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“The whole COMI concept is one where the jury is still out”: An interview with retired SDNY bankruptcy judge Robert Gerber

Dominic Lawson

01 August 2018

“The whole COMI concept is one where the jury is still out”: An interview with retired SDNY bankruptcy judge Robert Gerber

Robert Gerber, istock.com/spyarm

GRR met retired judge Robert Gerber, formerly of the US Bankruptcy Court for the Southern District of New York, as he gave his thoughts on how cross-border bankruptcy cases have evolved over time, and outlined his concerns about the use of the concept of the centre of main interests (COMI) in international insolvency proceedings. 

After graduating from Columbia Law School in 1970, Gerber started his legal career at Fried Frank Harris Shriver & Jacobson in New York. He left that firm for a tour of duty in the US Air Force, and then returned to Fried Frank, rising to partner, first specialising in securities and commercial litigation before moving into bankruptcy litigation and counselling work. All told, he was with Fried Frank for nearly 30 years.

Judge Gerber then joined the Southern District of New York (SDNY) bankruptcy bench in 2000, where he served for more than 15 years. He presided over many high-profile cases, notably declining to recognise the British Virgin Islands (BVI) insolvency of foreign exchange fund Creative Finance after finding that the BVI was not its centre of main interest. He also presided over the reorganisation of General Motors, the fourth-largest Chapter 11 filing in history.

Judge Gerber retired from the bench in 2016, joining the firm of Joseph Hage Aaronson in New York, where he is of counsel. He is a fellow of the American College of Bankruptcy.

GRR caught up with him ahead of his appearance on a panel about litigation finance for distressed companies, to ask about his career, and the most notable developments in the bankruptcy industry today.

Since retiring from the bench, you have been working as of counsel at Joseph Hage Aaronson. How does it compare to being a bankruptcy judge?

It’s quite different and in most respects it’s also very satisfying. Although – I’ll confess to you – I miss my old colleagues on the bench, the substantive work I did and the substantive challenges that I had, I love my new colleagues. And because I’m still allowed to receive my judicial pension, what I make from the firm enables me to pay a little more of my kids’ tuition than when I was on the bench. So the short answer is : “I miss my old job in many respects, but I’m very happy in what I do now.”

 

Was it an easy transition for you?

As a technical matter, yes. As a psychological matter, less so. People don’t laugh at my jokes all the time any more. People have started to forget me already! One of the guests at this morning’s conference asked me who I was and where I practised – how quickly they forget. But that was foreseeable and you can see me smiling as I say that.

 

And since you’ve returned to private practice, what’s the most interesting case you’ve worked on?

Much of it has been interesting, but I think the most generally satisfying role for me has been in my expert testimony, in particular one case in which I offered it in the Canadian courts.

Testimony on what US law is, is very rare in the US courts and certainly US bankruptcy judges don’t need testimony of that character. But because the US and Canadian legal systems are so similar, and US–Canadian business matters are so closely intertwined, the Canadians not infrequently care about what US law would provide. Because the dealings between US and Canadian entities are so frequent, matters frequently come up on what US law is, and how it might be applied in proceedings such as a Canadian proceeding.

The Canadian courts seem to be quite interested in any event, and they have been very, very courteous in hearing a US judge explaining US judicial rulings.

 

You were recently part of a transition board for the Woodbridge Group of Companies, a Canadian property developer and suspected Ponzi scheme subject to Chapter 11 proceedings in Delaware. Why were you called to work on the transition board?

Well, it’s funny. GRR wrote an article on that and it used very kind language, I thought, in explaining that we facilitated getting that case back on track. The stakeholder community, principally creditors in the Woodbridge Company’s case, needed to have the comfort that the board would have people on it who had both integrity that they could feel comfortable with and the competence to do that. Judge Peck, Jan Baker and I tried to offer that. I think we did that successfully. As you noted in your article, the company has now moved on to new fiduciaries and management, and I’m grateful that we were able to perform a role in getting the company back on track.

 

What exactly did you do on the case?

