Saturday was the final day of the National Conference of Bankruptcy Judges. The panels focused on ethics issues of the future, the role of empirical research and international insolvency.
The first topic up on the ethics panel was reasonable investigation. The hypothetical involved a lawyer who was unwittingly asked to facilitate money laundering and purchase of estate assets with hidden assets. Recent cases to be aware of include In re Soare, 493 B.R. 158 (Bankr. D. Nev. 2013)(attorney who failed to investigate whether judgment was nondischargeable and then refused to represent debtor in nondischargeability action required to disgorge fees) and In re Goodman, No. 12-1643 (9th Cir. BAP 9/5/13)(sanctions against attorney for negligent representation affirmed)(unpublished opinion can be found here).
We learned that ABA opinion 465 says that there is not a per se prohibition on attorneys offering groupons. (That doesn’t mean it’s a good idea, though).
The Ethics 20/20 Commission is working on guidelines that would allow foreign lawyers to appear in U.S. proceedings on a pro hac vice basis. However, a U.S. lawyer must reserve the absolute right to advice on American law.
Hunter v. Virginia State Bar, 744 S.E.2d 611 (Va. 2013) is an interesting case on the intersection between blogging and State Bar advertising requirements. Hunter published a blog titled “This Week in Richmond Criminal Defense,” which was accessible from his firm’s website. The overwhelming majority of posts were about cases in which he obtained favorable results for his clients. The blog did not contain any disclaimers. The Virginia Supreme Court found that Hunter’s blog constituted commercial speech subject to regulation by the Bar. The Court found that the Bar could require Hunter to place disclaimers on his posts about his own cases to the effect that the results in the given case did not guarantee the same results for other people. However, it found that the First Amendment allowed Hunter to discuss public details of his cases without the client’s permission. A dissent would have found that the First Amendment prevented the Bar from regulating the blog.
Muniz v. United Parcel Service, 2011 U.S. Dist. LEXIS 11219 (N.D. Cal. 2011) dealt with whether the defendant could subpoena the plaintiff’s lawyer’s postings to a listserv. The Court quashed the subpoena. The case illustrates the danger of revealing work product by posting on a listserv.
The panel on empirical research features three academics: Dean J. Richard Leonard of Campbell University School of Law, Prof. Theodore Eisenberg of Cornell Law School and Prof. Melissa Jacoby of UNC School of Law.
Until recently, Dean Leonard was a bankruptcy judge. He said that when he took the bench, he asked what he should read and was referred to Warren and Westbook’s empirical book, As We Forgive Our Debtors. He pointed out that empirical studies published by just one law review, the American Bankruptcy Law Review, were cited in 32 opinions ranging from trial courts to the Supreme Court.
Prof. Eisenberg said that empirical research can be used to disprove the conventional wisdom about bankruptcy. He referred to the view that the American bankruptcy system is too pro-debtor and noted that the concept of a Debtor-in-Possession is shocking to other countries. He pointed to empirical studies showing that U.S. reorganization cases paid 20% more to unsecured creditors than those in other countries. Of twelve studies looking at payouts to unsecured creditors in different countries, the top five payouts were in American bankruptcies. His conclusion was that the combination of the absolute priority and the Debtor-in-Possession led management to propose a higher dividend to unsecured creditors than plans in other countries.
He also talked about the importance of studying fees. He said, “From the day you graduate, (fees) will control your life.” He said that big fees made news while small ones did not. In this regard, he said that newspapers were just doing their jobs. However, he said that the headlines did not reflect reality. In smaller cases, the fees awarded average 17.6-21.6% of the assets of the debtor. However, when the assets involved exceeded $100 million, the fees averaged 1-2% of assets. He contended that fees charged by other professionals, such as investment bankers, charged more in fees.
In an interesting study, courts denied requested fees at the following rates:
New York 4.50%
Everyone else 2.29%
While I did not catch his conclusion, mine would be that you can’t assume that judges in Delaware and New York always march in lockstep.
Prof. Jacoby expressed the concern that empirical studies were too reactive. She said that there were numerous studies framed in response to concerns that debtors were getting too much relief in bankruptcy. She said that this approach was a limiting factor on the questions that academics ask and that academics should be more proactive in asking questions that others were not raising.
Two random points that she made were that academics need more theory in empirical research and that empirical research meant observation and that academics should take the time to observe bankruptcy courts at work.
Prof. Eisenberg got on a soapbox about parties making unsubstantiated claims about the legal system. He said:
You shouldn’t be able to stand in front of an audience and make nonsensical claims (with statistics). The Chamber of Commerce does it every day.
