More fundamentally, the ultimate goal of bankruptcy is to eliminate debt, but for many households today, that’s stronger medicine than necessary: They can pay their debts when the COVID shutdown ends and they return to work; they just need financial assistance in the interim to bridge a karacto.xyz Initially, following the passage of Chapter 15, a number of bankruptcy court decisions, such as the Second Circuit’s decision in In re Barnet, ii (imposing section debtor eligibility requirements in the United States to Chapter 15 foreign debtors) and the Fifth Circuit’s decision in In re Vitro SAB de CV, iii (refusing to grant third karacto.xyz /4-dynamic-trends-in-chapter · A Chapter 11 bankruptcy would allow J. Crew to stay in business, cut its borrowings and close weak stores to minimize costs. The situation remains fluid and plans could change, depending on karacto.xyz
Related videosIn Bankruptcy, what is Chapter 15
Through that process, a number of trends have emerged in recent U. However, recent cases have generally taken a more permissive approach, although this trend is not linear. While most decisions have increased prioritising the provision of broad relief to Chapter 15 debtors and have moved the jurisprudence away from formalistic procedural delays, U.
Once a debtor has obtained approval of its restructuring plan through its foreign proceeding, it is not uncommon for that approval to be appealed in whole, or in part, in foreign courts and for the debtor to nevertheless push forward with seeking enforcement of the plan in the United States.
This context implicates the thorny problem of whether the Chapter 15 court should delay enforcement in the United States pending an ongoing foreign appeal.
This pattern suggests that courts will perform a fact-specific inquiry on the question and so counsel to a Chapter 15 debtor seeking enforcement of its plan over a foreign appeal should accordingly be sure to develop a record to support that relief.
A group of shareholders appealed the plan confirmation in Brazil without successfully obtaining a stay pending appeal, with the appeal still pending when Judge Lane was asked to enforce the Brazilian plan in the United States. In deciding to enforce the Brazilian plan despite the appeal, Judge Lane emphasised his broad discretionary authority, including the authority to grant relief consistent with principles of comity. Similarly, in In re Agrokor DD , vi Judge Glenn refused to delay enforcement of the restructuring and settlement agreement approved by a Croatian insolvency court despite a potential pending dispute in the UK that may alter the enforcement of the plan with respect to English law-governed debt.
In that case, Agrokor DD, a holding company of food-related companies, reached a settlement agreement with creditors holding 78 per cent of claims. Judge Glenn agreed to enforce the terms of the settlement agreement with the caveat that he would not enter an order until the settlement agreement became effective in Croatia , even though there was a possibility for an English court to modify the settlement agreement.
Although the English court had also recognised the proceeding in Croatia, creditors there had argued that the English court should decline to enforce the settlement agreement under an English common law rule known as the Gibbs Rule, which provides that rights under English-law governed debt can only be adjudicated by English laws and cannot be discharged in a foreign proceeding.
While these cases appeared to demonstrate a trend of Chapter 15 courts avoiding imposing a delay in enforcement of an unstayed foreign court-approved plan, a more recent decision from shows that courts will not uniformly enforce unstayed foreign plans. There, Judge Glenn stayed the motion to enforce a confirmed plan in Brazil pending a decision from the Brazilian Court of Appeals.
Crucially, as in Oi , no stay on the effectiveness of the plan was granted in Brazil. Judge Glenn reasoned that there was no purpose in enforcing the confirmed plan in the United States if it were to be substantively reversed on appeal.
While noting that a foreign court-approved plan can be enforced in the exercise of comity, Judge Glenn explained that the interests of creditors, which must also be sufficiently protected, must take precedence even if the result is a delay in enforcement of the restructuring. Interestingly, notwithstanding the apparent inconsistency between QGOG and Oi , Judge Glenn underscored his view that his decision was consistent with his prior opinion from Agrokor , where he had declined to enforce the settlement agreement until it became effective in the foreign jurisdiction.
However, the two cases may have had important differences in terms of their practical effects. Agrokor involved a small delay on enforcement until the settlement agreement became effective abroad, resulting in a reasonable approach given that the United States should not accelerate enforcement over a foreign tribunal. On the other hand, the delay in QGOG is more significant and could potentially extend while a Brazilian appellate court reviews the confirmed plan on a timeline that is, itself, somewhat uncertain.
Moreover, the decision in QGOG effectively granted a stay pending appeal when no such stay was granted in the foreign court, in direct contradiction of the holding in Oi. Those who were hoping that Oi established a bright-line rule that foreign appeals absent a stay will not delay U. Indeed, QGOG will give renewed steam to dissident creditors who wish to arbitrage between different bankruptcy systems and hold up enforcement of a plan by invoking due process concerns.
For instance, Judge Glenn noted that the Brazilian proceedings had previously been reversed by appellate decisions and that, unlike in Agrokor where no objections to recognition of the foreign plan were raised, several objections were raised before the U.
