Nassau, Bahamas — The US Bankruptcy Court in Delaware dealt embattled developer Sarkis Izmirlian and Baha Mar Ltd a brutal blow on Tuesday when the court threw out Chapter 11 cases for all the Baha Mar companies based in The Bahamas, clearing the path for insolvency proceedings in the Bahamian courts to progress unencumbered by legal wrangling in another jurisdiction.
While he denied the motion to dismiss the Chapter 11 case for Northshore Mainland Services – the only US company involved in the bankruptcy filing – US Bankruptcy Judge Kevin Carey granted, without prejudice, the motions by CCA Bahamas and China Export-Import (CEXIM) Bank for dismissal of the Chapter 11 cases of the other affiliated companies.
Construction of the $3.5 billion resort project ground to a halt in February after a rapidly worsening liquidity crunch due to missed construction deadlines and missed payments.
Since then, the public pronouncements from Izmirlian and various members of the Christie administration and the public have been at times acrimonious, and at times conciliatory.
On June 29th, 2015, Baha Mar filed for Chapter 11 bankruptcy protection in the US Bankruptcy Court in Delaware.
The filing came as a surprise to all the other partners – CCA Bahamas, CEXIM Bank and the government of The Bahamas – given the ongoing negotiations that had appeared to be nearing consensual conclusion.
On July 20th, 2015, CCA Bahamas filed a motion to dismiss the Chapter 11 cases.
A week later, CEXIM bank also filed a motion to dismiss the Chapter 11 cases. CCA Bahamas and CEXIM are together referred to as the movants in Carey’s memorandum.
On July 16th, 2015, Attorney General Allyson Maynard-Gibson filed a petition in the Bahamian Supreme Court for the winding up of all Baha Mar’s Bahamian businesses, while at the same time applying to the court for appointment of provisional liquidators for the Bahamian debtors.
The court proceedings have been accompanied outside the court by a constant dueling dialogue in the press and on social media.
In a memorandum accompanying his order denying the dismissal motion for Northshore and granting the dismissal motions for the other companies, Carey explained that the central argument of the dismissal motions was that the proceedings belong in The Bahamas, not the US.
“More specifically, CCA and CEXIM assert that the debtors’ bankruptcy cases should be dismissed on a number of grounds, including that the debtors are not eligible for Chapter 11 relief in the United States under Bankruptcy Code 109(a) because all but one of the debtor corporations are organized under Bahamian law and hold few assets in the United States; that the debtors filed these Chapter 11 cases in bad faith or as a litigation tactic to avoid insolvency proceedings in The Bahamas; and that the best interests of the debtors and creditors would be better served by dismissal of these cases so that the parties can proceed with insolvency proceedings in The Bahamas, which is the venue with the most significant contacts and interests in the project, and it follows that most stakeholders would expect Bahamian law to apply to any winding up proceedings,” the judge said.
Carey noted that Baha Mar’s creditor matrix lists 5,172 creditors, and that 3,523 of those are listed as having an address in The Bahamas.
He noted that in order to determine whether a Chapter 11 petition is filed in good faith, a court should focus on whether the petition serves a valid bankruptcy purpose and whether the petition is filed merely to obtain a tactical litigation advantage.
According to the judge, the events leading up to the bankruptcy filing “clearly show debtors on the edge of a financial precipice,” but ultimately he found that, “when considering the spectrum of good faith and bad faith filings, the debtors’ Chapter 11 filings do not fall in or near the range of ‘patently abusive’”.
The totality of the facts and circumstances surrounding the debtors’ Chapter 11 filings do not support a finding of bad faith, Carey said.
The judge said Baha Mar’s ultimate argument was that dismissing the Chapter 11 cases and ‘abstaining in favor of the Bahamian proceeding’ is not in the best interests of Baha Mar and all the creditors, but only in the interests of CEXIM and CCA Bahamas.
“The matter before me is truly an international case with the main contestants hailing from Wilmington, Delaware, to Beijing, China, to Nassau, The Bahamas. The central focus of this proceeding, however, is the unfinished project located in The Bahamas,” the judge said.
“The debtors argue that Bahamian law limits their options to a liquidation proceeding. This argument has been challenged by the movants, who argue that a provisional liquidator may work with the parties to come to an arrangement or compromise that involves a restructuring.
“The movants’ argument is supported by the September 4th, 2015 ruling by the Bahamian Supreme Court, which appointed provisional liquidators with limited powers to preserve the debtors’ assets while promoting a scheme/plan of compromise among all stakeholders.”
Later, the judge said, “If I were convinced that denying the dismissal motions would have the effect desired by the debtors – bringing CCA, CEXIM and the government of The Bahamas back to the bargaining table – I might consider denying the dismissal motions.
“But the evidence does not reflect this and I am not convinced this will happen in short order. I am convinced, however, that prompt judicial action will enhance the likelihood of a successful outcome.”
Carey also noted in his memo that ‘conditions of comity’ support his abstention from the matter.
“The proceedings that have occurred to date in the Bahamian Supreme Court demonstrate that the debtors are being treated fairly and impartially,” he said.
“Although there are clear differences between the Bahamian insolvency proceedings and the United States’ Chapter 11 process, there has been no evidence that the Bahamian laws contravene the public policy of the United States.”
The dismissal of the Chapter 11 proceedings in all likelihood removes the protection of the automatic stay which prevented creditors and others with claims from potentially bankrupting the developer.