I OVERVIEW OF RESTRUCTURING AND INSOLVENCY ACTIVITY

The news regarding the US economy remains mixed as it relates to its impact on restructuring and insolvency activity. In 2016, fourth-quarter GDP advanced at an inflation and seasonally adjusted annual rate of 1.9 per cent, marking a slowdown from a short-lived third-quarter 3.5 per cent growth spurt.2 In April 2017, the Labor Department reported that the US had added only 98,000 jobs in March, a sharp slowdown from the previous two months. However, the unemployment rate in the US fell to 4.5 per cent, the lowest level since May 2007.3

Debt remains cheap and readily available. Accordingly, companies in distress continue to roll over and refinance their debt rather than explore court-supervised restructurings. These factors have translated into fewer bankruptcy filings. The US experienced an approximate 4.7 per cent decrease in commercial bankruptcy filings for the 12-month period ending 31 March 2017 compared with the same period ending 31 March 2016. Additionally, Chapter 11 case filings decreased by approximately 3.7 per cent over the same period.4 To some extent, this outcome is driven by the decline in Moody's global speculative default rate from 4.4 per cent per cent at the end of 20165 to a trailing 12-month global speculative-grade default rate of 3.3 per cent at closing in May 2017.6 Moody's expects the rate to decrease to 2.5 per cent by the end of 2017.7

While there continue to be fewer bankruptcy filings, there were also fewer large bankruptcy filings than in previous years. There were some notable exceptions. Clocking in at the top was the bankruptcy filing of Avaya Inc. (Avaya), a multinational telecommunications company that provides real-time communication applications to private and government customers and platforms around the world. Avaya (and certain of its affiliates) filed for bankruptcy on 19 January 2017, with approximately US$6.5 billion in assets. Other large bankruptcies included First NBC Bank Holding Company, Memorial Production Partners LP and Vanguard Natural Resources LLC.

II GENERAL INTRODUCTION TO THE RESTRUCTURING AND INSOLVENCY LEGAL FRAMEWORK

Title 11 of the United States Code (Bankruptcy Code) governs bankruptcy cases filed in the United States.8 The Bankruptcy Code is premised on the theory that an honest debtor deserves a fresh financial start and thus relief from its unsecured debts. It endeavours to allow for this fresh start, while at the same time balancing the rights of the debtor's various constituents as fairly and equitably as possible. Over the years, however, special interest groups have lobbied Congress for various amendments to the Bankruptcy Code. The last major amendments were contained in the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005 (Revised Code). These amendments have continued the gradual erosion of a debtor's ability to obtain the benefits of a fresh start and shifted the balance of power among all interested parties in a bankruptcy case, a campaign started by various special interest groups not long after the Bankruptcy Code was enacted by Congress in 1978. In addition to economic factors, these amendments have resulted in substantially fewer bankruptcy cases and, for those that do file, cases of much shorter duration.

The filing of a petition by the debtor (for corporations, this is usually a petition for relief under either Chapter 7 or Chapter 11 of the Bankruptcy Code) commences the bankruptcy case. There is no requirement that a company be ‘insolvent' to commence a voluntary bankruptcy case. Rather, case law has developed to require only that a petition be filed in good faith. Immediately upon filing a petition, the debtor obtains the benefit of an automatic stay. The stay prohibits most creditors from taking actions against the debtor and its property on account of pre-petition liabilities or agreements without express authorisation from the bankruptcy court.9 Thus, the stay gives the debtor the necessary ‘breathing space' to complete its reorganisation or orderly liquidation consistent with the terms of the Bankruptcy Code.

A company hoping to reorganise or liquidate with its management in place will file a petition under Chapter 11; a company with no option but to liquidate under court supervision will commence a Chapter 7 case. Banks, savings and loan associations, insurance companies, stockbrokers and commodity brokers are not eligible to file for Chapter 11 protection. In general, these types of entities are liquidated under other federal or state winding-up laws or, in the case of stockbrokers and commodity brokers, under their own sub-chapter of the Bankruptcy Code.10

Unlike many other insolvency proceedings throughout the world, in a Chapter 11 case, the debtor generally continues to manage its own affairs following commencement of the bankruptcy case (referred to as a debtor-in-possession).11 A trustee is rarely appointed to oversee a debtor's operations unless the situation suggests that one is necessary.12

In addition to the bankruptcy court judge and the US Trustee (UST) (a representative of the Department of Justice responsible for overseeing bankruptcy cases), the debtor-in-possession's actions will often be subject to scrutiny by one or more ‘official' committees appointed by the UST.13 The most common official committee is one composed of unsecured creditors. In larger cases, the committee typically retains its own professionals (including counsel) to represent the unsecured creditors' interests, and the debtor pays for the cost of these professionals. In some cases, equity holders or retirees will convince the UST to appoint a special committee for their constituents, especially in cases in which it appears the debtor may be solvent. Other official committees can be formed to represent other creditor groups, although such committees are rare, except in cases driven by mass torts such as asbestos liability.

