169 Search Results

October 3, 2019 |
Gibson Dunn Strengthens Business Restructuring and Reorganization Practice with Addition of Three Highly Regarded Partners in New York

Gibson, Dunn & Crutcher LLP is pleased to announce that Scott J. Greenberg, Steven A. Domanowski and Michael J. Cohen have joined the firm as partners in the New York office.  They all join from Jones Day, continuing their highly successful business restructuring and reorganization practice. Greenberg, who was co-head of the Jones Day Business Restructuring & Reorganization practice out of the New York office, will serve as Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group. “We are very excited to add this distinguished team to the firm,” said Ken Doran, Chairman and Managing Partner of Gibson Dunn.  “Scott, Steve and Michael have significant experience and enjoy stellar reputations, particularly within the creditor-side of the restructuring space, and their addition will strengthen our global restructuring practice.” “This team, which has built deep relationships with major institutions across a variety of investment classes, will nicely complement our premier practice on both the creditor and debtor sides of the house,” said David Feldman, Co-Chair of the firm’s Business Restructuring and Reorganization Practice Group. “We’re delighted to welcome Scott, Steve and Michael to the firm.” “We are thrilled to join Gibson Dunn,” said Greenberg.  “It is a great global firm with a deep bench of many talented practice groups to complement our top-notch restructuring team as we continue to grow our highly successful practice. The timing is perfect given the volume of work in the pipeline and the amount of distress coming down the pike.” About Scott Greenberg Greenberg’s practice is focused on representing debtors and creditors in restructurings, both in-court and out-of-court, with a strong emphasis on buy-side clients.  He is well known in particular for his representation of ad hoc groups of lenders in high profile restructurings as well as large Chapter 11 debtors. Before joining Gibson Dunn, Greenberg was a partner at Jones Day from 2013 to 2019, where he also  served as co-head of the Jones Day Business Restructuring & Reorganization practice out of New York.  He began his career as an associate at Weil, Gotshal & Manges LLP in its restructuring practice. Greenberg received his law degree in 2002, with honors, from Emory University School of Law, and was elected to the Order of the Coif.  He graduated cum laude from Boston University in 1999. About Steven Domanowski Domanowski’s practice is focused on restructuring and distressed finance matters.  He represents asset management firms, hedge funds, distressed debt holders and other distressed debt investors in restructurings in- and out-of-court, and distressed debt and other restructuring matters.  He has particular experience in the formation and representation of ad hoc lender groups at the top of the capital structure.  He also represents debtors in distressed situations and other restructuring matters. Prior to joining Gibson Dunn, Domanowski was at Jones Day in the firm’s Chicago office, where he had served as a partner since 2013.  He previously practiced at Bell, Boyd & Lloyd LLP. Domanowski received his law degree from DePaul University College of Law in 2002, cum laude, where he was also a member of the law review and received the American Bankruptcy Institute Medal of Excellence.  He graduated magna cum laude from University at Buffalo, State University of New York in 1999. About Michael J. Cohen Cohen represents companies, investors, lenders, creditors, acquirers and other parties in connection with business restructuring and reorganization matters, in- or out-of-court, domestically or internationally.  He has a particular focus on secured lender group representations. Before joining Gibson Dunn, Cohen was a partner at Jones Day.  Prior to Jones Day, he practiced at Cadwalader, Wickersham & Taft LLP.  He served as a law clerk for Judge Stephen D. Gerling of the U.S. Bankruptcy Court for the Northern District of New York from 2003 to 2004. Cohen earned his law degree in 2002 from Fordham University School of Law, where he was a member of Fordham Law Review and was awarded the American Bankruptcy Institute Medal of Excellence and the Benjamin Finkel Prize for his academic work on bankruptcy law.  He graduated with highest honors from Rutgers University, where he was a Henry Rutgers Scholar.

September 24, 2019 |
Webcast: Getting Ready for the Next Cycle: Recent Trends and Developments in DIP Financings

To achieve a successful reorganization, the first need of a debtor is access to post-petition financing. During the webinar, we review new developments in debtor in possession financing, roll-ups, adequate protection, and other matters, as well developments from the last wave of filings that we are bound to see again in the next wave. Join our panel of seasoned business restructuring and reorganization practitioners as we discuss these recent developments and strategies. View Slides (PDF) PANELISTS: David M. Feldman is a partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group. Mr. Feldman’s practice focuses on the representation of banks, hedge funds, private equity firms and companies in a variety of bankruptcy cases, out-of-court restructurings, and distressed asset and debt transactions. Mr. Feldman has 25 years of experience representing creditor committees, bondholders, bank groups and equity committees in some of the largest and most complicated Chapter 11 cases. Mr. Feldman regularly represents financial institutions and hedge funds as lenders in connection with cutting edge loan transactions, including debtor in possession (“DIP”) loans, Chapter 11 exit facilities, second-lien loans, mezzanine loans, bridge loans, acquisition facilities and other transactions. Eric Wise is a partner in the New York office of Gibson, Dunn & Crutcher. He is a member of Gibson Dunn’s Global Finance and Business Restructuring and Reorganization Practice Groups. Mr. Wise advises debtors and creditors in complex financing and restructuring transactions, including agent banks in complex leveraged financings, cross-border and multi-currency transactions, real estate financings, asset-based financings, and bank and bond/bridge financings and creditors and debtors in out-of-court and in-court restructurings. He has substantial experience in debt covenant analysis and junior capital structures, including second lien and subordinated financings and mezzanine structures. Mr. Wise also has extensive experience in Chapter 11 cases, and has been involved in numerous work-outs, rights offerings, recapitalizations, restructurings, and post-petition and exit financings, and distressed debt purchases and sales. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

September 13, 2019 |
Les classes de créanciers dans le nouveau droit des procédures collectives : pistes de réflexion.

Paris restructuring partners Benoît Fleury, Jean-Philippe Robé, Jean-Pierre Farges, and Pierre-Emmanuel Fender are the co-authors of “Les classes de créanciers dans le nouveau droit des procédures collectives : pistes de réflexion” [PDF] published in Fusions & Acquisitions Magazine on September 13, 2019. The paper discusses the dramatic modifications that will be undergone by the French restructuring landscape as a result of Directive 2019/1023 of June 20, 2019 on restructuring and insolvency. The co-authors focus on the innovative Directive-introduced concept of ‘class formation’ and concentrate on its potential consequences for debtors’, shareholders’ and creditors’ strategies.

August 13, 2019 |
Delaware Bankruptcy Court Rules That Liquidation Trustee Controls the Privilege of Board of Directors’ Special Committee

Click for PDF A Delaware bankruptcy court has held that a special committee’s advisors cannot withhold privileged documents from a liquidation trustee appointed pursuant to a chapter 11 plan. This decision serves as an important reminder that a bankruptcy trustee, including a trustee appointed to manage a liquidating trust established pursuant to a chapter 11 plan, may have exclusive control over a company’s privilege and that executives, board members, and their advisors may be unable to withhold documents from the trustee. Importantly, this decision highlights that even a company’s establishment of a special, independent committee with its own advisors may not be effective in shielding otherwise privileged communications from disclosure. I. Background In In re Old BPSUSH Inc.,[1] a company’s board of directors formed an audit committee (the “Audit Committee”), which investigated questions surrounding senior management’s financial reporting. The Audit Committee retained separate legal counsel, and its legal counsel retained financial advisors.[2] The Audit Committee’s advisors reviewed millions of documents, conducted multiple interviews, and generated a substantial amount of work product.[3] The company subsequently filed bankruptcy.[4] In bankruptcy, the company confirmed a chapter 11 plan that created a liquidation trust and vested the trust with all of the company’s “rights, titles, and interests in any Privileges,” which the plan defined to include “any privilege or immunity” of the company.[5] After the chapter 11 plan was confirmed and a trust was established, the liquidation trustee filed a motion to compel the Audit Committee’s legal and financial advisors to turn over all records related to the investigation.[6] The Audit Committee’s advisors objected to the trustee’s motion, arguing that the Audit Committee “was organized as an independent body, created and governed by a separate charter, with the right and power to engage independent counsel with separate attorney-client privileges and other protections”; therefore, the advisors argued that the liquidation trustee did not acquire the Audit Committee’s privileges.[7] Accordingly, the advisors withheld attorney notes of employee interviews, draft memoranda, the financial advisors’ internal analytics and work papers, and communications/emails with Audit Committee members.[8] II. Bankruptcy Court’s Analysis The Delaware bankruptcy court began its analysis by recognizing the longstanding principle established by the Supreme Court in Commodity Futures Trading Commission v. Weintraub, which held that a “trustee of a corporation in bankruptcy has the power to waive the corporation’s attorney-client privilege with respect to prebankruptcy communications.”[9] The Audit Committee’s advisors attempted to distinguish Weintraub, relying primarily on a Southern District of New York decision in In re BCE West, L.P. In BCE West, the court held, under similar circumstances, that a trustee appointed pursuant to a chapter 11 plan could not access privileged documents held by the advisors of a special committee appointed by the company’s board of directors.[10] The BCE West court reasoned that “[i]t is counterintuitive to think that while the Board permitted the Special Committee to retain its own counsel, the Special Committee would not have the benefit of the attorney-client privilege inherent in that relationship or that the Board of Directors or management, instead of the Special Committee, would have control of such privilege.”[11] Accordingly, the BCE West court determined that the special committee was a “separate and distinct group” from the remainder of the board of directors and that the trustee did not control the privilege.”[12] The Delaware bankruptcy court disagreed with BCE West and instead followed a subsequent Southern District of New York case, Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Medical Technologies), which addressed a similar situation and refused to follow BCE West.[13] In China Medical, the court considered whether a foreign representative in a chapter 15 bankruptcy could obtain documents related to an internal investigation conducted by the foreign debtor’s audit committee.[14] The court first determined that an audit committee is not completely separate from the board of directors; rather, it is a committee of the board and a “critical component of [the company’s] management infrastructure.”[15] The court also discussed the policy considerations in Weintraub and that “corporate management is deposed in favor of the trustee, and there is no longer a need to insulate committee-counsel communications from managerial intrusion.”[16] Based on these considerations, the China Medical court rejected BCE West and held that the foreign representative controlled the audit committee’s privilege. The Delaware bankruptcy court agreed with the China Medical court’s reasoning that “it is appropriate to extend the Supreme Court’s analysis in Weintraub and recognize that the trustee appointed as the representative of a corporate debtor controls the privileges belonging to the independent committee established by the corporate debtor.”[17] Accordingly, the court held that the liquidation trustee controlled the Audit Committee’s privileges and that its advisors were required to turn over all documents, communications, and work product, including any “draft factual memoranda and draft legal memoranda,” but excluding the legal advisor’s “firm documents intended for internal law office review and use.”[18] III. Implications of Decision It remains to be seen whether other courts will likewise reject BCE West and instead follow China Medical and Old BPSUSH. Although there does not appear to be much case law specifically addressing the issue, China Medical and Old BPSUSH serve as a warning that a special committee’s documents and communications may very well be discoverable by a trustee (including a trustee of a liquidating trust created pursuant to a chapter 11 plan) and/or company representative in bankruptcy. Therefore, members of a company’s board of directors, special committee, management, and all outside advisors should assume that any communications and work product will be discoverable by and subject to the exclusive control of a trustee if the company ultimately files for bankruptcy. More broadly, Old BPSUSH serves as a reminder, particularly to companies in financial distress, that communications assumed by the parties to be protected by privilege may ultimately be discoverable by a bankruptcy trustee. ______________________    [1]   In re Old BPSUSH Inc., 2019 WL 2563442, at *1 (Bankr. D. Del. June 20, 2019).    [2]   Id.    [3]   Id.    [4]   Id.    [5]   Id. at *4.    [6]   Id. at *1.    [7]   Id. at *2.    [8]   Id. at *8.    [9]   Id. at *4 (quoting Commodity Futures Trading Comm’n v. Weintraub, 471 U.S. 343, 358 (1985)). [10]   In re BCE W., L.P., 2000 WL 1239117, at *3 (S.D.N.Y. Aug. 31, 2000). [11]   Id. at *2. [12]   Id. [13]   See Krys v. Paul, Weiss, Rifkind, Wharton, & Garrison LLP (In re China Med. Techs.), 539 B.R. 643, 654-55 (S.D.N.Y. 2015). [14]   Id. at 646. [15]   Id. at 655. [16]   Id. at 656. [17]   In re Old BPSUSH Inc., 2019 WL 2563442, at *6. [18]   Id. at *7. The court recognized that an exception applies to “documents intended for internal law office review and use” because lawyers must “be able to set down their thoughts privately in order to assure effective and appropriate representation,” and such documents “are unlikely to be of any significant usefulness to the client or to a successor attorney.” Id. (quoting Sage Realty Corp. v. Proskauer Rose Goetz & Mendelsohn, L.L.P., 91 N.Y.2d 30, 37-38 (1997)). Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization or Securities Regulation and Corporate Governance practice groups, or the following authors: Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) Robert B. Little – Dallas (+1 214-698-3260, rlittle@gibsondunn.com) Matthew G. Bouslog – Orange County, CA (+1 949-451-4030, mbouslog@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) Securities Regulation and Corporate Governance Group: Elizabeth Ising – Washington, D.C. (+1 202-955-8287, eising@gibsondunn.com) James J. Moloney – Orange County, CA (+1 949-451-4343, jmoloney@gibsondunn.com) Lori Zyskowski – New York (+1 212-351-2309, lzyskowski@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 25, 2019 |
In the Pipeline: Understanding Post-Sabine Midstream Contract Rejection Risk

