submission, objection to, and adjudication of creditor claims. The provisions include: (i) procedures for the filing of proof

31 BUSINESS RESTRUCTURING REVIEW

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