August 31, 2012: Second Circuit Adopts Abuse of Discretion Standard of Review for Equitable Mootness Decisions

In In re Charter Comm’cns, Inc., 2012 WL 3764706 (2d Cir. Aug. 31, 2012), the Second Circuit adopted an abuse of discretion standard for reviewing equitable mootness determinations by district courts, while also reaffirming the Second Circuit’s rebuttable presumption of equitable mootness upon substantial consummation of a debtor’s plan. On appeal before the district court, Charter creditors challenged the validity of certain provisions in Charter’s plan of reorganization, including third party releases against Paul Allen, an investor and the chairman of Charter’s board of directors, and other directors, as well as a $375 million payment to Allen. These provisions were intended to induce Allen to comply with and facilitate the debtors’ reorganization. Among other things, the appellants sought to unwind the third party releases and cash payment to Allen. However, the debtors’ plan became effective and was implemented prior to the creditors’ appeal. The district court dismissed the appeals, finding that the debtors’ plan had been substantially consummated, that the relief requested would unravel the entire plan of reorganization, and that the appellant failed to rebut the presumption that the appeals were equitably moot. The appellants then appealed to the Second Circuit.

The Second Circuit adhered to the rebuttable presumption that an appeal is presumed equitably moot where a plan of reorganization has been substantially consummated. The Court held that the appellants failed to rebut that presumption by failing to establish that the relief requested on appeal would not affect the debtors’ emergence as a revitalized entity and would not require unraveling the plan. To the contrary, the Court found that modifying the terms of the Allen settlement “would impact other terms of the agreement and throw into doubt the viability of the entire plan.” Accordingly, the Court held that the district court did not abuse its discretion when dismissing the appeals as equitably moot.

The Charter decision is significant because the Second Circuit’s adoption of the abuse of discretion standard, along with its adherence to the rebuttable presumption, indicates that appellants likely face a difficult task appealing bankruptcy court decisions after the substantial consummation of a plan of reorganization.

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November 27, 2102: SDNY Bankruptcy Court Transfers Patriot Coal Cases to Eastern District of Missouri

At the end of November, Judge Shelley C. Chapman of the U.S. Bankruptcy Court for the Southern District of New York transferred venue of the chapter 11 cases of Patriot Coal Corporation and ninety-eight of its affiliates to the Eastern District of Missouri. Drawing on an array of jurisprudence regarding venue, Judge Chapman found that notwithstanding literal compliance with the applicable venue statute, the New York domicile of two of the debtors was insufficient to establish venue for all ninety-nine cases in the Southern District of New York when the two debtors were formed on the eve of the commencement of the chapter 11 cases admittedly for the sole purpose of establishing venue. As is typical in chapter 11 cases, Patriot and its affiliates bootstrapped their bankruptcy cases to the cases of two recently formed New York subsidiaries, notwithstanding the fact that the company had de minimis contacts with New York and conducted its business in West Virginia, Kentucky, and Missouri.

Although the Court found that the debtors’ practice of bootstrapping was not conducted in bad faith and that the debtors literally complied with the requirements of the venue statutes, the court nevertheless found that upholding the debtors’ choice of venue would “all but render the venue statute meaningless” and would encourage other debtors to forum shop. Furthermore, the Court found that the administrative efficiency of a particular jurisdiction and its access to capital markets and leading chapter 11 professionals likely will not, without more, suffice to overcome a motion to transfer venue by economic parties of interest.

The Patriot Coal decision joins other recent decisions, including the Cordillera Golf Club and Houghton Mifflin decisions, in which bankruptcy courts have granted motions to transfer venue from New York or Delaware. In light of these recent decisions, debtors and creditors should bear in mind that technical compliance with the venue requirements of section 1408 is not dispositive to a court’s analysis regarding choice of venue. Where, as in Patriot Coal, a debtor forms subsidiaries in a district in which there are no meaningful contacts, solely for the purpose of satisfying the statutory predicates, a court could transfer the case to another district.

