Zone of Insolvency

Zone of Insolvency

So. Cal. Luxury Real Estate Developer Woodbridge Group Files Chapter 11 Case

Posted in Bankruptcy

Woodbridge Group of Companies, a luxury real-estate developer, filed for chapter 11 reorganization on December 4, 2017.  Woodbridge and its 200-plus affiliates operated a sprawling, complex real estate enterprise that focused on the acquisition and development of high-end properties.

Although the company estimates the value of its properties to be nearly $1 billion, it asserts it was forced to seek chapter 11 protection due to increasing operational and regulatory costs combined with an inability to access new capital.  Woodbridge’s inability to recapitalize outside of chapter 11 is due, at least in part, to questionable capital-raising practices and the attendant regulatory scrutiny.

 Woodbridge’s Private Fundraising Practices Questioned By Regulators

Woodbridge historically raised capital through a “private fundraising operation” that has spawned more than 20 inquiries by state regulators and an ongoing investigation by the U.S. Securities and Exchange Commission (which is seeking information from Woodbridge, its affiliates, and its insiders).  Since 2012, Woodbridge and its affiliates had financed their expansion by offering short-term notes to individual investors promising substantial returns.  Typically, the notes were issued by a Woodbridge affiliate and were described as being ultimately secured by a first-priority lien on valuable real property.  More than $750 million of these notes—held by nearly 9,000 investors—were outstanding when Woodbridge filed for bankruptcy.

Woodbridge Noteholders Under Fire in Chapter 11

Woodbridge’s bankruptcy court filings assert that the noteholders failed to take the steps needed to properly “perfect” their security interests, and that the noteholders are therefore only unsecured creditors.  Woodbridge’s attorneys have promised to quickly file suit against the noteholders to strip them of their secured status.  Within the next few weeks, Woodbridge also plans to seek the bankruptcy court’s approval of a $100 million debtor-in-possession financing facility from Hankey Capital secured by “priming” liens on 28 of Woodbridge’s most valuable properties.  Woodbridge’s thousands of noteholders and the challenges to their claims are certain to dominate the early stages of the reorganization case.

Woodbridge’s Former Chief Executive Nets Consulting Deal

Woodbridge’s former chief executive, Robert Shapiro, could be a potential litigation target.  Although the SEC has not filed any charges as of today, Mr. Shapiro ceded control over Woodbridge to an independent management team to guide the company through its bankruptcy.  Mr. Shapiro will stay on as a “consultant” in exchange for $175,000 in monthly compensation and other benefits agreed to by the Woodbridge debtors.  That arrangement will also attract close scrutiny by the unsecured creditors’ committee that will be formed on December 14th and the bankruptcy court.  The SEC has informed the bankruptcy court that it has “serious concerns” about Woodbridge and that its Chapter 11 filing may force the agency to “make some decisions quickly.”

Official Committee of Unsecured Creditors Formation Meeting

The United States Trustee has scheduled a meeting of creditors to form an official committee of unsecured creditors on December 14, 2017 at 10:00 a.m. (ET) at The Doubletree Hotel, 700 King Street, Wilmington, Delaware 19081.

For more information about Woodbridge’s Chapter 11 case, please contact David LeMay at or 212.408.5112.

Woodbridge’s and certain of its affiliates’ Chapter 11 cases are pending in the United States Bankruptcy Court for the District of Delaware and are being jointly administered under Case No. 17-12560 (KJC).

Second Circuit Adopts “Efficient Market” Approach to Calculate Cramdown Interest

Posted in Bankruptcy

Last week, the Second Circuit established an “efficient market”-based approach for calculating cramdown interest rates. Adopting a test established by the Sixth Circuit, the Second Circuit held that courts must apply a market interest rate where an efficient market exists. See Momentive Performance Materials Inc. v. BOKF, NA (In the Matter of: MPM Silicones, L.L.C.), — F.3d —-, 2017 WL 4700314, No. 15-1682, (2d Cir. Oct. 20, 2017).  The decision will be welcomed by secured creditors (and distressed investors) who previously could be forced to accept replacement debt with below-market interest rates under a chapter 11 plan. Lower “formula”-based interest rates are still possible in the Second Circuit, but only where a market does not exist for comparable new debt.

