In re Board of Directors of Multicanal S.A.

• Decision Date: 27 August 2004
• Docket Number: No. 04-10523 (ALG).,No. 04-10280 (ALG).,04-10280 (ALG).,04-10523 (ALG).
• Citation: 314 B.R. 486
• Parties: In re BOARD OF DIRECTORS OF MULTICANAL S.A., Debtor in Foreign Proceeding. In re Multicanal S.A., Alleged Debtor.
• Court: U.S. Bankruptcy Court — Southern District of New York

314 B.R. 486

In re BOARD OF DIRECTORS OF MULTICANAL S.A., Debtor in Foreign Proceeding In re Multicanal S.A., Alleged Debtor.

No. 04-10280 (ALG).

No. 04-10523 (ALG).

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

August 27, 2004.

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Cleary, Gottlieb, Steen & Hamilton, By Lindsee P. Granfield, Esq., Kurt A. Mayr, Esq., Timothy S. Mehok, Esq., Maria McFarland, Esq., Sara Lester, Esq., New York City, for § 304 Petitioner Board of Directors of Multicanal S.A. and Alleged Debtor Multicanal S.A.

Proskauer Rose LLP, By Louis M. Solomon, Esq., Jeffrey Levitan, Esq., Caroline S. Press, Esq., Jennifer R. Scullion, Esq., Justin Killian, Esq., Adam T. Berkowitz, Esq., New York City, for Respondent and Involuntary Petitioner Argentinian Recovery Company LLC.

MEMORANDUM OF DECISION

ALLAN L. GROPPER, Bankruptcy Judge.

Multicanal S.A. ("Multicanal"), a cable company located in Argentina, has filed a petition under § 304 of the Bankruptcy Code seeking recognition in the United States of an acuerdo preventivo extrajudicial ("APE") proceeding in the Republic of Argentina. At the commencement of the proceeding, Multicanal also moved to enjoin a large United States holder of its Notes, Argentinian Recovery Company LLC ("ARC"), from continuing to pursue two lawsuits in New York State Court in which ARC sought a judgment for overdue amounts on the Notes. ARC is an entity formed to hold Multicanal Notes owned by certain clients of WRH Partners Global Securities, L.P. ("Huff"), an investment manager whose clients include pension funds, charitable foundations, research institutions and universities (for convenience, ARC and Huff will hereafter collectively be called "Huff"). Huff has opposed the § 304 petition and in addition, together with two affiliated Noteholders, filed an involuntary Chapter 11 petition against Multicanal under § 303 of the Bankruptcy Code. Multicanal has moved to dismiss the involuntary proceeding in favor of § 304 recognition and further argues that even if the § 304 petition is rejected, it would not be appropriate or feasible to attempt the involuntary reorganization of an Argentine company in a U.S. Chapter 11 case. The dual proceedings raise issues as to the recognition in the United States of foreign reorganization proceedings and the remedies available to U.S. creditors.

The facts relevant to the appropriate disposition of both petitions were the subject of a hearing that encompassed three days of testimony and the introduction of thousands of pages of documents and deposition testimony. Certain of the background facts have already been set forth in the Court's opinion dated March 12, 2004 denying Huff's motion to dismiss the § 304 petition. In re Bd. of Dirs. of Multicanal, S.A., 307 B.R. 384 (Bankr.S.D.N.Y.2004) (appeal pending). Huff argued that the protections under U.S. law given to holders of notes issued under an indenture qualified under the Trust Indenture Act of 1939 prohibit the non-consensual restructuring of notes in a foreign insolvency proceeding. This Court held that the Trust Indenture Act does not override § 304 of the Bankruptcy Code or preclude the enforcement in the United States of a foreign insolvency proceeding otherwise entitled to recognition here. The question now for decision is whether Multicanal has met its burden of establishing that the APE proceeding in Argentina is entitled to recognition. A related question is whether, on the other hand, the involuntary petition commenced by Huff and two other holders should be permitted to go forward.

On the basis of the entire record, the Court enters the following findings of fact and conclusions of law.

FACTS

Background

Multicanal S.A. is a sociedad anonima organized under Argentine law, with principal offices in Buenos Aires. It is a wholly-owned subsidiary of Grupo Clarin ("Clarin"), an Argentine media conglomerate that owns, among other properties, the largest circulation newspaper in Argentina. About 90% of Multicanal's operations are in Argentina, with virtually all of the remainder in Paraguay and Uruguay. Its revenues are derived primarily from monthly subscription fees for cable service, connection fees and advertising. Although it purchases goods and materials from this country, it has no ongoing business in the United States. As of January 28, 2004, the date that the involuntary petition was filed, its sole U.S.-based assets were three bank accounts with an aggregate balance of approximately $9,500.

