Source: https://www.hhrbankruptcy.com/
Timestamp: 2019-04-18 23:07:27+00:00

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In a special video, members of Hughes Hubbard’s Lehman team reveal the challenges they faced and overcame after Lehman Brothers collapsed 10 years earlier in what remains the largest bankruptcy in history. The team serves as counsel to James W. Giddens, the trustee overseeing the $123 billion liquidation of Lehman Brothers Inc., the largest single estate in the entire Lehman failure.
A recent decision by the Bankruptcy Court for the Western District of Texas in In re Palmaz Scientific, 2018 WL 1036780, at *5 (Bankr. W.D. Tex. Feb. 21, 2018) serves as a cautionary tale of the importance of monitoring the plan confirmation process. In Palmaz, the bankruptcy court held that a chapter 11 bankruptcy reorganization plan would not bar investors from pursuing direct claims against the directors and officers of debtor. However, this was a hollow victory for the plaintiffs as the bankruptcy court went on to hold that the terms of the confirmed plan of reorganization prevented the plaintiffs from satisfying their claims from the proceeds from director and officers’ insurance.
On March 4, 2016, Palmaz Scientific Inc., a biomedical company that developed implantable devices used in treating diseases, filed a chapter 11 bankruptcy petition. The court approved the debtor’s chapter 11 plan on July 15, 2016. Palmaz Scientific’s plan transferred some of the debtors’ assets, including D&O claims, to a litigation trust. The plan defined D&O claims to include claims against the debtor corporation, but not against former directors and officers.
Soon after the corporation filed for bankruptcy, one group of investors (Turnbull plaintiffs) filed a direct action against its founder, Dr. Julio Palmaz. Before the bankruptcy case, another group of investors (Ehrenberg plaintiffs) had filed suit against Palmaz Scientific, Dr. Palmaz, and the company’s CEO, Steven Solomon. To block these lawsuits, Dr. Palmaz and the corporation’s litigation trustee filed an injunction in the District Court for the Western District of Texas.
To determine if the injunction impacted the Turnbull and Ehrenberg plaintiffs, the bankruptcy court had to decide whether their suits included D&O claims. While the bankruptcy court found that the Turnbull plaintiffs could proceed with their direct claims, the Ehrenbergs’ derivative claims could not. In response to this ruling, the Ehrenberg plaintiffs amended their original demand and eliminated their derivative claims. This prompted Palmaz Scientific’s insurer and litigation trustee to jointly move for a declaratory judgment of whether the Ehrenberg plaintiffs’ amended complaint interfered with the trustee’s right to control D&O recoveries.
After closely reviewing Palmaz Scientific’s reorganization plan and the bankruptcy injunction, the court determined that the injunction only enjoined derivative claims, or those brought against the corporation. As the amended Ehrenberg demand only included direct claims against Dr. Palmaz and Mr. Solomon individually, the injunction did not apply. However, the court also found that the Ehrenberg demand violated the plan’s terms by interfering with the litigation trustee’s right to “control. . . all D&O Insurance Recoveries, including negotiations relating thereto and settlements” (ECF No. 356, Plan § 6.6(d)). According to the court, this clause gave the trustee a superior right over other creditors to all D&O insurance proceeds. As a result, the court found that the Ehrenberg plaintiffs lacked the legal ability to satisfy their demand.
The outcome in Palmaz is an example of winning the battle but losing the war. While creditor plaintiffs may be entitled to pursue claims against directors and officers of a debtor corporation, the terms of a chapter 11 reorganization plan may prevent them from satisfying their claims from the proceeds of a D&O insurance policy. This case demonstrates the importance to potential D&O claimants of monitoring the plan confirmation process to ensure that potential claims are not compromised.
-Summer associate Maya Jacob assisted in drafting.
