Argentinian Rec. Co. v. Bd. of Dirs. of Multicanal

• Decision Date: 28 September 2005
• Docket Number: No. 05 Civ. 3844(AKH).,No. 04 Civ. 3619(AKH).,No. 05 Civ. 1968(AKH).,No. 05 Civ. 1969(AKH).,04 Civ. 3619(AKH).,05 Civ. 1968(AKH).,05 Civ. 1969(AKH).,05 Civ. 3844(AKH).
• Citation: 331 B.R. 537
• Parties: ARGENTINIAN RECOVERY COMPANY LLC, W.R. Huff Asset Management Co., LLC, The Huff Alternative Income Fund, L.P., and WRH Partners Global Securities LP, Willard Alexander, WRH Global Securities Pooled Trust, Appellants, v. BOARD OF DIRECTORS OF MULTICANAL S.A. and Multicanal S.A., Appellees.
• Court: U.S. District Court — Southern District of New York

Page 537

331 B.R. 537

ARGENTINIAN RECOVERY COMPANY LLC, W.R. Huff Asset Management Co., LLC, The Huff Alternative Income Fund, L.P., and WRH Partners Global Securities LP, Willard Alexander, WRH Global Securities Pooled Trust, Appellants, v. BOARD OF DIRECTORS OF MULTICANAL S.A. and Multicanal S.A., Appellees.

No. 04 Civ. 3619(AKH).

No. 05 Civ. 1968(AKH).

No. 05 Civ. 1969(AKH).

No. 05 Civ. 3844(AKH).

United States District Court, S.D. New York.

September 28, 2005.

COPYRIGHT MATERIAL OMITTED

Caroline Stacey Press, Proskauer Rose LLP, Jeffrey W. Levitan, Proskauer Rose Goetz & Mendelsohn, Jennifer R. Scullion, Louis M. Solomon, Michael E. Foreman, Proskauer Rose LLP, New York, NY, Michael B. Smith, Gibson, Dunn & Crutcher, LLP, Palo Alto, CA, Adam T. Berkowitz, Esq., New York City, for Appellants.

Lindsee P. Granfield, Cleary Gottlieb Steen & Hamilton, LLP, New York, NY, for Appellees.

OPINION AND ORDER REMANDING TO BANKRUPTCY COURT

HELLERSTEIN, District Judge.

Cross-border reorganizations of insolvent public companies present complex issues for our courts. I consider in this opinion one facet of such complexities — the interplay between the requirements of the Securities Act of 1933 (the "Securities Act"), and the comity normally extended to reorganizations of foreign companies, chartered and operating under the laws of another country. The case comes to me on appeal from a final order of the United States Bankruptcy Court for the Southern District of New York (the "Bankruptcy Court"), In re Bd. of Dirs. of Multicanal S.A., 314 B.R. 486 (Bankr.S.D.N.Y.2004) (Gropper, U.S.B.J.) [hereinafter Opinion and Order of Aug. 27, 2004]; In re Bd. of Dirs. of Multicanal S.A., Order (Bankr. S.D.N.Y. Jan. 6, 2005); In re Bd. of Dirs. of Multicanal S.A., Order (Bankr.S.D.N.Y. Dec. 2, 2004). For the reasons discussed below, I remand the proceedings to the Bankruptcy Court to consider if the securities offered to appellants are exempt from the registration requirements of the U.S. securities laws and, if not, whether the registration with the Securities and Exchange Commission (the "SEC") that appellees have begun to pursue will provide just and non-discriminatory treatment to the holders of the debt instruments of Multicanal, S.A.

I. The Facts of Record

Multicanal owns and operates cable operations in Argentina, Paraguay and Uruguay. It is wholly-owned by Grupo Clarin, an Argentine media conglomerate, but was financed substantially by international lenders who were organized under trust indentures naming the Bank of New York trustee and providing that the law of New York was to be the governing law. Multicanal registered its debt offerings with the SEC, and filed the monthly and annual disclosure statements required by the Securities Exchange Act and regulations.

Following four years of recession, Argentina's economy collapsed in late 2001. The Argentine Peso was unpegged from the United States Dollar, and fell to one-quarter of its former level, trading in February 2002 at a value approximating $0.25 to the Dollar. Multicanal, although continuing to pay its trade creditors, was unable to pay interest and honor principal on its foreign, dollar-denominated debt instruments, and defaulted on 509 million dollars of its debt. It engaged J.P. Morgan Securities, Inc. to advise it on a plan of restructuring.

The procedure chosen was an Acuerdo Preventivo Extrajudicial ("APE"), a privately negotiated restructuring of an insolvent company's debt. Under Argentine law, such a plan must first be approved by two-thirds in amount and a majority in number of the holders of the debt, and then be judicially confirmed in proceedings brought before the Commercial Trial Court, in this case, in Buenos Aires, with a right of appeal to the higher Argentine courts. If the court approves, finding no material inaccuracies in the company's current financial information, approval by the requisite number and amount of creditors, and that the plan is not abusive or fraudulent, all creditors are bound by the plan and the company's debt becomes restructured and modified in accordance with the plan.