The goal of a debtor in commencing a Chapter 11 case is to confirm and consummate a Chapter 11 reorganisation plan. Unless a trustee has been appointed, the debtor initially has the exclusive right to file a reorganisation plan.14 The exclusivity period, however, is not indefinite. Indeed, plan exclusivity can only be extended up to a maximum of 18 months after the petition date, with the court's permission.15 Before 2005, when the Revised Code became law, a debtor could obtain unlimited extensions to its exclusivity period, provided authorisation was obtained from the bankruptcy court. The limit imposed by the Revised Code on plan exclusivity provides an opportunity for creditors to wait out the debtor's exclusivity period and ultimately propose their own plan.

Before a debtor can solicit votes on its reorganisation plan, it must provide creditors with a disclosure statement that has been approved by the bankruptcy court.16 The bankruptcy court's role is not to approve the contents of the disclosure statement; rather, its role is to ensure that the disclosure statement contains ‘adequate information' to permit a creditor to make an informed decision to accept or reject the related plan. Following approval of the adequacy of the disclosure statement,17 the debtor may solicit votes from creditors and equity holders entitled to vote on the plan. Groups of creditors and equity holders will be categorised into different ‘classes'. If the requisite votes are received, the debtor will seek confirmation, or approval, of the plan by the bankruptcy court.

Aside from the required votes, the most critical requirement of the Bankruptcy Code for the plan is the ‘best interests of creditors test'.18 This test requires that each creditor either accept the plan or receive under the plan a distribution equivalent to what it would receive if the debtor were to liquidate rather than reorganise.19 In some cases, the test requires valuation of property given to dissenting creditors. Because valuation is a complex and fact-intensive undertaking, a ‘best interests fight' can lead to time-consuming and expensive litigation.

The second critical requirement is that at least one ‘class' of claims votes for a plan if there is a class of impaired - or affected - claims. For this vote, the votes of insiders do not count. Two-thirds in amount and more than 50 per cent in number of creditor class members that vote must vote for the plan for the class to be deemed to have accepted the plan. In the event that equity security holders are proposed to receive a distribution, classes of equity security holders must vote for the plan by at least two-thirds in amount.

Usually, at least one class will either affirmatively reject or be deemed to have rejected the plan because that class is not slated to receive a distribution under the plan. In those cases, the debtor can confirm its plan by ‘cramming down' these creditors or equity security holders. ‘Cram down' requires the debtor to prove that the plan does not discriminate unfairly and is fair and equitable with respect to each class of claims or interests that is impaired under the plan and has not accepted it.20 The ‘unfair discrimination' test is a nebulous concept. By contrast, the ‘fair and equitable' test is more straightforward and basically follows an absolute priority waterfall, under which secured creditors are entitled to full payment (at least over time) before unsecured creditors and equity holders receive a distribution. Despite this rather simplistic concept, valuation and issues regarding the present value of future payments to secured creditors are often hotly contested.

Confirmation of a reorganisation plan provides a reorganising Chapter 11 debtor with the fresh start that most debtors hope to obtain by reorganising under the Bankruptcy Code. The discharge that the debtor receives under the Bankruptcy Code is key to the ‘fresh start'. This discharge bars creditors and equity security holders from looking to the debtor for satisfaction of claims owed to them prior to the commencement of the Chapter 11 case. Rather, their sole source of recovery is under the plan. Corporate debtors liquidating under either Chapter 7 or Chapter 11 of the Bankruptcy Code, however, do not obtain a discharge.

i Absolute priority rule

A basic premise under the Bankruptcy Code is that, in the absence of consent,21 distributions to creditors must follow the ‘absolute priority rule'. In applying this rule, lower priority creditors may receive a distribution only after more senior classes are paid in full.22 Secured creditors are first in the priority scheme. Secured claims typically include pre-petition lenders and trade creditors with security interests (including holders of mechanics' liens and materialmen's liens). ‘Administrative expense' claims are second in priority. Included in this bucket are claims relating to the post-petition operations of the debtor, and ‘cure' claims that arise when debtors ‘assume', or agree to be bound by, pre-existing contracts. The Bankruptcy Code also elevates to administrative expense priority status certain pre-petition claims of vendors of goods that would ordinarily have been treated as general unsecured claims before the enactment of the Revised Code. A Chapter 11 reorganisation plan must provide for payment of administrative expense claims and priority claims in full on the plan's effective date, although individual creditors may agree to a payout over time. Next in order of priority come ‘priority claims', which include certain pre-petition wages and commissions, employee benefit plan contributions, unsecured claims in connection with certain prepayments for goods or services from the debtor (e.g., the pre-petition purchase of goods ‘laid away' with the debtor, up to a cap) and certain taxes.