The dispute between Relativity and Netflix centered around Netflix’s assertion that it had the right under a licensing agreement, as amended, to stream two of Relativity’s films, Masterminds and The Disappointments Room, before they were scheduled to be released in the theatres. Netflix’s proposed actions would have completely undercut Relativity’s recently confirmed chapter 11 plan of reorganization, the feasibility of which was premised on the significant proceeds that Relativity expected to receive from first theatrically releasing the films and then Netflix distributing them under the licensing agreement.
Finding that Netflix did not have the contractual right to do so, the Bankruptcy Court granted Relativity’s motion under section 1142(b) of the Bankruptcy Code to enforce the plan and enjoined Netflix from streaming the films before they were released in the theaters. Netflix appealed, arguing that the Bankruptcy Court did not have jurisdiction over the post-confirmation dispute. Both the District Court and the Second Circuit affirmed.
Following its decisions in In re U.S. Lines and In re Petrie Retail, Inc., which found core bankruptcy court jurisdiction over post-confirmation disputes concerning the parties’ rights to the proceeds of major insurance contracts and the interpretation of a lease assigned under a Bankruptcy Court-approved sale order, the Second Circuit reasoned that the dispute between Netflix and Relativity was a core proceeding because of the impact that Netflix’s threatened distribution of the films would have on Relativity’s confirmed plan of reorganization.
As recounted by the Second Circuit, during the confirmation proceedings, Netflix objected to Relativity’s proposed plan of reorganization, questioning whether Relativity could actually theatrically release the films on the schedule proposed in the plan, and arguing that theatrical release of the films before distribution by Netflix was a material requirement to the licensing agreement. Relativity’s confirmed plan of reorganization incorporated Netflix’s understanding of the importance of the film’s being theatrically released before being streamed on Netflix. Testimony from the hearing on Relativity’s motion established that Netflix’s pre-release streaming of the films would have eviscerated the revenue streams anticipated by Relativity’s plan. The Second Circuit thus concluded that Netflix’s change of position would significantly impact the administration of the estate and “undercut the creditor relief provided by the Plan,” thus rendering the dispute a core proceeding over which the Bankruptcy Court properly exercised jurisdiction.
. Netflix, Inc. v. Relativity Media, LLC (In re Relativity Fashion, LLC), 696 Fed. App’x 26 (2d Cir. 2017).
. The Bankruptcy Court also found that the doctrines of judicial estoppel and res judicata barred Netflix from asserting it had the right to stream the unreleased films because of the order confirming Relativity’s plan of reorganization and the related proceedings before the Bankruptcy Court.
. 197 F.3d 631 (2d Cir. 1999).
. 304 F.3d 223 (2d Cir. 2002).
. Indeed, the Bankruptcy Court did not believe that Netflix’s change in position was made in good faith. The Bankruptcy Court believed that Netflix had recently negotiated more advantageous licensing agreements and speculated that “Netflix waited until very late in the process to spring this new issue on the Debtors in the hopes that it could gain leverage to force a contract change or maybe even a contract cancellation.” In re Relativity Fashion, LLC, No. 15-11989 (MEW), 2016 WL 3212493, at *12 (Bankr. S.D.N.Y. Jun. 1, 2016).
We are pleased to share with our readers the Hughes Hubbard Bankruptcy Year-End Review for 2017. We thank our friends for entrusting us with these rewarding engagements and look forward to building on these successes in 2018.
On December 21, the Bankruptcy Court for the Southern District of New York recognized and agreed to enforce the unopposed foreign restructuring plan of oil exploration company C.G.G. S.A. (“C.G.G.,” or the “Company”) under Chapter 15 of the Bankruptcy Code. C.G.G.’s restructuring marks one of the few times a U.S. bankruptcy court has been asked to enforce a French court-sanctioned bankruptcy plan.