Multicanal's restructuring can be traced to Argentina's recent economic collapse. In late 2001, following four years of economic recession, Argentina experienced "the worst economic crisis in its history." See Applestein v. Republic of Argentina, No. 02 Civ. 4124, 2003 WL 22743762, at ^*2 (S.D.N.Y.2003); Lightwater Corp. v. Republic of Argentina, No. 02 Civ. 3804, 2003 WL 1878420, at ^*2 (S.D.N.Y.2003). In November 2001, in response to a run on the Argentine banks, the government restricted access to bank deposits and instituted controls on foreign exchange. In February 2002, in further response, the Argentine government allowed the peso, which had been tied to the U.S. dollar on a one-to-one parity basis for the previous ten years, to float. Over the next four months the peso's value decreased approximately 75% relative to the U.S. dollar. Restrictions on access to U.S. dollars and the sharp devaluation of the peso made Multicanal's acquisition of programming from the United States much more expensive and hindered its ability to make interest payments on its substantial dollar-denominated debt obligations. This debt, representing substantially all of Multicanal's debt for money borrowed, includes Bank debt and five series of U.S. dollar-denominated notes (the "Notes") in an aggregate principal amount of U.S. $509 million. It also represents about 97% of Multicanal's total debt; as of December 31, 2003, trade debt represented only about 3% of Multicanal's outstanding debt. Multicanal has paid all of its undisputed trade debt in the ordinary course of its business since February 2002. The situation is very different with respect to its debt for money borrowed.

The Notes are unsecured and were issued in five series between 1997 and 2001: (1) $97 million in principal amount of 9 1/4% notes due 2002; (2) $99 million in principal amount of 10 1/2% notes due 2007; (3) $131 million in principal amount of Series E 13.125% notes due 2009; (4) $38 million in principal amount of Series C 10 1/2% notes due 2018; and (5) $144 million in outstanding principal Series J Floating Rate Notes due 2003 (collectively, the "Notes"). The Notes are governed by New York law and provide for payment in New York in U.S. dollars. They were issued under indentures qualified under the U.S. Trust Indenture Act; the Bank of New York serves as indenture trustee. Multicanal employed U.S. financial advisors and institutions to market, sell and underwrite the Note issues. The Notes were not initially registered with the U.S. Securities and Exchange Commission but were issued with a commitment by Multicanal to do so, and they were later registered. Since 1997 Multicanal has been subject to the reporting obligations set forth in Section 15(d) of the Securities Exchange Act of 1934. 15 U.S.C. § 78o(d).

On February 1, 2002, Multicanal defaulted on payments of principal and interest on certain of the Notes, and by April 2002 Multicanal had defaulted on payments due on all five series of Notes. It also defaulted on its Bank debt, which is also unsecured. Multicanal considered its options and determined that it would explore the possibility of restructuring its outstanding financial debt. In June 2002 Multicanal announced that it had retained J.P. Morgan Securities Inc. ("Morgan") as its financial advisor to assist in the formulation of a restructuring proposal to submit to creditors.

There are two principal means of restructuring under the Argentine insolvency laws. The first is by a concurso preventivo, which seeks to reorganize a debtor's business and avoid liquidation of the estate. In a concurso the debtor continues to manage its business under the supervision of a court-appointed supervisor and a creditors' committee. Creditor consents for the restructuring are obtained after the debtor has filed for relief with the court. An automatic stay is triggered by the filing of a concurso, and transactions outside of the ordinary course of business require prior court authorization.¹

The second means of restructuring is by an acuerdo preventivo extrajudicial, or APE, which is generally much less expensive and time-consuming than a concurso. An APE is a privately negotiated debt restructuring, supported by a qualified majority of a debtor's creditors, that is submitted to an Argentine court for judicial approval. An APE proceeding gives rise to judicial oversight after creditor approval has been solicited, from the time of the filing for confirmation. An APE may only affect claims of unsecured creditors; those claims that are not affected by the APE remain unimpaired.

The laws governing APE proceedings were amended in May 2002, largely in response to the Argentine economic crisis, to increase their scope and effect. The 2002 amendments, which incorporated certain existing provisions applicable in a concurso, provide (i) for the imposition of a stay on all claims affected by an APE and (ii) that the terms of the APE will be binding upon all holders of claims affected by the APE. Court confirmation of an APE requires the support of holders of a majority in number and two-thirds in total outstanding amount of the affected unsecured indebtedness. Affected creditors may object to confirmation of an APE before an Argentine court based on the inaccuracy of a company's statements of assets and liabilities, the failure to obtain the requisite vote needed for approval, or on the ground...