General unsecured claims, in terms of priority, come after secured claims, administrative claims and priority claims, but before subordinated debt claims.23 Equity interests (including equity-related damage claims that are treated as equity) are lowest on the distribution ‘waterfall' and, as a result, equity holders rarely receive a bankruptcy distribution.

ii Treatment of contracts in bankruptcy

A debtor generally has the power to hand-pick which executory contracts and unexpired leases it wants to be bound by following its reorganisation. A contract is usually found to be ‘executory' when both the debtor and the non-debtor party to the contract have material performance obligations outstanding. If the debtor chooses to assume (or keep) a contract, it will be bound under all the terms of the agreement. Alternatively, if the debtor no longer seeks to be bound by the agreement, it will ‘reject' it. Upon rejection of a contract, the debtor is no longer required to perform and the contract is deemed breached as of the date the bankruptcy commenced. Damages resulting from such a breach are referred to as ‘rejection damages'. Under certain circumstances, a debtor may be able to assign its interest in a contract or lease to a third party.24

In the event a debtor does not assume an agreement, the default option under the Bankruptcy Code is rejection.25 The deadline to make the assumption or rejection decision with respect to unexpired leases and executory contracts (other than leases for non-residential real property) is the date a Chapter 11 plan is confirmed by the bankruptcy court. The deadline for a debtor to assume or reject an unexpired lease for non-residential real property can be much sooner (i.e., generally 210 days after commencement of the bankruptcy case, absent landlord consent). In a case where leased real property locations number in the hundreds, as in large retail cases, the debtor should make preliminary decisions on which leases it wants to assume or reject prior to commencing its bankruptcy case, and thereby attempt to avoid assuming leases it may not ultimately need.

iii Security interests

In the United States, Article 9 of the Uniform Commercial Code (Article 9 and the UCC, respectively), as adopted by each of the 50 states, generally applies to any security interest created by contract in personal property and fixtures securing payment or other performance of an obligation.26 Article 9, therefore, is the statute that sets forth the process by which one party may take and enforce a security interest in the property of another party.

There are three components to the creation and enforcement of a security interest under Article 9 - attachment, perfection and priority. Under Article 9, a security interest attaches to collateral at the moment it becomes enforceable against the debtor. Only an attached security interest may be perfected under Article 9. Perfection is the process by which a secured party gives public notice of its security interest in collateral. A perfected security interest will prevail over claims of an interest in collateral by other parties (including liens of creditors using the judicial process to obtain liens on the collateral). State law, generally uniform throughout the United States, will dictate the method for perfecting a consensual security interest.

In many cases, two or more creditors may have security interests in the same collateral. In such cases, Article 9 provides general rules as to the ranking of security interests - that is, which security interest takes priority over the others. As a general rule, an earlier-secured party will prevail over later-secured creditors. There are, however, exceptions to this general rule and, therefore, practitioners must refer to Article 9 in the applicable jurisdiction relevant to a particular transaction or consult local counsel.

Article 9 has a critical interplay with the Bankruptcy Code. Upon the bankruptcy filing, the debtor steps into the role of a ‘hypothetical lien creditor'.27 This means, in general, that it may void any unperfected security interest. Accordingly, it is critically important for secured creditors to ensure that their liens are properly perfected, especially when transacting business with a distressed company on the verge of bankruptcy. Again, while there are some variations in the details, security interests are usually ‘perfected' by filing in a governmental registry or by taking possession of the collateral.

Whereas the UCC, which deals with the creation of security interests in personal property, is fairly uniform as adopted in all 50 states, security interests or mortgages in real property are controlled by different laws in each of the 50 states. However, most state laws provide for the recording of mortgages in local governmental offices. As with security interests in personal property, a bankruptcy trustee or debtor-in-possession can avoid improperly recorded mortgages by stepping into the shoes of state-law creditors.

iv Clawback actions

The Bankruptcy Code gives a debtor certain ‘avoidance powers' to recover property transferred by the debtor to third parties before the petition date. Generally, these avoidance actions fall into two categories: the transfers had the effect of preferring one creditor over others; or the transfers were made for the purpose of hindering, delaying or defrauding creditors from collecting on their claims.

‘Transfer' is defined broadly and encompasses payments as well as the granting and perfection of liens. Transfers that the debtor can prove to be fraudulent or preferential can be treated as voidable transfers. In many instances it is unnecessary to prove that the debtor or the recipient, or both, had a wrongful motive - the Bankruptcy Code is concerned only with ensuring equal treatment of creditors, even if that means unwinding well-intentioned arm's-length transfers of property. That said, the recipient of a voidable transfer has certain affirmative defences to shield all or a portion of the transfer from the debtor.

The most common voidable transfer is referred to as a ‘preference'. Preferences are those payments a debtor makes to a pre-petition creditor on the ‘eve' of the bankruptcy filing28 that allow such creditor to receive more on account of its claim than it would have received had it waited in line with other creditors and received its distribution in a liquidation of the debtor pursuant to Chapter 7 of the Bankruptcy Code. The amount the creditor received in connection with the transfer will be voidable, subject to certain defences, although the net economic impact to the creditor (after negotiations with the trustee or debtor) will generally be a return of money in excess of the hypothetical liquidation distribution. To the extent the transfer is avoided, the preference recipient would have a claim against the debtor.

Fraudulent transfers that can be recovered include transfers made with the actual intent to hinder, delay or defraud creditors. Recoverable fraudulent transfers also include transfers for inadequate consideration when the debtor (transferor) is insolvent, undercapitalised or was unable to pay its debts as they became due. The Bankruptcy Code has its own fraudulent transfer provisions, but the debtor-in-possession may also prosecute such claims under similar state law provisions.

