Business Restructuring + Insolvency Summer Update August 2013 To our friends and clients: We have had a busy and productive 2013 as we continue to work on many of the largest and highest profile matters of recent years. The recognition we have received for our achievements this year has been remarkable as you may recall, in May we were named Chambers USA Bankruptcy Firm of the Year for 2013, and before that we were named a Law360 Bankruptcy Practice Group of the Year for 2013. Below, we have provided you with a short update of recent developments in our significant engagements in the U.S. and abroad. For a little substantive reading, the second part of this booklet includes summaries of some recent happenings in insolvency law in the United Kingdom and Europe, where interesting developments are afoot. We hope you enjoy the rest of your summer and, as always, we are grateful for your support. MoFo s Business Restructuring + Insolvency Group Residential Capital LLC We represent Residential Capital and its affiliatied debtors in their chapter 11 cases. The sales of ResCap s mortgage loan servicing and origination platform successfully closed in February 2013, generating approximately $4.1 billion in gross proceeds, which was approximately $1 billion more than the debtors would have received through stalking horse transactions. On June 26, 2013, the bankruptcy court approved a plan support agreement entered into by ResCap and the majority of its major creditors, which contemplates a chapter 11 plan in which former parent Ally Financial Inc. will contribute $2.1 billion to the debtors estates. The plan support agreement is a product of around-the-clock negotiations under the mediation of Judge Peck. On July 3 and 4, respectively, ResCap filed a proposed chapter 11 plan and disclosure statement. A hearing on the disclosure statement is currently scheduled for late August. MF Global MoFo has represented the Chapter 11 Trustee in MF Global s bankruptcy. In April 2013, MF Global won bankruptcy court approval of a chapter 11 plan to liquidate its assets, make distributions to creditors and, ultimately, conclude its bankruptcy. MoFo continues to work on the matter, now representing the plan administrator in resolving and settling outstanding claims against the continued on page 2
debtors, as well as advising the company and its board on legacy issues. In addition, we are representing the litigation trustee in the litigation against former officers and directors commenced by the former Chapter 11 Trustee. Over the course of this case, on behalf of the Chapter 11 Trustee, we conducted an investigation and, in early April 2013, filed a report with the bankruptcy court attributing blame for MF Global s collapse to the actions and failures of key members of MF Global s former management, in particular Jon Corzine (former CEO and chairman), Bradley Abelow (former COO) and Henri Steenkamp (former CFO). Following this, in late April 2013, we filed a lawsuit against the former officers for breach of their fiduciary duties and failure to act in good faith which ultimately resulted in the collapse and bankruptcy of MF Global. The lawsuit is currently pending before the Bankruptcy Court for the Southern District of New York. Triad MoFo has been retained as special counsel to the debtor in the chapter 11 case of Triad Guaranty Inc. In particular, we are advising on bankruptcy related tax and regulatory issues. Triad is the parent company of an Illinois domiciled insurance company that provided private mortgage insurance in all 50 states and the District of Columbia. It filed for bankruptcy in June 2013. Ambac MoFo represented the creditors committee in the chapter 11 case of Ambac Financial Group. As counsel, we negotiated a global settlement of claims that were asserted for the IRS and the Wisconsin Insurance Commissioner, resulting in more than a 15% increase in the value of the bonds held by creditors. On May 1, 2013, Ambac successfully emerged from chapter 11 with the issuance of new capital stock with market capital and corresponding recoveries to creditors of over $1 billion. This case is believed to be the first partial rehabilitation of an insurance company in the U.S. Pinnacle We represented the creditors committee in the chapter 11 case of Pinnacle Airlines Corp., which resulted in a chapter 11 plan in which Delta would own the reorganized company upon exit from bankruptcy. The plan was confirmed in April and went effective on May 1, 2013. The acquisition of Pinnacle by Delta closed in early May. Furthermore, creditors will receive a distribution under the plan that, although small, is certainly more than they would have received under a liquidation, which was perilously close at certain points during the case. Eastman Kodak Company MoFo is lead bankruptcy counsel to numerous intellectual property licensees and licensors