Click for PDF After a significant wave in 2015 and 2016, bankruptcy filings in the exploration and production (“E&P”) sector of the oil and gas industry temporarily leveled off. With sustained volatility in energy prices and a trend of increased leverage among borrowers, stakeholders in the sector would be well advised to prepare for the potential risks of any further E&P distress. The landmark decisions in the chapter 11 case of Sabine Oil & Gas Corporation established both a substantive precedent and a procedural template regarding bankrupt E&P debtors’ attempts to reject burdensome contracts with midstream services providers. Understanding both the applicable legal framework and procedural considerations that will govern future rejection disputes will be critical to strategic positioning ahead of the next wave of distress in the E&P sector. Background: Rejection of Executory Contracts and Midstream Services Agreements The Bankruptcy Code provides a mechanism for debtors to reject executory contracts, relieving the debtor from its future performance obligations thereunder and leaving the contractual counterparty with a prepetition claim against the debtor for breach of contract. Section 365(a) of the Bankruptcy Code allows a debtor in possession, “subject to the court’s approval,” to “assume or reject any executory contract.”[1] While the Bankruptcy Code does not define “executory contract,” most courts use the definition of a contract under which both parties have unperformed obligations where the failure of either party to complete performance would constitute a material breach excusing the performance of the other party.[2] In determining whether to approve a motion to assume or reject such a contract, courts evaluate whether the proposed assumption or rejection is a reasonable exercise of the debtor’s business judgment. Absent the involvement of certain types of contractual counterparties that receive special Bankruptcy Code protections, “the interests of the debtor and its estate are paramount; adverse effects on the non-debtor contract party arising from the decision to assume or reject are irrelevant.”[3] Given the significant volatility in oil and gas prices and the structure of midstream services contracts—which typically require the producing company to either deliver a minimum production volume or pay a deficiency payment—the ability to reject contracts is a critical tool for an E&P debtor seeking to use chapter 11 of the Bankruptcy Code to restructure burdensome obligations. From midstream providers’ perspective, rejection is inappropriate because the agreements at issue provide them with not only contractual promises of payment, but also dedications of underlying oil and gas mineral rights and associated acreage; in other words, the agreements convey real property interests. Courts have generally held that real property interests cannot be rejected because they do not involve future material, reciprocal obligations.[4] Thus, midstream providers, which generally incur substantial up-front costs through infrastructure investments in connection with their contracts, argue that permitting rejection upsets their (and their secured lenders’) business expectations that their dedications will remain in place and bind any successors to the subject mineral interests, even if the counterparty is reorganized under chapter 11 of the Bankruptcy Code. During the 2015-16 wave of oil and gas bankruptcies, disputes frequently arose over whether midstream services contracts are executory contracts that can be rejected, or contracts containing real property covenants that “run with the land,” rendering the contract ineligible for rejection.[5] A series of decisions in the Sabine bankruptcy addressed this issue on the merits and the federal courts, applying their interpretation of Texas law, concluded that a group of midstream contracts did not include rights in favor of the service-prover that ran with the land, and therefore could be rejected.[6] The Sabine Decisions The rejection dispute in Sabine involved several contracts between the debtor, a Texas-based onshore oil and gas exploration and production company, and two midstream gathering service providers: Nordheim Eagle Ford Gathering, LLC (“Nordheim”) and HPIP Gonzalez Holdings, LLC (“HPIP”). Under each contract, Sabine agreed to deliver all gas and condensate that it produced in certain “dedicated” areas to Nordheim and HPIP, respectively, for gathering, transportation, and processing. Under each contract, Sabine paid monthly gathering fees and was further required to make deficiency payments to the extent that it failed to deliver certain minimum amounts of gas and condensate on an annual basis. In seeking to reject the contracts, the debtors argued that because of the substantial and sustained decline in gas prices, it was no longer financially viable to deliver the minimum amounts under the contracts, and the resulting deficiency obligations would impose a considerable and unnecessary drain on the estate’s resources. As a threshold matter, the bankruptcy court found the decision to reject was a reasonable exercise of the debtors’ business judgment.[7] However, both Nordheim and HPIP argued that certain covenants under the agreement, including Sabine’s dedication of the specified production areas, “ran with the land” and thus could not be rejected. Each of the agreements was governed by Texas law. Under Texas law, in order for a covenant to “run with the land”, it must, among other things, “touch and concern the land.”[8] While the issue is not clearly settled, some Texas courts have also imposed a further requirement of “horizontal privity of estate,” which generally requires “simultaneous existing interests or mutual privity between the original covenanting parties as either landlord and tenant or grantor and grantee.”[9] Because the midstream providers did not identify any governing authority rejecting the horizontal privity requirement, the Sabine bankruptcy court analyzed the issue and concluded that such privity was absent because the covenants at issue did not reserve any interest in the subject real property.[10] The bankruptcy court further held that the covenants did not “run with the land,” finding that the covenants did not “touch and concern the land”. Citing Fifth Circuit precedent, the court explained that it is not enough for a covenant to “affect the value of the land,” and that it must “‘affect the owner’s interest in the property or its use in order to be a real covenant.’”[11] The court further noted that under Texas law, minerals cease to be real property and instead become personal property once they are extracted from the ground.[12] Because the covenants concerned only Sabine’s interest in personal property—i.e., the extracted gas and condensate—and did not affect its interest in the relevant real property—i.e., the “dedicated” land—the court held that the contractual dedication did not burden Sabine’s property interest in the land, but rather identified personal property that was subject to the agreements. The bankruptcy court also focused on the fact that the dedication covenants were triggered not by any action on the dedicated land, but rather by the receipt or storage of the subject products by the midstream providers.[13] This distinguished the case from Energytec, where the Fifth Circuit concluded that certain covenants in an agreement relating to a pipeline system did run with the land, such that the debtors could not sell the pipeline free and clear of a creditor’s interest.[14] In Energytec, the obligation to pay a monthly transportation fee was triggered by the flow of gas through a pipeline on the subject property.[15] There, the agreement gave the contractual counterparty consent rights over any assignments—a clear burden on the producer’s interest—and provided that the contractual transportation fee was secured by a lien on the pipeline system. By contrast, the agreements in Sabine did not give consent rights to the midstream counterparties, and the fees payable thereunder were unsecured; in fact, the dedicated properties were separately pledged to the debtors’ secured lenders.[16] These diverging results illustrate the critical importance of the precise language employed in midstream services contracts; it is unclear whether the bankruptcy court in Sabine would have reached a different conclusion had the contracts at issue contained more specific dedication language. The district court affirmed, basing its ruling on a finding that the covenants did not “touch and concern” the land and expressly declining to decide whether a real covenant under Texas law requires horizontal privity.[17] By contrast, the Second Circuit upheld the lower courts’ rulings that the covenants at issue did not “run with the land”, but based its holding on a lack of horizontal privity between the parties to the agreements rather than on whether the contracts “touched and concerned” the land.[18] After concluding that horizontal privity was a requirement of a Texas real covenant based on a lack of authority to the contrary, the appellate court held that such privity was absent because the real property involved in the contract—i.e., the land that was the subject of the dedicated leases—was not conveyed by the contracts or otherwise.[19] The court observed that it is not enough if the subject contract merely “involves” land; rather, horizontal privity must exist with respect to the specific land burdened by the covenant at issue.[20] Thus, it was of no moment that two of the contractual arrangements involved the conveyance of separate land adjacent to the dedicated land.[21] Post-Sabine Developments As of this writing, the substantive holding of Sabine has not been tested in any reported decision. Both shortly before and after the initial Sabine decision, midstream rejection disputes arose in numerous other E&P companies’ chapter 11 cases. While arising in different contexts, each dispute was settled before the nature of the underlying midstream contracts was adjudicated. In Sandridge Energy, the bankruptcy court expressed skepticism regarding the Sabine holding; however, in announcing a settled resolution of the dispute, the debtors’ counsel explained that the amount at issue did not justify the expected cost of litigation.[22] In Quicksilver Resources, the issue arose in connection with a sale of the debtors’ assets under section 363 of the Bankruptcy Code, as the debtors’ success on a motion to reject certain midstream contracts governed by Texas law was a condition precedent to closing the sale.[23] The initial Sabine decision was issued several days after oral argument on the Quicksilver rejection motion, and the parties settled shortly thereafter. The debtors withdrew the rejection motion, and the purchaser agreed to enter into replacement midstream agreements with a corresponding reduction of the agreed purchase price by $2.5 million. In several other cases, debtors resolved pending midstream rejection disputes by agreeing to assume the subject contracts on modified economic terms, while providing consideration for any prepetition deficiency or unpaid fee claims through an allowed general unsecured claim.[24] Critically, the issues in Sabine were governed by Texas law pursuant to choice-of-law provisions in the contracts, and even in Texas these issues have not been settled by the Texas Supreme Court. Midstream contracts providing for the application of another state’s law will require analysis of real covenants and equitable servitudes under such state’s law. For example, the chapter 11 case of Triangle USA Petroleum, LLC, an exploration and production company operating primarily in the Williston Basin of North Dakota and Montana, involved a dispute over certain midstream contracts governed by North Dakota law.[25] In contrast to Texas, where real covenant disputes are guided by common law principles, North Dakota statutes provide specific guidance on the requirements for a finding that a covenant “runs with the land.”[26] Procedural Considerations While its substantive result has generated debate, Sabine established a clear procedural roadmap for midstream contract rejection disputes that has served as a template in numerous cases. Before reaching the covenant issue, the Sabine court concluded that it could not “decide substantive legal issues, including whether the covenants at issue run with the land, in the context of a motion to reject, unless such motion is scheduled simultaneously with an adversary proceeding or contested matter to determine the merits of the substantive legal disputes related to the motion.”[27] Although rejection proceedings are designated as contested matters under the Federal Rules of Bankruptcy Procedure, the court held that these are summary proceedings intended to efficiently review the debtor’s decision to reject, and are inappropriate for resolving a lengthy trial with disputed issues.[28] Following Sabine, debtors seeking to reject midstream agreements have generally simultaneously filed a motion to reject and commenced an adversary proceeding seeking a declaratory judgment establishing that the relevant covenants do not “run with the land.”[29] Like any potentially fact-intensive litigation, the resolution of an adversary proceeding seeking a declaratory judgment (or a similar state court suit) can take an extended period of time.[30] However, debtors may be able to ensure that such litigation does not slow the overall progress of their restructuring by pursuing plan confirmation in parallel with rejection and including a plan provision contemplating a conditional rejection based on the outcome of litigation still pending at the time of confirmation. The TUSA case involved such a provision, referred to as a “toggle”.[31] In TUSA, the debtors sought to reject certain midstream services contracts with Caliber Midstream Partners, L.P. (“Caliber”). Prior to the petition date, Caliber commenced litigation in North Dakota state court seeking a declaratory judgment establishing that its contracts contained covenants that “ran with the land” and thus could not be rejected.[32] The “toggle” provision in the debtors’ plan of reorganization provided that the Caliber contracts would be deemed rejected as of the effective date of the plan, conditional on (i) the debtors prevailing in the North Dakota declaratory judgment action, and (ii) the bankruptcy court determining or estimating the allowed amount of Caliber’s rejection damages claim at less than $75 million.