The primary objective of any buyer at a Section 363 sale, whether one purchasing for cash or an existing secured creditor making a credit bid, is to obtain good title to the purchased assets free and clear of any liens, claims, or interests. However, a recent decision on this subject by the Bankruptcy Appellate Panel ("BAP") of the United States Court of Appeals for the Ninth Circuit is causing something of a stir in the bankruptcy world.

In Clear Channel Outdoor, Inc. v. Knupfer (In re PW, LLC), the Ninth Circuit BAP held that a senior secured creditor's credit bid, in an amount less than the aggregate value of all liens against the property in question, did not satisfy the requirements of Section 365(f) and permit the sale to be "free and clear" of the existing junior liens on the property and reversed the bankruptcy court's order on appeal. You can read the entire opinion by following the link in this sentence.

For an excellent discussion of the decision and the analysis employed by the BAP, be sure to read Steve Jakubowsi's post on the case over at The Bankruptcy Litigation Blog. Instead of covering the same ground, I want to discuss some of the implications of the decision for Section 363 bankruptcy sales.

Credit Bid Or Foreclosure? First, the Clear Channel decision raises questions about how a senior secured creditor should proceed in a bankruptcy case.

• On the one hand, the BAP's decision that a sale will not be "free and clear" of junior liens is not that surprising. It has generally been accepted that for a "short sale" under Section 363 (one in which the purchase price is less than the amount of liens against the property) to be free and clear of liens, the secured creditors must consent or one of the other exceptions under Section 363(f) must be satisfied. Those other exceptions include a lien subject to "bona fide" dispute or a situation in which the lien holder can be forced to accept a cash payment in satisfaction of the lien.
• What has surprised some about this new decision is the holding that a credit bid by a senior secured creditor also cannot be made free and clear of junior liens, even though the senior secured creditor could have wiped out the junior liens through a foreclosure under state law.
• Section 363(f)'s focus on the "aggregate value of all liens on such property" makes the existence of junior liens the issue, regardless of whether they are in the money. Put differently, even if the junior liens are worthless, they exist and a Section 363 sale to a credit bidding senior secured creditor will not be free and clear of those junior liens.  
• With the enormous increase in second lien lending over the past several years, including many second lien loans made as part of private equity buyouts, expect to see more Chapter 11 bankruptcy cases in which substantial junior liens are present.

This ruling seems to leave secured creditors seeking to take title to their collateral with two main choices. One is to seek relief from the automatic stay to foreclose on its collateral, avoiding the Section 363 sale and credit bid approach altogether. If the assets cannot be sold for cash in an amount greater than the senior secured creditor's claim, and if a reorganization is not reasonably in prospect (the key factors in a bankruptcy court's decision whether to lift the stay), this may be the preferred path. A second approach would be to complete the credit bid through a Chapter 11 plan of reorganization, something the Clear Channel court implied was also available. However, some secured creditors may find the delay and expense involved in being a plan proponent problematic. As a plan proponent, the secured creditor would take on the obligation to pay administrative expenses of the estate on the effective date of the reorganization plan, as well as satisfaction of all of the other requirements for confirming a plan.

The Risks Of An Appeal: The Limits Of Section 363(m) And The Mootness Doctrine. Second, perhaps the most important aspect of the Clear Channel decision is the risks it exposes even for "good faith" purchasers in Section 363 sales. Purchasers of assets under Section 363 regularly seek a finding that they are a good faith purchaser because a sale to such a buyer cannot be overturned on appeal. This protection is found in Section 363(m) and reads as follows:

The reversal or modification on appeal of an authorization under subsection (b) or (c) of this section of a sale or lease of property does not affect the validity of a sale or lease under such authorization to an entity that purchased or leased such property in good faith, whether or not such entity knew of the pendency of the appeal, unless such authorization and such sale or lease were stayed pending appeal.