in the Kodak bankruptcy case, including Intel, Nikon and Dai Nippon Printing Co., Ltd., in addition to other creditors. Our lawyers have continuously fought to preserve and protect clients intellectual property rights, including by leading an ad hoc group of major technology companies in fiercely opposing various improper sale and plan proposals by Kodak and by negotiating protective provisions for the resulting sale orders and disclosure statement. Many of our clients have also sought our expertise on the bankruptcy sale and claims processes in this case, including seeking advice on how best to protect key intellectual property and related rights in bankruptcy. In addition, MoFo represented Kyocera Corporation in defending its rights, claims, defenses and interests in connection with patent and related litigation against Kodak pending in various courts, ultimately resulting in a successful global settlement that preserved considerable value for Kyocera. PMI As counsel to the creditors committee in the chapter 11 case of The PMI Group, Inc., our efforts and leadership in a complex mediation facilitated a consensual resolution 2 Business Restructuring + Insolvency Summer Update, August 2013 continued on page 3
among the debtor, the debtor s regulated insurance subsidiary (MIC) and the Arizona Insurance Commissioner overseeing MIC s stock court rehabilitation. As a result of the successful mediation, we were able to realize value for a substantial portion of the debtor s net operating losses, and unlock the residual value at the debtor s reinsurance subsidiaries. On July 25, 2013, the bankruptcy court confirmed the debtor s plan of reorganization, which was proposed with substantial input and direction from MoFo and its constituents and preserves the balance of the consolidated tax group s tax attributes for future use by the reorganized debtor. The reorganized debtor will emerge from bankruptcy with a clean balance sheet and the ability to utilize the remaining tax attributes to realize additional value for the debtor s prepetition creditors through future investments. Across the pond HMV Administration In connection with the administration in the UK and Ireland of HMV, a major entertainment retail chain, MoFo London represented a number of supplier creditors, including Warner Music UK, Paramount Home Entertainment, Cinram, Arvato, Channel 4 and ITV, as well as two Sony businesses encompassing Sony Music Entertainment UK and Sony DADC UK. MoFo concluded settlements with the administrators of HMV on behalf of the suppliers for the stock that remained at the stores when it went into administration, which also has paved the way for the future supply of stock to the new HMV entity. Landmark Supreme Court Ruling in Icelandic Bank Collapse MoFo continues to represent Landsbanki Islands hf. (n/k/a LBI hf.), one of the three largest banks in Iceland that collapsed in 2008 with combined liabilities in excess of $65 billion. Most recently, we have represented Landsbanki in proceedings in the Supreme Court of the United Kingdom against Heritable Bank, a subsidiary of Landsbanki in Scotland. The Supreme Court recently held that, although as a matter of Icelandic law, Heritable s claims against Landsbanki had been extinguished, they could still be used for the purpose of set-off in Heritable s administration against the claims submitted by Landsbanki. This complex cross-border litigation raises important issues in respect of the interaction of European Economic Area and national rules for litigation within a winding-up process. The Supreme Court s decision is a landmark ruling for set-off in cross-border insolvencies. MF Global Our London office has been advising on various issues in relation to the MF Global UK estates in order to recover assets for the MF Global U.S. estates which were formerly in chapter 11 proceedings. MoFo has successfully concluded an agreement with the Special Administrators as part of a global settlement that, following certain conditions being satisfied, will allow a more efficient and cost-effective distribution to the creditors of all the MF Global estates. Liquidators of Saad Investments Company Limited We continue to work with the liquidators of the Cayman Islands company, Saad Investments Company Limited (SICL), in connection with its $9.2 billion liquidation. We are resolving issues arising from a $2.815 billion loan to SICL under an unsecured English law governed revolving credit facility. Some banks in the loan syndicate also had bilateral facilities with SICL and some hold assets worth several hundred million dollars for SICL. The banks rights of security and set-off in respect of those assets, which are located across numerous jurisdictions and are held pursuant to agreements with differing governing law clauses (including Swiss, English and New York law), has been one of the major issues we are handling. We have also been assisting the Swiss bankruptcy trustee with a variety of issues arising in an independent, local mini-bankruptcy proceeding in Switzerland and have been seeking information under compulsion from various institutions in both London and foreign jurisdictions. 3 Business Restructuring + Insolvency Summer Update, August 2013 continued on page 4