C.G.G. is a nearly 90-year-old French company specializing in geophysical services. Its business comes predominantly from the Oil and Gas Exploration and Production (“E&P”) industry. Like other companies in E&P, as oil and gas prices dropped, C.G.G.’s revenues dropped precipitously, from more than $3.4 billion in 2012 to $1.2 billion in 2016. C.G.G. simultaneously faced nearly $3 billion in funded indebtedness. C.G.G. initially divested non-core assets and reduced its headcount to save money, but soon determined that those measures were insufficient, and that restructuring was necessary. The Company initiated restructuring in France in February 2017. Negotiations with stakeholders eventually resulted in a June 2017 Lock-Up agreement, through which the company’s shareholders agreed not to sell their shares. Negotiations also led to a restructuring support agreement that would swap nearly $2 billion in debt for most of the reorganized Company’s equity.
C.G.G. passed the restructuring agreement, called the Safeguard plan, with more than 90% of voting creditors approving. The French court accepted the plan via a “Sanctioning Order” on December 1.
On December 6, C.G.G., through its Foreign Representative, filed a new motion in the Southern District, requesting the court (a) give full force and effect to the Sanctioning order; (b) permanently enjoin actions against the Safeguard Plan within the U.S.; (c) declare securities given to the creditors under the plan (the “Safeguard Securities”) exempt from Section 1145 registration; (d) authorize C.G.G.’s Foreign Representative to seek entry of a final decree to close the Chapter 15 case under Rule 5009(c); and (e) waive the 14-day stay of effectiveness for the order.
Bankruptcy Judge Martin Glenn granted the motion on all counts. The court first determined that the Sanctioning Order (the “Order”) fell within “any appropriate relief,” as required under section 1521(a)(7). The court cited the creditors’ overwhelmingly support for the Safeguard Plan and reasoned that the plan’s effectiveness, and the concurrent Chapter 11 cases, was conditioned on the court’s acceptance of the Order.
The court then found that, as required under Section 1522, the interests of creditors and all interested parties in the case were “sufficiently protected.” The court reasoned that, without the court’s approval of the Order, the Plan might not be fully implemented. Further, the French court had already fully determined, after a hearing with interested parties, that the Safeguard plan gave sufficient protection. The court also agreed to permanently enjoin actions against the Safeguarding Plan.
The court also determined the Safeguard Securities were exempt from federal and state registration requirements. It found that section 1145, which allows exemptions from Securities laws, can be applied to Chapter 15 cases through sections 1507 and 1521 as long as the securities (a) were offered or sold under a plan; (b) were securities of the debtor or an affiliate in a joint plan; and (c) were sold in exchange for a claim against the debtor or affiliate, as per section 1145(a)(1). The court found that all three requirements were satisfied.
Last, the court found that, upon its order becoming final, section 350(a)’s requirements for closing a case were satisfied, and thus the case could be closed following the procedures of rule 5009(c). The court also waived the 14-day stay of effectiveness, in order to allow the restructuring to begin immediately.
The Southern District has frequently recognized and enforced foreign court orders in approval of a foreign debtor’s restructuring plan – including recent plans from Hong Kong, Australia, Canada, the Caymans, and South Africa. But as Judge Glenn remarks in his opinion, French Safeguard plans have rarely been brought to U.S. bankruptcy courts for recognition and enforcement. The ruling suggests that French plans that are widely approved by creditors will receive a stamp of approval from the Southern District. It suggests moreover that the court will defer to the findings of French courts that have fully heard all parties to the restructuring on issues like section 1522 sufficient protection.
In its recent decision in In re Peregrine Financial Group, the Seventh Circuit became the first circuit to accept a definition of “customer property” which excludes retail foreign exchange contracts, or “forex contracts”, and spot metal contracts. The Court’s ruling highlights the risk parties that transact in foreign exchange transactions and OTC metal transactions may face in the event that a future commodities merchant is forced into liquidation.