Here, the BAP held that although the sale itself to the senior secured creditor could not be overturned on appeal, the protection of Section 363(m) did not extend to the question of whether the sale was made "free and clear" of the junior liens. Instead, the BAP ruled that even in the absence of a stay pending appeal, the appellate court could reverse the "free and clear" determination because Section 363(m) is expressly limited to sale orders under Sections 363(b) and (c), which authorize the sale or lease of property, and does not extend to "free and clear" orders under Section 363(f).

Going hand in hand with the Section 363(m) ruling was the decision's holding that the closing of the asset sale did not render the "free and clear" issue moot. Instead, even though no stay pending appeal was obtained, the BAP concluded that relief could still be granted on the "free and clear" question by ordering that the junior lien remained attached the property even after its sale. 

When Should A Buyer Close The Sale? The Section 363(m) and mootness rulings raise issues about when a buyer of assets under Section 363 should close on the sale. The BAP's views on Section 363(m) and mootness do not appear limited to the credit bid situation involved in the Clear Channel decision. Instead, if a good faith purchaser for cash pays less than the "aggregate value of all liens" against the purchased assets -- or perhaps a question exists whether a lien or interest is really in "bona fide" dispute -- the "free and clear" aspect of the sale may be outside the protection of Section 363(m) and an appeal by a secured creditor or other interest holder may not be moot.

• Buyers usually prefer to close as soon as possible after entry of a bankruptcy court's order approving the sale, especially if the value of the assets are declining or the debtor is running out of cash.
• A buyer that closes with an appeal threatened runs the risk of having the "free and clear" decision overturned months or even years later and the purchased assets suddenly subject to the debtor's liens.
• While every sale objection or appeal will not raise these issues, if a serious objection to the "free and clear" aspect of the bankruptcy court's sale order has been made, and the objector is likely to appeal, the buyer should consider whether to wait until the later of (a) the passage of the 10-day appeal period, or (b) a final appellate decision affirming the bankruptcy court's denial of the objection, before agreeing to close the sale. 
• Buyers may want to consider including provisions in the asset purchase agreement to permit this type of flexibility on when to close or to terminate the agreement if the closing is substantially delayed.

The Precedential Effect Of A BAP Decision. Unlike a U.S. Court of Appeals itself, a BAP is made up of bankruptcy judges, not federal circuit judges. Given a BAP's place in the judicial system's hierarchy, its decisions are not given the same precedential weigh as U.S. Court of Appeals decisions, and this means that the U.S. Court of Appeals for the Ninth Circuit might reach a different conclusion. Moreover, BAP decisions generally are not binding on bankruptcy courts in the Ninth Circuit. That said, some bankruptcy judges make a practice of following BAP decisions and the BAP's reasoning may influence other judges.

Conclusion. The BAP's Clear Channel decision has important implications for Section 363 asset sales. Secured creditors intent on making a credit bid may now rethink that approach when junior liens are present. Cash buyers may be more cautious on when to close a sale if disputes exist over whether the sale should be "free and clear" of existing liens and interests. It will be interesting to see how other courts, in the Ninth Circuit and beyond, react to the decision, so stay tuned.

On June 16, 2008, the United States Supreme Court issued its decision in Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc., the case involving whether Section 1146(a) of the Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer “under a plan confirmed under section 1129 of the Code,” applies to transfers of assets occurring prior to the actual confirmation of such a plan. The issue has taken on added importance in recent years because so many sales of assets in Chapter 11 bankruptcy cases -- including the one in the Piccadilly case -- are made through Section 363, well before any plan of reorganization is confirmed.

(For more background on the issue, and the oral argument before the Supreme Court last March, you can read a prior post entitled "What Happened At the Supreme Court Oral Argument In The Section 1146(a) Transfer Tax Exemption Case?")