He went on to say that we study areas that we care about, such as economic statistics. He said:
You couldn’t say that the inflation rate is 20% (and get away with it). However, you could say that plaintiffs are recovering multimillion dollar verdicts because of crazy juries.
The learned professors also made two seemingly contradictory statements. On the one hand, they stated that there is a lot of shoddy empirical research out there and that empirical studies should not be blindly accepted. On the other hand, they said that the appeal of empirical research was the “ability of completely untrained people to get into it.” I think that the point here was that anyone can pick a facet of the legal system to observe, but that it is helpful to partner with statistics geeks to help tell you the significance of what you observed. (TBLB: My words, not theirs).
International Insolvency: The Good, the Bad and the Ugly
The international insolvency panel largely focused on three cases: In re Lehman Brothers Holdings, Inc., No. 08-13555 (Bankr. S.D. N.Y.) (the good), In re Nortel Networks, Inc., No. 09-10138 (Bankr. D. Del.) (the bad) and Ad Hoc Group of Vitro Noteholders v. Vitro, SAB de CV (In re Vitro, SAB de CV), 701 F.3d 1031 (5th Cir. 2012) (the ugly). (The Clint Eastwood reference came from panelist Bruce Leonard). The panelists were Judge James Peck from the Southern District of New York, Marc Adams of Wilkie Farr, Andrew Leblanc from Milbank Tweed and Bruce Leonard from the Ontario office of Cassels Brock. In some cases, my notes do not indicate who said what so I will have to attribute comments generically to the panel.
Before getting into the cases, Judge Peck provided an introduction to chapter 15. Judge Peck noted that according to section 1501, the purpose of chapter 15 is to “incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of” increasing cooperation between courts of the United States and other countries. However, as illustrated by the cases that followed, there are factors that get in the way of those purposes.
According to Mr. Abrams, chapter 15 is “the exclusive portal through which foreign representatives can seek assistance of the U.S. bankruptcy courts.” Chapter 15 allows an American court to recognize and enforce orders and decrees from foreign courts. It is not a reorganization chapter like chapter 11, but merely allows American courts to assist foreign courts with regard to assets of foreign entities in the United States.
Under Chapter 15, a foreign representative may seek recognition of a proceeding in another country as either a foreign main proceeding (Main Proceeding) or a foreign non-main proceeding (Non-Main Proceeding). A Main Proceeding is one that is filed in the company’s center of main interest (COMI). A Non-Main Proceeding is one filed anywhere else that the company has non-transitory economic activity. A proceeding filed somewhere that is neither a COMI or has non-transitory economic activity is not entitled to recognition.
Unlike the U.S. venue laws, the COMI determination pays little attention to the company’s domicile or state of incorporation. Instead, it is more of a nerve center test. While this may seem clear, Judge Peck commented that “what is written down is not necessarily clear until the circuit court tells you it is clear.” In the recent case of Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013), the Second Circuit held that COMI is determined as of the date of filing of the chapter 15 petition, so that activities of the foreign representative prior to the filing of the chapter 15 can change what would have otherwise been the COMI.
The importance of being a Main Proceeding vs. a Non-Main Proceeding turns on sections 1520 and 1521. Under section 1520, a Main Proceeding (which is a proceeding filed in the COMI) is entitled to automatic relief, including enforcement of the automatic stay and sales free and clear of liens for assets in the USA. Under section 1521, there are various forms of discretionary relief that can be granted to either a Main Proceeding or a Non-Main Proceeding.
The panelists stated that Lehman Brothers and Nortel Networks shared many similarities. Both were large entities with multi-national operations that took a major hit after the freeze of the credit markets in September 2008. Nortel filed in September 2008, while Lehman Brothers held on until January 2009. (TBLB: The role of the U.S. government in orchestrating the filing of Lehman Brothers is well documented in the movie Too Big to Fail in which a committee of top economic advisors decides that Lehman Brothers should go ahead and file chapter 11 at which point someone asks whether the company should be informed).
In the Nortel case, the business operated in 140 countries through a series of five business lines as opposed to operating through subsidiaries. It filed proceedings in the United States, Canada and the U.K. The U.S. claimed priority based on the location of the assets, Canada claimed priority based on the company’s headquarters and the U.K. claimed dibs based on the location of the intellectual property. The United States and Canadian proceedings recognized each other as contemplated by UNCITRAL. The U.S. also recognized the U.K. proceeding as a Non-Main Proceeding. However, the Canadian and U.K. administrators did not seek recognition of each other’s proceedings.
