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The Baha Mar Debtors Sent Packing Back To The Bahamas
In re Northshore Mainland Servs., Inc., 2015 WL 5444707, Case No. 15-11402 (KJC), — B.R. —- (Bankr. D. Del. Sept. 15, 2015)
In His Honor’s most recent Memorandum, Judge Carey dismissed the chapter 11 cases of the Baha Mar debtors (the “Debtors”), except as to one—Northshore Mainland Services, Inc, which is a Delaware corporation with operations in the United States. Despite the Court’s acknowledgment of the significant benefits to all parties in proceeding with a restructuring under chapter 11, the Court appeared constrained to rule that all parties would be best served by dismissal under Bankruptcy Code section 305(a).
The Baha Mar Resort (the “Project”) is a grandiose resort development project in The Bahamas, which was to include four new hotels, a Las Vegas-style casino, and a Jack Nicklaus signature golf course. The Project would generate nearly 5,000 jobs upon completion and represent a significant portion of The Bahamas’ GDP. As with many stalled construction projects, the Project’s completion date was pushed several times in breach of the construction contract, which led to litigation amongst CCA Bahamas Ltd. (the obligor under the construction contract) and The Export-Import Bank of China (the prepetition lender) (together, the “Movants”) as well as a severe liquidity crunch. In June 2015, the Debtors opened several bank accounts in Delaware. Then, on June 29, 2015 (the “Petition Date”), the Debtors filed the chapter 11 cases in the Delaware Bankruptcy Court and filed an Originating Summons in The Bahamas seeking recognition and a stay of all legal proceedings involving the Debtors. On July 31, 2015, the Bahamian Supreme Court denied the stay and recognition of the Debtors’ chapter 11 proceedings, citing—among other reasons—the Debtors’ Bahamian place of incorporation, principal place of business, and location of creditors and assets. Importantly, the Bahamian court stated that no party-in-interest “could ever have had an expectation that if insolvency should intervene the laws of the District of Delaware of the United States would govern[.]” Op. at 8. On September 4, 2015, the Bahamian court appointed provisional liquidators for the Debtors.
The Movants moved to dismiss the Delaware chapter 11 cases under Bankruptcy Code sections 109, 305, and 1112. The Court found that the Debtors met the eligibility requirements under section 109(a) because the Debtors owned property in the United States, notwithstanding the timing of the bank account openings. Under section 109, the Court considered only a snapshot of the Debtors taken on the Petition Date. As for dismissal for “cause” under section 1112(b) for a bad faith filing, the Court utilized a two-factor test: First, whether the petition served a valid bankruptcy purpose, and second, whether the petition was filed merely to obtain a tactical litigation advantage. While the Debtors acknowledged that they filed the cases in Delaware to maintain control over the Project and reorganize under the Bankruptcy Code as opposed to liquidation, the Court held that “[w]ithout more, this [was] not the type of ‘tactical advantage’ that constitutes bad faith”, noting also that the cases were not a two-party dispute. Op. at 15.
Finally, when determining the best interests of the Debtors and creditors for dismissal under section 305, the Court considered the following non-exhaustive factors: (i) the economy and efficiency of administration; (ii) whether another forum was available to protect the interests of both parties; (iii) whether federal proceedings were necessary to reach a just and equitable solution; (iv) whether there was an alternative means of achieving an equitable distribution of assets; (v) whether the debtor and creditors were able to work out an out-of-court arrangement which better served all interests in the case; (vi) whether a non-federal insolvency had proceeded so far that it would be costly to start afresh with a federal bankruptcy process; and (vii) the purpose for which bankruptcy jurisdiction had been sought. Op. at 17 (citing In re AMC Investors, LLC, 406 B.R. 478, 488 (Bankr. D. Del. 2009)). Judge Carey took a broad-brush approach in evaluating these factors. He stated that the Debtors’ choice of forum was entitled to some weight and noted that chapter 11 would be an ideal vehicle for the Debtors and their creditors. However, the Debtors’ proposed plan provided for treatment of the Movants to be determined in the Delaware proceeding while treatment of all other creditors would be determined outside of the Court. According to the Court, this bifurcated plan “only invites further dispute, that is, litigation in this forum and in others.” Op. at 21. The Court was “disappointed” that the parties could not have come to an agreement in formulating a consensual plan, and indicated that it may have denied the dismissal motions if it was convinced that such denial would bring the parties back to the bargaining table and move the cases forward. Op. at 21. Unfortunately, no greater good could be accomplished—in light of the parties’ expectations that disputes would be resolved in The Bahamas—by exercising jurisdiction over these cases.