The Supreme Court's Holding. In a 7-2 decision written by Justice Clarence Thomas, the Supreme Court held that Section 1146(a) applies only to post-confirmation transfers made under the authority of a confirmed plan of reorganization. Follow the link for a copy of the Supreme Court's decision. The Court reversed the Eleventh Circuit (opinion below available here), which unlike the Third and Fourth Circuits, had held that pre-confirmation transfers could also be covered by the exemption. The Supreme Court summed up its holding as follows:

The most natural reading of §1146(a)’s text, the provision’s placement within the Code, and applicable substantive canons all lead to the same conclusion: Section 1146(a) affords a stamp-tax exemption only to transfers made pursuant to a Chapter 11 plan that has been confirmed. Because Piccadilly transferred its assets before its Chapter 11 plan was confirmed by the Bankruptcy Court, it may not rely on §1146(a) to avoid Florida’s stamp taxes. Accordingly, we reverse the judgment below and remand the case for further proceedings consistent with this opinion.

Keys To The Decision. In examining the statute and the parties' arguments, the Supreme Court found Florida's reading of the statute far more reasonable:

While both sides present credible interpretations of §1146(a), Florida has the better one. To be sure, Congress could have used more precise language—i.e., “under a plan that has been confirmed”—and thus removed all ambiguity. But the two readings of the language that Congress chose are not equally plausible: Of the two, Florida’s is clearly the more natural. The interpretation advanced by Piccadilly and adopted by the Eleventh Circuit—that there must be “some nexus between the pre-confirmation transfer and the confirmed plan” for §1146(a) to apply, 484 F. 3d, at 1304—places greater strain on the statutory text than the simpler construction advanced by Florida and adopted by the Third and Fourth Circuit.

Later, the Court added the following:

Even if we were to adopt Piccadilly’s broad definition of “under,” its interpretation of the statute faces  other obstacles. The asset transfer here can hardly be said to have been consummated “in accordance with” any confirmed plan because, as of the closing date, Piccadilly had not even submitted its plan to the Bankruptcy Court for confirmation. Piccadilly’s asset sale was thus not conducted “in accordance with” any plan confirmed under Chapter 11. Rather, it was conducted “in accordance with” the procedures set forth in Chapter 3—specifically, §363(b)(1). To read the statute as Piccadilly proposes would make §1146(a)’s exemption turn on whether a debtor-in-possession’s actions are consistent with a legal instrument that does not exist—and indeed may not even be conceived of—at the time of the sale. Reading §1146(a) in context with other relevant Code provisions, we find nothing justifying such a curious interpretation of what is a straightforward exemption.

In dismissing another of Piccadilly's arguments, the Court had occasion to make an interesting comparison between the mechanics of assumption and rejection of executory contracts and the timing of a transfer for Section 1146(a) purposes:

We agree with Bildisco’s commonsense observation that the decision whether to reject a contract or lease must be made before confirmation. But that in no way undermines the fact that the rejection takes effect upon or after confirmation of the Chapter 11 plan (or before confirmation if  pursuant to §365(d)(2)). In the context of §1146(a), the decision whether to transfer a given asset “under a plan confirmed” must be made prior to submitting the Chapter 11 plan to the bankruptcy court, but the transfer itself cannot be “under a plan confirmed” until the court confirms the plan in question. Only at that point does the transfer become eligible for the stamp-tax exemption.

The Court also found that the placement of Section 1146(a) in a subchapter entitled "POSTCONFIMRATION MATTERS" was yet another factor which, while not decisive, helped to undermine Piccadilly's arguments.

Canon Fodder. The Court next held that even if the statute were ambiguous, which the Court did not expressly decide, two canons of statutory interpretation would compel a decision in favor of Florida's reading of the statute.

• First, changes were made to Section 1146 as recently as the 2005 amendments to the Bankruptcy Code, and Congress is generally presumed to be aware of judicial interpretations of a statute (here decisions from the Third and Fourth Circuits refusing to apply the exemption to pre-confirmation transfers, both of which predated the Eleventh Circuit's 2007 decision in Piccadilly) when the statute was revised.
• Second, a federalism canon directs courts to proceed carefully before recognizing an exemption from state taxation that Congress has not clearly expressed. Given Piccadilly's arguments that the statute was ambiguous, the Court found this canon to be "decisive in this case."
• The Court rejected the canons advanced by Piccadilly, most notably viewing Chapter 11 (and Section 1146) as a remedial statute to be liberally construed to facilitate reorganizations.