The excellent and thorough decisions of Bankruptcy Judge Gropper, previously cited, describe Multicanal's efforts, through J.P. Morgan, to identify and locate noteholders and to negotiate a plan with representatives. Approximately 80% of Multicanal's debt was held by United States' investors, predominantly by large institutions qualifying under the U.S. securities laws as sufficiently large and sophisticated as to relax the scope and extent of disclosure obligations for "private" offerings and sales of securities to them. However, 5% of Multicanal's debt, approximately 25 million dollars in amount, was held by smaller investors, who were neither offshore nor of requisite size to qualify for that more relaxed status of disclosure. Issuances of securities to them had to satisfy the full registration requirements of the U.S. securities laws. Multicanal paid remuneration to J.P. Morgan to solicit the Multicanal noteholders, and, with holders of 94% of the principal amount of notes participating, 68% of the aggregate principal amount of the outstanding debt voted to approve the APE. It appears that J.P. Morgan's compensation was incentive based, in whole or in part, according to the success achieved.

The APE, negotiated by Multicanal with and approved by the requisite number and amount of its debt, distinguished between the larger and smaller holders of its debt. The larger holders, of requisite size and sophistication to enjoy the status of "Qualified Institutional Buyer" ("QIB") under the U.S. securities laws, that is, those to whom securities could be offered and sold privately with relaxed disclosure and registration obligations, were offered a choice between accepting cash equal to approximately 30% of the face value of the debt holdings with 2% interest for the time between APE approval and payment (the "Cash Option"), or choosing between two securities options-either 10-year notes bearing interest at lower, variable rates (the "Par Option"); or a combined debt-equity option of 7-year notes with a fixed 7% interest rate, or an economically equivalent floating rate, and shares of common stock (the "Combined Option"). The Bankruptcy Court found that both securities options distributed a higher value than the Cash Option, with the Combined Option yielding as much as $0.44 on the dollar, exclusive of equity. However, the U.S. smaller holders, the non-QIBs or "retail holders," were not given this choice. The proponents of the APE reasoned that the debt and debt-equity options could not be issued to them without registration under the U.S. securities laws, and the company did not wish to incur the obligations under the U.S. securities laws to register the new securities with the SEC. Accordingly, the non-QIBs were offered only the Cash Option, that is, 30 cents per dollar of face amount of debt holdings.

Appellant Argentinian Recovery Company LLC ("ARC") is an entity created to hold Multicanal Notes owned by certain clients of WRH Partners Global Securities, L.P., also referred to by the Bankruptcy Court as "Huff."¹ Huff is an investment manager whose clients, as found by the Bankruptcy Court, include both qualified and non-qualified institutional buyers. Huff voted against the APE, and filed objections in the Commercial Trial Court in Buenos Aires, in opposition to the petition by Multicanal for judicial approval. Huff subsequently filed suit in the New York Supreme Court, seeking judgment and attachments of bank accounts and related relief, and judgments for the full face amount of the debt they held. In response, Multicanal's Board of Directors petitioned the United States Bankruptcy Court for the Southern District of New York, pursuant to section 304 of the Bankruptcy Code, 11 U.S.C. § 304, to open an ancillary bankruptcy proceeding in support of the proceedings in Argentina, to enjoin the state court actions or any further "interfering" actions in the United States, and to afford comity to the Argentine proceedings. On January 16, 2004, the Bankruptcy Court granted a temporary restraining order pending resolution of Multicanal's section 304 petition. Huff countered by initiating a petition pursuant to section 303 of the Bankruptcy Code, 11 U.S.C. § 303, to open involuntary bankruptcy proceedings against Multicanal.

II. The Proceedings in the Bankruptcy and District Courts

A. The Bankruptcy Court Proceedings.

In the Bankruptcy Court, Opinion and Order of Aug. 27, 2004, 314 B.R. at 501, Judge Gropper recited the lengthy proceedings with regard to the development and negotiation of the APE, its approval by 68% of the debt, the objections by the QIBs and the retail holders, and his ultimate conclusion, after full hearing and deliberation, that, with one exception noted below, the section 304 petition should be granted and that the APE proceeding should be given full force and effect in the United States to the same extent as in Argentina.

Section 304 of the Bankruptcy Code, as Judge Gropper observed, provides for the enforcement by United States courts of foreign insolvency reorganizations. Section 304 provides for the protection of foreign debtors' estates against lawsuits by creditors in the United States, in order to promote "economical and expeditious administration" of such estates, subject to certain criteria to assure just, fair and nondiscriminatory treatment of creditors, including United States creditors. Section 304 provides:

(a) A case ancillary to a foreign proceeding is commenced by the filing with the bankruptcy court of a petition under this section by a foreign representative.

(b) Subject to the provisions of subsection (c) of this section, if a party in interest does not timely controvert the petition, or after trial, the court may —

(1) enjoin the commencement or continuation of —

(A) any action against —

(i) a debtor...