[33] The failure of either condition to occur would result in the assumption of the Caliber contracts and payment of associated cure amounts. The plan further allowed Caliber to vote its potential rejection claim and participate in the rights offering contemplated under the plan. Caliber objected to the plan, arguing that the conditional rejection provision allowed the debtors to indefinitely delay their decision to assume or reject, and that such decision could not be delayed past confirmation. In a bench ruling, the bankruptcy court sided with the debtors and confirmed the plan, noting that while the debtors were “asking for something that has never been done before,” this did not mean that the requested relief was prohibited. The court explained that the language of sections 365(d)(2) and 1123 of the Bankruptcy Code was permissive and not indicative of an absolute deadline for assumption or rejection.[34] Finding the conditions to be “simply a recognition that the debtor is not in a position to reject without knowing the effect of that rejection,” the court upheld the provision and confirmed the plan.[35] Practical Advice The result in Sabine and the subsequent resolutions of midstream contract disputes in other chapter 11 cases provide several important lessons to guide future expectations. First, the issue of whether a particular midstream agreement can be rejected is a fact-specific question of state law.  The principles of property and contract law guiding the inquiry, which vary from state to state, are uniformly complex and, in some cases, unsettled. Second, the prevailing procedural approach for such disputes established in Sabine and upheld by other bankruptcy courts requires a formal and potentially protracted litigation in the form of a declaratory judgment action asserted through an adversary complaint in bankruptcy court or a separate state court litigation. To the extent that litigation is pursued in the bankruptcy case, questions regarding bankruptcy courts’ statutory and constitutional authority to adjudicate these disputes create further potential for delay and uncertainty of venue. Third, notwithstanding these potential procedural delays, debtors may take advantage of Bankruptcy Code mechanisms, including claims estimation and the potential to confirm a “toggle” plan with a delayed conditional rejection provision, to ensure that their chapter 11 cases proceed expeditiously despite the pendency of rejection-related litigation. This represents a significant potential downside for midstream counterparties, who bear the burden of prolonged uncertainty as to the ongoing viability of their contracts even as the producer-debtor is able to consummate a restructuring or sale. These considerations make it essential for stakeholders to clearly understand the cost-benefit calculus of litigating the rejection of a midstream contract well in advance of a producer’s financial distress, and to frequently update such analysis as the dispute progresses. The parties must balance the significant legal and procedural uncertainty, including the potential for protracted and costly litigation, against the alternative cost of a consensual resolution that may involve modification of the agreement’s economic terms and satisfaction of prepetition amounts at a discount to their face value. In the 2015-16 cycle, this cost-benefit analysis, combined with the recovery in oil and gas prices, likely drove many of the post-Sabine settlements. It remains to be seen whether economic circumstances in any future cycles of E&P distress will ultimately result in judicial decisions that shed more light on the underlying substantive issues. __________________________    [1]   11 U.S.C. § 365(a).    [2]   See, e.g., Sharon Steel Corp. v. National Fuel Gas Distrib. Corp., 872 F.2d 36, 39 (3d Cir. 1989).    [3]   In re Sabine Oil and Gas Corp., 547 B.R. 66, 71 (Bankr. S.D.N.Y. 2016) (“Sabine”) (citing Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d 1095, 1099 (2d Cir. 1993)).    [4]   See, e.g., Glosser v. Maysville Reg’l Water Dist., 174 Fed. App’x 34, 38-39 (3d Cir. 2009) (holding that an easement could not be assumed and assigned under section 365 of the Bankruptcy Code because outstanding duties under the easement were “not material” and “ministerial” in nature); In re Copper Creek Estates-Grand Island LLC, No. BK11-40496-TJM, 2011 WL 2681224 (Bankr. D. Neb. Jul. 8, 2011) (builder that placed restrictive covenant on vacant lots in exchange for providing financing to landowner had no ongoing obligations under agreement, which was not executory in nature; thus, covenant ran with the land and could not be rejected).    [5]   Midstream providers have also argued in the alternative that such covenants constitute equitable servitudes under applicable state law. See, e.g., Sabine at 79. Under Texas law, “a covenant that does not technically run with the land can still bind successors to the burdened land as an equitable servitude if: (1) the successor to the burdened land took its interest with notice of the restriction, (2) the covenant limits the use of the burdened land, and (3) the covenant benefits the land of the party seeking to enforce it.” Reagan Nat’l Advert. of Austin, Inc. v. Capital Outdoors, Inc., 96 S.W.3d 490, 495 (Tex. Ct. App. 2002) (internal citations omitted).    [6]   There is no controlling Texas Supreme Court decision on point. Accordingly, the Bankruptcy Court predicted how Texas law would interpret the contracts at issue. If and when the Texas Supreme Court addresses this issue, a different result may ensue.    [7]   Sabine at 74.    [8]   Sabine at 75-76 (citing Inwood North Homeowners’ Ass’n, Inc. v. Harris, 736 S.W. 2d 632, 635 (Tex. 1987). In addition, the covenant must relate to a thing in existence or specifically bind the parties and their assigns and be intended to run with the land by the parties, and the successor to the burden of the covenant must have notice. Id. Because it concluded that the covenant did not “touch and concern the land”, the Sabine court did not specifically analyze these other elements.    [9]   Id. at 76 (citing Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W. 903, 910-11 (Tex. 1982); Newco Energy v. Energytec, Inc. (In re Energytec, Inc.), 739 F.3d 215, 222 (5th Cir. 2013) (internal quotations omitted)). [10]   Id. [11]   Id. at 77 (quoting El Paso Refinery, LP v. TRMI Holdings, Inc. (In re El Paso Refinery, LP), 302 F.3d 343, 356 (5th Cir. 2002)). [12]   Id. [13]   Id. at 78. [14]   739 F.3d at 222. [15]   Sabine at 79. [16]   Id. at 78-79. [17]   HPIP Gonzales Holdings, LLC v. Sabine Oil & Gas Corp. (In re Sabine Oil & Gas Corp.), 567 B.R. 869, 877 n.5 (S.D.N.Y. 2017). [18]   Sabine Oil & Gas Corp. v. Nordheim Eagle Ford Gathering, LLC (In re Sabine Oil & Gas Corp.), 734 Fed. Appx. 64, 67 (2d Cir. 2018) (summary order). [19]   Id. at 66-67. The panel applied the same reasoning as the bankruptcy court, stating that “[i]t would be improper for us to read a traditional requirement of real covenants out of Texas state law when there is no Texas law instructing courts to do so.” Id. To the extent that the Texas Supreme Court rules on the issue—for instance, if that court accepts a certified question from a federal court—this aspect of the Sabine holding could potentially be overturned. In connection with the midstream contract dispute in In re Quicksilver Resources, a Texas law expert advocating for the midstream providers observed that “[t]he Texas Supreme Court has had the opportunity to include horizontal privity as a requirement of a covenant running with the land, but it has not done so, and indeed, has found that covenants that would not otherwise meet the horizontal privity “requirement” were in fact covenants running with the land.” No. 15-10585-LSS, Dkt. No. 1189-1 at ¶ 61 (Bankr. D. Del. Feb. 29, 2016) (citing Inwood N. Homeowners’ Ass’n, Inc. v. Harris, 736 S.W.2d 632, 635 (Tex. 1987); Westland Oil Dev. Corp. v. Gulf Oil Corp., 637 S.W.2d 903, 910-11 (Tex. 1982)). [20]   Id. at 67. [21]   Id. Each of the Sabine courts further rejected the alternative argument that the midstream contracts constituted “equitable servitudes,” primarily because the agreements did not provide any benefit to any real property of the midstream providers. Id. at 68. [22]   In re Sandridge Energy, Inc., No. 16-32488 (DRJ), Dkt. No. 460 at 13 (Bankr. S.D. Tex. Jul. 4, 2016) (court stating that it had “been looking for an opportunity to correct the State of New York” regarding a disputed issue of whether certain covenants “ran with the land”). [23]   The midstream providers argued that the contractual dedications of the total volume of gas owned or controlled by the debtors in the Barnett Shale were covenants that ran with the land under Texas law, and thus could not be rejected. No. 15-10585-LSS, Dkt. No. 1189 (Feb. 2, 2016). [24]   See In re Penn Virginia Corp., No. 16-32395 (KLP), Dkt. No. 524 (Bankr. E.D. Va. Aug. 5, 2016) (order approving settlement of rejection dispute contemplating assumption of midstream agreements with amended fee and minimum production terms and providing midstream counterparty with, among other things, $25 million allowed general unsecured claim and ability to participate in debtors’ rights offering based on 50% of such claim); In re Emerald Oil, Inc., No. 16-10704 (KG), Dkt. No. 754 (Bankr. D. Del. Sep. 28, 2016) (joint notice of global settlement providing that debtors will assume midstream contract with modified economic terms and provide counterparty with, among other consideration, 50% of crude sale proceeds, $2 million cash payment, and allowed unsecured damages claim for $10 million); In re Magnum Hunter Res. Corp., No. 15-12533 (KG), Dkt. Nos. 983, 1166, 1131, and 1214 (Bankr. D. Del.) (debtors reached separate settlement arrangements with four midstream providers, agreeing to assume two of the contracts on modified economic terms, reject a third in exchange for an allowed general unsecured claim of $15 million, and reject a fourth while withdrawing the related adversary complaint against the counterparty without prejudice). [25]   In re Triangle USA Petroleum, LLC, , Case No. 16-11566 (MFW) (Bankr. D. Del.) (“TUSA”). [26]   See N.D. Cent. C. § 47-04-25 (“The only covenants which run with the land are those specified in this chapter and those which are incidental thereto.”); id. § 47-04-26 (setting forth requirements for a covenant to run with the land and providing examples). [27]   Sabine at 73. [28]   Id. (citing Orion Pictures Corp. v. Showtime Networks (In re Orion Pictures Corp.), 4 F.3d 1095, 1098-99 (2d Cir. 1993); In re The Great Atlantic & Pacific Tea Co., 544 B.R. 43, 48 (Bankr. S.D.N.Y. 2016)). [29]   See, e.g., In re Penn Virginia Corp., No. 16-32395 (KLP) (Bankr. E.D. Va.), Dkt. No. 320 (motion to reject filed contemporaneously with complaint commencing declaratory judgment adversary proceeding); In re Triangle USA Petroleum Corp., No. 16-11566 (MFW) (Bankr. D. Del.), Dkt. No. 67 (same); In re Magnum Hunter Res. Corp., No. 15-12533 (KG) (Bankr. D. Del.), Dkt. No. 1062 (order directing debtors to commence an adversary proceeding to determine state law contract issues). [30]   Eureka Hunter, a midstream service provider in the Magnum Hunter chapter 11 case, raised additional procedural issues regarding bankruptcy court authority that have the potential to further delay the covenant determination. Eureka first argued that because its underlying contract claims did not invoke substantive rights provided by the Bankruptcy Code, they were “non-core” under the Bankruptcy Code, meaning that a bankruptcy court would only have the statutory authority to enter proposed findings of fact and conclusions of law subject to review by a district court. Eureka further argued that one aspect of its contract claims had to be adjudicated by an Article III court pursuant to the requirements of Stern v. Marshall and related Supreme Court decisions. 131 S. Ct. 2594, 2620 (2011). While Eureka’s claims were settled, these arguments could be raised in nearly any contractual rejection dispute, inserting another layer of procedural uncertainty and potential delay into the proceedings. [31]   Gibson Dunn represented an ad hoc group of TUSA’s senior unsecured noteholders. [32]   TUSA attempted to commence a declaratory judgment adversary proceeding in bankruptcy court and dismiss the state court action, but the bankruptcy court deferred to the first-filed state court action. [33]   Section 502(c) of the Bankruptcy Code provides for estimation for the purpose of allowance “any contingent or unliquidated claim, the fixing or liquidation of which, as the case may be, would unduly delay the administration of the case.” 11 U.S.C. § 502(c). The TUSA debtors requested that the court estimate the maximum amount of the potential rejection damages claim, establishing a cap on potential liability in order to facilitate plan negotiations that included a new money investment not conditioned on the final resolution of the Caliber litigation. [34]   Tr. of Hearing, Case No. 16-11566 (MFW) (Bankr. D. Del. Mar. 10, 2017), at 112; see also Findings of Fact, Conclusions of Law, And Order Confirming Third Amended Joint Chapter 11 Plan of Reorganization of Triangle USA Petroleum Corp. And Its Subsidiary Debtors, Case. No. 16-11566 (MFW) (Bankr. D. Del. Mar. 10, 2017), Dkt. No. 825, at 22. See 11 U.S.C. § 365(d)(2) (“[T]he court, on the request of any party to [an executory] contract . . ., may order the [debtor] to determine within a specified period of time whether to assume or reject such contract . . . .” (emphasis added)); 11 U.S.C. § 1123(b) (“[A] plan may . . . provide for the assumption, rejection, or assignment of any executory contract . . . of the debtor not previously rejected . . . .”). [35]   The Caliber litigation was ultimately settled; the parties agreed to renegotiate the midstream contracts before the North Dakota state court adjudicated the declaratory judgment action. In re Triangle USA Petroleum Corporation, No. 16-11566 (MFW), Dkt. No. 1007. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization or Oil and Gas practice groups, or any of the following: Matthew K. Kelsey – New York (+1 212-351-2615, mkelsey@gibsondunn.com) Matthew P. Porcelli – New York (+1 212-351-3803, mporcelli@gibsondunn.com) Julia Philips Roth – Los Angeles (+1 213-229-7978, jroth@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) Oil and Gas Group: Michael P. Darden – Houston (+1 346-718-6789, mpdarden@gibsondunn.com)   © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