The Dissent. Justice Stephen G. Breyer, in a dissent joined by Justice Stevens, focused on "whether the time of the transfer matters." Finding the language of the statute ambiguous, he looked to the policy Congress was trying to implement with the statute. He concluded that Congress would not have "insisted upon temporal limits" in Section 1146(a) since, in his view, "it makes no difference whether a transfer takes place before or after the plan is confirmed."

Other Bloggers Weigh In. For an excellent and entertaining review of the decision, be sure to read Steve Jakubowski's post on his Bankruptcy Litigation Blog. Hat tip as well to the SCOTUS Blog for first reporting on the decision (and updating its excellent wiki on the case) and to the Delaware Business Bankruptcy Report for its post as well.

Minor Impact On Chapter 11 Cases? Of course, the most immediate impact of the decision is that pre-confirmation Section 363 sales will no longer be exempt from stamp or transfer taxes in any circuit, and those taxes will have to be paid.  What remains to be seen is whether sales will be delayed until plan confirmation in order to take advantage of the Section 1146(a) exemption. Given how many asset sales in Chapter 11 cases these days are conducted at the early stages of a case because of financing limitations and declining asset values, a move to delay those sales until plan confirmation seems unlikely. With an economic downturn upon us, the pressures that have led to the expanded use of Section 363 are not likely to abate, regardless of how attractive a stamp or transfer tax exemption may be.

The Spring 2008 edition of the Absolute Priority newsletter, published by the Cooley Godward Kronish LLP Bankruptcy & Restructuring group, of which I am a member, has just been released. The newsletter give updates on current developments in bankruptcies and workouts with the goal of keeping you "ahead of the curve" on these issues. Follow the links in this sentence to access a copy of the newsletter or to register to receive future editions.

The latest edition covers a range of cutting edge topics, including:

• The ability of unsecured creditors to recover post-petition attorney's fees;
• Key issues when selling claims in bankruptcy;
• Jury trials and proofs of claim;
• Assignments for the benefit of creditors; and
• The impact of post-petition performance on executory contracts.

We have also included information on some of our recent representations of official committees of unsecured creditors in Chapter 11 bankruptcy cases, and unofficial committees in out-of-court workouts, involving major retailers. These include Sharper Image, Lillian Vernon, CompUSA, Wickes Furniture, and The Bombay Company, among others. In addition, a note from my partner Adam Rogoff, the editor of Absolute Priority, discusses the increasing number of bankruptcy filings nationwide and our representation of Bayonne Medical Center in its Chapter 11 reorganization.

I hope you find this latest edition of Absolute Priority to be a helpful resource.

Bankruptcy professionals and the public rarely get a chance to read a judge's own research binder. Fortunately, however, Chief Judge Randall J. Newsome of the United States Bankruptcy Court for the Northern District of California has made his very helpful 348-page research binder available on the Court's website. Follow the links in this sentence to access the entire binder in pdf format and this HTML version organized by topic. I've found the binder to be an excellent way to identify leading cases on a particular topic quickly. The pdf version can also be searched using a key word or phrase. 

Updated as of February 8, 2008, and covering cases through Volume 378 of Bankruptcy Reports, the research binder collects a vast range of cases on business bankruptcy and other topics under the Bankruptcy Code and the Federal Rules of Bankruptcy Procedure. Chief Judge Newsome presides in the Northern District of California so the primary focus of the research binder is on Ninth Circuit law, but some out-of-circuit law is listed as well.

Chief Judge Newsome's disclaimer puts this helpful tool's function in perspective:

The following list of cases and supplemental information is presented for informational and educational purposes only. Though it represents the aggregation of 19 years of research, the Court makes no claims as to its current level of accuracy. Some of the cases set forth may very well have been superseded, reversed, or otherwise may no longer be good law. The Court has posted it with the intention to educate and assist those who may find it helpful. Accordingly, users should consider it a first, but by no means final, research tool, and should cite check all cases listed herein for continued viability prior to relying on such cases in practice.

With those caveats in mind, it can be a great place to start when researching bankruptcy law issues in Ninth Circuit.