Bankruptcy of Maythem Al-Ansari We continue to advise the trustees in the bankruptcy of Maythem Al-Ansari, who was convicted on charges of money laundering and whose assets include more than 80 properties in the UK, Dubai, Morocco, Spain and India. Recently, we obtained judgment against the debtor s wife to recover certain assets she claimed belonged to her rather than the debtor. This case is particularly interesting because the trustees successfully made an application to vary the criminal restraint order to enable them to deal with the defendant s assets under the Insolvency Act 1986, something we believe has never been done before. Land Bank of Taiwan A cross-practice, cross-office MoFo team from London and New York represented Land Bank of Taiwan in relation to a dispute with Lehman Brothers. The main issue at stake was the applicability of flip clauses in derivatives disputes. A flip clause operates to invert investor priority rights to repayment in the event of a default that affects the value of a security. The Supreme Court of the United Kingdom, in the Belmont Park case, held that flip clauses were enforceable under English Law. However, a New York judge has given a first instance decision finding that they are not enforceable under the U.S. Bankruptcy Code. Following a compulsory mediation in New York, the parties have now concluded a successful settlement of all the issues in dispute. Recent developments in UK and European insolvency law New European Commission Consultation on EU Approach to Insolvency The European Union does not have a uniform insolvency law. Rather, member states have their own insolvency legislation and are subject to EU Regulation 1346/2000, which provides a framework for establishing which member states rules should apply to insolvency proceedings with a cross-border nature. The regulation ensures that there is only one main proceeding in respect of any EU insolvency and that any secondary proceeding in another member state should be coordinated. Furthermore, EU Directive 2001/24 provides a similar function in respect of EU credit institutions where only one set of proceedings in the institution s home member state is permitted, with no scope for secondary proceedings. There have been various initiatives, particularly by the EU Parliament, to seek to harmonize certain aspects of insolvency law across the EU to minimize situations in which disparities between national insolvency and restructuring laws create obstacles, competitive disadvantages or difficulties for companies with cross-border activities or ownership within the EU. Approximately 200,000 businesses across the EU become insolvent each year, and about a quarter of those have a cross-border element. In March 2012, the European Commission published a consultation (i.e., a public questionnaire in which any party with an interest in the topic covered may provide his/ her view) on the future of European insolvency law and its proposals for a regulation to amend the EU Regulation 1346/2000 (as described above). Following that, in December 2012, the Commission identified the most problematic differences among the insolvency laws of EU member states in the context of establishing an integrated insolvency legal framework across the EU. Most recently, 4 Business Restructuring + Insolvency Summer Update, August 2013 continued on page 5
on July 5, 2013, the European Commission published a consultation on a new approach to insolvency to create an EU rescue and recovery culture to help companies and individuals in financial difficulties. The aim of the recent consultation is to identify the issues on which the new European approach to business failure and insolvency should focus, in order to develop a rescue and recovery culture. The consultation closes on October 11, 2013. The issues on which the Commission is seeking views include: whether the divergence of national laws in relation to the tests for insolvency and the conditions for the opening of insolvency proceedings are problematic; whether differences in national rules for restructuring plans should be eliminated; whether differences in national laws as to the status, powers, qualifications, licensing and supervision of insolvency office holders have created problems; and whether differences in national laws relating to the avoidance of transactions detrimental to creditors are problematic. Lehman Application for Determination of Priority in Payment of Statutory Interest and Subordinated Debt Claims