III SIGNIFICANT TRANSACTIONS, KEY DEVELOPMENTS AND MOST ACTIVE INDUSTRIES

i Pre-planned bankruptcies: a quick escape from an all-out bankruptcy

Pre-planned bankruptcies continue to be a useful tool for debtors as they try to manage the time and expense of a US bankruptcy filing. There are two types of pre-planned bankruptcies: pre-packaged and pre-negotiated bankruptcies. Pre-packaged bankruptcies (pre-packs) are typically utilised by companies seeking to right-size their capital structures (e.g., to address maturities or deleverage from existing secured lender or bondholder indebtedness). The pre-packaged bankruptcy mechanism is not useful for companies seeking to achieve an operational turnaround or that need to modify other significant liabilities such as pension, retiree medical or mass tort liabilities.

In a pre-pack, the Chapter 11 case is commenced after the plan proponent has obtained the requisite votes to approve a reorganisation plan.29 In pre-negotiated plans, the creditors entitled to vote on the plan indicate their support for the plan before the commencement of the case,30 often in the form of a ‘lock-up' agreement, but the vote occurs following the commencement of the case. It is common for pre-packs to last less than 60 days. Absent complications, pre-negotiated bankruptcies will take 45 to 60 days longer than a pre-pack. These periods are far shorter than the duration of traditional Chapter 11 cases.

The pre-pack concept is an important negotiation tool as companies attempt to obtain concessions from their constituents. The requirement to achieve an accepting class of creditors (and, therefore, to bind non-accepting class members) under the Bankruptcy Code is two-thirds in amount and one-half in number of those creditors who cast a vote. If acceptance is received from almost all of the creditors from whom votes are solicited, companies will often consummate the restructuring without filing for bankruptcy. Moreover, the threat of a pre-pack makes it less likely that a filing will be required, because there is little reason for creditors to withhold their acceptance once the company has received acceptances sufficient to satisfy the minimum threshold for an accepting class in the Chapter 11 context.

This past year has seen numerous headline pre-negotiated and pre-packaged bankruptcy filings and exits. For example, Roust Corporation, a vodka manufacturer in Poland and Russia, filed for Chapter 11 on 30 December 2016 with a pre-packaged plan to reorganise approximately US$1.14 billion of debt. The plan was confirmed on 6 January 2017 and went effective on 17 February 2017. Notably, because Roust Corporation had provided the required notices before it filed for bankruptcy, the company's plan of reorganisation was confirmed within six days of its Chapter 11 filing.

ii Active industries: retail

In 2017, the convenience and pervasiveness of online shopping took a significant toll on the retail industry, leading to near-record numbers of bankruptcy filings by major retail chains. By April 2017, the number of major retailers that filed for bankruptcy in 2017 surpassed the total number of retail companies that filed for bankruptcy during all of 2016, putting 2017 on pace to surpass the record of 18 major retail bankruptcies that were filed in 2009.31 Major retail chains that filed for bankruptcy in 2017 as of the date of this publication include Gordmans, hhgregg, RadioShack (General Wireless Operations Inc), Gander Mountain, BCBG Max Azria, MC Sports, Eastern Outfitters, Wet Seal, The Limited, Payless Inc., Rue21, and Gymboree. According to Bloomberg, citing to an analysis by S&P Global Market Intelligence, department stores, electronics stores, and apparel stores are at highest risk for filing for bankruptcy protection in 2017, while the food and home improvement segments are at lower risks.32

iii Case law developments
Puerto Rico debt restructuring

In June 2016, the US Supreme Court upheld certain lower court decisions that declared unconstitutional a Puerto Rican law aimed at restructuring the territory's debt. In Commonwealth v. Franklin Cal. Tax-Free Tr., the Supreme Court reasoned that Chapter 9 of the Bankruptcy Code (dealing with bankruptcies by municipalities) pre-empted the proposed Puerto Rican law, as Chapter 9 declares any ‘State' law aimed at restructuring a municipality's debt to be invalid.33 However, territories like Puerto Rico are not eligible to utilise Chapter 9 bankruptcy protections because they are not strictly municipalities, which left Puerto Rico without a judicial option with which to restructure or otherwise manage its growing debt.

To fill this gap, Congress passed and President Obama signed into law the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA) on 30 June 2016. The law establishes a seven-member Oversight Board that has broad latitude to supervise any fiscal plans and budgets that the government of Puerto Rico develops to ensure that such plans satisfy predetermined criteria. Under PROMESA, local Puerto Rican governmental entities are still responsible for drafting specific fiscal plans and budgets, but any proposed measures are subject to revision by the Oversight Board.

PROMESA also establishes a framework to restructure debt issued by the Puerto Rican government. Under Title VI, the law establishes a collective action restructuring process, and under Title III, the law establishes a process similar to that which is available to municipalities under Chapter 9 of the Bankruptcy Code. On 3 May 2017, Puerto Rico filed to restructure its general obligation debt under Title III, followed by Puerto Rico's sales tax authority filing for relief under Title III a few days later. The two filings have been combined and account for approximately US$36 billion, roughly half of Puerto Rico's total debt. As of June 2017, both in-court proceedings and restructuring negotiations remain ongoing.