At the start of a Chapter 15 case, the first question a U. However, this approach is not without exceptions; courts are often vigilant of bad faith on the part of either the debtor or a creditor seeking recognition and may restrict the scope of relief accordingly to address inequities.
Two recent decisions by Judge Glenn in the Southern District of New York show a willingness to bend the traditional concept of COMI in order to provide the debtor with Chapter 15 relief necessary to its reorganisation. For the other debtors, Judge Glenn recognised the Brazilian proceeding as the respective foreign main proceeding. QGOG illustrates that even where COMI analysis did not result in foreign main recognition, the court may still grant broad discretionary relief to ensure uniform treatment for the debtors and reduce the likelihood of procedural headaches that may compromise the restructuring.
Nevertheless, this recent trend of flexibility to COMI analysis is not without exceptions. Frequently, courts have refused to give a blank cheque in COMI analysis and will still scrutinise whether the party seeking recognition acted in bad faith. At a protective order hearing, Judge Lane suggested that it may be theoretically possible to limit the scope of recognition relief granted to a foreign representative who filed in bad faith, but left the issue to be determined at a later date.
Recognition is only the beginning of the Chapter 15 process. Following recognition, a U. The question of the scope of appropriate relief often tests the usefulness of comity as a guiding principle. Two recent cases demonstrate that while courts may prioritise comity to grant broad relief under Chapter 15 to implement a foreign court-approved restructuring, there are also limits to comity as a guiding principle.
Those seeking to predict the scope of relief granted by a U. Throughout the relatively short existence of Chapter 15, the concept of comity to foreign tribunals has been at its heart. Often, the principle of comity has led U. This trend can be seen in a recent case, in which a Delaware bankruptcy court compelled a creditor to resolve the priority of its claims through a foreign proceeding, even when a choice of law clause pointed to the United States. The Italian restructuring was later recognised in the United States as a foreign main proceeding.
The U. Judge Silverstein sided with the foreign representative, holding that the validity and amount of the claims could be determined by a Florida court, but any dispute over priority and distribution must be resolved in Italy. The view of comity taken by the court in Energy Coal is consistent with a modern, uniform view of cross-border insolvencies, showing U.
Other decisions nonetheless make clear that there are limits to comity as a guiding principle. In Platinum , the debtor was a Cayman Islands limited partnership that was placed into liquidation in the Cayman Islands, which proceeding was later recognised as a foreign main proceeding. Assignments are generally intended for business liquidations, not to reorganize or rehabilitate a business.
Under an assignment, an independent assignee is selected and acts as a fiduciary to the creditors of the business. The assignee is similar to a bankruptcy trustee and is responsible for liquidating the assets of the business at maximum value. If all the creditors are fully paid through the assignment, including the fees and costs of the assignee, then any residual interest or funds will be returned to the owners or shareholders of the business.
Initiating an Assignment Under an assignment, the business assigns its assets to a new assignment estate in writing. The assignment estate is represented by the assignee. The assignee is usually selected by the business, although creditors can sometimes influence the selection process. There are many organizations that specialize in serving as assignees under state law assignments.
It is important for management to select a reputable assignee so that creditors will have confidence in the process. An experienced assignee can also ease the process for management. In connection with the assignment, management is required to file a schedule of assets and liabilities as well as a list of names and addresses of all creditors of the business. The assignee will then notify the creditors on the list that an assignment has been filed. The assignee will also establish a deadline by which all creditors must file a claim with the assignee.
While assignments do not have the "automatic stay" injunction that is found under the bankruptcy laws, practically speaking, the business is not likely to endure continued collection efforts after an assignment. Continued collection effort against a business that has assigned its assets to an assignment estate is a meaningless exercise because the business is nothing more than an empty shell with no assets. When the business wants to sell its assets but the sales price is not sufficient to repay all of its debts, selling the assets through an assignment may present a more efficient alternative to selling the assets in a bankruptcy case.
The buyer, if one has been located, will often dictate to the business whether it would prefer to purchase the assets of the business through a bankruptcy or an assignment. In an assignment, the buyer will receive a "bill of sale" from the assignee that the assets are transferred free and clear of claims of creditors.
The sale in an assignment is likely to occur with very little delay or disruption to operations. Upon selection of the assignee, management can immediately work with the assignee and the buyer to market the assets of the business to third parties in advance of the assignment in order to assure the assignee that the value of the assets to be sold is being maximized.
While an assignee is required to maximize the value of the assets to be sold and creditors have the right and ability to voice concerns to the assignee regarding a proposed sale, the assignee is typically empowered with the ability to carry out a sale without a state court order.
