Foreign and Multinational Business Insolvency in the United States By Robin E. Phelan [email protected] Gary Sullivan [email protected] 8HAYNES AND BOONE, LLP, 1998 © International Insolvency Institute — www.iiiglobal.org Contents INTRODUCTION AND OVERVIEW .................................................................................1 Secured Claims and Enforcement .........................................................................1 Unsecured Claims and Enforcement .....................................................................2 Liquidation .............................................................................................................2 Reorganization.......................................................................................................3 MULTINATIONAL INSOLVENCIES ..................................................................................4 Recognition of Foreign Cases, Representatives....................................................4 Recognition of Foreign Creditors and Claims ........................................................5 Return of Assets to a Foreign Representative.......................................................5 Conflict of Law Issues............................................................................................5 CLAIMS AND ENFORCEMENT PREBANKRUPTCY......................................................6 Security in Real Property.......................................................................................6 Security Interests in Personal Property .................................................................6 Unsecured Claims .................................................................................................7 LIQUIDATION .................................................................................................................12 Principal Laws Governing Liquidation..................................................................12 Courts Which Administer Liquidation...................................................................12 Commencement of a Liquidation.........................................................................13 Parties to a Bankruptcy Case ..............................................................................15 The Liquidation Estate.........................................................................................17 Trustee=s Avoidance Powers...............................................................................18 Creditors and Claims ...........................................................................................20 PRIORITIES ...................................................................................................................21 Priority in Specific Collateral................................................................................21 Surcharging Secured Creditor Collateral ..................................................21 Priming Liens ............................................................................................21 Pre-Petition Security Interests ..................................................................21 Junior Secured Creditors ..........................................................................22 Priority Among Unsecured Claims.......................................................................22 Unsecured Super-Super Priority Creditors ...............................................22 Inadequate AAdequate Protection@Super Priority Creditors...................22 Administrative Expense Priority ................................................................22 Involuntary Case AGap@ Claims .............................................................23 Wage and Salary Claims ..........................................................................23 Contributions to an Employee Benefit Plan...............................................23 Claims Against Grain Storage and Fish Storage/Processing Facilities ...................................................................................................23 Deposits by Consumers............................................................................24 Alimony and Child Support .......................................................................24 Priority Tax Claims ....................................................................................24 Obligations to Agencies Regulating Federally Insured Depository Institutions ................................................................24 Nonpriority Unsecured Claims ..................................................................24 Late-Filed Claims in Chapter 7 Cases ......................................................24 © International Insolvency Institute — www.iiiglobal.org Penalty Claims in Chapter 7 Cases ..........................................................25 Claims for Interest in Chapter 7 Cases .....................................................25 Mechanisms for Reordering Bankruptcy Priorities ..............................................25 Subordination Agreements .......................................................................25 Equitable Subordination............................................................................25 Substantive Consolidation ........................................................................26 Disallowance of Claims Otherwise Valid Under Nonbankruptcy Law 26 Property of the Estate - Trust Fund Doctrine.............................................26 Discharge of Claims and Debtor..........................................................................27 Officers, Directors and Affiliates ..........................................................................27 Non-Judicial Liquidation.......................................................................................28 REORGANIZATION........................................................................................................29 Principal Laws Governing Reorganization...........................................................29 Courts Which Administer Reorganization............................................................29 Commencement of Reorganization .....................................................................29 Reorganization Estate .........................................................................................30 Administrative Powers..........................................................................................30 Creditors and Claims ...........................................................................................31 Officers, Directors, Affiliates ................................................................................32 Reorganization Plan and Process .......................................................................32 Non-Judicial Reorganization................................................................................34 © International Insolvency Institute — www.iiiglobal.org Foreign and Multinational Business Insolvency in the United States Robin E. Phelan Gary Sullivan Haynes and Boone Dallas, Texas INTRODUCTION AND OVERVIEW The United States has a relatively efficient and flexible legal structure to deal with insolvent entities. Creditors can be protected by liens upon specific collateral and blanket liens upon essentially all assets of a debtor. Debtors and unsecured creditors can utilize the reorganization provisions of Chapter 11 of the United States Bankruptcy Code to reorganize businesses which require restructuring. These protections are available to foreign entities that do business in the United States and apply to multi- national insolvencies. The basic structure of these rights and protections are described in these materi- als Secured Claims and Enforcement Many commercial lenders in the United States require that borrowers secure repayment of their busi- ness loans with collateral. The types of collateral sought by commercial lenders will depend on the credit-worthiness of the borrower, the nature of the borrower=s business, the relationship between the collateral and purposes of the loan, the relative value of the borrower=s assets available to be mort- gaged as collateral and the feasibility of obtaining prior perfected liens. For instance, a business loan to a manufacturer is typically secured by the borrower-manufacturer=s inventory of raw material, work in process and finished goods. In addition, the borrower-manufacturer will be expected to further secure the loan with any accounts receivable or proceeds created on the sale of the finished goods. Likewise, a loan obtained for the purpose of purchasing a particular asset or group of assets is typically secured by the asset (or assets) purchased. If the borrower intends to lease the asset to others during the term of the loan, rentals received by the borrower may also be included in the collateral pool. If the borrower fails to satisfactorily perform its obligation, the lender may exercise a number of rem- edies. The lender may choose to sue the borrower for repayment and obtain a court-supervised fore- closure sale of the collateral. The lender may also have the option to sell the collateral through non- judicial means. Foreclosure is generally governed by state law, rather than federal law. All states permit non-judicial sales of personal property collateral. However, only a minority of states permit the lender to undertake a non-judicial foreclosure of real estate. Most states require some court supervision