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Restructuring Newswire Fall 2017

Posted in Chadbourne Presentations

Norton Rose Fulbright released its Restructuring Newswire for the Fall 2017.  Find the following topics in this issue:

  • Supreme Court to decide scope of safe harbor protections against avoidance claims
  • Extraterritoriality and the Bankruptcy Code: the uncertain reach of the US avoiding powers
  • Sales of inventory:  Third Circuit clarifies the meaning of “received” under section 503(b)(9) of the Bankruptcy Code
  • Chapter 15 developments:  United States enforce Canadian restructuring plans

To read the Newswire, click here.

Good News/Bad News in Keeping Affiliates out of Bankruptcy

Posted in Bankruptcy

A bankruptcy filing by one company does not necessarily mean that its affiliates will also file for bankruptcy. It is common for a financially distressed company to file for bankruptcy while its financially sound affiliates continue business operations in the ordinary course. The bad news, however, is that a court may disregard a company’s decision not to file for bankruptcy in connection with an affiliate bankruptcy filing if the company is managed and operated in a manner that disregards the corporate separateness between it and affiliates(s) that have filed for bankruptcy. Consequently, the assets of a non-debtor company may be made available to satisfy creditors of affiliates in the bankruptcy cases of those affiliates. However, the good news is that while such “substantive consolidation” of non-debtors with debtors is possible, it is generally unlikely. Indeed, if a single creditor of the non-debtor company will be harmed by the substantive consolidation of such company with affiliates in bankruptcy, the risk of such substantive consolidation becomes relatively remote. This scenario recently played out in a case pending in the Western District of Oklahoma. See In re Stewart, Adv. No. 16-1117, Doc. No. 163 (Bankr. W.D. Okla. Aug. 17, 2017). Continue Reading

Lenders Beware: Diligence Needed to Protect that Guarantee Claim From Substantive Consolidation in Bankruptcy

Posted in Bankruptcy

Last month, the Bankruptcy Court for the Southern District Of New York overruled an objection to proposed substantive consolidation provisions included in the plan of reorganization for Republic Airways Holdings Inc. See In re Republic Airways Holdings Inc., 565 B.R. 710 (Bankr S.D.N.Y. 2017). The bankruptcy court’s ruling provides a good refresher on the requirements of substantive consolidation in the Second Circuit. More importantly, the decision shows the importance that diligence plays not only at the time a lender/creditor enters into a transaction with its borrower, but also later on if both the borrower and the borrower’s guarantor end up in bankruptcy. Continue Reading

SCOTUS Ends Structured Dismissals that Circumvent Priority Rules

Posted in Bankruptcy

TruckPhoto_WEBEarlier today, in Czyzewski v. Jevic Holding Corp., the Supreme Court put an end to “structured dismissals” that allow a debtor to leave bankruptcy while circumventing the Bankruptcy Code’s creditor payment priority scheme.

A Chapter 11 debtor generally has three options for exiting bankruptcy: (1) a confirmed plan of reorganization (or liquidation); (2) conversion to Chapter 7 and liquidation of the debtor’s estate; or (3) dismissal of the bankruptcy case entirely. Chapters 11 and 7 both broadly require the debtor’s estate to make distributions to creditors in accordance with a statutorily mandated order of priorities (although Chapter 11 provides more flexibility than Chapter 7 in this respect). Continue Reading

Appeals Court Strengthens Protections for Bankruptcy Committee Members

Posted in Bankruptcy, Bankruptcy Courts

Serving on a court-appointed bankruptcy committee can come with many benefits, and the list just got a little longer. In Blixseth v. Brown, the Ninth Circuit held that committee members enjoy some of the same protections as trustees when it comes to potential attacks for actions taken during a bankruptcy case. Applying the Barton doctrine, the court held that a committee member could not be sued outside the bankruptcy court for actions taken in its committee member capacity without bankruptcy court approval.


