In a decision that may come as a surprise to many, the Court of Chancery of the State of Delaware (the “Court”) recently dismissed a derivative suit brought by a creditor on behalf of an insolvent limited liability company. See CML V, LLC v. Bax et al., 6 A.3d 238 (Del. Ch. 2010)(JetDirect Aviation Holdings, LLC, Nominal Defendant).

It is well established that the automatic stay imposed under section 362 of the United States Bankruptcy Code (the “Bankruptcy Code”) in a typical bankruptcy case applies extraterritorially. Thus, creditors of a Chapter 11 debtor are generally prohibited from exercising any remedies against a debtor or its assets anywhere in the world. Up until recently, no court had addressed the scope of the stay applicable in a Chapter 15 case.

On December 16, 2010, the Supreme Court of Canada determined that in Companies’ Creditors Arrangement Act (“CCAA”) reorganization proceedings, the Crown enjoys no super-priority status in relation to its claims for unremitted sales taxes arising under the Goods and Services Tax (the “GST”) or similar provincial sales taxes.

The aggregate costs associated with a formal court-supervised insolvency proceeding can be substantial. In Canada, the obligation to pay these restructuring costs are typically secured by court-ordered charges over all of the property of the debtor and can rank in priority to the liens of secured creditors in the same collateral. As a result, these costs can have a material impact on the ultimate net recovery received by creditors. But how is the burden of these costs shared among secured creditors?

In the recent decision in Re Xerium Technologies Inc.1, the Ontario Superior Court of Justice recognized an order made by the U.S. Bankruptcy Court for the District of Delaware that confirmed the debtor’s pre-packaged Chapter 11 plan of reorganization. The decision provides useful guidance on how the Ontario Court may consider similar applications in the future. Many will take comfort from the fact that the decision revisits a number of relevant factors established in case law that pre-dates the current formulation of the cross-border provisions that make up Part IV of the CCA A.

Cow Harbour Construction Ltd1

introduction

The 2009 amendments to the Companies’ Creditors Arrangement Act (Canada) (the “CCAA”) and the Bankruptcy and Insolvency Act (Canada) codified with some modifications judge made law giving a court authority to grant super-priority priming liens to secure interim financing (or debtorin- possession financing).

An increasing number of restructuring cases involve several creditors with security over varied assets or asset classes. In such cases there is often a dispute over allocation of the costs of the reorganization. This is particularly true in failed restructurings where costs are high and realizations are low.

In a May 28, 2010 decision, Judge Alan Gold of the United States District Court for the Southern District of Florida granted a motion to dismiss claims filed against lenders on a revolving loan agreement to the Fontainebleau resort and casino project in Las Vegas. The claims were brought by two term loan lenders for the project, Avenue CLO Fund, which had provided term loan funding, and Aurelius Capital, which had acquired the interests of other term lenders following the project’s bankruptcy.

After nearly fifteen years of unsuccessful attempts to recover $71 million worth of securitized bonds after the 1990 bankruptcy of Continental Airlines, Inc., Bluebird Partners L.P. may have suffered its final defeat. In a recent decision by a New York trial court in Bluebird Partners v. The Bank of New York, et al., No. 601016/1996 (New York Co. June 7, 2010), the court granted summary judgment to defendant Bank of New York (“BNY”), holding that the bank behaved prudently in establishing a litigation reserve fund as the collateral trustee in the airline’s bankruptcy.

Background