Davis Polk & Wardwell

Lead counsel to Purdue Pharma in a Chapter 11 that has played out under intense scrutiny

History of the practice

Davis Polk & Wardwell can trace its origins back to 1849, when it went by the name Guthrie Bangs & Van Sinderen and served as a professional berth for US President Grover Cleveland between his two non-consecutive terms in the White House.

The cross-border insolvency practice dates back to the 1970s, when it conducted seminal work in settlement risk in international finance and (at the time, novel) cross-border asset freezes, including in relation to the 1979 Iranian crisis. Among Davis Polk’s then-clients was JP Morgan predecessor Morgan Guaranty Trust Company, which it advised on the collapse of Herstatt Bank. The firm also worked on some of the first international cases to involve court cooperation across jurisdictions, such as the restructuring of Robert Maxwell’s media empire, which saw its partners negotiate cross-border protocols long before the drafting of Chapter 15.

Its role in international insolvency developed dramatically during the 1980s and 1990s, when it became a key player in major developments including the International Bar Association’s Cross-border Insolvency Concordat. Donald Bernstein, New York partner and current chairman of the firm’s restructuring group, also served as an official delegate to the insolvency working group of the United Nations Commission on International Trade Law ahead of its production of the Model Law, and was a founding director of the International Insolvency Institute (III).

Since 2008, the firm has continued to advise Western banks and major financial institutions in restructurings, as well as helping them to comply with new regulations enforced as a result of the global financial crisis.

Bernstein is currently chairman of the restructuring group, which has two global co-chairs in New York, Marshall Huebner and Damian Schaible, plus a head of cross-border restructuring in Timothy Graulich – an III member and INSOL fellow, who was promoted to that specialist role in January 2021.

Network

Davis Polk’s insolvency team spans four continents. The firm’s Manhattan office hosts the most partners, who work with colleagues in London, São Paulo, Hong Kong and Tokyo.

Who uses it?

Fulcrum creditors, especially ad hoc groups of lenders and noteholders that usually end up owning restructured companies.

The firm advised all eight US global systemically important financial institutions (G-SIFIs) on their “living wills” required under the US Dodd-Frank Act. It is the leading US-based global firm working with international regulators on the “too big to fail” problem.

Some other important client names include Ford Motor Company; the administrators and liquidators of UK and European Lehman Brothers affiliates; and UK retail conglomerate Tesco.

Davis Polk’s offices in Brazil, Hong Kong and Japan have led to instructions in several large-scale Latin American and Asia-Pacific restructurings.

Historic track record

In the early 1990s, Bernstein represented three bank lenders to Robert Maxwell’s business empire in protocol negotiations between a US examiner and PwC in the UK. Now-senior counsel Karen Wagner also acted for them in a preferential transfers litigation, which was thrown out of the English courts because the US had superior jurisdiction. That litigation ended up in the US Second Circuit Court of Appeals, where the banks prevailed, and is still cited in cross-border cases today.

At around the same time, Davis Polk represented Irish commercial aircraft leasing company Guinness Peat Aviation in a US$10 billion restructuring, leading an exchange offer.

It also acted as US counsel to Telecom Argentina – which was restructuring in its native country – in a New York litigation to address the claims of non-consenting debt holders. The case established an important choice of law precedent in America.

The firm also represented an international banking group in one of the first cross-border pre-packaged cases: the 1992 bankruptcy of Memorex-Telex, a US electrical goods manufacturer.

Davis Polk’s work with large banks saw it act for the joint administrators and liquidators of Lehman Brothers International Europe (LBIE) and its UK-based affiliates in litigation worth US$100 billion against its US entities; and then in a complex settlement resolving billions of dollars’ worth of claims among more than 80 Lehman entities. Later, it helped LBIE’s administrators reach a US$38 million settlement with Lehman Brothers Inc and Lehman’s US broker in what was one of the largest inter-company settlements in history and the largest case to engage the US Securities Investor Protection Act.

Davis Polk acted for the Federal Reserve Bank of New York and the US Department of the Treasury in connection with the successful US$180 billion restructuring and recapitalisation of American International Group.

The firm managed to get Chapter 15 recognition of computer parts manufacturer Elpida’s Japanese plan of reorganisation – the first time that a US court recognised a Japanese plan under Chapter 15.