On Wednesday, March 26, 2008, the United States Supreme Court heard oral argument in the case of Florida Dept. of Revenue v. Piccadilly Cafeterias, Inc. A link to the transcript of the oral argument can be found below. The case presents the following question:

Whether section 1146(a) of the Bankruptcy Code, which exempts from stamp or similar taxes any asset transfer “under a plan confirmed under section 1129 of the Code,” applies to transfers of assets occurring prior to the actual confirmation of such a plan?

With so many asset transfers in Chapter 11 cases taking place through Section 363 asset sales before plan confirmation, rather than when plans are consummated after confirmation, how the Supreme Court answers the question presented will have a significant impact on the extent to which debtors end up paying stamp and other transfer taxes as a practical matter.

The Eleventh Circuit's Decision And Aftermath. The Supreme Court case results from a decision by the U.S. Court of Appeals for the Eleventh Circuit holding that pre-confirmation sales can be subject to the exemption under Section 1146(a) if followed by plan confirmation later in the case. Use the link in this sentence to read the Eleventh Circuit's decision in Piccadilly.

• For additional background on the Piccadilly case, be sure to read Steve Jakubowski's excellent post on his Bankruptcy Litigation Blog from December 2007 when the Supreme Court accepted the case for consideration.
• The Cornell University Law School has also prepared a helpful analysis and overview of the case.
• You can find the various briefs and other papers at this Supreme Court of the United States Wiki page maintained by the Supreme Court of the United States Blog.

The Language of Section 1146(a). The one-sentence section, Section 1146(a), was previously numbered Section 1146(c) but its language has not changed. (Many court orders and opinions still use the old designation.) The statute provides as follows:

The issuance, transfer, or exchange of a security, or the making or delivery of an instrument of transfer under a plan confirmed under section 1129 of this title, may not be taxed under any law imposing a stamp tax or similar tax.

As discussed below, much of the dispute over the scope of this exemption is based on interpretation of the phrase "under a plan confirmed."

Section 363 Sales And Transfer Taxes. As bankruptcy professionals know, Section 363 asset sales often precede confirmation of a plan by months. When confirmed, the plan may simply distribute the cash generated from prior sales of the debtor's assets or may enable a reorganized but smaller debtor to emerge from bankruptcy. Courts around the country have taken very different views on whether Section 1146(a)'s exemption should apply to these pre-confirmation transfers.

Some courts will include findings in Section 363 sale orders that the sale, even though prior to plan confirmation, is exempt from stamp and similar taxes. This sale order from the Southern District of New York illustrates that approach:

The sale of the Purchased Assets . . . is a prerequisite to the Debtors’ ability to confirm and consummate a plan or plans. The Sale Transaction is therefore an integral part of a plan or plans to be confirmed in the Debtors’ cases and, thereby, constitutes a transfer pursuant to section 1146(c) of the Bankruptcy Code, which shall not be taxed under any law imposing a transfer tax, a stamp tax or any similar tax.

Cases filed in Delaware will likely receive a very different response. In 2003, the Third Circuit in In re Hechinger Inv. Co. of Del., Inc., 335 F.3d 243 (3d Cir. 2003) -- unlike the Eleventh Circuit in Piccadilly -- held that the Section 1146(a) exemption does not apply to pre-confirmation transfers. (The Third Circuit's opinion was authored by then Circuit Judge, and now Associate Justice, Samuel Alito.) Delaware's new local rule governing Section 363 sales requires sale motions to make express disclosure of an effort to obtain such a provision in a sale order:

Tax Exemption. The Sale Motion must highlight any provision seeking to have the sale declared exempt from taxes under section 1146(a) of the Bankruptcy Code, the type of tax (e.g., recording tax, stamp tax, use tax, capital gains tax) for which the exemption is sought. It is not sufficient to refer simply to "transfer" taxes and the state or states in which the affected property is located.