The assignment statutes typically do not provide a readily available vehicle by which dissenting creditors can object to a sale. One significant disadvantage to selling assets through an assignment is that the assignee has no ability to force the transfer of leases and contracts absent the consent of the lessor or other party to the contract. In a bankruptcy case, such consent is usually not necessary and the bankruptcy court could force the transfer of certain leases and contracts to a third party if defaults are cured and there is an adequate showing that the third party will be able to perform in the future.
Therefore, where the value of the business is in its long term real property leases used at its retail locations or its franchise agreement, a bankruptcy case is likely to be more advantageous than an assignment when the lessor or franchisor is unwilling to consent to a sale and transfer of the leasehold or agreement.
In addition, in a bankruptcy case, the buyer is likely to receive a more comprehensive "bill of sale" in the form of a court order that allows the assets to be sold free and clear of all liens, interests and encumbrances and a court finding that the buyer is a "good faith purchaser," which protects the buyer from losing the benefit of the sale in the event of an appeal of the sale.
However, there are costs, risks, and delays associated with a sale in a bankruptcy case both chapter 7 and chapter 11 , which may cause an assignment to be more appealing to the buyer. A sale in a chapter 7 bankruptcy may result in an extended cessation of operations, which can often be fatal to selling a business as a going concern or to fully capturing the good will value of a business.
The filing of a chapter 11 bankruptcy case with the goal of selling substantially all assets in the early phase of the case can also be problematic. First, a chapter 11 bankruptcy case where the business acts as the trustee is often prohibitively expensive for small to medium size businesses. An experienced business bankruptcy attorney will usually require a sizable fee retainer to be paid before filing the case.
Second, although management can continue to operate the business, absent exigent circumstances, 20 to 30 day's notice of the sale is required to be given. Third, the bankruptcy court is likely to pay closer scrutiny to the sale of substantially all assets of the business in the early phase of a chapter 11 case than a sale in a chapter 7 case because the goal of a chapter 7 case is to liquidate assets whereas the goal of a chapter 11 case is to reorganize and rehabilitate the business.
Avoidance Powers of the Assignee In addition to selling assets, in many states, the assignee also has powers to avoid transfers made by the business during certain statutory periods prior to the assignment.
These recoveries include transfers made to creditors in the 90 days preceding the assignment filing that allowed the creditors to receive more than they would have in a hypothetical bankruptcy case, as well as transfers of assets to third parties pursuant to which the debtor received less than reasonably equivalent value, i.
Distribution of Assets After the administration of assets and the expiration of the deadline to file claims, the assignee will review the claims that are filed. If a claim is not timely filed, the claim will normally be disallowed. A creditor with a lien in the assets of the business will retain such lien in the assets, even after the assignment. The assignee will usually file objections with the state court if a claim is disputed.
Upon resolving all claim disputes, the assignee will distribute the funds in the assignment estate first to any creditor that has a valid lien on assets of the assignment estate, second to pay the fees and costs associated with administering the assignment estate, third to pay priority unsecured creditors, fourth to pay all other creditors, and fifth to pay the owners of the business.
If the funds are not sufficient to pay a particular class of creditors in full, the creditors in that class will receive pro rata payments and the classes junior to that class will not receive payment. Once the assignee is satisfied that all the assets of the assignment estate have been liquidated and all claims have been paid in the priority scheme set forth by statute, the assignee will prepare a final accounting and request the state court to close the case.
The Costs of an Assignment While assignments are usually a little less expensive than chapter 7 bankruptcy liquidations, and significantly less expensive than chapter 11 bankruptcy reorganizations, the process can still be costly.
The fees of an assignee are negotiated as part of the assignment contract executed with the business when the assignment takes place. The assignee's fees are often calculated based on a percentage of the funds disbursed to creditors, similar to a chapter 7 bankruptcy trustee.
Some states place maximum limits on the amount that an assignee can charge an assignment estate. In addition, the assignee has the right to retain its own professionals, such as lawyers or accountants, who typically charge the assignment estate for fees on an hourly basis and for all out of pocket expenses. Rights and Remedies of Creditors in an Assignment Unlike bankruptcy, the creditors' rights and remedies in an assignment are usually not expressly provided for by statute and it may be difficult for dissenting creditors to object to actions of the assignee.
A creditor can argue that an assignee has breached its fiduciary duties to the creditors although such claim can be difficult and expensive to establish. In addition, if a creditor is unhappy that the business has used the assignment process, a creditor may institute an involuntary bankruptcy proceeding by filing an involuntary bankruptcy petition with the bankruptcy court.
The bankruptcy court would then decide whether to: 1 allow the bankruptcy process to be used to liquidate the assets of the business; or 2 to "abstain" and allow the state law assignment process to continue under the supervision of the state court. In other words, an assignment could force the business into a bankruptcy case, notwithstanding the business's careful deliberation and evaluation of its non-bankruptcy alternatives. Learn more about business bankruptcies-and how to save your business-in Bankruptcy for Businesses Entrepreneur Press.
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