Must creditors holding claims denominated in a foreign currency against a debtor in a US bankruptcy case bear the risk of a postpetition decline in the value of the dollar? In In re Global Power Equipment Group Inc.,1 the Bankruptcy Court for the District of Delaware says yes, holding that, pursuant to section 502(b) of the Bankruptcy Code, a contested claim denominated in foreign currency must be converted into United States currency as of the petition date instead of a later judgment or breach date.

The Conversion Date Dispute

Equitable mootness is a doctrine grounded in equity pursuant to which an appeals court will dismiss an appeal of a bankruptcy order — even if effective relief could conceivably have been granted — because the implementation of such relief (e.g., the reversal of a bankruptcy court order) would be inequitable to third parties. This doctrine may be applied to achieve the necessary finality of bankruptcy orders and decisions that is required to effectuate the successful, expedient reorganization of debtors in bankruptcy.2

So far this year, fewer European and American businesses have encountered financial distress that required either bankruptcy or restructuring procedures than in the same period in 2020. This decline occurred despite the ongoing economic impact of COVID-19.

The first of three compliance deadlines for US regulations requiring resolution-related amendments to qualified financial contracts is January 1, 2019, and delaying compliance until the subsequent deadlines creates additional risk. Compliance programs may not be able to eliminate this risk due to the scope of contracts to be remediated and the staggered compliance period that looks back to the first compliance date.

On 12 December 2013, our client, Magyar Telecom B.V. (the “Company”), a Dutch holding company of the Invitel group of companies (the “Group”) and one of the leading telecommunication services providers in Hungary, completed the restructuring of its €345 million 9.5% Senior Secured Notes due 2016 (the “Notes”).

The recent financial crisis has resulted in events that once seemed impossible. Recently, in the federal government’s attempts to bail out the auto industry, an event unprecedented in American history almost occurred: the forced subordination of existing secured debt to new loans issued by the federal government. If the government were to revive this concept in future bailouts and attempt to subordinate the liens of secured creditors, a suit challenging the constitutionality of such action would have a good chance of success.

The Potential For Forced Subordination

Sometimes the interpretation of the Bankruptcy Code leads to unexpected results. In a recent case, the US Bankruptcy Appellate Panel of the Ninth Circuit (BAP) has ruled that section 510(b) of the Bankruptcy Code requires the subordination of certain claims against a debtor to all equity interests in the debtor, even though such subordination may mean that the holders of the claims will receive nothing on the claims.

In re Foamex Int’l, Inc., et al.,1 the United States Bankruptcy Court for the District of Delaware held that the damage cap contained in section 502(b)(6) of the Bankruptcy Code applies not only to rental payments, but also to damages from the breach of any lease covenants, including maintenance and repair obligations. In doing so, the Court reduced a specific landlord’s claim and recovery by more than $700,000 and established precedent that could diminish the claims of landlords in other cases pending and filed in Delaware.

Background

The COVID-19 pandemic shook the global real estate and hospitality industry as lockdowns were put in place across the globe. The sudden and unexpected lack of footfall caused revenues in physical centers such as restaurants, shopping malls and hotels to plummet, compounding existing structural inefficiencies and accelerating the speed of change for many businesses.

Investors in non-performing loans ("NPLs") continue to look for new jurisdictions and opportunities to achieve attractive returns on capital. Much of the European NPL market is now in a relatively advanced state (particularly in the more mature parts of the market such as UK, Ireland, the Netherlands, Spain and, to a lesser extent, Italy). Funds are, therefore, looking further afield for NPL opportunities. One interesting jurisdiction, given the 1.71 trillion yuan (c.US $270 billion) of NPLs held by commercial banks, is China.