Structured dismissals

The US Supreme Court has recently narowed the grounds on which structured dismissals may be approved. In a 6-2 decision in Czyzewski v. Jevic Holding Corp., the Court found that structured dismissals must abide by the priority scheme set forth in the Bankruptcy Code, unless otherwise approved by the affected creditors.34

Many times, Chapter 11 is used as a means by which to sell assets free and clear of liens or security interests with such liens and security interests to attach to the proceeds.35 After consummation of the sale, a debtor can either confirm a plan of reorganisation or liquidation or liquidate under Chapter 7 of the Bankruptcy Code. Since these options can be time consuming and costly, ‘structured dismissals' of such bankruptcy cases have been used with increasing frequency. Bankruptcy courts often introduce new elements in a dismissal. In Czyzewski v. Jevic Holding Corp., the Court articulated that while the Bankruptcy Code does not explicitly require adherence to the priority rules in a structured dismissal context, bankruptcy courts may only approve settlements that follow such priority rules contained in other parts of the Bankruptcy Code.

Jevic is a trucking company that filed for bankruptcy pursuant to Chapter 11. The debtor was found to have violated certain of its employees' termination notification rights under the Worker Adjustment and Retraining Notification Act (WARN) and, accordingly, such employees had a claim equal to US$1.7 million that was entitled to priority under the Bankruptcy Code. Fraudulent-transfer claims against Jevic's senior secured lenders were resolved whereby such lenders agreed to a US$3.7 million settlement payment provided that the bankruptcy case was dismissed pursuant to a structured dismissal whereby the employees' WARN Act claims would not be paid even though the claims of junior creditors would receive payment.

The Supreme Court struck down the lower courts' approval of this settlement arrangement, asserting that it violated the Bankruptcy Code's priority system. Indeed, had there been a settlement with the lenders but no dismissal, and had the settlement proceeds been distributed under a plan or in a Chapter 7 liquidation, the workers' priority claims would have entitled them to US$1.7 million. Had there been no settlement but rather a straight dismissal or conversion, the fraudulent-transfer claims against the senior creditors would have revested in the workers or become an asset of the Chapter 7 bankruptcy estate, respectively.

The decision emphasised that structured dismissals could not be used as a workaround designed to achieve results that would not be possible under alternative liquidation mechanisms. The Court found that the priority scheme is a fundamental element of the Bankruptcy Code, and that it would be improper to read in an exemption for structured dismissals to those rules without an explicit statement by Congress or any evidence of legislative intent. As a result, the decision in Jevic will likely reduce the popularity of structured dismissals and cause more cases to end in liquidation.

Noteholder protections

Section 316(b) of the Trust Indenture Act of 1939 (TIA) provides qualified noteholders with a consent right over any changes to the payment terms or the ability to sue to enforce payment of an indenture. This provision gives minority bondholders protection from any non-consensual changes to the terms of the debt security that would otherwise be favoured and implemented by the majority bondholders. Since 1939, Section 316(b) has almost universally been interpreted to provide protection only to actual alterations to the payment terms or the bondholder's right to sue. However, in Marblegate Asset Management LLC v. Education Management Corp., the District Court for the Southern District of New York held that the statute protected the noteholder's ‘practical ability' to receive payment, an interpretation that would broadly expand the scope of 316(b) protection from merely actual changes to payment terms to any transaction that could affect whether a noteholder could be paid back the debt on its notes. 36 The District Court in MeehanCombs Global Credit Opportunities Funds, LP v. Caesars Entertainment Corp. reached a similar conclusion.37

The transaction at issue in the Marblegate case involved a restructuring in which the secured creditors released the guaranty of their debt by Education Management Corp., which triggered a similar release of the Education Management Corp.'s guaranty of its unsecured notes. The holders of the unsecured notes argued that this arrangement impaired the ‘practical ability' of the noteholders to collect payment on the bonds, and as such was a violation of Section 316(b) of the TIA. Though the arrangement did not actually change the payment terms of the indenture or the ability of the bondholders to sue, the District Court agreed with this broad interpretation of the TIA.

The Second Circuit reversed the lower court's interpretation.38 The Second Circuit asserted that there is no absolute right to repayment under the statute, and, additionally, that there would be no uniform way to apply the lower court's ‘practical ability' standard. Instead, that standard would force courts to determine what implicates an issuer's ‘practical ability' to repay its bonds on a subjective and case-by-case basis. Because the Second Circuit did not find that the TIA created an absolute right to repayment, and the transaction at issue did not change any of the terms of the indenture or impair any noteholder's right to bring a lawsuit, the District Court found that the transaction was not in violation of Section 316(b) of the TIA, and effectively reinstated the narrower interpretation of the provision.