Based on the view that the company’s assets were melting ice cubes, the three administrators quickly agreed upon a sale of the company’s assets for $7 billion. However, four years later, the funds continue to sit in escrow because the parties could not agree upon a formula for allocating the sales proceeds. After three failed mediations, a trial has been scheduled for 2014 with at least four competing formulas for distribution.
Mr. Abrams commented that the Model Law was not well equipped to deal with the situation where there were three competing COMIs.
Judge Peck stated:
It is hard to design a law that gets to good results. People have to get to good results.
The panel’s consensus was that because the Nortel assets were sold prior to obtaining an agreement for distribution of the proceeds that the parties lacked sufficient incentives to cooperate once the money was in the lockbox.
According to Judge Peck, in Lehman Brothers, on the other hand, the assets were “not easily monetized” and “had to be cultivated.” The only way to unlock the value was through a consensual plan, as opposed to Nortel where the creditors were in gridlock. In Lehman Brothers, the parties negotiated a protocol for international cooperation and “based on the excuse given by the protocol, people talked to each other and developed a plan.”
Vitro was a large Mexican glassmaker with U.S. debt. It obtained approval of a concurso in Mexico and sought recognition in the United States. In Mexico, all creditors vote together in a single class, including insiders and intercompany claims. Furthermore, approval of a concurso constitutes a novation which releases all guarantors. Finally, because a focus of the Mexican law is preserving jobs, a concurso must have the approval of equity.
When Vitro sought recognition in the U.S., Judge Hale said no based primarily on section 1506, which states that relief need not be granted if it would be “manifestly contrary to the public policy of the United States.” I have previously written about Judge Hale’s decision here. The Fifth Circuit affirmed Judge Hale, but on different grounds. You can find the Fifth Circuit opinion here. The Fifth Circuit ruled that the granting of non-debtor releases is an issue that has divided the circuit courts. Because federal courts do not agree upon this issue, allowing non-debtor releases could not be “manifestly contrary.” Instead, the Fifth Circuit held that:
On the basis of the foregoing analysis, we hold that Vitro has not met its burden of showing that the relief requested under the Plan—a non-consensual discharge of non-debtor guarantors—is substantially in accordance with the circumstances that would warrant such relief in the United States. In so holding, we stress the deferential standard under which we review the bankruptcy court’s determination. It is not our role to determine whether the above-summarized evidence would lead us to the same conclusion. Our only task is to determine whether the bankruptcy court’s decision was reasonable.
Opinion, p. 58.
The panel was critical of this opinion, asking whether it meant that the United States would be exporting its laws to other countries. Judge Peck stated:
Recognition was intended to be a presumption to facilitate the reorganization goals of other jurisdictions. Vitro seems to have changed that model.
Mr. Abrams argued that:
The panel put blinders on when applying a plain meaning approach.
Abrams also said that he thought Judge Hale had the right approach in examining whether the result was manifestly contrary to the public policy of the United States, even though he did not agree with the Judge’s conclusion.
The panel noted that the Fourth Circuit has opined that Courts should avoid reaching the section 1506 issue to avoid retaliation. Judge Peck stated that:
I defer to a court that is at least civilized.
He gave the example of a case decided by a local court in India that he had deferred to.
In the Fairfield Sentry case, the Second Circuit was asked to address the “manifestly contrary” issue in the context of a foreign proceeding in which the records had been sealed. It held that open records were not a matter of such importance to US policy as to negate recognition.
Mr. Abrams concluded with the remark that
It is not time to trigger an Amber Alert for Chapter 15 and international cooperation yet.
This is a very good conference. However, when I attend, I am usually pulling down long days and am mainlining coffee to stay awake. I can’t help but notice that some very smart people are not very dynamic speakers. If you are speaking at a conference as prestigious as the National Conference of Bankruptcy Judges, is it not too much to ask that you look up from your notes and speak loudly enough to be heard. If you sound bored with your own presentation, you are probably putting your audience to sleep. I would also like to put in a word for more diversity in program formats. Four people on a one hour panel who don’t interact with each other is nothing more than a series of short monologues. While brevity is much to be desired, fifteen minutes or less is not enough time to tell me something I don’t already know. When it comes to putting together a panel, quality of content is to be desired over quantity of talking heads. If you are going to put multiple people up there, make them interact with each other and preferably disagree on some things. In the words of Robin Williams, “If you are going to go into the jungle, clash.” The student loan debate was a good example of how to keep things lively.