Other courts have taken a similar view. The Section 363 sale guidelines adopted by the Bankruptcy Court for the Northern District of California call out various provisions that the Bankruptcy Court generally will not approve in a sale order, including the following:

Any provision that purports to exempt the transaction from transfer taxes under section 1146(c). By its own terms, that section applies only to a sale pursuant to a plan of reorganization, not a sale outside of a plan under section 363(b).

The Supreme Court Oral Argument And Transcript. Against this background, the Supreme Court heard oral argument in the Piccadilly case on March 26, 2008. A copy of the transcript of the oral argument is available by clicking on the link in this sentence.

It's difficult to tell how the decision will come out based on the questions asked by the various Justices, but the questions are themselves quite interesting. Some focused on why Congress would want to exempt post-confirmation but not pre-confirmation transfers. Others implied that the plain language of the statute limited the reach of the exemption only to transfers made, literally, "under" a confirmed Chapter 11 plan of reorganization. Still others inquired about the administrative impact on states if pre-confirmation transfers were initially exempt but subsequently could be taxed in the event that no plan was ever confirmed. An additional topic raised was whether, if the statute were held to exempt pre-confirmation transfers, the exemption should cover only those transfers "necessary" for a later plan confirmation or also transfers merely "instrumental" to a later plan confirmation. 

The State's Arguments. During the argument, the State of Florida contended that the statute was unambiguous and that the word "under" meant a transfer made at or following confirmation of plan. Arguing for this bright-line rule, the State asserted that if pre-confirmation transfers could also be exempt taxing authorities would not know, at the time a transfer was recorded, whether a Chapter 11 plan would in fact later be confirmed to validate the exemption. From a policy perspective, the State argued that tax exemptions should be narrowly construed, that stamp and other transfer taxes generate millions of dollars in revenues, and that it would be an administrative burden to require states to monitor Chapter 11 cases to see if plans were later confirmed to validate exemptions claimed on earlier asset transfers.

The Debtor's Arguments. The debtor made both policy and statutory interpretation arguments. On the policy side, Piccadilly argued that a debtor cannot get a Chapter 11 plan confirmed without cash, debtors often make Section 363 asset sales to preserve value and raise funds needed to confirm a Chapter 11 plan later in the case, the exemption was designed to save cash for the benefit of creditors, and these pre-confirmation sales should receive the same benefit from the exemption. The debtor also asserted that the key phrase in Section 1146(a), "under a plan confirmed" appears in Section 365(g)(1). Section 365 was interpreted by the Supreme Court in N.L.R.B. v. Bildisco &. Bildisco, 465 U.S. 513 (1984), to require pre-confirmation, not post-confirmation, decisions on executory contracts. The debtor contended that because the phrase "under a plan confirmed" means before confirmation when used in Section 365(g)(1), it must mean before confirmation in Section 1146(a) as well. In contrast, the debtor argued, Congress used the different phrase "confirmed plan" in Sections 1142(b) or 511(b) when it intended to refer to a point after plan confirmation.

Conclusion. Whether Section 1146(a)'s exemption from transfer taxes applies to pre-confirmation transfers has split circuit and bankruptcy courts alike over the years. The questions asked during the Supreme Court's oral argument in the Piccadilly case suggest a similar split among the Justices over how the statute should be interpreted. With the Supreme Court's term ending in the next few months, however, debtors, creditors, and taxing authorities should not have to wait much longer for a definitive answer to this open issue.  

The United States Bankruptcy Court for the Southern District of New York has announced proposed changes to its Local Bankruptcy Rules in light of the recent amendments to the Federal Rules of Bankruptcy Procedure that took effect on December 1, 2007. Many of the largest business bankruptcy cases are filed in the Southern District of New York, which includes Manhattan, making these proposed amendments to the Local Bankruptcy Rules of particular interest.

• A redline version showing the proposed local rule changes is available by clicking on the link in this sentence.
• For more on the national bankruptcy rule amendments that prompted these proposed local rule changes, you can read this article, entitled "Important Changes To Bankruptcy Rules Take Effect," or view the redlined national bankruptcy rule changes directly, by clicking on their respective links in this sentence.