There is rarely a surplus in an insolvent estate after the unsecured creditors and the costs of the insolvency proceedings have been paid. However, in the Lehman and MF Global administrations in the UK, this may be a reality that gives rise to its own legal issue: if there are sufficient funds to satisfy, in full, the claims of unsecured creditors, do those creditors then have priority in payment for interest on debts post insolvency ( Statutory Interest ) ahead of payment of subordinated debt claims? Lehman Brothers International (Europe) (in administration) and other UK affiliates have filed a joint application with the Chancery Division of the High Court of Justice for determination of this issue. The UK Insolvency Act 1986 provides that any surplus remaining after the payment of the debts proved in a winding up shall, before being applied for any other purpose, be applied in paying interest on those debts in respect of the periods during which they have been outstanding since the since the date of insolvency. However, when a lender has agreed to subordinate its debt to all other creditors, has the lender also agreed that its debt is subordinated to Statutory Interest? The answer will, to some extent, be dependent on the terms of the respective subordinated loan agreement. If the lender is entitled to file a claim in respect of the subordinated debt, even if it has not become payable, the provisions of the Insolvency Act 1986 would indicate that the subordinated debt should be paid in priority to Statutory Interest. Although the court in the Lehman application is expected to decide this issue later this year (the hearing is scheduled for November), the judgment may be subject to appeal, which could go as far as the Supreme Court of the United Kingdom. Recent Decision on Treatment of Cross- Claims and Right to Set-Off Between Different EEA Jurisdictions In its decision in Joint Administrations of Heritable Bank Plc v The Winding-Up Board of Landsbanki Islands hf., the Supreme Court of the United Kingdom recently considered how cross-claims between two credit institutions should be dealt with in insolvency proceedings in two different states in the European Economic Area (EEA). Landsbanki is an Icelandic company and Heritable, a wholly owned subsidiary of Landsbanki, is a Scottish company. Both have been in insolvency since 2008. Each bank has claims against the other and this particular case involved claims brought in Scotland by Landsbanki against Heritable for about 86 million and various claims brought in Iceland by Heritable against Landsbanki for approximately 905 million. Landsbanki rejected Heritable s claims and Heritable withdrew them before the court in Iceland could make a determination. On the other hand, in Scotland, Heritable accepted Landsbanki s claims and wanted to set them off against its claim against Landsbanki. 5 Business Restructuring + Insolvency Summer Update, August 2013 continued on page 6
In a dispute regarding Heritable s right to set-off, the Scottish court found for Landsbanki. Heritable appealed to the Inner House of the Court of Session, which found in favor of Heritable, and, finally, Landsbanki appealed to the Supreme Court of the United Kingdom. Landsbanki s appeal turned on the construction of the Credit Institutions (Reorganisation and Winding Up) Regulations 2004 (the Regulations ), which implements the European Directive on the reorganization and winding up of credit institutions. Landsbanki argued that regulation 5 of the Regulations provides that an insolvency measure in an EEA state has effect in the UK in relation to an EEA credit institution. Consequently, the extinguishment of Heritable s claims under Icelandic law should be applied in Heritable s administration to prevent it from using the claims for the purpose of set-off. The Supreme Court disagreed and dismissed the appeal, finding that the Regulations clearly distinguished between EEA credit institutions and UK credit institutions. Regulation 5 works to ensure that the process of windingup an EEA credit institution must be conducted in the member state in which it is incorporated meaning that Landsbanki s winding-up must be conducted under Icelandic law and those proceedings must be given effect in the UK as if part of the UK s law. Likewise, since Heritable was a UK institution, its winding-up must be effected pursuant to Scottish law. According to the Supreme Court, other provisions of the Regulations preserve the conditions for set-off as being governed by Scottish law and, therefore, Heritable is not precluded from setting-off its claims against Landsbanki in its own administration proceedings. In summary, the Supreme Court held that, although as a matter of Icelandic law, Heritable s claims against Landsbanki were extinguished, the claims could still be used for the purpose of set-off against the claims