The District Court's reading of Section 316(b) of the TIA was potentially devastating to an issuer's ability to achieve an out of court restructuring because almost all restructurings will have an effect on a dissenting bondholder's ‘practical ability' to receive repayment and, therefore, would require unanimous bondholder consent. Many authors were pondering whether a bankruptcy filing would be required to complete all restructurings that were not truly consensual. The Second Circuit's reversal likely allays most of those fears - at least for now - and returns the law and practice to its pre-Marblegate status.

iV INTERNATIONAL

i Background on Chapter 15

In 2005, Congress added Chapter 15 to the Bankruptcy Code. Chapter 15 ‘incorporates the Model Law on Cross-Border Insolvency to encourage cooperation between the United States and foreign countries with respect to transnational insolvency cases'.39 Chapter 15 is based on a ‘rigid recognition standard' that one court labelled ‘consistent with the general goals of the Model Law'.40 Thus, if a US bankruptcy court denies recognition of a foreign proceeding, Section 1509(d) of the Bankruptcy Code provides that ‘the court may issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from courts in the United States'.41 This has been interpreted to mean that Chapter 15 recognition is now the sole form of relief in the United States with respect to foreign insolvency proceedings.42

A foreign representative can obtain recognition under Chapter 15 of the Bankruptcy Code ‘by the filing of a petition for recognition of a foreign proceeding under Section 1515'.43 Two types of recognition of a foreign proceeding are possible under Chapter 15: recognition as a foreign main proceeding or recognition as a foreign non-main proceeding. Greater relief is available to a foreign representative of a foreign main proceeding than for a representative of a foreign non-main proceeding.

In order for a US court to recognise a foreign proceeding as a main proceeding, the foreign proceeding must be ‘pending in the country where the debtor has the center of its main interests',44 (COMI). COMI is not defined in Chapter 15. Section 1516(c), however, sets out a presumption that the debtor's registered office is the COMI ‘[i]n the absence of evidence to the contrary'.45 Moreover, one of the first bankruptcy decisions to analyse the matter defined a company's COMI as a debtor's ‘principal place of business' under concepts of United States law'.46 Indeed, the concept of COMI is lifted from the EU Regulation, which defines COMI as ‘the place where the debtor conducts the administration of his interests on a regular basis and is therefore ascertainable by third parties'.47 On the other hand, the Second Circuit has rejected the notion that ‘principal place of business' analysis should be used,48 but did note that the concept is still useful in determining the factors that point to a COMI. The court went on to say that ‘any relevant activities, including liquidation activities and administrative functions, may be considered in the COMI analysis'.49

The Second Circuit also provided more guidance in determining the relevant period to examine in establishing a debtor's COMI, concluding that the relevant analysis should be based on the debtor's ‘activities at or around the time the Chapter 15 petition is filed [...but] that a court may consider the period between the commencement of the foreign insolvency proceeding and the filing of the Chapter 15 petition to ensure that a debtor has not manipulated its COMI in bad faith'.50

Lacking the required COMI, a foreign proceeding may be recognised as a non-main proceeding under Chapter 15 if the foreign proceeding is ‘pending in a country where the debtor has an establishment'.51 ‘Establishment' is defined in Chapter 15 as ‘any place of operations where the debtor carries out a nontransitory economic activity'.52 Determining whether a debtor has an establishment in the foreign proceeding jurisdiction ‘is essentially a factual question, with no presumption in its favour'.53 At least one court has held that non-main recognition is restricted to a jurisdiction in which a debtor has assets.54

ii Recent developments
In re Hanjin Shipping Co Ltd

The recent Hanjin Shipping Co Ltd (Hanjin) insolvency provides an interesting example of the practical application of Chapter 15. Hanjin was the largest shipping company in South Korea and the world's ninth-largest shipper. After experiencing an extreme liquidity crisis, on 31 August 2016, Hanjin filed for protection under the Debtor Rehabilitation and Bankruptcy Act in the Seoul Central District Court of South Korea. At the time of its filing, eight of Hanjin's vessels were arrested in port, 43 vessels were at sea, 39 vessels were outside ports waiting for some indication that they would not be arrested, and many other vessels were stopped and unable to pass through the Panama or Suez Canal. At the time of the filing, among other things, Hanjin's vessels were carrying vital components for manufacturers such as HP and Samsung Electronics which were in the process of building inventory for the upcoming holiday season.

Despite the protections afforded by the Korean proceeding, Hanjin feared that its creditors would file enforcement actions in other countries, including the United States. To stave of such risk and to ensure that its shipping routes to the United States would not be adversely impacted, Hanjin's foreign representative filed a Chapter 15 case in the Bankruptcy Court for the District of New Jersey on 2 September 2016. In the Chapter 15 case, Hanjin sought an order recognising the Korean proceeding and applying Sections 362 and 365 of the Bankruptcy Code to the Chapter 15 case in order to protect Hanjin's assets in the United States and prevent contract counterparties from modifying or terminating related contracts. On 9 September 2016, the bankruptcy court entered an order for preliminary relief implementing a stay against the assertion of maritime liens and the seizure of vessels, and providing cargo owners with additional negotiation rights.55 Without this provisional relief, which was later affirmed when the US bankruptcy court entered the final recognition order on 13 December 2016, and the broad protections contemplated thereby, Hanjin's idled ships would have not been able to dock at US ports and resume normal business activities. The Hanjin filing thus demonstrates the utility of Chapter 15 in stabilising the US operations of international companies that face seemingly overwhelming logistical challenges during the pendency of a foreign bankruptcy proceeding.