Cash Collateral And DIP Financing Disclosures. The most significant proposed changes for Chapter 11 bankruptcy cases address cash collateral and DIP financing motions and, if adopted, the local rule amendments would supplement the disclosures required by amended Federal Rule of Bankruptcy Procedure 4001. Proposed Local Bankruptcy Rule 4001-2 would require at least fifteen material provisions to be disclosed in cash collateral and DIP financing motions. These include the following:

• the amount of cash to be used or borrowed, including any borrowing base formula and availability;
• material conditions to closing, including budget provisions;
• pricing and economic terms, including various fees;
• any effect on existing liens;
• any carve-outs from liens or superpriorities;
• any cross-collateralization;
• any roll-up provisions;
• any provisions that would materially limit the Court's power or discretion or the fiduciary duties of a trustee, debtor in possession, or committee;
• any limitation on the lender's obligation to fund activities of a trustee, debtor in possession, or committee;
• termination or default provisions;
• any change of control provisions;
• any deadline for sale of property;
• any prepayment penalty or other restriction on repayment;
• terms governing joint liability of debtors; and
• any funding of non-debtor affiliates.

Additional Proposed Financing Changes. Other provisions would require (1) disclosure regarding efforts to obtain financing, (2) adequate notice after an event of default and before a lender could exercise remedies, (3) disclosure regarding carve-outs and allocations of carve-outs, (4) investigation periods for committees, and (5) appearances at preliminary and final hearings. In addition, the proposed local rule would mandate certain provisions in proposed orders, including a reservation of the Court's right to unwind roll-ups if a successful challenge is later made. 

Other Proposed Amendments. The remaining proposed amendments are mainly technical. They would repeal local rules that have become unnecessary, drop the requirement that attorneys use an identifier that includes the last four digits of their social security number, conform attorney signature rules to current practice, and dispense with the need for a separate memorandum of law if a discussion of the law is included in the motion itself.

Opportunity For Comments. The Bankruptcy Court has not yet promulgated these local rule amendments and it is accepting comments on the proposed changes until April 23, 2008. Information on how to submit comments is available on the Court's website at the Local Rule page.

With the enormous amount of business between the United States and Canada these days, it's little wonder that from time to time U.S. companies find themselves affected by a Canadian insolvency proceeding. A better understanding of Canada's approach to bankruptcy and insolvency law can be helpful when sizing up how such a filing might affect your rights.

The Lay Of The Land. Canada has two primary federal insolvency acts, the Bankruptcy and Insolvency Act, known as the BIA, and the Companies' Creditors Arrangement Act, known as the CCAA. (A third statute, the Winding-up and Restructuring Act, is less frequently invoked.) You can access the text of each of three acts by clicking on the preceding links. These national statutes also operate in conjunction with applicable provincial law.

Canada's Reorganization Law. When larger Canadian companies need protection from creditors they often seek relief under Canada's CCAA. The CCAA is the Canadian insolvency law most analogous to Chapter 11 of the U.S. Bankruptcy Code. Company management generally remains in charge as a debtor in possession, although a monitor is appointed and has certain oversight authority. Unlike the much longer U.S. Bankruptcy Code, the CCAA currently has only 22 sections, leaving it to the courts to fill in the gaps. Courts generally do so, including issuance of an early "initial order" that commonly implements a stay similar to the automatic stay of U.S. bankruptcy  law. (Click on the link for an example of an initial order.) Other court orders permit contracts and leases to be disclaimed (rejected), assets to be sold, and a restructuring to be implemented through a plan of arrangement after voting by creditors.

• There are, however, many important differences between the CCAA and Chapter 11. Although describing those differences is beyond the scope of this post, fortunately Sheryl E. Seigel, chair of the Business Restructuring & Insolvency Group at Lang Michener LLP in Toronto, has written an excellent overview of the CCAA that includes a comparison to Chapter 11.
• Entitled "Distinctions with a Difference: Comparison of Restructuring Under the CCAA with Chapter 11 Law and Practice," the paper is available by clicking on its title.