More recently, it also worked on the bankruptcy of American toy retailer Toys “R” Us, advising the administrative agent and book runner on a US$2.3 billion debtor-in-possession (DIP) facility. In the same case, Davis Polk advised Fung Retailing, the former minority partner in Toys “R” Us’ Asia joint venture (JV), on its acquisition of a greater stake in the JV via a settlement with the majority partner in December 2018. The settlement allowed Toys “R” Us to exit Chapter 11 weeks later.

The firm further advised Volkswagen on its worldwide multibillion-dollar exposure to defective airbag maker Takata. After pleading guilty to wire fraud and agreeing to pay US$850 million to car manufacturers, Takata entered into civil rehabilitation in Japan and Chapter 11 proceedings in Delaware. A February 2018 global settlement paved the way for approval of Takata’s Chapter 11 plan and the sale of the viable parts of its business to a competitor.

Davis Polk also oversaw the successful Chapter 15 recognition of Curaçao insurer ENNIA’s restructuring under emergency regulations, in the face of objections from a shareholder. The case marked the first time that a Curaçao insolvency process was recognised in the US.

On the sovereign debt side, the firm represented Citigroup as paying agent for Argentine bonds in a high-profile litigation with Argentina over holdout creditors. The litigation concerned the enforceability of pari passu clauses in Argentina’s sovereign bond contracts, after a US court told Citibank not to pay other bondholders until the state had paid holdouts. Argentina had threatened to expropriate Citi’s local assets if it complied with the US court ruling.

Recent events

The firm has largely avoided the poaching spree that has affected many of its contemporaries in 2020, simply promoting Natasha Tsiouris to partner in New York during the research period.

The III invited associate David Schiff in New York to join its NextGen leadership programme in 2021.

Top cases of the research period

The firm was appointed lead restructuring counsel to opioid producer Purdue Pharma in March 2018, ahead of its infamous Chapter 11 proceedings filed in September 2019, after the group faced more than 2,900 civil actions in the first governmental mass tort in US history. The case has been playing out against negative media publicity and scrutiny from the US Congress, the Department of Justice, 50 state governments and other public and private entities. Davis Polk facilitated the resignation of the group’s former owners, the Sackler family, oversaw a governance overhaul and reached a settlement with around half the state plaintiffs that would see the group transfer its assets to a public benefit trust to help people with opioid addictions. In March 2021, the group submitted a Chapter 11 plan that would also see the Sacklers agree to contribute US$4.3 billion towards the bankruptcy estate and divest its ownership, in return from immunity from further civil litigation. After a long and heavily contested sanction hearing, New York bankruptcy Judge Robert Drain approved Purdue’s plan in September 2021. But as soon as it was approved, the US Department of Justice and several states appealed to a Manhattan district court, stating the Sacklers’ releases were unconstitutional. Purdue’s bankruptcy was recognised in Canada in February 2020.

Mexican airline Aeroméxico tapped a team from the firm led by Graulich to help it see through its Chapter 11 proceedings filed in June 2020. The team helped Aeroméxico secure US$1 billion in debtor-in-possession funding from Apollo and an ad hoc group of unsecured noteholders, US$800 million of which was convertible into equity in the reorganised debtors, with a junior lien priority. Davis Polk says the combined traits of the financing were “virtually unprecedented” in a free-fall Chapter 11.

The firm acted for Jamaica-headquartered telecoms group Digicel and KPMG partners as its Bermudian joint liquidators in a US$5.2 billion restructuring through a series of exchange offers that Davis Polk structured, and a Bermuda scheme of arrangement that the firm helped gain recognition in New York; the scheme became effective in June 2020.

Davis Polk also continues to be international counsel to Chinese coffee chain Luckin, advising on its restructuring and working to settle various litigations against it concerning alleged violations of US securities law, after Luckin was accused of overstating its 2019 sales volumes. The litigations include a claim for fraudulent misrepresentation by subscribers of New York law-governed convertible bonds issued in January 2020. Luckin entered provisional liquidation in the Cayman Islands at its own application in July 2020 with a view to implementing a scheme of arrangement, having entered an agreement with the convertible senior noteholders. Those Cayman proceedings were recognised in Hong Kong in October 2020 and Davis Polk helped Luckin seek recognition in the US too, five months later. In September 2021, Luckin announced that it had entered into a binding term sheet to settle a US class action lawsuit filed by investors that acquired Luckin Coffee American depository shares between May 2019 and July 2020.