June 3, 2019 |
Reducing Litigation Risk Through Transaction Independence: Takeaways from Tribune’s Two-Step LBO

Orange County partner Oscar Garza and associates Douglas Levin and Matthew Bouslog are the authors of “Reducing Litigation Risk Through Transaction Independence: Takeaways from Tribune’s Two-Step LBO” [PDF] published in ABI Journal in June 2019.

May 29, 2019 |
Webcast: Getting Ready for the Next Cycle: Unlocking Value in Troubled Companies: 363 Asset Sales and Alternatives

Join a panel of seasoned Gibson Dunn attorneys for a discussion that will examine Section 363 sales and their alternatives, with particular focus on key issues that can impact the rights and obligations of parties in interest before, during and after an auction or private sale. The webinar discusses complex issues, strategies and key considerations designed to maximize value – and mitigate risks – in a distressed sale scenario. This webinar is the third in a series of upcoming webinars. Our Getting Ready for the Next Cycle webinars will cover, among other topics: (a) prepackaged and pre-negotiated bankruptcies; (b) buying and selling financially distressed companies/assets; (c) DIP financing; (d) rights offerings and other methods for financing an exit from Chapter 11; (e) fiduciary duties for boards of financially distressed companies; and (f) European and Asian financings and workouts. Our next webinar in this series is scheduled for June 27th; registration details will be available next month. View Slides (PDF) PANELISTS: Oscar Garza is a partner in the Orange County and Los Angeles offices of Gibson, Dunn & Crutcher. He is a member of the Business Restructuring and Reorganization Practice Group (and is a former co-chair of the restructuring group), Transnational Litigation and Latin America Practice Groups. Mr. Garza’s restructuring practice involves representing debtors, creditors’ committees, and secured creditors in chapter 11 cases, advising buyers and sellers of the assets of financially distressed companies, and representing Bankruptcy Trustees in complex cases. Mr. Garza obtained his law degree from the University of Arizona College of Law, where he was a member of the Arizona Law Review, and he currently serves on the board of visitors for the law school. He is and has been a frequent lecturer on bankruptcy law and practice. Keith R. Martorana is a partner in the New York office of Gibson, Dunn & Crutcher and a member of the Business Restructuring and Reorganization Practice Group.  Mr. Martorana’s practice focuses on representing financial institutions, creditor groups and hedge funds inside and outside of chapter 11 in numerous industries, including the retail, communications, energy, homebuilding, automotive, emergency services, commercial real estate, and manufacturing sectors.  Mr. Martorana received his Juris Doctor, magna cum laude, from New York Law School, where he also served as an Executive Articles Editor of the New York Law School Law Review. Taylor Hathaway-Zepeda is an associate in the Los Angeles office of Gibson, Dunn & Crutcher. She practices in the firm’s Corporate Department. Prior to joining Gibson Dunn, Ms. Hathaway-Zepeda served as managing law clerk to Chief Judge Sandra Lynch of the U.S. Court of Appeals for the First Circuit. Ms. Hathaway-Zepeda is a graduate of Harvard Law School, where she was an editor of the Harvard Law Review and a finalist in the 100th Ames Moot Court Competition. Prior to law school, she earned a Master of Philosophy degree in Development Studies – with a focus on international economics – from the University of Cambridge in the United Kingdom as a recipient of the Frank Knox Memorial Fellowship. Michael S. Neumeister is an associate in the Los Angeles office of Gibson, Dunn & Crutcher.  He is a member of the Business Restructuring and Reorganization Practice Group and the Corporate Department.  Mr. Neumeister has a wide array of experience in representing clients in bankruptcy and restructuring matters in many different industries.  His representations have included representing debtors and lenders in in-court and out-of-court restructurings, and buyers in large and small bankruptcy sales.  Mr. Neumeister received his Juris Doctor in 2010 from the University of Southern California Law School, where he graduated as a member of the Order of the Coif and served as a Senior Content Editor for the Southern California Law Review. MCLE INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

April 25, 2019 |
Webcast: Getting Ready for the Next Cycle: Prepackaged and Prenegotiated Chapter 11 Reorganization Strategies

Join a panel of seasoned Gibson Dunn partners for a discussion focusing on prepackaged and prenegotiated Chapter 11 reorganization cases. The webinar will discuss the complex issues that debtors and creditors face in negotiating prepacks and prenegotiated restructuring plans. Our panelists will discuss benefits and risks for both debtors and creditors of prepackaged and prenegotiated plans to accomplish a Chapter 11 reorganization. This webinar is the second in a series of upcoming webinars on Getting Ready for the Next Cycle. Our Getting Ready for the Next Cycle webinars will cover, among other topics: (a) prepackaged and pre-negotiated bankruptcies; (b) buying and selling financially distressed companies/assets; (c) DIP financing; (d) rights offerings and other methods for financing an exit from Chapter 11; (e) fiduciary duties for boards of financially distressed companies; and (f) European and Asian financings and workouts. Our next webinar in this series is scheduled for May 9, 2019; registration details will be available later this month. View Slides (PDF) PANELISTS: Michael A. Rosenthal is a partner in the New York office of Gibson, Dunn & Crutcher and Co-Chair of Gibson Dunn’s Business Restructuring and Reorganization Practice Group.  Mr. Rosenthal has extensive experience in reorganizing distressed businesses and related corporate reorganization and debt restructuring matters.  He has represented complex, financially distressed companies, both in out-of-court restructurings and in pre-packaged, pre-negotiated and freefall chapter 11 cases, acquirors of distressed assets and investors in distressed businesses.  During the recent financial and credit crisis, Mr. Rosenthal has been active in representing and providing advice to entities regarding their rights and exposure related to difficulties in the financial services sector, including issues related to loan restructurings, spin-offs, derivative products, securitizations and customer account issues.  In addition to debtors, acquirors and investors, Mr. Rosenthal has represented creditors’ committees, secured and unsecured creditors, bondholders and trustees.  He also has substantial experience in advising private equity firms and others on distressed and fulcrum security investing strategies. Oscar Garza is a partner in Gibson, Dunn & Crutcher’s Orange County and Los Angeles offices, joined the firm in 1990.  He is a member of the Business Restructuring and Reorganization Practice Group (and was a former co-chair of the restructuring group), Transnational Litigation and Latin America Practice Groups. Mr. Garza’s restructuring practice involves representing debtors, creditors’ committees, and secured creditors in chapter 11 cases, advising buyers and sellers of the assets of financially distressed companies, and representing Bankruptcy Trustees in complex cases. Mr. Garza’s transnational litigation practice is currently focused on leading and coordinating the defense against recognition and enforcement of foreign judgments with significant emphasis in defending actions in Latin America.  He is also advising on litigation strategy for multinational corporations involved in litigation within Latin America. Alan Moskowitz is an associate in the New York office of Gibson, Dunn & Crutcher and a member of Gibson Dunn’s Business Restructuring and Reorganization Practice Group.   Mr. Moskowitz’s practice focuses on representing secured creditors, agents and lenders in syndicated lending groups, ad hoc lender groups, debtors, debtor-in-possession lenders, distressed debt investors, distressed asset acquirers, and other parties-in-interest in complex chapter 11 cases and out-of-court restructurings across various industries. Matthew G. Bouslog is an associate in the Orange County office of Gibson, Dunn & Crutcher LLP where he practices in the firm’s Business Restructuring and Reorganization Practice Group.  Mr. Bouslog specializes in representing companies in complex restructuring matters.  Mr. Bouslog frequently represents debtors, creditors, and other interested parties in out-of-court and in-court restructurings, distressed acquisitions, and bankruptcy-related litigation.  A significant number of Mr. Bouslog’s matters have involved cross-border issues. MCLE INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast.  No certificate of attendance is required for California “self-study” credit.

