Restructuring

Contributed by Sally Willcock
One aspect of the Truvo Group restructuring worthy of particular note is the preliminary injunction issued by Bankruptcy Judge Gonzalez in the Southern District of New York that prohibited named defendants (including unknown defendants) and all other creditors of the Truvo debtors from taking certain actions against the Truvo debtors’ non-debtor European operating subsidiaries.  Specifically, the U.S. bankruptcy court enjoined these parties from enforcing their rights under guarantees that the European operating subsidiaries had given in respect of the debtors’ prepetition financing facilities.  Truvo USA v. The Bank of New York (In re Truvo USA LLC), Case No. 10-03341 (AJG) (July 14, 2010 Bankr. S.D.N.Y.).  The injunction also prohibited any insolvency or similar proceedings being initiated against the European entities in any jurisdiction.

By way of background, the Truvo Group is a Belgian-based print and online directories publisher that also has operations in Ireland and in Portugal.  On July 1, 2010, Truvo USA and four other U.S. holding companies voluntarily filed for chapter 11 protection after more than 70% of the Truvo Group’s senior lenders had signed a Plan Support Agreement that contemplated a debt for equity swap.  The plan also proposes to compromise the debt guaranteed by the European operating subsidiaries.  The Truvo debtors are holding companies that have no revenue-generating operations.  Instead, they depend upon upstream revenues and capital support from their European operating subsidiaries and intermediate holding companies in the form of guarantees of both their senior and high yield finance facilities.
In requesting the U.S. bankruptcy court to enjoin actions against the European non-debtor entities, the debtors expressed concern that during the pendency of the debtors’ chapter 11 cases holders of high yield junior notes or dissident senior lenders could take action to collect or enforce the guaranteed debt against the European non-debtor entities.
On the petition date, Judge Gonzalez entered a temporary restraining order granting ex parte injunctive relief under sections 105(a) and 362(a) of the Bankruptcy Code.  After a hearing on July 14, the court entered a preliminary injunction granting the same relief.  The injunction expires on the earlier of November 11, 2011 and the date on which the Plan Support Agreement is terminated.
The debtors themselves acknowledged that the requested injunction, extending as it did to protect the European non-debtor entities, was unusual, but they were able to point to the decision last year in Lyondell Chem. C. v CentrePoint Energy Gas Servs. Inc (In re Lyondell Chem Co.), 402 B.R. 571 (Bankr. S.D.N.Y. 2009), in which an injunction of similar scope had been granted.  Moreover, bankruptcy courts in a number of other contexts have used their equitable powers under section 105(a) to preliminarily enjoining actions against non-debtors.  What makes both Lyondell and now Truvo appear different is the extraterritorial nature of the injunction.
In Truvo, the debtors were able to satisfy Judge Gonzalez that the preliminary injunctive relief they had requested was necessary to prevent them from suffering imminent and irreparable injury, which would threaten their ability to consummate a plan of reorganization, and which would destroy value in the debtors’ estates.  The judge concluded that the issuance of a preliminary injunction appeared to be necessary to preserve and maximise the value of the Debtors’ estates and was in the best interests of the debtors, their estates and their creditors.  Judge Gonzalez agreed that,  if steps were taken to enforce the guaranteed debt against the European non-debtor entities, this might subject these entities to involuntary insolvency proceeding or enforcement actions, which would make it difficult, if not impossible, to maintain the going concern value of the Truvo group.  Further, the court concluded that temporary delay imposed by the injunction would not prejudice the other creditors to any degree comparable with the prejudice that all creditors as a group and all parties in interest in the Truvo debrors’ chapter 11 cases would suffer if the enforcement actions were not prevented, so that the balance of the equities weighed in favour of the debtors.
It remains to be seen whether the injunction granted in this case is an illustration of a developing trend, in an increasingly global business environment, of the U.S. bankruptcy courts granting injunctive relief with a wide jurisdictional reach and to protect non-debtor entities that might otherwise not been entitled to seek protection under chapter 11.  It also remains to be seen to what extent any such injunctive relief actually may be enforced against creditors that otherwise have no contacts with the United States.