Well, we functioned as you would hope a board would function: considering decisions to be made at the board level (as contrasted to the operational level), getting the corporate governance working properly, and working with the stakeholders to ensure that their needs and concerns would be addressed. A lot of the additional stuff, as you would well imagine, is subject to attorney–client privilege and other confidentiality obligations. But what we tried to do was to implement what I might call “best practices” in corporate governance and thinking through issues, deciding them in a disinterested way and being sensitive to the needs and concerns of the stakeholders.

 

And was this the first time a “dream team” of this kind has been assembled for this purpose?

No, it’s not really. Shortly before the filing of the Adelphia Communication Corporation Chapter 11 case (or cases – there were 200 of them) on my watch, the independent directors of Adelphia brought on new directors, such as Anthony Kronman, who at the time was the Dean of the Yale Law School, to perform a similar role, to give the stakeholder community confidence that the corporate governance issues would be addressed in a thoughtful and ethically appropriate way. So what we did is not all that different from what Adelphia did with new directors, like Dean Kronman and others, more than 15 years ago.

I would hope that companies that have had flaws in their corporate governance in the pre-petition period would give greater consideration to bringing on respected folks – they don’t need to be judges of course, or even superstars in the bankruptcy community, like Jan Baker is – to get companies back on track.

 

Later on today you will speak on a panel about litigation finance. Can you give any indication of what you will say on this panel?

Assuming that the practice is engaged with the disclosure and other attention to the legal concerns incident to doing it right, litigation finance is not only permissible, it’s a salutary practice.

One would need to be comfortable, of course, that there’s been appropriate disclosure of all of the terms, and that folks putting the financing arrangements together would have used appropriate diligence to get the best terms possible. They would need to satisfy the court that the financing was in the best interests of the estate, and that the litigation, as a general conceptual matter, would be a net plus for the estate. But let’s be clear. The purpose of such an inquiry is to protect two things: the welfare of the estate, and the integrity of the judicial system. It’s not to address the needs and concerns of the targets of the litigation, which are appropriately dealt with by other means. If the lawsuit is not deserving of winning, there are plenty of other ways of dealing with that.

And of course, when a judge is dealing with that, he or she must be very careful that the focus is solely on the financing itself, because a lot of the pretrial matters (and sometimes the entirety of the case) will be before the same judge who is deciding whether or not the financing should be approved. And the defendants in any such litigation deserve to be comfortable that the judge who is going to hear the suit is going to be fair on the merits, and that this is strictly a matter of “is the financing appropriate for the estate or not?”. You don’t want to decide more than is necessary to meet the estate’s needs on the financing front. And for sure you’d have to be very careful to maintain a level playing field in any litigation to follow.

 

Going back in time, could you tell us about your route to becoming a bankruptcy judge?

It actually goes back to 1973, shortly after I got out of the Air Force, when I worked on my first bankruptcy matter. In those days there were a few bankruptcy boutiques, but most firms, especially large firms, did not have bankruptcy departments as they do now, and litigators – which is what I was when I got out of the Air Force – would do bankruptcy work.

I worked on a major Chapter 11 under the old Bankruptcy Act in San Diego, California, and got a lot of early experience there. I started before there was an automatic stay, getting temporary restraining orders (TROs) to block foreclosures against assets in which the estate had an interest. And I came to love the subject. I did bankruptcy and other stuff for about 15 years as a general purpose litigator, and in 1989 I went into bankruptcy litigation.

By the 1990s I realised that I loved bankruptcy so much that I wanted to take it up a step. I certainly understood the different roles one takes when representing clients and advancing their needs and concerns. But I thought it would be both intellectually challenging and personally satisfying if I could do it without regard to what my client’s needs and concerns were. I put my hat in the ring for a judgeship and was successful in getting that judgeship in 2000.

 

What do you think was the most important cross-border case you decided?

When I thought about what would be the single most important one I had, I had some difficulty. But I can identify a handful of them. Several of my Chapter 15 cases, each in their own way, have been both challenging and important in my own mind: Basis Yield, Creative Finance, Soundview Elite. I also had Chapter 11 cases where I got to coordinate with non-US judges, most significantly Justice James Farley in Ontario, a wonderful judge, with whom I worked on the PSINet case, coordinating the parallel administrations of assets in the US, on the one hand, and in Canada, on the other.

