Four recent decisions in the Chapter 15 arena all support the use of Chapter 15 by a foreign representative in the pursuit of relief in the US.
On April 24 of this year, Judge Sean H. Lane of the US Bankruptcy Court for the Southern District of New York issued his opinion in the Chapter 15 cases of Australian debtors B.C.I. Finances Pty Limited (in Liquidation) and affiliates, granting recognition of the Australian liquidation proceedings of these related debtors. The Chapter 15 cases were filed by the joint provisional liquidators in the Australian proceedings because certain of the debtors' principals (who had been found liable in Australia for various tax and breach of statutory and fiduciary duty violations) had relocated to New York, likely in an effort to avoid recovery by the liquidators. The provisional liquidators commenced the Chapter 15 cases to pursue discovery and possible litigation against these insiders.
Certain parties objected to the debtors’ eligibility for Chapter 15 in the US on the grounds that they did not comply with the Section 109(a) requirement that the debtor have “a domicile, a place of business, or property in the United States….” In an oft-discussed decision—Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet, 737 F.3d 238 (2d Cir. 2013)—the Second Circuit had ruled that the property requirement of section 109(a) applies in Chapter 15 cases (based on the fact that section 103(a) of the Bankruptcy Code provides that all of Chapter 1 applies in Chapter 15 cases). The Second Circuit so ruled even though in Chapter 15, it is the foreign debtor’s legal representative, not the debtor itself, that files the petition for recognition, and it is section 1517 that provides the requirements for Chapter 15 recognition. A number of courts since Barnet have endorsed workarounds that have allowed for Chapter 15 eligibility based on minimal connections to the US.
In B.C.I., the court overruled the objection based on section 109(a), and found that the provision by each debtor of US$1,250 in retainers to the liquidators’ US counsel as well as the existence of breach-of-fiduciary-duty claims against the insiders who were located in the US, each constituted property in the US sufficient to satisfy the Barnet standard and section 109(a). Judge Lane made clear that even a minimum amount of property satisfied section 109(a) and rejected the argument that the very small retainers were provided to “manufacture” statutory eligibility.
Finally, the court undertook a thorough analysis to determine the situs of the fiduciary duty claims, including considering expert testimony. The court concluded that, under New York’s “greater interest test,” Australian law should determine the situs of the claims, and under Australian law, the claims were deemed to be situated in New York because they were properly recoverable where the defendants were located. Thus, these claims constituted property in the US for purposes of section 109(a).
The use of Chapter 15 has also been sanctioned by courts in aid of foreign representatives looking for discovery from US parties in interest. Recently, in the jointly administered Chapter 15 cases of Platinum Partners Value Arbitrage Fund L.P. and Platinum Partners Value Arbitrage Intermediate Fund L.P., US District Court Judge Denise Cote of the Southern District of New York upheld Bankruptcy Judge Shelley Chapman’s ruling allowing foreign representatives to use the Chapter 15 process to obtain discovery against the company’s auditors not otherwise available to them in the Cayman Islands main proceeding. In doing so, the district court dismissed the auditors’ arguments that (i) accountants’ work product and other materials were not property of the debtors, and thus were not discoverable under Cayman law, and (ii) the arbitration clause in the auditors’ engagement letter prevented discovery because it related to claims or disputes against the auditors. Judge Cote easily rejected, as have other courts, the notion that discovery in the US should be constrained if not available in the main proceeding. She also chose not to read the arbitration clause so broadly as to prohibit discovery when no claim had been asserted against the auditors.
The next decision worth mentioning is Avanti Communications Group PLC, No. 18-10458 (MG), 2018 WL 1725544 (Bankr. S.D.N.Y. Apr. 9, 2018). While the Avanti court dealt in part with the Section 109 eligibility issue -- and had no problem deciding that the retainer paid to the New York law firm representing the foreign representative as well as the fact that the indenture relating to one of the debtor’s debt issuances was governed by New York law each constituted property in the US for purposes of section 109 -- it is more notable for its discussion of whether recognition of the Debtor’s UK scheme of arrangement allowed for enforcement of the third-party releases provided for therein.
