Has the law changed in Canada based on the September, 2017 decision of Justice Myers of the Ontario Superior Court of Justice in the Toys ”R” Us (Canada) Ltd. case? Section 11.2 of the Canadian Companies’ Creditors Arrangement Act (“CCAA”) allows the Court to create a charge to secure a DIP financing. However, that section provides that “the security or charge may not secure an obligation that exists before the order is made”. This had been interpreted in prior cases as a prohibition on using DIP proceeds to pay pre-filing secured loans. The Court would, however, permit post-filing receipts to be swept in favour of the pre-filing secured loan, so the wisdom in Canada was that a “creeping” DIP payment structure was fine, whereas using DIP proceeds to repay pre-filing secured debt was not permitted. Justice Myers focused on whether the DIP charge (in favour of the same group of lenders who had provided pre-filing financing) was “being used to improve the security of the pre-filing ABL lenders or to fill any gaps in their security coverage”. He concluded that it was not, so permitted the DIP proceeds to be used to repay the pre-filing secured loan in full. We think the Court was correct in focusing on whether priorities were being re-ordered, since it is our view that this is what the above-noted restriction in Section 11.2 of the CCAA was intended to prevent.
In a decision significantly impacting the ability of a plaintiff to prosecute avoidance actions, the United States Supreme Court, in Merit Management Group, LP v. FTI Consulting, Inc., 583 U.S. ___ (2018), unanimously held that a transfer of funds, where a financial institution served as a mere conduit, does not entitle the recipient of the transfer to avail itself of the “safe harbor” defense provided for in section 546(e) of the Bankruptcy Code. Focusing on the construction and plain meaning of the statutory language, the Court’s ruling resolved the current split among circuits interpreting and applying section 546(e). Continue Reading
In a matter of first impression at the Circuit level, the United States Court of Appeals for the Ninth Circuit held that a court may confirm a plan filed on behalf of multiple debtors that has been approved by an impaired class of creditors of only one of the debtors. JPMCC 2007-C1 Grasslawn Lodging, LLC v. Transwest Resort Properties Inc. (In re Transwest Resort Properties, Inc.), 881 F.3d 724 (9th Cir. 2018). This ruling is in contrast with the Delaware bankruptcy court’s ruling in the Tribune Company Chapter 11 case, where as successfully advocated by Norton Rose Fulbright attorneys, the court held that a plan must be approved by an impaired class of creditors of each of the debtors party to the plan. The following is a brief description of the case background and the court’s analysis. Continue Reading
In a decision last month, the First Circuit maintained the relatively narrow scope of protection provided to intellectual property licensees upon rejection of a license in bankruptcy. Focusing on the statute’s language, the court of appeals held that Bankruptcy Code section 365(n) fails to protect either a trademark license or exclusive distribution rights of a debtor’s trademarked goods, even when the trademark-related rights are incorporated into a license containing other protected intellectual property. See Mission Product Holdings, Inc. v. Tempnology LLC, No. 16-9016 (1st Cir. January 16, 2018). The First Circuit’s decision deepens a split among the circuits regarding the rights of trademark licensees when a licensor-debtor rejects a license in bankruptcy. Continue Reading
U.S. companies that engage in business in multiple jurisdictions should be mindful of a recent decision by the United States Bankruptcy Court for the District of Delaware. In the Chapter 15 case of Energy Coal S.P.A., the bankruptcy court held that U.S. choice of law and forum selection provisions in a contract with a non-U.S. company did not override the terms of a foreign restructuring plan that was approved by a foreign court. The court stated that it is “appropriate to expect U.S. creditors to file and litigate their claims in a foreign main bankruptcy case.” See In re Energy Coal S.P.A., Case No. 15-12048 (Bankr. D. Del. Jan. 02, 2018). Continue Reading
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. Continue Reading
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.
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.
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
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