In the late 1990s, Timothy Blixseth (“Blixseth”) and Edra Blixseth (“Edra”), then husband and wife, developed the Yellowstone Mountain Club (together with its subsidiaries and related entities, “Yellowstone”), an exclusive ski and golf resort in Montana that caters to the “ultra-wealthy.” Blixseth was advised by his lawyer, Stephen Brown (“Brown”), in his business activities and, later, in his divorce from Edra. As part of the divorce, Edra received the Yellowstone companies. Continue Reading

Delaware Bankruptcy Court Limits Access to Emails in Cross-Border Bankruptcy Case

Posted in Bankruptcy

A recent decision by Judge Sontchi in the Bankruptcy Court for the District of Delaware casts some light on the methods that representatives of non-U.S. debtors can—and can’t—use to track down those who owe such debtors money.

The Representatives of the Irish liquidation proceeding for Irish Bank Resolution Corporation Limited (“IBRC”) obtained recognition of the Irish proceeding under Chapter 15 of the Bankruptcy Code on December 18, 2013. Following that recognition, the Representatives sought to use the discovery mechanisms available in the United States to gain access to the contents of a Yahoo email account maintained in the name of “Abdullah Rasimov.” IBRC is owed approximately €2.8 billion for loans it advanced to companies owned or controlled by Seán Quinn and his five adult children. Based on anonymous tips and confidential discovery conducted before the English High Court, the Representatives believe that the Rasimov account is associated with Séan Quinn’s attempts to evade repayment of the €2.8 billion. Continue Reading

Good Deeds May Be Rewarded in Chapter 7—at least in the Sixth Circuit

Posted in Bankruptcy

ThinkstockPhotos-123820749Under the Bankruptcy Code, a creditor may be reimbursed its actual and necessary expenses in making a “substantial contribution” in a chapter 9 or 11 case. Whether a creditor has made a substantial contribution is a question of fact, but generally requires that a creditor demonstrate a tangible benefit to the estate. It is unlikely that a creditor would “throw good money after bad” and attempt to make a substantial contribution in a chapter 7 case where creditor recoveries are typically limited to pennies on the dollar. There may nevertheless be instances where a creditor’s actions substantially contribute to a chapter 7 case and yield an increase recovery for all creditors.  Despite the lack of express authority to reimburse such expenses as an administrative expense outside of chapter 9 or 11, a divided United States Court of Appeals for the Sixth Circuit recently concluded that a creditor could be awarded its expenses that substantially benefit a chapter 7 estate. See In re Connolly North America, LLC, No. 13-2489 (6th Cir. Sept. 21, 2015). Continue Reading

Bankruptcy Court Authorizes Hellas II Liquidators to Proceed with Claims against Apax, TPG and Others

Posted in Bankruptcy

ThinkstockPhotos-454037465Chadbourne & Parke LLP currently represents the English liquidators of Hellas Telecommunications (Luxembourg) II SCA, a company that formerly owned one of the largest mobile phone operators in Greece. On behalf of the English liquidators, in 2012 Chadbourne obtained an order from the US Bankruptcy Court from the Southern District of New York granting Chapter 15 recognition of Hellas II’s liquidation proceeding. In March 2014, on behalf of the English liquidators, Chadbourne filed a lawsuit in the New York bankruptcy court asserting New York fraudulent transfer law and unjust enrichment claims and seeking the recovery of approximately €1 billion that was siphoned out of Hellas II as part of a dividend recapitalization by, among others, private equity giants TPG Capital Management and Apax Partners. Following the bankruptcy court’s dismissal of the New York law-based fraudulent conveyance claims, Chadbourne, on behalf of the liquidators, requested leave to file an amended complaint to assert, in addition to a surviving unjust enrichment claim, a fraudulent transfer claim under section 423 of the UK Insolvency Act, a fraudulent trading claim under section 213 of the UK Insolvency Act, and, in the alternative, a fraudulent transfer claim under Article 1167 of the Luxembourg Civil Code and Article 448 of the Luxembourg Commercial Code. Ultimately, the bankruptcy court authorized the liquidators to assert their English law claims (in addition to the surviving New York law unjust enrichment claim), clearing the way for the liquidators to move ahead in seeking recovery from TPG, Apax, and others.

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