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November 28, 2012: Fifth Circuit Refuses to Enforce Non-Consensual Non-Debtor Releases in Mexican Plan of Reorganization

On November 28, 2012, the United States Court of Appeals for the Fifth Circuit declined to enforce a plan of reorganization confirmed under Mexican bankruptcy law on the grounds that it contained non-consensual releases of bondholder claims against the debtors’ non-debtor subsidiaries. Unlike the bankruptcy court below, the Fifth Circuit did not hold that non-consensual non-debtor releases are “manifestly contrary” to U.S. public policy, and it did not foreclose the possibility that such releases could be approved under Chapter 15. Instead, the Court held that non-consensual non-debtor releases should be approved in chapter 15 cases only upon a showing of the same type of “exceptional circumstances” that justify such releases in those U.S. jurisdictions that permit them. Vitro SAB de CV v. Ad Hoc Group of Vitro Noteholders et al. (In the Matter of Vitro SAB De CV), No. 12-10542, 2012 U.S. App. LEXIS 24443 (5th Cir. Nov. 28, 2012)

Arguably even more significant than the case’s specific holding was the Fifth Circuit’s adoption of a new, three-step analytical framework for assessing the types of relief available under two of chapter 15’s key relief provisions, sections 1507 and 1521. In the first step of this new methodology, a bankruptcy court presented with a request for relief from a foreign debtor would consider whether the requested relief falls into one of the enumerated categories in section 1521. If it does not, the court next assesses whether the requested relief falls within the scope of section 1521(a)’s more general language allowing the court to grant “any appropriate relief.” Finally, if the court determines that the relief is not available under either the specific or the general language in section 1521, the court may consider whether to grant the relief as a form of “additional assistance” under section 1507. Unlike the types of relief available under section 1521, such “additional assistance” under section 1507 can include forms of relief not otherwise available under U.S. law and not previously granted under chapter 15’s predecessor statute, former section 304 of the Bankruptcy Code. Because of chapter 15’s relatively recent enactment in 2005, little guidance had existed prior to this decision about how to reconcile the new chapter’s complex and sometimes seemingly contradictory provisions. The Fifth Circuit’s systematic new approach is thus likely to be widely adopted by other courts.

November 2012: SDNY Bankruptcy Courts Issue Multiple CBA Opinions

Bankruptcy Courts in the Southern District of New York issued multiple opinions in the bankruptcy cases of Hostess Brands, AMR and Pinnacle Airways addressing the debtors’ attempts to reject collective bargaining agreements pursuant to section 1113 of the Bankruptcy Code. Although the particular points of contention in each case was different, the debtors’ original motion to modify their respective CBA was carefully scrutinized by the bankruptcy court and rejected on the grounds that specific provisions of the proposed modification were not necessary to the debtors’ reorganization. Using these decisions as a guide, Hostess and AMR made changes to their proposals and ultimately obtained court approval to unilaterally modify CBAs that had not been consensually modified. AMR ultimately reached consensual agreements with its unions. However, the Bakery, Confectionery, Tobacco and Grain Workers International Union initiated a strike which led to Hostess’s liquidation.

These decisions have put debtors on notice that in order to reject a CBA, every aspect of its proposal to the union must be necessary to the debtor’s reorganization. However, where specific aspects of the proposal do not satisfy this requirement, the courts have shown a willingness to provide the parties with the steps that must be taken in order to obtain approval.

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California Chapter 9 Filings

2012 witnessed a significant uptick in the number of distressed municipalities filing for chapter 9 bankruptcy protection. In California alone, three municipalities, the City of Mammoth Lakes, the City of San Bernardino and City of Stockton, filed for chapter 9 in 2012, and more filings loom on the horizon.

These cases highlight several important issues facing both municipalities and municipal creditors. First, as evidenced in Stockton, municipalities are increasingly relying on pendency plans adopted during the case to balance their budgets and to determine which debts and obligations will continue to be paid during the bankruptcy case. Although pendency plans are controversial because they are subject to relatively limited court oversight, California bankruptcy courts, including the courts in Stockton and Vallejo, grant municipalities wide latitude to formulate a pendency plan, despite the potential impact on creditors.

Second, creditors have consistently challenged whether a proposed municipal debtor is eligible to file to file for chapter 9 under section 109 of the Bankruptcy Code and under state authorization statutes. As a result, a municipality contemplating a bankruptcy filing should anticipate significant litigation surrounding its eligibility to file for chapter 9. Finally, these cases demonstrate that the eventual treatment and priority of the California Public Employees’ Retirement System’s claims against Stockton and San Bernardino in a future plan of debt adjustment will have a significant impact on the holders of the municipalities’ general obligation bonds.

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