Until recently, In re Atari, Inc. was a closed case, but, in a recent decision, the bankruptcy court for the Southern District of New York found that “other cause” existed to reopen the bankruptcy cases.
Atari, Inc. and certain of its affiliates (the “Debtors”) filed for chapter 11 in January, 2013. Atari Europe SAS and Atari S.A. (the “Atari Entities”), which were affiliates of the Debtors but not debtors themselves in the chapter 11 proceeding, were the obligor and guarantor, respectively, under a Credit Agreement with Alden Global Value Recovery Master Fund, L.P. (“Alden”), secured by intellectual property assets of the Debtors and intercompany claims the Atari Entities held against certain Debtors. Alden also provided post-petition financing to the Debtors. Several months into the case, the Debtors and Atari S.A. proposed a plan of reorganization including a global settlement with Alden that provided for amendments to the Credit Agreement and mutual releases of claims. In addition, the plan of reorganization provided that the bankruptcy court would retain exclusive jurisdiction to determine disputes arising under the plan. The plan was confirmed and went effective on December 24, 2013.
Over a year later and after the bankruptcy cases were closed, a dispute arose with respect to the payment terms under the Credit Agreement. Alleging that no payment was due under the Credit Agreement as amended, the Atari Entities failed to make a payment that Alden expected, and Alden moved to foreclose on the collateral. The Atari Entities brought three suits in the Commercial Court of Paris; one seeking a statutory grace period under French law for the purported default under the Credit Agreement, one seeking to recover alleged overpayments of interest under the Credit Agreement, and one seeking damages for Alden’s allegedly improper foreclosure on collateral.
Three months after the suits were filed in the Commercial Court of Paris, Alden filed a motion in the bankruptcy court to reopen the bankruptcy cases, to require compliance with the release provisions of the plan, and to enjoin further litigation in the Commercial Court of Paris.
Reopening for Cause
Under section 350(b) of the Bankruptcy Code, a bankruptcy case can be reopened “to administer assets, to accord relief to the debtor, or for other cause.” “Other cause” is not defined in the Bankruptcy Code and bankruptcy courts are given broad discretion in deciding whether to reopen a case. Courts in the Southern District of New York evaluate six factors to determine whether other cause exists to reopen a bankruptcy case. These factors include:
- the length of time the case was closed;
- whether another forum has jurisdiction over the matter that is the basis for reopening the case;
- whether prior litigation in the bankruptcy court determined that another court would be the appropriate forum;
- whether any parties would suffer prejudice should the court grant or deny the motion;
- the extent of the benefit to any party by reopening; and
- whether it is clear at the outset that no relief would be forthcoming if the motion to reopen is granted.
In Atari, all six factors weighed toward reopening the bankruptcy cases. First, the bankruptcy court determined that the length of time that the case had been closed was not a significant factor in deciding whether to open the case. Instead of noting the length of time from the date the bankruptcy cases had been closed, the bankruptcy court instead relied on the fact that Alden’s motion to reopen had been filed only three months after the Atari Entities filed the three actions in France.
For the next four factors, the bankruptcy court primarily focused on the terms of the global settlement and agreed plan of reorganization. The court found that the global settlement, including the participation of the Debtors in the amendments to the Credit Agreement, was an integral part of the confirmed plan of reorganization. As part of that global settlement and plan, the parties agreed that the bankruptcy court would have exclusive jurisdiction to hear disputes related to the enforcement of the plan. As a result, the bankruptcy court found that, even though the Commercial Court of Paris was available as an alternative forum, the bankruptcy court had exclusive jurisdiction to interpret and enforce its own prior orders. In addition, even without the grant of exclusive jurisdiction, the bankruptcy court found that it was more closely connected to the releases granted under the plan and, thus, the more appropriate forum for related disputes.
Similarly, the bankruptcy court found that the third and fourth factors weighed in favor of granting Alden’s motion because the bankruptcy court, in confirming the plan, determined that it would have exclusive jurisdiction over disputes under the plan, and determined that Alden would be prejudiced if that portion of the global settlement and plan were not enforced. Because the bankruptcy court was required to look at whether any party would be prejudiced, the court found that the Debtors could not reasonably argue that they would be prejudiced in the very forum that they selected in their plan. On the flip side of prejudicial, the bankruptcy court found the enforcement of the rights that were bargained for in connection with the plan was sufficiently beneficial to warrant reopening the bankruptcy cases.
Lastly, though the parties agreed that the bankruptcy court did not need to reach the merits on the question of whether the plan releases were applicable to the Atari Entities’ claims in the Commercial Court of Paris to rule on the motion to reopen, the bankruptcy court, after hearing competing expert evidence on French law, found that Alden had made a colorable argument that the releases entitled Alden to an injunction barring the actions in the French court.
In short, the court held that the interplay of the agreed releases and the agreed retained jurisdiction for the bankruptcy court justified the reopening of the Atari, Inc. bankruptcy cases. The bankruptcy court’s decision is not only a good roadmap to the relevant factors for reopening a bankruptcy case, but also a clear reminder to carefully consider every provision of a proposed plan in light of the circumstances of the case, including applicable jurisdiction.
Brenda Funk is an Associate at Weil Gotshal & Manges, LLP in Houston.