Restructuring

Contributed by Yvanna Custodio
In this second installment of the Lookback Period – Six Weeks, we take brief holiday trips internationally, with two posts on eligibility for chapter 15 recognition and service of claim objections by U.S. mail to foreign claimants, and domestically to Delaware, with a series on Judge Sontchi’s decision on postpetition interest, as well as a post about a decision from the Court of Chancery of Delaware on the interpretation of indentures. 
Chapter 15 Eligibility
In Debra McElligott’s post entitled Chapter 15 for All:  SDNY Bankruptcy Court Holds that Indenture Governed by New York Law Constitutes “Property in the United States Under Section 109(a),”  the debtor, a company headquartered in Singapore, was held eligible to have its foreign proceeding recognized under chapter 15 of the Bankruptcy Code because it was an obligor under an indenture governed by New York law.  The post noted the split in authority regarding whether a foreign debtor seeking recognition of its foreign proceeding under chapter 15 must satisfy the requirements of section 109(a) of the Bankruptcy Code, which requires debtors to reside or have a domicile, place of business, or property in the United States.  The United States Court of Appeals for the Second Circuit said yes, while one Delaware bankruptcy court said no.
In the case before it, however, the United States Bankruptcy Court for the Southern District of New York held that the existence of the New York-law governed indenture was sufficient under section 109(a) even though the debtor did not have a place of business in the United States.  The court reasoned that a debtor’s contract rights are its intangible property and the location of such property is where the obligation is “meant to be discharged.”  The court found that the notes under the debtor’s indenture were to be discharged in New York, justifying eligibility for chapter 15 recognition.
Foreign Claimants
How do you serve foreign claimants in a bankruptcy proceeding?  In the post entitled One Fewer Reason to Fear the Hague Convention—New York Bankruptcy Court Permits Mailing of Claim Objection to Foreign Claimants, Maurice Horwitz observed that the United States Bankruptcy Court for the Southern District of New York may have made it easier for debtors to obtain relief from preferential payments to a foreign entity, even if the recipient is a foreign entity with no U.S. address.  As Maurice pointed out, under Bankruptcy Rule 7004, the standard for service of a summons and complaint upon an individual in a foreign country is governed by Rule 4(f)(1) of the Federal Rules of Civil Procedure, made applicable to adversary proceedings by Bankruptcy Rule 7004(a), which provides that, unless a defendant waives service of process, service must be “by any internationally agreed means . . . that is reasonably calculated to give notice, such as those authorized by the Hague Convention . . . .”
Although the debtors in the case Maurice discussed never served complaints in accordance with Bankruptcy Rule 7004(a), and thus their adversary proceeding seeking recovery of the preferential payments was dismissed, they opted to mitigate their losses from the preferential transfers by objecting to the claims of the foreign claimants.   The debtors relied on section 502(d) Bankruptcy Code, which prevents a recipient of an avoidable transfer from a debtor from receiving further distributions from the estate based on a claim filed in the bankruptcy case, unless the entity first turns over the property or repays the avoidable transfer.  The court recognized the split in authority over whether objections to claims of foreign entities are governed by the less costly and time-consuming Bankruptcy Rule 3007 (which allows service by U.S. mail) or the more difficult process required by Bankruptcy Rule 7004.   The bankruptcy court agreed with the debtors here, holding that the claims objections are “otherwise governed by” Bankruptcy Rule 3007; thus, service by mail was sufficient.
Postpetition Interest
In a series entitled Delaware Bankruptcy Court Addresses When, if Ever, Unsecured Creditors are Entitled to Postpetition Interest in Chapter 11, Scott Bowling dissected Judge Sontchi’s decision in the Energy Future Holdings chapter 11 cases.  In that case, the unsecured notes indenture expressly provided that the noteholders were entitled to postpetition interest at the contractual rate.  During the bankruptcy case, the indenture trustee filed a proof of claim asserting, among other things, entitlement to such postpetition interest.
The first installment focused on the court’s decision that postpetition interest is not a constituent part of an unsecured claim, rejecting the indenture trustee’s argument that postpetition interest was part of the allowed unsecured claim arising from the notes.  The second installment answered the question whether the best interests test under section 1129(a)(7) of the Bankruptcy Code entitles unsecured creditors to postpetition interest and, if so, at what rate.  The court held that the best interests test requires that unsecured creditors that are impaired and vote to reject the plan receive postpetition interest at the federal judgment rate when the debtor is solvent.  The third installment discussed the third component of the court’s ruling:  A chapter 11 plan need not provide postpetition interest to a rejecting unsecured class to cram it down under the absolute priority rule when equity is receiving a distribution, but it must provide the court the ability to order postpetition interest based on equitable considerations.  The fourth installment, which is in the pipeline, will examine the court’s discussion of the meaning of claim impairment under the Bankruptcy Code and whether unsecured creditors are entitled to postpetition interest in order to be unimpaired.
Indenture Issues
Brian Wells’s post entitled Distressed Investor Finds Covenant-Lite Loan Offers Little Protection—Quadrant Structured Products v. Vertin featured a decision from the Delaware Court of Chancery focusing on indenture interpretation.  In that case, a debt investor had purchased a company’s notes on the investment thesis that the notes were undervalued, believing the company’s equity investor (which was also a holder of the company’s notes) would dissolve the company and liquidate its assets.  As a result of the company’s positive performance, however, the company reduced its debt by purchasing the equity investor’s notes without purchasing any of the debt investor’s notes.  In response, the debt investor claimed that the company’s selective purchase of the notes violated the indenture’s redemption procedures and argued that the company violated the implied covenant of good faith and fair dealing.  The court rejected both arguments, finding on the first point that the redemption provision in the indenture was not intended to restrict the company’s actions in any way and, on the second point, that the debt investor was “seeking to obtain a right that it did not bargain for explicitly.”
Don’t pack your bags for the holidays just yet—the Weil Bankruptcy Blog will be back tomorrow for the final installment of this Lookback Period series.
Yvanna Custodio is an Associate at Weil Gotshal & Manges, LLP in New York.