submitted by Landsbanki in Heritable s administration. This is believed to be the first time that courts have considered how competing insolvency measures would apply when two banks in the same group were subject to different insolvency regimes since the Regulations were enacted. Decision on Treatment of Pension Claims in UK Insolvency Proceedings The Supreme Court of the United Kingdom recently issued a long anticipated decision in the Lehman and Nortel cases regarding the priority of pension claims in UK insolvency proceedings. In the UK, the pension regulator, pursuant to the UK Pensions Act 2004, has the authority to issue a Financial Support Direction that requires a company to put money into its pension funds. At issue in these cases was whether such a direction issued against a company after it commenced insolvency proceedings should be treated as an administrative expense or a general unsecured claim. The Nortel and Lehman pension funds argued that pension liabilities were administrative expenses and, therefore, should be paid before other claims. The lower courts agreed and found in their favor. However, on July 24, 2013, the Supreme Court of the United Kingdom, on appeal, issued a decision unanimously reversing the decision of the lower courts. Instead, the Supreme Court held that the liability of a company to make a payment into its pension fund pursuant to a Financial Support Direction gives rise to a general unsecured claim and does not rank as an administrative expense even when the Financial Support Direction was issued after the insolvency proceeding began. The Supreme Court found that characterizing liability with respect to a Financial Support Direction based on when it was issued was arbitrary and that the statutory right of pension fund trustees to receive those funds should not afford them higher priority than unsecured creditors. These appeals raise an important issue of the interrelationship between statutory liability and corporate insolvency. The decision of the Supreme Court is welcomed by those in the insolvency and restructuring world. It is seen to promote a rescue culture in consideration of the fact that substantial administrative expense claims can hinder the ability of an administrator or liquidator to achieve the statutory purpose for which they are appointed. 6 Business Restructuring + Insolvency Summer Update, August 2013 continued on page 7
Our U.S. Team G. Larry Engel lengel@mofo.com Stefan W. Engelhardt sengelhardt@mofo.com Todd M. Goren tgoren@mofo.com Gary S. Lee Group Chair glee@mofo.com Lorenzo Marinuzzi lmarinuzzi@mofo.com Brett Miller New York Managing brettmiller@mofo.com Larren M. Nashelsky Firm Chair lnashelsky@mofo.com Anthony Princi aprinci@mofo.com Norman S. Rosenbaum nrosenbaum@mofo.com Adam Lewis Senior Counsel alewis@mofo.com Alexandra S. Barrage Of Counsel abarrage@mofo.com Melissa A. Hager Of Counsel mhager@mofo.com Jennifer L. Marines Of Counsel jmarines@mofo.com Kathleen E. Schaaf Senior Of Counsel kschaaf@mofo.com Jordan A. Wishnew Of Counsel jwishnew@mofo.com Craig A. Damast Attorney cdamast@mofo.com Daniel J. Harris dharris@mofo.com Kristin A. Hiensch khiensch@mofo.com William M. Hildbold whildbold@mofo.com Samantha Martin smartin@mofo.com Stacy L. Molison Attorney smolison@mofo.com Naomi Moss nmoss@mofo.com James A. Newton jnewton@mofo.com Vincent J. Novak vnovak@mofo.com Jonathan Petts jpetts@mofo.com John A. Pintarelli jpintarelli@mofo.com Erica J. Richards erichards@mofo.com Meryl L. Rothchild mrothchild@mofo.com 7 Business Restructuring + Insolvency Summer Update, August 2013 continued on page 8
Our UK Team Peter J. Green pgreen@mofo.com Jeremy C. Jennings-Mares jjenningsmares@mofo.com Kevin Roberts kroberts@mofo.com Jonathan Wheeler jwheeler@mofo.com John Adams johnadams@mofo.com Keily Blair kblair@mofo.com Duncan Stuart Grieve dgrieve@mofo.com Lewis Gavin Lee lewislee@mofo.com James Lloyd jlloyd@mofo.com 8 Business Restructuring + Insolvency Summer Update, August 2013
NEW YORK SAN FRANCISCO LOS ANGELES PALO ALTO SACRAMENTO SAN DIEGO WASHINGTON, D.C. NORTHERN VIRGINIA DENVER TOKYO LONDON BRUSSELS BEIJING SHANGHAI HONG KONG SINGAPORE About Morrison & Foerster We are Morrison & Foerster a global firm of exceptional credentials. Our clients include some of the largest financial institutions, investment banks, Fortune 100, technology and life science companies. We ve been included on The American Lawyer s A-List for 10 consecutive years. Chambers Global named MoFo its 2013 USA Law Firm of the Year, and Chambers USA named the firm both its 2013 Intellectual Property and Bankruptcy Firm of the Year. Our lawyers are committed to achieving innovative and business-minded results for our clients, while preserving the differences that make us stronger. 9 Business Restructuring + Insolvency Summer Update, August 2013 2013 Morrison & Foerster LLP, mofo.com