Peregrine was a registered “Future Commission Merchant” (“FCM”) and a registered “Forex Dealer Member” of the National Futures Association. Peregrine, in addition to futures, dealt in retail foreign currency transactions and spot metal transactions. In 2012, it was discovered that over a twenty-year period Peregrine’s CEO, Russel L. Wasendorf, had embezzled nearly $200 million from Peregrine’s segregated customer future accounts. In July 2012, as a result of this defalcation, Peregrine filed for bankruptcy and a trustee was appointed to administer the Peregrine estate. Subchapter IV of Chapter 7 of the Bankruptcy Code, 11 U.S.C. §§ 761–767, governs the bankruptcy of a futures commissions merchant such as Peregrine, and provides for the distribution of “customer property” in priority to all other claims. “Customer property” is defined as including funds received in connection with a commodity contract, 17 C.F.R. § 190.08(a)(1)(i)(A), which in turn is defined in § 761(4) of the Bankruptcy Code.
The Peregrine Trustee excluded certain former account holders of Peregrine from receiving priority distributions of customer property based on his determination that the forex and spot metal transactions they had conducted through Peregrine did not constitute “commodity contracts” as defined by the Bankruptcy Code. In response to the Trustee’s determination, certain former account holders (the “Plaintiffs”) commenced an adversary and assert that their forex and spot metal contracts should be treated as commodity contracts, which would entitle them to priority distributions.
As defined in section 761 of the Bankruptcy Code, a “commodity contract” includes futures contracts, or a contract “similar to” a futures contract. In Peregrine, the Plaintiffs pointed to both the language of the statute and congressional intent that they suggested supported the finding that their retail forex contracts and spot metal contracts were “similar to” futures contracts and therefore fell within the definition of commodity contract contained in the Bankruptcy Code. Based largely on its previous ruling in In re Zelener, 373 F.3d 861 (7th Cir. 2004), the Seventh Circuit disagreed.
In Zelener, the Seventh Circuit considered whether “[forex transactions] are contracts of sale of a commodity for future delivery regulated by the Commodity Futures Trading Commission.” The Seventh Circuit held that retail forex transactions were distinguishable from futures contracts because the “customer buys foreign currency immediately rather than as of a defined future date, and because the deals lack standard terms. [The defendant] buys and sells as a principal; transactions differ in size, price, and settlement date. The contracts are not fungible and thus could not be traded on an exchange.” The Court expanded on this reasoning to find that the retail forex transactions and spot metal transactions were also not “similar to” futures contracts because “Zelener illustrated these two types of transactions were not alike in substance or essentials.” As the Court explained, “[f]utures contracts are fungible instruments that allow parties to trade in the contract with a clearinghouse accepting the risk of any counterparty default. Retail forex, in contrast, involves private transactions that bear no fungible features.” The Court also rejected the Plaintiff’s argument that the legislative history of section 761 indicates that Congress intended for retail forex transactions to be treated as commodities contractions, noting “Congress has had opportunities to include OTC metal and retail forex transactions in the definition of ‘commodity contract’ but has declined to do so. For example, in 2010, as part of Dodd-Frank, Congress amended section 761(4) to include ‘cleared swap’ transactions, 11 U.S.C. § 761(4)(F)(ii), yet declined to include retail forex or OTC metals.” The Court noted that this reasoning was further strengthened by the overall goals of the commodity broker provisions of chapter 7, which are to promote market stability during events of insolvency; a concern that is not implicated with retail forex or OTC metals because they are uncleared transactions where the customer assumes the risk of default.
The decision provides an important warning to lesson to forex and spot metal traders. Namely, that forex and spot metal transactions are not protected under Chapter 7 of the Bankruptcy Code, and will not receive priority distribution in a liquidation.
* Olivia Bensinger assisted with the preparation of this post.
 In re Peregrine Fin. Grp, Inc., 866 F.3d 775 (7th Cir. 2017), adopting the opinion of Secure Leverage Grp., Inc. v. Bodenstein, 558 B.R. 226, 241 (N.D. Ill. 2016).
 11 U.S.C. § 761(4)(F)(i) (2012).
 In re Zelener, 373 F.3d 861, 862 (7th Cir. 2004).
 Secure Leverage Grp., 558 B.R. at 241.

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