In re Sanjel (USA) Inc

In In re Sanjel (USA) Inc, the Bankruptcy Court for the Western District of Texas provided some guidance as to whether a bankruptcy court may properly modify or limit a stay imposed in a foreign bankruptcy proceeding by modifying language in the recognition order giving effect to such stay in the United States.56 In this case, Sanjel (USA) Inc, an energy services provider, and certain affiliates (Sanjel) commenced reorganisation proceedings in Canada under the Companies' Creditor Arrangement Act (CCAA). In that proceeding, the Canadian court approved a broad stay which shielded Sanjel's directors and officers from litigation.

In the Chapter 15 case that followed, the US bankruptcy court entered a recognition order that enforced the broad Canadian stay of litigation against Sanjel's directors and officers, which is not generally within the scope of the automatic stay under the Bankruptcy Code. Critically, this recognition order would have barred certain of Sanjel's US employees who sought to bring actions against Sanjel's directors and officers for unpaid wages, and because the statute of limitations for those actions would continue to run during the course of the Chapter 15 proceeding, such claims would likely be extinguished if the broad Canadian stay were enforced domestically.

Accordingly, two of Sanjel's employees requested that the bankruptcy court modify the stay in the recognition order. Sanjel argued that the Canadian stay should not be modified, as any such modification would be a distraction for the directors and officers and prevent them from devoting their full attention to the restructuring. Such arguments against modifying the stay were similar to those that ultimately prevailed in In re Nortel Corp, a case before the United States Bankruptcy Court for the District of Delaware; in that case, the bankruptcy court held that any parties asserting prejudice because of the Canadian stay should request relief in the Canadian forum, rather than through a modification to the US recognition order.57

Departing from the holding in In re Nortel Corp, the bankruptcy court in this case held that Section 1522(a) of the Bankruptcy Code permits a US bankruptcy court to modify a recognition order in order to narrow the stay enforced therein, provided that ‘the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.' Accordingly, the court under took an analysis of the balance of hardships; if such balance lay with the creditors seeking relief, then the recognition order (and the underlying stay) could be modified. Here, the court held that the hardships of the movants outweighed those of the debtor, and therefore modified the recognition order to limit the Canadian stay in the United States, thus allowing the employees to pursue their claims against the directors and officers. As part of this holding, the court emphasised that it would be unduly burdensome to require the employees to seek relief from the stay in the Canadian court where the claims they sought to assert were fully based on statutory rights created by United States law to protect employees within the United States.

1 J Eric Ivester is a partner at Skadden, Arps, Slate, Meagher & Flom LLP. Mr Ivester acknowledges and gratefully appreciates the substantial work and assistance provided by Bram Strochlic, an associate at the firm, in preparing this chapter.

2 Ben Leubsdorf, Wall Street Journal, ‘U.S. Economy Returns to Lackluster Growth', 27 January 2017; available at www.wsj.com/articles/u-s-gdp-grew-1-9-in-fourth-quarter-1485524015.

3 Josh Mitchell, Wall Street Journal, ‘The Numbers - March Jobs Report', 7 April 2017; available at https://blogs.wsj.com/briefly/2017/04/07/march-jobs-report-the-numbers-3/.

4 ‘March 2017 Bankruptcy Filings Down 4.7 Percent', United States Courts, 19 April 2017; available at www.uscourts.gov/news/2017/04/19/march-2017-bankruptcy-filings-down-47-percent.

5 Moody's Investor Services, ‘Moody's: Global Annual Default Count Tally Highest Since 2009, Despite Easing Spec-Grade Rate', 10 January 2017; available at www.moodys.com/research/Moodys-
Global-annual-default-count-tally-highest-since-2009-despite--PR_360516.

6 Moody's Investor Services, ‘Moody's: Global speculative-grade default rate continues downward trend in May', 9 June 2017; available at www.moodys.com/research/Moodys-Global-speculative-grade-default-rate-continues-downward-trend-in--PR_368021.

7 Id.

8 11 USC, Sections 101-1532.

9 The few exceptions include certain offsets under various financial contracts, taxes and the actions by certain governmental authorities who are asserting their police and regulatory powers. See 11 USC, Section 362(b).

10 Note, however, that holding companies of banks, insurance companies and brokers are eligible to file for Chapter 11 relief: thus the filings of Lehman Brothers Holdings Inc and the holding company of Washington Mutual Bank. Insurance companies are liquidated under state law procedures, which differ among the 50 states. Banks are liquidated under the Federal Deposit Insurance Act.

11 11 USC, Section 1107.

12 11 USC, Section 1104. Fraud is the main reason a trustee is appointed.

13 11 USC, Section 1103.

14 Note that if a Chapter 11 trustee is appointed, neither the debtor nor the Chapter 11 trustee has the exclusive right to file a plan. 11 USC, Section 1121(c)(1).