Third-party releases are a hot-button issue in the US—where the circuit courts are split on whether third-party releases are ever permissible without consent and, in those circuits that do permit them, what constitutes such consent—but they are generally allowed in UK schemes of arrangement. Although there were no objections lodged to recognition of the Avanti scheme or to enforcement of the releases through a sanctions order, Southern District Bankruptcy Judge Martin Glenn decided to address the issues regarding approval of the scheme and releases head on.
Judge Glenn pointed out that the issues presented by third-party releases in Chapter 15 cases are different than in Chapter 11 cases, with the focus being on whether the foreign court had proper authority to grant the releases and thus whether in Chapter 15 to recognize and enforce the foreign court order bases on comity. Judge Glenn focused his attention on two provisions of Chapter 15, section 1521(a), which authorizes the court to grant “any appropriate relief” to a foreign representative, “where necessary to effectuate the purposes of [Chapter 15] and to protect the assets of the debtor or the interests of the creditors”, and section 1507(a) and (b), which allows the court to “provide additional assistance to a foreign representative” if, “consistent with principals of comity”, such assistance will, among other things, assure “just treatment of all holders of claims”, “protection of claim holders in the United States against prejudice” and “distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by this title”.
Focusing in particular on the “principals [sic] of comity and cooperation with foreign courts” language of section 1507, Judge Glenn looked at the extent to which creditors in the UK scheme of arrangement had been given a full and fair opportunity to vote on, and be heard in connection with, the restructuring. The court noted that the scheme had received 98 percent approval by the one class affected, and creditors therein had been afforded a right to be heard consistent with US due process standards. Accordingly, the court granted the request for recognition and enforcement of the scheme and related sanctions order.
Comity was also the focus of the final case covered here— Oi S.A., Case No. 16-11791 (Bankr. S.D.N.Y. July 9, 2018)—another decision by Judge Lane. The Oi group of companies is one of the world’s largest integrated telecommunications service providers, with over 70 million customers in Brazil. With over US$65 billion in debt, the case was the largest in Brazilian history.
After much litigation in multiple jurisdictions, the Brazilian debtors were able to negotiate and confirm a restructuring plan in their Brazilian proceeding. A disgruntled shareholder objected to the plan and appealed the court order approving it. The shareholder sought a stay pending appeal, but the stay was denied.
While the appeal was pending, the Chapter 15 debtors sought an order from the New York Bankruptcy Court enforcing the plan and approval order. They also sought to issue stock in the US in connection with the plan. The disgruntled shareholder objected to the relief requested in the US, and sought to have the bankruptcy court stay enforcement of the plan and order until the appeal was determined—in effect, giving the shareholder the benefit of a stay of enforcement denied to it by the Brazilian court.
Judge Lane analyzed the issues using the same two Chapter 15 provisions that Judge Glenn focused on in Avanti—section 1507 (providing assistance) and section 1521 (granting any appropriate relief)—and decided it was appropriate to grant comity to the Brazilian plan of reorganization so that it would be “implemented in a manner consistent with its terms and without unnecessary delay and costs.”
The bankruptcy court did not buy the shareholder’s arguments that the debtors were using Chapter 15 to “short-circuit” the process in Brazil. On the contrary, it found that because the vast majority of the company’s stakeholders participated in the Brazilian proceeding, approved of the plan and would be harmed by the failure to timely effectuate the transactions contemplated by the plan, it was the shareholder who was attempting to do an end run around the Brazilian proceeding. In so holding, the court recognized and acknowledged that (a) the shareholder still had recourse in Brazil in connection with the appeal, and (b) if the Brazilian confirmation order was overturned, the shareholder would be entitled to come back to the Bankruptcy Court for appropriate relief. Accordingly, the shareholder's objection was overruled.
While each of these decisions is largely consistent with prior decisions by US courts overseeing Chapter 15 cases, collectively they work to highlight and further cement the benefits of Chapter 15 to foreign representatives looking to enforce litigation rights or restructuring plans emanating from foreign jurisdictions.
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