April 29, 2019 |
S.D.N.Y. Decision May Have Significant Impact on Bankruptcy Code “Safe Harbor” for Securities Transactions

Click for PDF On April 23, 2019, in In re Tribune Co. Fraudulent Conveyance Litigation, 2019 WL 1771786 (S.D.N.Y. Apr. 23, 2019) (“Tribune”), Judge Denise Cote of the District Court for the Southern District of New York held that the Bankruptcy Code “safe harbor” provision in 11 U.S.C. § 546(e) prevents a plaintiff from clawing back payments that Tribune Company (“Tribune”) made to public shareholders in 2007 as part of a go-private transaction.[1]  Section 546(e) bars a trustee from asserting a claim for constructive fraudulent transfer to avoid (or undo) a “settlement payment” (i.e., a payment for securities) made by or to certain protected entities (“Covered Entities”), including a “financial institution.”[2] The decision is important because it is one of the first, if not the first, to specially address footnote 2 in Merit Management Group, LP v. FTI Consulting, Inc., 138 S. Ct. 883 (2018), which opinion was viewed as severely limiting the scope of the safe harbor. I.  Supreme Court Decision in Merit Management On February 27, 2018, the Supreme Court in Merit Management held that the safe harbor does not protect a transfer that merely passed through a Covered Entity, where neither the transferor nor the transferee is itself a Covered Entity.[3]  By way of footnote 2, the Supreme Court expressly avoided addressing whether, because the Bankruptcy Code defines a “financial institution” to include the “customer” of a “financial institution” under certain circumstances,[4] the safe harbor protects a transfer made by or to a party that constitutes a protected “customer” but is not otherwise a Covered Entity.[5]  That was the issue decided in Tribune. II.  Background in Tribune In 2007, Tribune, a public company, consummated a tender offer and then went private through a merger six months later.  In the tender offer, Tribune borrowed funds and transmitted the cash required to repurchase approximately 50% of its outstanding shares to Computershare Trust Company, N.A. (“CTC”), which acted as “Depository.”  CTC, on Tribune’s behalf, then accepted and held tendered shares and paid out $34 per share to tendering shareholders.  In the merger, CTC acted as an “Exchange Agent” and performed essentially the same function. One year after the merger, on December 8, 2008, Tribune and various subsidiaries commenced chapter 11 bankruptcy cases.  A litigation trust was established pursuant to Tribune’s chapter 11 plan, and the trustee (“Trustee”) pursued a claim to recover the tender offer and merger payments from Tribune’s former shareholders, alleging that the payments constituted an actual fraudulent transfer under 11 U.S.C. § 548(a)(1)(A).[6]  The Trustee did not bring a claim for constructive fraudulent transfer because he acknowledged that, based on controlling Second Circuit law at the time, the safe harbor barred the claim because the payments went through CTC.[7]  After the Supreme Court rejected that theory in Merit Management, the Trustee filed a motion for leave to amend his complaint to add a claim for constructive fraudulent transfer. III.  District Court Held That Section 546(e) Protects Tribune’s Shareholder Payments Because They Were Made By a “Financial Institution” (i.e., Tribune) Judge Cote denied the Trustee’s motion for leave to amend on grounds including futility, holding that the safe harbor still bars the Trustee’s proposed claim, notwithstanding Merit Management, because Tribune constituted a “financial institution.”  That conclusion rested on four premises: (1) it was “undisputed” that CTC is a “financial institution” because it is a “bank” and “trust company”; (2) Tribune was CTC’s “customer” based on the “ordinary meaning” of that term because “Tribune engaged the CTC’s services as depositary in exchange for a fee” and “was a ‘purchaser’ of CTC’s ‘services’”; (3) CTC acted as Tribune’s “agent,” based on the “well-settled meaning of th[at] common-law term[],” because “CTC was entrusted with billions of dollars of Tribune cash and was tasked with making payments on Tribune’s behalf to Shareholders upon the tender of their stock certificates to CTC,” which “is a paradigmatic principal-agent relationship”; and (4) “CTC acted ‘in connection with a securities contract,’” which is broadly defined to include any agreement to repurchase securities, as Tribune had done.[8] The Trustee argued that “reading the definition of ‘financial institution’ to cover an entity like Tribune would run counter to the spirit of the Supreme Court’s decision in Merit Management, which rejected the idea that a bank or trust company acting as a ‘mere conduit’ can be sufficient ground to invoke the safe harbor provision.”[9]  Rejecting that argument, Judge Cote noted that “the Supreme Court specifically declined to address the scope of the definition of ‘financial institution,’” and, ultimately, “[t]he text of Section 101(22)(A) compels the conclusion that Tribune itself was a ‘financial institution.’”[10] IV.  Takeaways from Tribune The customer-as-financial-institution argument accepted in Tribune offers a potential defense to a claim for constructive fraudulent transfer, which is most important in situations where neither the transferor nor the transferee is otherwise a Covered Entity.  It remains to be seen whether other courts will follow Tribune,[11] and, if so, whether its holding will be extended beyond large public securities transactions (as in Tribune) to small public or private transactions where a bank facilitates a payment for securities (as in Merit Management).  In any event, Tribune signals a potential step toward regaining some of the safe harbor’s protective ground that appeared lost in Merit Management.    [1]   Gibson, Dunn & Crutcher LLP represents certain shareholders and directors in this litigation.    [2]   11 U.S.C. § 546(e).    [3]   138 S. Ct. 883.  The decision is discussed in greater detail in our previous client alert.  See Garza, Oscar, Rosenthal, Michael & Levin, Douglas, Supreme Court Settles Circuit Split Concerning Bankruptcy Code “Safe Harbor” (Mar. 5, 2018).    [4]   See 11 U.S.C. § 101(22)(A) (“The term ‘financial institution’ means . . . a Federal reserve bank, or an entity that is a commercial or savings bank, industrial savings bank, savings and loan association, trust company, federally-insured credit union, or receiver, liquidating agent, or conservator for such entity and, when any such Federal reserve bank, receiver, liquidating agent, conservator or entity is acting as agent or custodian for a customer . . . in connection with a securities contract . . . such customer[.]”) (emphasis added).    [5]   See 138 S. Ct. at 890 n.2 (“The parties here do not contend that either the debtor or petitioner in this case qualified as a ‘financial institution’ by virtue of its status as a ‘customer’ under § 101(22)(A). . . .  We therefore do not address what impact, if any, § 101(22)(A) would have in the application of the § 546(e) safe harbor.”).    [6]   The actual fraudulent transfer claim was dismissed on January 6, 2017.  See In re Tribune Fraudulent Conveyance Litig., 2017 WL 82391 (S.D.N.Y. Jan. 6, 2017).    [7]   Tribune, at *2 (“The law in the Second Circuit at that time was that section 546(e) applied to any transaction involving one of the financial entities listed in that section, ‘even as a conduit.’”) (quoting In re Quebecor World (USA) Inc., 719 F.3d 94, 100 (2d Cir. 2013)).    [8]   Id. at *9-11.    [9]   Id. at *12.    [10]   Id.   [11]   Tribune is also subject to appeal. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or any of the following: Oscar Garza – Orange County, CA (+1 949-451-3849, ogarza@gibsondunn.com) Douglas G. Levin – Orange County, CA (+1 949-451-4196, dlevin@gibsondunn.com) Matthew G. Bouslog – Orange County, CA (+1 949-451-4030, mbouslog@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

April 19, 2019 |
Gibson Dunn Ranked in Legal 500 EMEA 2019

The Legal 500 EMEA 2019 has recommended Gibson Dunn in 14 categories in Belgium, France, Germany and UAE.  The firm was recognized in Competition – EU and Global in Belgium; Administrative and Public Law, Dispute Resolution – Commercial Litigation Industry Focus – IT, Telecoms and the Internet, Insolvency, Insurance, Mergers and Acquisitions, and Tax in France; Antitrust, Compliance, Internal Investigations and Private Equity in Germany; and Corporate and M&A and Investment Funds in UAE. Chézard Ameer, Ahmed Baladi,  Jean-Pierre Farges and Dirk Oberbracht were all recognized as Leading Individuals. Jérôme Delaurière was listed as a “Next Generation Lawyer.”  

March 29, 2019 |
New York Bankruptcy Court Affirms Enforceability of Well-Drafted Make-Whole Provision Against Bankrupt Debtor in In re 1411 Realty Owner, LLC