I’m a strong believer in international cooperation, particularly with those countries like the Commonwealth where our laws are so similar. And where we have differences – such as in preference litigation, where in the Commonwealth you have to have an intent to implement a preference, and, in the US, it’s almost like strict liability – sometimes I wonder whether the non-US law might even be better than our own. But in any event, whenever we can work in cooperation, I love that.

The irony is that although I’ve done perhaps 30 Chapter 15s, those that have had published opinions have been a very small subset, because most of the time the implementation is so straightforward that it doesn’t require writing opinions. And a couple of my opinions – Creative Finance being one, Basis Yield being another – may have given people concern that I didn’t really mean it when I was talking about international cooperation. But that would be almost like a blind man feeling an elephant, because I’m a very strong believer in providing non-US courts with support whenever we can.

 

You presided over the restructuring of General Motors. Could you tell us what it’s like to work on such a large and high-profile case?

It’s a little bit scary, because you understand the responsibilities of it. The logistics are challenging as well. On the most famous issue that was addressed, whether General Motors (what we now call ”old GM”) should have its assets sold in the summer of 2009, there were 800 objections to the motion. And we had to be sure that they were being fairly decided, on the one hand, and that they’d be decided in an efficient way, on the other.

And a case of that profile also requires communicating your decision effectively, by which I mean giving the parties and the appellate courts confidence that you’ve thought the decision through. And in a matter of such great public interest, the opinion has to be written in a way so that it will be comprehensible to the public. There is a responsibility on the part of the judge, in a case of that character, to keep the proceedings as transparent as possible and to communicate the reasons for any decisions that are made.

 

In 2016 you declined to recognise the British Virgin Islands (BVI) bankruptcy proceedings of Creative Finance and Cosmorex as foreign main proceedings under Chapter 15, on the basis that neither of the companies’ centre of main interests (COMI) was in the BVI. How was that ruling received in the US bankruptcy law sphere?

The Creative Finance decision was well received in the US. It was not as well received in the BVI. But it was not an assault on the courts of the British Virgin Islands, or even the fiduciaries in the British Virgin Islands. Rather, it dealt with a situation following what was one of the most – if not the most – egregious efforts to hinder, delay and defraud creditors that I had ever seen. And to prevent an estate fiduciary from doing his job. The facts created in many ways a perfect storm.

Also, the COMI concept deserves a fresh look, in my opinion, as I told folks when I spoke to them at a panel in the BVI. If the creditors of the world are content to have letter box jurisdictions like Cayman and BVI administer insolvency proceedings, I’m not sure that it’s so bad to allow that to happen – especially since the legal systems in Cayman and BVI are so similar to those we have in the US. I think people in the BVI may have feared that this was an assault against the integrity of the BVI, and I would hope they would not continue with that state of mind.

 

How did New York cross-border insolvency proceedings change in the years you were a judge?

Well, the most significant difference from when I started the job was that, back in 2000, we handled our international insolvencies under section 304 of the Bankruptcy Code, a now-repealed provision that was replaced when Chapter 15 was enacted in 2005. Under 304, we had many, but not all, of the powers that we have now. Chapter 15 materially advanced the interests of cross-border cooperation and enabled us to do it more effectively in a lot of ways. With the same changes, however, it took away judicial discretion to fine-tune the management of our cases to meet the needs and concerns of each case. And especially since judges can be reversed for an abuse of judicial discretion, I’ve always thought that giving bankruptcy judges discretion, especially in areas where they have expertise, helps creditors quite a bit.

Chapter 15 also introduced the concept of COMI from the original UNCITRAL proposals, and I have mixed feelings about that. Requiring a showing of COMI is no problem in cases that I never had to write about. For example, I had a shipping company called Korea Lines, and you know what? Its COMI was in Korea. But in Basis Yield, the company was organised in Cayman, and Cayman law said that a company of that character – an “exempted company” – couldn’t do business there. Its provisional liquidators filed the Chapter 15 case two days after the Cayman insolvency case had been filed, and I had to deal with the COMI. I ruled that there was an issue of fact as to whether Basis Yield, which operated out of Australia, really had its COMI in Cayman Islands.