Cross-Border Issues. Canada has not yet adopted the Model Law on Cross-Border Insolvency, which the U.S. did in 2005 as Chapter 15 of the U.S. Bankruptcy Code. At least for now, Canada continues to use its own cross-border procedures under Section 18.6 of the CCAA and cross-border protocols used to coordinate proceedings in different countries. (For more on Chapter 15, you may find this prior post entitled "Chapter 15: The Bankruptcy Code's New Cross-Border Insolvency Rules," of interest.)

Important Changes May Be Coming. Canada is currently working on adoption of significant revisions to its bankruptcy and insolvency laws. The legislation was originally proposed in 2005 as Bill C-55, and more recently was approved in legislation known as Bill C-12.  If it comes into force, this law would make a number of changes, including one of interest to licensees of intellectual property. The legislation would add to the CCAA a formal provision akin to Section 365(n) of the U.S. Bankruptcy Code, protecting the rights of licensees to continue to use licensed intellectual property if the underlying license agreement is disclaimed (rejected) in the CCAA proceeding.

Conclusion. Navigating Canadian insolvency law can be complex, especially when proceedings are pending in both the U.S. and Canada. Getting advice from U.S. and Canadian bankruptcy counsel can prove invaluable if your business becomes involved in an insolvency proceeding north of the border.   

For a number of years, the concept of deepening insolvency has been one of the more hotly debated issues in the insolvency arena. Two of my colleagues in the Bankruptcy & Restructuring group at Cooley Godward Kronish LLP, Michael Klein and Ronald Sussman, have written an interesting article entitled "Tide Has Turned On Deepening Insolvency - Courts Now Rejecting Theory As Cause Of Action," published in the February 2008 issue of the Journal of Corporate Renewal by the Turnaround Management Association. You can read the article by clicking on its title above.

The article gives a succinct overview of the impact of last year's Delaware Supreme Court decisions in the North American Catholic Educational Programming, Inc. v. Gheewalla and Trenwick America cases (as well as the Chancery Court's Trenwick decision that was adopted by the Supreme Court). In particular, the article describes how the Gheewalla decision altered the "zone of insolvency" analysis and how Trenwick's rejection of deepening insolvency as a cause of action in Delaware has led courts in other jurisdictions to follow suit. Directors of financially troubled companies and their counsel will find the article an informative read.

For more information on the Gheewalla decision, including a copy of the Delaware Supreme Court's opinion, click here. For more on the Trenwick decision, including copies of the Delaware Supreme Court order and Chancery Court opinion, click here.

The Delaware Bankruptcy Court has recently adopted amended Local Rules, which became effective on February 1, 2008, and they include meaningful changes to the procedures governing Section 363 sales of assets. New Local Rule 6004-1, entitled "Sale and Sale Procedures Motions," requires additional disclosure and the highlighting of certain key provisions often seen in sale motions.

By following the links in this sentence you can find the redline version and clean version of the new Delaware Bankruptcy Court Local Rules.

The Section 363 Sale. As a reminder, a bankruptcy asset sale often happens in the first few weeks or months of a Chapter 11 case, rather than as part of a plan of reorganization. Frequently this will involve a sale of all or substantially all of a debtor's business as a going concern. The sale is generally referred to as a "Section 363 sale" because Section 363 is the key Bankruptcy Code section that governs a debtor's sale of assets in bankruptcy. The debtor must seek bankruptcy court approval of a sale that is not in the ordinary course of business and of any effort to transfer executory contracts, intellectual property licenses, or commercial real estate leases to the buyer.

Sale Motion Requirements. The new local rule first addresses motions to sell property of the estate. A copy of the proposed or near-final purchase agreement must be attached to the motion, as well as a proposed sale order, and any request for a consumer privacy ombudsman under Section 332 of the Bankruptcy Code must be included. The most interesting changes, however, are in the list of provisions which, if included in the motion or sale order, must be highlighted together with a justification for each such provision. These include the following:

• Sale to insiders
• Agreements with management
• Releases
• Private sale or no competitive bidding
• Closing and other deadlines
• Good faith deposit
• Interim agreements with proposed buyer
• Use of sale proceeds
• Section 114