Partners Bernstein, Graulich and Elliot Moskowitz in New York further continue to advise lender HSBC in the international saga unfolding over industrial fishing group China Fishery’s valuable Peruvian anchovy business. In 2015, HSBC commenced insolvency proceedings against China Fishery in the Cayman Islands and Hong Kong, but it withdrew them after a successful challenge against the Hong Kong liquidators, and agreed to a deed of undertaking that the group would sell its Peruvian business by July 2016. Instead of abiding by the deed, China Fishery filed a Chapter 11 case. During the research period, Davis Polk was helping HSBC defend a US$245 million adversary damages action by the Chapter 11 trustee for the Peruvian business, who accused it of “unbridled overreach” in enforcing its interests. After years of stalemate, the case lurched forward in March 2021 when US investment firms Burlington and Monarch proposed a Chapter 11 plan that would see them take control of the Peruvian business, while the group’s ruling family would roll up all intercompany claims. The Chapter 11 court approved the plan in June, as did the trustee, who settled his HSBC litigation, and also secured settlement of a fraud suit brought by BVI liquidators of another part of China Fishery Group against the family owners. The group is now plotting a UK restructuring plan and a Singapore scheme to complete the creditor takeover and has secured recognition of the Chapter 11 plan in Singapore.

Having overseen the US$4.5 billion restructuring of Odebrecht-owned oil group OOG – the largest extrajudicial restructuring in Brazil – and got it recognised in the US, the firm advised bondholders with notes guaranteed by another Odebrecht group entity, construction arm OEC, in a US$3 billion out of court restructuring. Odebrecht rejected a plan put forward by the bondholders in March 2019; but the two sides entered into a memorandum of understanding the following September and Odebrecht placed the resulting plan before a São Paulo court in August 2020, following a consent solicitation process that received support from 60% of the bondholder group. The court approved the plan in October and it was recognised in New York in December 2020. Graulich worked with partners Angela Libby in New York and Manuel Garciadiaz in São Paulo on the case.

Since April 2019, Davis Polk has also been assisting noteholders and lenders to Brazilian miner Samarco with the restructuring of US$4 billion in funded debt, after a serious and fatal 2015 dam accident left it facing environmental, regulatory, operational and financial headwinds. The firm represented Bank of New York Mellon as notes trustee in a litigation in against Samarco, which, alongside bondholder suits in Brazil, spurred the beleaguered company to enter judicial reorganisation in April 2021, followed by Chapter 15 recognition in May. Davis Polk appeared in the US recognition proceedings for an ad hoc group of bondholders citing concerns about Samarco’s lack of negotiation with creditors. Other unsecured creditors have also challenged the restructuring plan in Brazil, saying it places shareholders’ interests ahead of creditors.

Client references

Rafael Rojo, head of non-profit group Bonistas del Patio, says that his team first encountered Davis Polk in the restructuring of the Government Development Bank of Puerto Rico, part of the territory’s major public debt overhaul. “Davis Polk was representing a consortium of hedge funds and we had a local counsel. Notwithstanding, we worked as a team and accomplished a very satisfactory debt restructuring,” Rojo says.

This experience persuaded Bonistas to engage Davis Polk for the restructuring of the Puerto Rico Sales Tax Financing Corporation, COFINA. This “was also carried out with great results,” Rojo notes. “The constructive nature of Davis Polk’s performance and ability to understand the different positions of stakeholders allowed them a unique approach to all involved parties in seeking consensual solutions,” he says. “This collaborative attitude was highly distinguishable to the many parties involved in this process.”

Rojo says that partners Brian Resnick and Bernstein both stood out: “Brian is extremely analytical and has a high level of understanding at macro and micro level, without losing focus of the bottom line. Don has wide understanding as well; his seniority and soft-spoken touch, along with his track record, add a lot of credibility to his views when trying to get a point across.”

Frauke Eßer, legal counsel for crises, insolvencies and antitrust at Volkswagen Group Purchasing, describes the Takata case as “of major importance for Volkswagen”. 

“We have never experienced a better law firm on the restructuring side. Their knowledge on economics and law provides substantive criteria to distinguish them from their competitors,” she says.

In particular, Eßer highlights New York partner Darren Klein, who is “not only a magnificent lawyer, but… has also studied economics at university and worked as an economic consultant for four years”. She describes him as “extremely smart, creative and an influencer”, and says that he helped Volkswagen to succeed in nearly all of its negotiations.

Graulich also gets the thumbs-up from VW: “Timothy is a real expert for cross-border cases and is very experienced in Japan and other jurisdictions.”