15 11 USC, Section 1121(d)(2)(A).

16 USC, Section 1125(b).

17 Id. In some cases, the disclosure statement can be approved at the time the plan is approved.

18 See 11 USC, Section 1129(a)(7).

19 Id.

20 11 USC, Section 1129(b)(1).

21 Consent is obtained through the votes of classes of claims and interests.

22 The payments may be simultaneous, provided that the senior creditor will eventually be paid the present value of their claims in full.

23 See, generally, 11 USC, Section 507(a).

24 11 USC, Section 365(f). See also 11 USC, Section 365(c) for additional assignment restrictions.

25 11 USC, Section 365(d)(1).

26 Each of the 50 states and the District of Columbia have adopted their own version of the UCC. All references to Article 9 contained herein are to Article 9 as set out in the model UCC. Practitioners are encouraged to refer to Article 9 as adopted in the jurisdiction relevant to each particular transaction, to consult local counsel, or do both.

27 See 11 USC, Section 544.

28 The reach-back period is generally 90 days, unless the transferee is an ‘insider' of the debtor, in which case the reach-back period is one year.

29 11 USC, Section 1125(g) of the Bankruptcy Code provides that an acceptance or rejection of the plan may be solicited from a holder of a claim or interest before the commencement of the case, provided that such solicitation complies with the applicable non-bankruptcy law.

30 The Bankruptcy Code requires that two-thirds in amount and more than one-half in number of a class of creditors vote to accept a plan for that class of creditors to be deemed to have accepted the plan. 11 USC, Section 1126(c).

31 Mary Beth Quirk, Consumerist, ‘Number Of Big Retail Bankruptcies In 2017 Already Equal To All Of Last Year', 1 April 2017; available at https://consumerist.com/2017/03/31/number-of-big-retail-
bankruptcies-in-2017-already-equal-to-all-of-last-year.

32 Kim Bhasin, Bloomberg, ‘Retailers Are Going Bankrupt at a Record Pace', 24 April 2017; available at www.bloomberg.com/news/articles/2017-04-24/retailers-are-going-bankrupt-at-a-record-pace.

33 Commonwealth of Puerto Rico v. Franklin California Tax-Free Trust, 136 S.Ct. 1938 (2016).

34 Czyzewski v. Jevic Holding Corp., 136 S.Ct. 2541 (2016).

35 See 11 USC, Section 363.

36 Marblegate Asset Mgmt. v. Educ. Mgmt. Corp., 75 F. Supp. 3d 592 (SDNY 2014).

37 MeehanCombs Glob. Credit Opportunities Funds, LP v. Caesars Entm't Corp., 80 F. Supp. 3d 507 (SDNY 2015).

38 Marblegate Asset Mgmt., LLC v. Educ. Mgmt. Fin. Corp., 846 F.3d 1 (2d Cir. 2017).

39 HR Rep No. 109-31(1), at 105 (2005), reprinted in 2005 USCCAN 88, 169.

40 In re Bear Stearns High-Grade Structured Credit Strategies Master Fund Ltd, 389 BR 325, 332 (SDNY 2008).

41 11 USC, Section 1504.

42 See Iida v. Kitahara (In re Iida), 377 BR 243, 257 n21 (BAP 9th Cir 2007) (‘Subsections (b)(2), (b)(3), and (c) [of Section 1509] make it clear that Chapter 15 is intended to be the exclusive door to ancillary assistance to foreign proceedings').

43 11 USC, Section 1504.

44 11 USC, Section 1502(4).

45 11 USC, Section 1516(c).

46 In re Tri-Continental Exch Ltd, 349 BR 627, 629 (Bankr. ED Cal 2006).

47 In re Bear Stearns, 389 BR at 336 (quoting Council Regulation (EC) No. 1346/2000, Paragraph 13).

48 Morning Mist Holdings Ltd v. Krys (In re Fairfield Sentry Ltd), Case No. 11-4376, 2013 WL 1593348, at *6 (2nd Cir 2013).

49 Id. at *8.

50 See Id. at *8.

51 11 USC, Section 1502(5).

52 Id. Section 1502(2).

53 In re Bear Stearns, 389 BR at 338.

54 Id. at 339 (‘In general, Section 1521(c) of the Bankruptcy Code limits the scope of relief available in a nonmain proceeding to relief related to assets located in the nonmain jurisdiction or closely connected thereto, while a plenary bankruptcy proceeding where the [debtors] are located would control the [debtors'] principal assets').

55 Order granting provisional relief pursuant to Sections 362, 365(e), 1519, 1520 and 105(a) of the Bankruptcy Code pending hearing on petition for recognition as a foreign main proceeding, In re Hanjin Shipping Co Ltd, 16-27041 (Bankr. D.N.J., September 9, 2016), ECF 102.

56 In re Sanjel (USA) Inc., et al., Case No. 16-50778-CAG (Bankr. W.D. Tex. July 29, 2016).

57 In re Nortel Networks Corp., 2013 BL 317273, at *3-4 (D. Del. Nov. 15, 2013).