Click for PDF A recent bankruptcy court decision from the Southern District of New York held that a make-whole premium in a loan agreement was enforceable against a bankrupt borrower, notwithstanding the Second Circuit’s 2017 decision in Momentive.  The bankruptcy court held that, while make-whole premiums contingent on “prepayment” of a loan are presumed not to be triggered by a payment after acceleration of the underlying debt, because such a payment is not a prepayment, parties can—and in this case, did—contract around that rule with clear and unambiguous language stating that the premium is payable even if the debt is paid before the original maturity date as the result of acceleration. State of the Law Concerning the Enforceability of Make-Whole Provisions In negotiating loan agreements or note indentures, lenders frequently insist on including provisions for the payment of make-whole premiums, sometimes styled as “prepayment premiums,” “redemption premiums,” or “yield maintenance premiums.”  These types of provisions are designed to compensate lenders for the loss of future interest payments if and when borrowers repay their debts prior to the relevant debt instrument’s agreed-upon maturity date.  Likewise, they insure that lenders will not lose the benefit of their bargain if circumstances prevent them from redeploying the principal on similarly advantageous terms—for example, if prevailing interest rates have declined.  Accordingly, courts generally treat make-wholes as liquidated damages provisions, which, under New York law, are enforceable according to their terms provided that the premium is not “plainly or grossly disproportionate to the [lender’s] probable loss.”  JMD Holding Corp. v. Cong. Fin. Corp., 4 N.Y.3d 373, 380 (2005). Make-whole provisions vary in the language they use to describe the event that triggers a premium—for example, one loan agreement might refer to “prepayment” of a debt, and another an “optional redemption.”  Accordingly, courts have reached differing conclusions about whether they are enforceable against borrowers who have filed for bankruptcy, an event that typically triggers a default and automatic acceleration of the underlying debt.  In a 2013 decision, the Second Circuit held that, since acceleration moves the maturity date forward to the date of the bankruptcy filing, any subsequent payment would not trigger the “voluntary prepayment” clause at issue in that case, as “prepayment can only occur prior to the maturity date.”  In re AMR Corp., 730 F.3d 88, 103 (2d Cir. 2013) (emphasis added).  By contrast, in its 2016 decision in In re Energy Future Holdings Corp., the Third Circuit held that certain second-lien secured noteholders were entitled to an “optional redemption” premium following the borrower’s bankruptcy, reasoning that (1) as opposed to “prepayment,” “redemption” encompasses both pre- and post-maturity repayments of a debt; and (2) the debtor’s redemption of the accelerated notes was “optional,” since it could have reinstated the notes with their original maturity date pursuant to the Bankruptcy Code, but chose not to do so.  824 F.3d 247, 254 (3d Cir. 2016). The Second Circuit had the occasion to re-visit the enforceability of make-whole provisions in In re MPM Silicones, LLC (“Momentive”), holding that a make-whole provision—which permitted the debtor to “redeem” certain notes “at its option” in return for payment of a premium—was not triggered by a post-bankruptcy repayment of the notes.  874 F.3d 787, 801–2 (2d Cir. 2017).  Applying the same reasoning as in AMR, the Second Circuit held that, where a default results in acceleration, changing the date of the notes’ maturity, any repayment was neither a “prepayment” nor “optional,” since the obligation to redeem the notes arose automatically by operation of the acceleration clauses.”  Id. at 802–3.  In so doing, the Second Circuit appeared to reject the distinction between “prepayment” and “redemption” made by the Third Circuit and, instead, noted that the “plain meaning of the term ‘redeem’ is to ‘repay[ ] . . . a debt security . . . at or before maturity.’”  Id. at 803 (citations omitted). 1141 Realty Owner, LLC Confirms That Well-Drafted Make-Whole Provisions May Still Be Enforced Despite construing make-whole provisions strictly against lenders, neither AMR nor Momentive appeared to preclude lenders from enforcing contractual language that explicitly provides for payment of a make-whole premium upon acceleration of a debt.  For instance, the AMR decision cited with approval an unpublished 2010 district court opinion that held that the parties to a loan agreement “could have provided for the payment of premiums in the event of payment pursuant to acceleration.”  See AMR, 730 F.3d at 104 (citing HSBC Bank USA, Nat’l Ass’n v. Calpine Corp., No. 07–cv–3088, 2010 WL 3835200 (S.D.N.Y. Sep. 15, 2010) (emphasis added).  That proposition, however, remained untested until Judge Bernstein’s March 18 opinion in In re 1441 Realty Owner, LLC, which was the first issued by a bankruptcy court in the Second Circuit to rule on the enforceability of a make-whole provision since Momentive. The dispute in 1441 Realty Owner, LLC arose in the context of the bankruptcy of the owner of the Flatiron Hotel, a 62-room property encumbered by a mortgage loan with outstanding principal of approximately $24.2 million.  No. 18-12341 (SMB), 2019 WL 1270818, at *1 (Bankr. S.D.N.Y. Mar. 18, 2019).  The Loan Agreement—entered into in 2015, several years after the Second Circuit’s decision in AMR—defined the Maturity Date for the loan as May 6, 2025 “or such other date on which the final payment of the principal of the Note becomes due and payable as therein or herein provided, whether at such stated maturity date, by declaration or acceleration, or otherwise.”   Id. (emphasis in original).  The Loan Agreement also provided that “[i]f, following an Event of Default […] payment of all or any part of the Debt is tendered by Borrower or otherwise recovered by Lender, such tender or recovery shall be deemed a voluntary prepayment by Borrower in violation of the prohibition against prepayment set forth in Section 2.3.1 and Borrower shall pay, in addition to the Debt, (i) an amount equal to the Yield Maintenance Default Premium ….” Id. (emphasis in original). In September 2017, after the hotel owner (the “Debtor”) failed to maintain valid and effective liquor licenses for the hotel—an event of default under the Loan Agreement—the holder of the mortgage, Wilmington Trust, N.A., declared a default and elected to accelerate and demand repayment of the outstanding indebtedness, plus accrued interest and “all other sums due under the Loan Documents.”  Id. at *2.   After the Debtor filed for bankruptcy in July 2018, Wilmington Trust filed a proof of claim for $32,048,285, which included $3,108,096.78 attributed to the Yield Maintenance Default Premium.  Id.  Relying on the Second Circuit’s decisions in Momentive and AMR, the Debtor argued that the premium must be disallowed because Wilmington Trust had accelerated the debt.  Id. at *2, *5.   The Debtor contended that courts “will only uphold prepayment premiums after acceleration where the applicable loan agreement expressly provides that the premium is due following an acceleration” and noted that “the word ‘acceleration’ is ‘conspicuously absent’ from the relevant provision of the Loan Agreement.”  Id. at *3 (quoting Debtor’s Reply at ¶ 12, 16). Wilmington Trust responded that the premium was payable under the unambiguous terms of the Loan Agreement, which, unlike the agreements at issue in AMR and Momentive, provided that the premium would be triggered by any post-default payment, which includes post-acceleration payments.  Id. at *2.  The bankruptcy court agreed, holding that, while the Second Circuit has indeed held that “[g]enerally, a lender that accelerates a loan following a default forfeits the right to a prepayment premium,” id. at *4, nevertheless “parties can and here did contract around the general rule,” id. at *5.  In holding that the Loan Agreement was unambiguous that the make-whole premium would be payable post-acceleration, the bankruptcy court  noted that, insofar a note agreement “deemed” a repayment made pursuant to a lender’s exercise of remedies to be a “prepayment” that would trigger a make-whole provision, the absence of a specific reference to acceleration was “irrelevant.”  1141 Realty Owner, LLC, 2019 WL 1270818 at *5 (citing In re AE Hotel Venture, 321 B.R. 209, 218–19 (Bankr. N.D. Ill. 2005)).[1] Lessons for Lenders and Debtors from 1141 Realty Owner, LLC Judge Bernstein’s opinion in 1141 Realty Owner, LLC holds that neither AMR  nor Momentive created a per se rule barring the enforceability of make-whole provisions following the acceleration of a debt in the Second Circuit.  As the court noted, a lender’s rights in any given case “depend  on the terms of [the relevant agreement], not upon the wholly different agreements in [Momentive] and AMR.”  1141 Realty Owner, LLC, 2019 WL 1270818 at *5.  Likewise, while the burden remains on lenders to draft clear agreements that protect their rights to make-whole premiums post-acceleration, there are no mandatory “magic words”; rather, “parties can provide for their rights with any language that plainly conveys their intent.”  Id. at *6.  Nevertheless, lenders would be well-advised to be as explicit as possible, since a debtor in bankruptcy facing liability for a multimillion-dollar make-whole as well as junior creditors have strong incentives to contest the matter where there is any ambiguity in the underlying agreement. Likewise, debtors should think twice before assuming that a bankruptcy filing in the Southern District of New York will allow them to avoid incurring a hefty make-whole premium in a credit agreement or note indenture.  Notably, however, the Debtor in 1141 Realty Owner, LLC did not raise the arguments addressed in the Fifth Circuit’s recent opinion in In re Ultra Petroleum Corporation, which suggested that a make-whole premium constituted “unmatured interest” that a creditor is barred from recovering under section 502(b)(2) of the Bankruptcy Code.  In re Ultra Petroleum Corp., 913 F.3d 533, 547–548 (5th Cir. 2019).    [1]   Having decided the main issue of contract interpretation, the court went on to hold that Loan Agreement’s Yield Maintenance Default Premium was an enforceable liquidated damages clause under New York law, noting that the “[t]he party seeking to avoid the liquidated damages clause bears the burden of proving that it is [an unenforceable] penalty,” and that the Debtor “gave short shrift” to this issue, raising it only once in a footnote.  Id. at **4–5. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or any of the following: Matthew K. Kelsey – New York (+1 212-351-2615, mkelsey@gibsondunn.com) Michael K. Gocksch – Los Angeles (+1 213-229-7076, mgocksch@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 26, 2019 |
Gibson Dunn Advises on “Restructuring Deal of the Year”

The Brookstone Holdings asset sale, for which Gibson Dunn served as legal counsel, was recognized as the “Restructuring Deal of the Year” at the inaugural The Deal Awards Middle Market. These awards, announced on March 26, honor leaders and innovators in the world of dealmaking. Gibson Dunn’s Business Restructuring and Reorganization Practice Group advises companies in financial distress, their creditors and investors, and parties interested in acquiring assets from companies in distress.  We also guide hedge funds, private equity firms and financial institutions investing in distressed debt and/or equity through the restructuring and bankruptcy process.

March 14, 2019 |
Del. Bankruptcy Court Reclaims Control Of Article III Suits

New York partner Matthew Kelsey and associate Matthew Porcelli are the authors of “Del. Bankruptcy Court Reclaims Control Of Article III Suits” [PDF] published by Law360 on March 14, 2019.

March 13, 2019 |
Paragon Court Upholds Bankruptcy Courts’ Constitutional Authority to Adjudicate Fraudulent Transfer Claims