Debates over COMI are expensive, they’re time-consuming and they’re distractions, so I ask myself why I was constrained by statute and case law. But would it have been such a sin to support the Cayman Islands in the Basis Yield insolvency? I doubt it. I’m sure it would have been a quick and easy happy ending.

The COMI issue arose again in the Fairfield Sentry decision out of the Second Circuit. We now know that enough activity by a liquidator in a letter-box jurisdiction, after the filing of an insolvency proceeding, can cause the COMI to change. But how much activity is enough to do it? How will the creditors of the world have the certainty they need to know whether the insolvency representatives’ activities after a filing of an insolvency proceeding, which hasn’t taken place yet, will be sufficient to pass muster under Fairfield Sentry? And of course if you’re looking for certainty, it’s hard to think of a better way to achieve certainty than just finding out where the company’s incorporated or otherwise organised.

So I do have problems with the COMI concept. I well understand how people can be nervous about companies invoking other countries’ laws as a flag of convenience to avoid important institutional concerns for the protection of creditors, but for me the whole COMI concept is one where the jury is still out.

 

The SDNY Bankruptcy Court adopted the JIN Guidelines for Communication and Cooperation last year. Is this something that would have been helpful when you were on the bench?

Yes, I think they would. I’ve read them and I think they’re a magnificent piece of work. I should say that they codify and expand upon practices that a lot of us had been following for a long time. I mentioned the PSINet case, working with Justice Farley, for instance. And what we were doing back in 2001 had a striking similarity to the types of practices that found their way into the JIN Guidelines that were enacted in February 2017.

One thing that I thought was particularly valuable in the JIN Guidelines was making the distinction between “procedural” communications with the foreign court (or between the two nations’ courts), on the one hand, and “substantive” ones, on the other. I’m a big believer in transparency. I have a nervousness about ex parte communications, and believe as much as possible should be done in the clear, if I can use an old military expression, with the requisite transparency for the creditors. When I was working with Justice Farley during PSINet, we were very careful to maintain that transparency.

On the other hand during PSINet, I was on the phone with Justice Farley talking about procedural matters – the rescheduling of our joint video conference, which was going to take place just after 9/11 – and personal ones. I’ll remember to this day that phone call on the afternoon of 9/11. Justice Farley showed such remarkable compassion in saying to me, “Look if there’s anything I can do to help you folks, just let me know”, and I recall his extraordinary sympathy and compassion. That was not an ex parte communication in the sense that it was with a creditor or a litigant. It was judge to judge and there was nobody else on the phone. That would be permitted now and, of course, it was permissible back then.

So I think the drafters of these guidelines deserve a lot of credit. They expressed in very clear terms what I would think should be best practices in cross-border communications.

 

What impact do you think the Guidelines will have on cross-border insolvency cases in the Southern District of New York?

Well, because we had already done a lot of it, I think they are going to be evolutionary, rather than revolutionary. I don’t think judges are going to need to do anything very much different under them. But they’ll provide a useful checklist, and will be of considerable value to members of the stakeholder community who would not have realised or focused on the fact that we were doing a lot of this already.

 

Are there any other current cases that you think bankruptcy lawyers should pay close attention to?

I think there is one in particular that I would note, which is the Merit Management v FDI case now pending in the Supreme Court. The matter of safe harbours has always been a challenging one; safe harbours cut against long-standing principles of insolvency law that we’ve had, in both US and Commonwealth law, going back to the 1500s, of ensuring that creditors are paid as much as possible and are treated as fairly as possible. Those principles underlie our fraudulent-conveyance laws, even with the understandable desire to avoid toppling financial markets. Over the years, safe harbour provisions were inserted into the US Bankruptcy Code, with a stated desire to protect the financial markets. If properly drafted, that would have been benign. But it was done using language that, in my view, was overly broad, imprecise and circular. And yet with all of that, that language was applied in accordance with some courts’ perceptions of plain meaning.