Click for PDF The Supreme Court’s watershed Stern v. Marshall decision altered the division of labor between bankruptcy courts and district courts, establishing that bankruptcy courts lacked authority under Article III of the United States Constitution to enter final orders resolving certain “core” claims notwithstanding Congress’s grant of such authority in the Bankruptcy Code.[1] A recent decision by the Bankruptcy Court for the District of Delaware in the bankruptcy case of offshore drilling contractor Paragon Offshore[2] represents the latest chapter in Stern’s ongoing aftermath.[3] While Stern focused on a state law tortious interference counterclaim, Paragon involves quintessential bankruptcy causes of action: fraudulent transfer claims held by the debtor’s estate. In Paragon, the court determined that under Stern v. Marshall and related case law, Article III does not preclude bankruptcy courts from entering final orders to resolve fraudulent transfer claims brought by a debtor’s successor-in-interest against a defendant that has not asserted a claim against the debtor’s estate. In so holding, the bankruptcy court disagreed with prior decisions by the Ninth Circuit and district courts in the Southern District of New York, setting the stage for a continuing battle on appeal and creating the potential for an eventual circuit split on the issue. The decision also provides guidance on the related issue of implied consent to bankruptcy court authority under Stern. I.    Background And Procedural Context The Paragon decision arose in an adversary proceeding brought by a post-confirmation litigation trust (the “Litigation Trust”) against Noble Corporation plc (“Noble”), a former parent entity that spun off Paragon Offshore plc and certain of its debtor affiliates (collectively, “Paragon”) in an August 2014 transaction (the “Spinoff”). The Litigation Trust brought certain causes of action, including five fraudulent transfer claims, against Noble, alleging that the Spinoff defrauded Paragon’s creditors. Specifically, the complaint alleged that Noble used the Spinoff to isolate a fleet of aged offshore drilling rigs in a newly created group of subsidiaries named Paragon Offshore, caused Paragon to incur $1.73 billion of indebtedness, transferred the proceeds to Noble, and distributed Paragon equity to Noble shareholders, leaving limited value behind for Paragon’s creditors. Paragon commenced voluntary chapter 11 proceedings on February 14, 2016. Shortly after the petition date, the debtors proposed an ultimately unsuccessful plan (the “Failed Plan”) that incorporated a settlement agreement between Noble and Paragon (the “Settlement Agreement”). The Settlement Agreement provided broad releases for Noble and affiliated parties in connection with claims arising out of the Spinoff, including fraudulent transfer or similar claims.[4] The releases’ effectiveness was conditioned on bankruptcy court approval of the Settlement Agreement and effectiveness of the Failed Plan. In November 2016, the bankruptcy court denied confirmation of the Failed Plan on feasibility grounds.[5] The debtors then proposed a new plan that did not incorporate the Settlement Agreement, which the bankruptcy court confirmed on June 7, 2017 (the “Confirmed Plan”). The Confirmed Plan created the Litigation Trust as a successor to the debtors and distributed interests in the Litigation Trust to Paragon’s creditors.[6] Noble provided input into the drafting of the Confirmed Plan, but did not object at any point to its inclusion of language granting the bankruptcy court exclusive jurisdiction to adjudicate claims held by the Litigation Trust “to the fullest extent permitted by law.”[7] On December 15, 2017, the Litigation Trust commenced the adversary proceeding against Noble and other defendants (collectively, the “Defendants”). The Defendants responded by filing a motion to determine, arguing that the bankruptcy court lacked constitutional authority to adjudicate the fraudulent transfer claims (among other claims), and seeking a determination that the bankruptcy court could only enter proposed findings of fact and conclusions of law with respect to such claims.[8] The Defendants argued that the Supreme Court’s decisions in Stern and Granfinanciera, S.A. v. Nordberg (“Granfinanciera”) compelled the conclusion that the bankruptcy court lacked the constitutional authority to issue final orders when a debtor or its successor-in-interest files a fraudulent transfer claim against a party that has not filed a claim in the underlying bankruptcy case.[9] II.    Threshold Issue of Consent As a threshold matter, the bankruptcy court considered whether Noble had implicitly consented to the bankruptcy court’s entry of final orders with respect to the fraudulent transfer claims. Under Wellness Int’l Network, Ltd. v. Sharif, the court would not need to reach the Article III issues raised by the Defendants if it found such consent.[10] The Litigation Trust argued that Defendants had implicitly consented by entering into the Settlement Agreement, and by failing to object to the Confirmed Plan’s providing the bankruptcy court with exclusive jurisdiction over the claims against Noble, despite Noble’s active participation in the negotiation of the plan. The court rejected both arguments, first concluding that Noble’s agreement to allow the court to approve the Settlement Agreement did not necessarily constitute consent to its eventual adjudication of then-unasserted underlying claims.[11] Second, the court held that a failure to object to a plan provision providing a bankruptcy court with ongoing jurisdiction does not constitute waiver of a party’s rights to have claims heard by an Article III court, because Stern drew an express distinction between subject matter jurisdiction and the allocation of constitutional authority.[12] III.    The Court’s Stern Analysis Turning to the Article III issue, the bankruptcy court initially noted that, by challenging its authority, the Defendants sought a determination that a federal statute was unconstitutional because the 1984 amendments to the Bankruptcy Code (the “1984 Amendments”) directed bankruptcy courts to enter final orders in core proceedings.[13] Core proceedings expressly include “proceedings to determine, avoid, or recover fraudulent conveyances.”[14] With this in mind, the court observed that the general principle of judicial restraint “weighs heavily against such a declaration,” because “federal statutes are presumed constitutional.”[15] The Defendants argued that the Supreme Court had already ruled on the constitutionality of fraudulent transfer actions against non-claimants in Granfinanciera and Stern. Accordingly, the bankruptcy court’s decision turned on whether the two precedents controlled, based on a close analysis of each case. Similar to the circumstances in Paragon, Granfinanciera involved a party with no claim against a bankruptcy estate being hauled into bankruptcy court to defend against a fraudulent transfer claim. The Supreme Court held that such a party “has a right to a jury trial when sued by the trustee in bankruptcy to recover an allegedly fraudulent monetary transfer.”[16] However, the Paragon court distinguished Granfinanciera because the issue before the court was not Article III authority, but rather the right to a jury trial under the 7th Amendment, and whether the so-called “public rights exception” could limit that right. While the Supreme Court did cite Article III case law to bolster its ultimate conclusion, the bankruptcy court observed that Granfinanciera specifically avoided addressing the constitutionality of the division of labor between bankruptcy courts and district courts established by Congress through the 1984 Amendments.[17] Thus, while observing that it was “a difficult question,” the court concluded that Granfinanciera did not control the Article III issue before it.[18] Turning to Stern, the bankruptcy court acknowledged that it “was very much an Article III case, and it discusses the Granfinanciera holding at length.”[19] Nevertheless, citing the Supreme Court’s admonition in Stern that the decision should be read narrowly and its “crystal clear statement” that Congress had exceeded its Article III power only “in one isolated respect,” the court concluded that Stern did not control because that isolated issue—a bankruptcy court’s constitutional authority to finally resolve a state law counterclaim that is not necessarily resolved in the proof of claim process—was not before the bankruptcy court.[20] Notably, the bankruptcy court acknowledged that other courts, including the Ninth Circuit and three judges in the Southern District of New York, reached the opposite conclusion and held that Stern extended Granfinanciera to the Article III context. But the court observed that in Executive Benefits Insurance Agency v. Arkison, the Supreme Court indicated ambiguity on the issue by expressly assuming, without deciding, that fraudulent transfer claims were Stern claims.[21] Having concluded that neither Granfinanciera nor Stern controlled, the bankruptcy court declined to extend their holdings to deem bankruptcy courts’ final adjudication of fraudulent transfer claims unconstitutional and denied the motion to determine.[22] IV.    Practical Implications Paragon provides bankruptcy court litigants with several points of guidance for forum-determinative Stern issues. First, a party’s entry into a settlement agreement submitted to a bankruptcy court for approval does not necessarily constitute that party’s implicit consent to the bankruptcy court’s authority to finally adjudicate such claims.[23] Second, a party’s failure to object to an exclusive jurisdiction provision in a plan during that party’s active participation in plan development does not constitute consent to the bankruptcy court’s constitutional authority, indicating that parties may negotiate plan provisions without thereby waiving their entitlement to an Article III tribunal. Third, the Paragon decision makes it more likely that fraudulent transfer claims can be finally adjudicated by bankruptcy courts—at least in the Third Circuit. Given that the decision creates a split in authority, and in light of the court’s statement that the Stern issue was “a difficult question,” it appears likely that the result will be tested on appeal. _______________________    [1]   564 U.S. 462, 503 (2011) (“Stern”).    [2]   Paragon Litigation Trust v. Noble Corp. plc (In re Paragon Offshore, plc), Ch. 11 Case No. 16-10386 (CSS), Dkt. No. 2178 (Bankr. D. Del. Mar. 11, 2019) (“Paragon”); Adv. Proc. No. 17-51882 (CSS).    [3]   For prior client alerts discussing Stern-related developments in connection with the permissibility of third-party non-debtor releases, see https://www.gibsondunn.com/two-recent-bankruptcy-court-decisions-on-third-party-releases-highlight-divergent-approaches-to-the-operative-proceeding-analysis/; https://www.gibsondunn.com/post-confirmation-sunedison-bankruptcy-release-decision-rejects-operative-proceeding-analysis-finds-lack-of-jurisdiction-to-approve-third-party-releases/.    [4]   Paragon at 7.    [5]   Id. at 7-8.    [6]   Id. at 8.    [7]   Id.    [8]   Id. at 8-9.    [9]   492 U.S. 33 (1989). [10]   135 S. Ct. 1932, 1947-48 (2015). [11]   Paragon at 13-14. [12]   Id. at 14-15. [13]   28 U.S.C. §§ 157 and 158. [14]   28 U.S.C. § 158(b)(2)(H). [15]   Paragon at 16 (citing Koslow v. Commonwealth of Pennsylvania, 302 F.3d 161, 175 (3d Cir. 2002); Union Pac. R.R. Co. v. United States, 99 U.S. (9 Otto) 700, 718 (1878)). [16]   Granfinanciera, 492 U.S. at 36. [17]   Paragon at 20 (quoting Granfinanciera at 64) (“[The Supreme] Court took pains to declare that it did not ‘express any view as to whether . . . Article III allows jury trials in fraudulent conveyance actions to be held before non-Article III bankruptcy judges subject to the oversight provided by the district courts pursuant to the 1984 Amendments.’”). [18]   Id. at 19-21. [19]   Id. at 21. [20]   Id. at 21-23. [21]   573 U.S. 25, 37 (2014). [22]   Paragon at 23-24. [23]   Because the Paragon settlement agreement never became effective, parties negotiating settlement agreements with debtors should also include carefully drafted language addressing this point to avoid any argument that the Paragon holding is distinguishable. Gibson, Dunn & Crutcher’s lawyers are available to assist with any questions you may have regarding these issues.  For further information, please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Business Restructuring and Reorganization practice group, or any of the following: Matthew K. Kelsey – New York (+1 212-351-2615, mkelsey@gibsondunn.com) Samuel A.  Newman – Los Angeles (+1 213-229-7644, snewman@gibsondunn.com) J. Eric Wise – New York (+1 212-351-2620, ewise@gibsondunn.com) Matthew P. Porcelli – New York (+1 212-351-3803, mporcelli@gibsondunn.com) Please also feel free to contact the following practice group leaders: Business Restructuring and Reorganization Group: David M. Feldman – New York (+1 212-351-2366, dfeldman@gibsondunn.com) Robert A. Klyman – Los Angeles (+1 213-229-7562, rklyman@gibsondunn.com) Jeffrey C. Krause – Los Angeles (+1 213-229-7995, jkrause@gibsondunn.com) Michael A. Rosenthal – New York (+1 212-351-3969, mrosenthal@gibsondunn.com) © 2019 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

March 8, 2019 |
Gibson Dunn Ranked in Chambers Europe 2019

Gibson Dunn received 30 rankings in Chambers Europe 2019: 22 individual rankings and eight firm rankings. The firm was recommended in the following categories: Competition/European Law – Belgium; Corporate Investigations – Europe-wide; Corporate/M&A: High-End Capability – France; Restructuring/Insolvency – France; TMT: Information Technology – France; Compliance – Germany; Corporate/M&A: High-End Capability – Germany; Dispute Resolution: White-Collar Crime: Corporate Advisory – Germany. The following Gibson Dunn partners were recognized as leaders in their fields: Peter Alexiadis, Ahmed Baladi, Sandy Bhogal, Jérôme Delaurière, Jean-Pierre Farges, Benoît Fleury, Charlie Geffen, Ariel Harroch, Chris Haynes, Ali Nikpay, Dirk Oberbracht, Wilhelm Reinhardt, Sebastian Schoon, Benno Schwarz, Steve Thierbach, David Wood, and Finn Zeidler.

January 15, 2019 |
Five Gibson Dunn Partners Recognized in Who’s Who Legal in Restructuring and Insolvency

Who’s Who Legal Restructuring and Insolvency 2019 recognized five Gibson Dunn partners. Los Angeles partners Robert Klyman and Jeffrey Krause, New York partners David Feldman and Michael Rosenthal, and Paris partner Jean-Pierre Farges were listed. The list was published in January 2019.

December 21, 2018 |
Turnarounds & Workouts Names Jeffrey Krause Among its Outstanding Restructuring Lawyers

Los Angeles partner Jeffrey Krause was named by Turnarounds & Workouts to its 2018 list of Outstanding Restructuring Lawyers. The list was published in the December 2018 issue. Krause serves as Co-Chair of the firm’s Business Restructuring and Reorganization Practice Group.  He has a broad corporate restructuring practice and has handled significant debtor and creditor committee representations, as well as representations of acquirers of assets from chapter 11 debtors, lessors and secured and unsecured creditors.  He is a fellow of the American College of Bankruptcy.

December 18, 2018 |
Gibson Dunn Ranked Top in Debt Restructuring and Insolvency by Magazine des Affaires

French business magazine Magazine des Affaires has ranked Gibson Dunn in the top tier in both its debt restructuring and insolvency categories. The rankings were published in the December 2018 restructuring special of Magazine des Affaires.