Some of that supposed “plain meaning” has been taken to the extreme. And even though no bankruptcy judge in his or her right mind would ever impose liability on a clearing house or conduit, some courts, including appellate courts, have ruled that the mere presence of a financial institution, even merely as a conduit in a transaction that would otherwise be subject to avoidance, provides a “get-out-of-jail-free” card with respect to that transaction. It’s even led to rhetorical questions, which in my view are more than merely rhetorical. Could it ever properly be the law that transactions are immunised just because funds are passed by means of cheques or wire transfers processed through financial institutions? Can fraudulent transfers be avoided only when the money was carried in a paper bag? And is that what it takes to avoid a fraudulent transfer whose recovery would otherwise be a slam-dunk proposition?

The Merit Management v FDI case is going to deal with the conduit issue, and it’s going to be a very useful indicator of whether perceptions of “plain meaning” – especially when plain meaning has been applied in so many cases where there isn’t plain meaning – can trump US bankruptcy policy. Frankly, I think the statute in this regard is so ambiguous that you can’t apply plain meaning under any circumstances. I’m going to be following the case with great interest.

[N.B. The US Supreme Court has since ruled on the case.]

 

Do you ever miss working on the bench?

All the time, terribly. I was blessed with the opportunity to decide a lot of very, very difficult and interesting issues. It was 15 years of continual challenges, and I miss those challenges, and I miss getting to deal with those issues. And I also terribly miss my old colleagues, the folks whom I served next to, not just in the Southern District of New York, but in I don’t know how many other districts across the country. I certainly love my present colleagues and I love the work I do now, but yes, I miss the old job quite a bit.

 

What do you get up to in your spare time?

Well, I have a 19-year-old boy, and my greatest love is hanging out with him. Now that he’s old enough to drive, we have a simple relationship; he does the driving, I get to sit next to him and we talk. We talk sports, and now that he’s in college and studying business and economics, we talk about those things. We talk about any number of things and that’s a source of great joy to me. I also have similar discussions, of course, with my wife, but seeing my kid having grown up before my very eyes is my greatest joy.

 

Now that you are no longer on the bench, are there observations about US bankruptcy jurisprudence that you can make about the constraints you had?

Yes, several. I already mentioned our safe harbour jurisprudence, which in my judgement has gone way off track. As I said, no judge in his right mind would ever impose liability on a conduit. No judge in his right mind would ever impose liability on a clearing house. So this legislation in many respects was a solution in need of a problem, and its language has been construed way beyond what the legislation was intended to protect against.

We have a terrible problem with student loans in this country, based upon early precedents with a different statute, dealing with a different problem, and I shudder to think how much student loan debt we have in this country now, and how many tragedies we have because of our inability to discharge student loan debt.

I’ve mentioned that while any judge will start with the words of the statute in dealing with the matter of statutory interpretation, plain meaning has been applied far too often to statutes that are anything but plain in their meaning, and where application of “plain meaning” would run contrary to centuries of bankruptcy jurisprudence. I may sound like the kid in “The Emperor’s New Clothes”, but I think it’s time to step back and look at that situation, and get it back on track in terms of what I would consider to be appropriate statutory interpretation.

 

And are there any aspects of practice in non-US jurisdictions that impressed you that you’d like US courts to emulate?

There were several. Again, from my experiences as an expert in courts in the Commonwealth. In the UK, experts are expected to caucus with each other after they’ve filed their reports, to narrow areas of disagreement where possible, and to highlight, for the benefit of the court, the areas in which the disagreement remains. I think that’s a salutary practice; I think it would be well for US courts to consider doing something similar.

I was also impressed in several ways by the way in which litigation is handled in Canada. Canadian law, following a case called Hryniak v Mauldin, gives judges the ability to grant summary judgment, even if there might be said to exist a dispute of fact, where you really don’t need a trial. And they’re allowed to use common sense in granting or denying summary judgment. I think that’s a terrific practice, and I would encourage courts and the drafters of US Civil Rule 56 to incorporate that.

I also like other ways by which the Canadian courts do things. They can use expert reports that have been prepared in writing and obviate the need for live testimony, except in cases where live testimony going beyond the written reports is really necessary. The Canadian courts generally have impressed me with the clarity of their opinions. They write in plain English a lot better than a lot of our US judges do. Their numbering system makes it easier to reference things and find things.

If I were king of the world, I would encourage my US colleagues to follow some of the Canadian techniques.

GRR met Judge Gerber in February at the annual Wharton Restructuring and Distressed Investment Conference in New York