October 11, 2018 |
Financing Arrangements and Documentation: Considerations Ahead of Brexit

Click for PDF Since the result of the Brexit referendum was announced in June 2016, there has been significant commentary regarding the potential effects of the UK’s withdrawal from the EU on the financial services industry. As long as the UK is negotiating its exit terms, a number of conceptual questions facing the sector still remain, such as market regulation and bank passporting. Many commentators have speculated from a ‘big picture’ perspective what the consequences will be if / when exit terms are agreed.  From a contractual perspective, the situation is nuanced. This article will consider certain areas within English law financing documentation which may or may not need to be addressed. Bank passporting The EU “passporting” regime has been the subject of much commentary since the result of the Brexit referendum.  In short, in some EU member states, lenders are required under domestic legislation to have licences to lend.  Many UK lenders have relied on EU passporting (currently provided for in MiFID II), which allows them to lend into EU member states simply by virtue of being regulated in the UK (and vice versa). The importance for the economy of the passporting regime is clear. Unless appropriate transitional arrangements are put in place to ensure that the underlying principle survives, however, there is a risk that following Brexit passporting could be lost.  Recent materials produced by the UK Government suggest that the loss of passporting may be postponed from March 2019 until the end of 2020, although financial institutions must still consider what will happen after 2020 if no replacement regime is agreed.  The UK Government has committed to legislate (if required) to put in place a temporary recognition regime to allow EU member states to continue their financial services in the UK for a limited time (assuming there is a “no deal” scenario and no agreed transition period). However, there has not to date been a commitment from the EU to agree to a mirror regime. Depending on the outcome of negotiations on passporting, financial institutions will need to consider the regulatory position in relation to the performance of their underlying financial service, whether that is: lending, issuance of letters of credit / guarantees, provision of bank accounts or other financial products, or performing agency / security agency roles. Financial institutions may need to look to transfer their participations to an appropriately licensed affiliate (if possible) or third party, change the branch through which it acts, resign from agency or account bank functions, and/or exit the underlying transaction using the illegality protections (although, determining what is “unlawful” for these purposes in terms of a lender being able to fund or maintain a loan will be a complex legal and factual analysis).  More generally, we expect these provisions to be the subject of increasing scrutiny, although there seems to be limited scope for lenders to move illegality provisions in their favour and away from an actual, objective illegality requirement, owing to long-standing commercial convention. From a documentary perspective, it will be necessary to analyse loan agreements individually to determine whether any provisions are invoked and/or breached, and/or any amendments are required.  For on-going structuring, it may be appropriate for facilities to be tranched – such tranches (to the extent the drawing requirements of international obligor group can be accurately determined ahead of time) being “ring-fenced”, with proportions of a facility made available to different members of the borrower group and to be participated in by different lenders – or otherwise structured in an alternative, inventive manner – for example, by “fronting” the facility with a single, adequately regulated lender with back-to-back lending mechanics (e.g. sub-participation) standing behind.  In the same way, we also expect that lenders will exert greater control – for example by requiring all lender consent in all instances – on the accession of additional members of the borrowing group to existing lending arrangements in an attempt to diversify the lending jurisdictions.  Derivatives If passporting rights are lost and transitional relief is not in place, this could have a significant impact on the derivatives markets.  Indeed, without specific transitional or equivalence agreements in place between the EU and the UK, market participants may not be able to use UK clearing houses to clear derivatives subject to mandatory clearing under EMIR.  Additionally, derivatives executed on UK exchanges could be viewed as “OTC derivatives” under EMIR and would therefore be counted towards the clearing thresholds under EMIR.  Further, derivatives lifecycle events (such as novations, amendments and portfolio compressions) could be viewed as regulated activities thereby raising questions about enforceability and additional regulatory restrictions and requirements. In addition to issues arising between EU and UK counterparties, equivalence agreements in the derivatives space between the EU and other jurisdictions, such as the United States, would not carry over to the UK.  Accordingly, the UK must put in place similar equivalence agreements with such jurisdictions or market participants trading with UK firms could be at a disadvantage compared to those trading with EU firms. As a result of the uncertainty around Brexit and the risk that passporting rights are likely to be lost, certain counterparties are considering whether to novate their outstanding derivatives with UK derivatives entities to EU derivatives entities ahead of the exit date.  Novating derivatives portfolios from a UK to an EU counterparty is a significant undertaking involving re-documentation, obtaining consents, reviewing existing documentation, identifying appropriate counterparties, etc. EU legislation and case law Loan agreements often contain references to EU legislation or case law and, therefore, it is necessary to consider whether amendments are required. One particular area to be considered within financing documentation is the inclusion of Article 55 Bail-In language[1].  In the last few years, Bail-In clauses have become common place in financing documentation, although they are only required for documents which are governed by the laws of a non-EEA country and where there is potential liability under that document for an EEA-incorporated credit institution or investment firm and their relevant affiliates, respectively.  Following withdrawal from the EU, the United Kingdom will (subject to any transitional or other agreed arrangements) cease to be a member of the EEA and therefore English law governed contracts containing in-scope liabilities of EU financial institutions may become subject to the requirements of Article 55.  Depending on the status of withdrawal negotiations as we head closer to March 2019, it may be appropriate as a precautionary measure to include Bail-In clauses ahead of time – however, this analysis is very fact specific, and will need to be carefully considered on a case-by-case basis. Governing law and jurisdiction Although EU law is now pervasive throughout the English legal system, English commercial contract law is, for the most part, untouched by EU law and therefore withdrawal from the EU is expected to have little or no impact.  Further, given that EU member states are required to give effect to the parties’ choice of law (regardless of whether that law is the law of an EU member state or another state)[2], the courts of EU member states will continue to give effect to English law in the same way they do currently.  Many loan agreements customarily include ‘one-way’ jurisdiction clauses which limit borrowers/obligors to bringing proceedings in the English courts (rather than having the flexibility to bring proceedings in any court of competent jurisdiction). This allows lenders to benefit from the perceived competency and commerciality of the English courts as regards disputes in the financial sector. Regardless of the outcome of the Brexit negotiations, such clauses  are likely to remain unchanged due to the experience of English judges in handling such disputes and the certainty of the common law system. It is possible that the UK’s withdrawal will impact the extent to which a judgement of the English courts will be enforceable in other EU member states.  Currently, an English judgement is enforceable in all other EU member states pursuant to EU legislation[3].  However, depending on the withdrawal terms agreed with the EU, the heart of this regulation may or may not be preserved. In other words, English judgements could be in the same position to that of, for example, judgements of the New York courts, where enforceability is dependent upon the underlying law of the relevant EU member state; or, an agreement could be reached for automatic recognition of English judgements across EU member states.  In the same vein, the UK’s withdrawal could also impact the enforcement in the UK of judgements of the courts of the remaining EU member states. Conclusion Just six months ahead of the UK’s 29 March 2019 exit date, there remains no agreed legal position as regards the terms of the UK’s withdrawal from the EU. It is clear that, for so long as such impasse remains, the contractual ramifications will continue to be fluid and the subject of discussion.  However, what is apparent is that the financial services sector, and financing arrangements more generally, are heavily impacted and it will be incumbent upon contracting parties, and their lawyers, to consider the relevant terms, consequences and solutions at the appropriate time. [1]   Article 55 of the Bank Resolution and Recovery Directive [2]   Rome I Regulation [3]   Brussels I regulation. Gibson Dunn’s lawyers are available to assist in addressing any questions you may have regarding these issues. Please contact the Gibson Dunn lawyer with whom you usually work, any member of the firm’s Global Finance practice group, or the authors: Amy Kennedy – London (+44 (0)20 7071 4283, akennedy@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Alex Hillback – Dubai (+971 (0)4 318 4626, ahillback@gibsondunn.com) Please also feel free to contact the following leaders and members of the Global Finance and Financial Institutions practice groups: Global Finance Group: Thomas M. Budd – London (+44 (0)20 7071 4234, tbudd@gibsondunn.com) Gregory A. Campbell – London (+44 (0)20 7071 4236, gcampbell@gibsondunn.com) Richard Ernest – Dubai (+971 (0)4 318 4639, rernest@gibsondunn.com) Jamie Thomas – Singapore (+65 6507 3609, jthomas@gibsondunn.com) Michael Nicklin – Hong Kong (+852 2214 3809, mnicklin@gibsondunn.com) Linda L. Curtis – Los Angeles (+1 213 229 7582, lcurtis@gibsondunn.com) Aaron F. Adams – New York (+1 212 351 2494, afadams@gibsondunn.com) Financial Institutions Group: Arthur S. Long – New York (+1 212-351-2426, along@gibsondunn.com) Michael D. Bopp – Washington, D.C. (+1 202-955-8256, mbopp@gibsondunn.com) Jeffrey L. Steiner – Washington, D.C. (+1 202-887-3632, jsteiner@gibsondunn.com) Carl E. Kennedy – New York (+1 212-351-3951, ckennedy@gibsondunn.com) © 2018 Gibson, Dunn & Crutcher LLP Attorney Advertising:  The enclosed materials have been prepared for general informational purposes only and are not intended as legal advice.

July 31, 2018 |
Webcast: Strategies Regarding Corporate Veil Piercing and Alter Ego Doctrine

Please join a panel of seasoned Gibson Dunn attorneys for a presentation on how a company can best protect itself against “veil-piercing” claims and “alter ego” liability.  We provide an overview of what it means to “pierce the corporate veil” and the circumstances that have prompted courts to ignore the corporate separateness of entities and impose “alter ego” liability. We also focus on strategies to minimize the risk of facing claims for veil piercing and alter ego liability and maximize your chances for success in connection with any such claims. View Slides [PDF] PANELISTS: Robert A. Klyman is a partner in Gibson Dunn’s Los Angeles office. He is Co-Chair of the Firm’s Business Restructuring and Reorganization practice group. Mr. Klyman represents debtors, acquirers, lenders, ad hoc groups of bondholders and boards of directors in all phases of restructurings and workouts. His experience includes advising debtors in connection with traditional, prepackaged and “pre-negotiated” bankruptcies; representing lenders and bondholders in complex workouts; counseling strategic and financial players who acquire debt or provide financing as a path to take control of companies in bankruptcy; structuring and implementing numerous asset sales through Section 363 of the Bankruptcy Code; and litigating complex bankruptcy and commercial matters arising in chapter 11 cases, both at trial and on appeal. John M. Pollack is a partner in Gibson Dunn’s New York office. He is a member of the Firm’s Mergers and Acquisitions, Private Equity, Aerospace and Related Technologies and National Security practice groups. Mr. Pollack focuses his practice on public and private mergers, acquisitions, divestitures and tender offers, and his clients include private investment funds, publicly-traded companies and privately-held companies. Mr. Pollack has extensive experience working on complex M&A transactions in a wide range of industries, with a particular focus on the aerospace, defense and government contracts industries. Lori Zyskowski is a partner in Gibson Dunn’s New York office. She is Co-Chair of the Firm’s Securities Regulation and Corporate Governance practice group. Ms. Zyskowski advises public companies and their boards of directors on corporate governance matters, securities disclosure and compliance issues, executive compensation practices, and shareholder engagement and activism matters. Ms. Zyskowski advises clients, including public companies and their boards of directors, on corporate governance and securities disclosure matters, with a focus on Securities and Exchange Commission reporting requirements, proxy statements, annual shareholders meetings, director independence issues, and executive compensation disclosure best practices. Ms. Zyskowski also advises on board succession planning and board evaluations and has considerable experience advising nonprofit organizations on governance matters. Sabina Jacobs Margot is an associate in Gibson Dunn’s Los Angeles office. She is a member of the Firm’s Business Restructuring and Reorganization and Global Finance practice groups. Ms. Jacobs Margot practices in all aspects of corporate reorganization and handles a wide range of bankruptcy and restructuring matters, representing debtors, lenders, equity holders, and strategic buyers in chapter 11 cases, sales and acquisitions, bankruptcy litigation, and financing transactions. Ms. Jacobs Margot also represents borrowers, sponsors, and lending institutions in connection with acquisition financings, secured and unsecured credit facilities, asset-based loans, and debt restructurings. MCLE CREDIT INFORMATION: This program has been approved for credit in accordance with the requirements of the New York State Continuing Legal Education Board for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the areas of professional practice requirement. This course is approved for transitional/non-transitional credit. Attorneys seeking New York credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. This program has been approved for credit in accordance with the requirements of the Texas State Bar for a maximum of 1.0 credit hour, of which 1.0 credit hour may be applied toward the area of accredited general requirement. Attorneys seeking Texas credit must obtain an Affirmation Form prior to watching the archived version of this webcast. Please contact Jeanine McKeown (National Training Administrator), at 213-229-7140 or jmckeown@gibsondunn.com to request the MCLE form. Gibson, Dunn & Crutcher LLP certifies that this activity has been approved for MCLE credit by the State Bar of California in the amount of 1.0 hour. California attorneys may claim “self-study” credit for viewing the archived version of this webcast. No certificate of attendance is required for California “self-study” credit.