United States: Recent New York Decisions Bolster Use Of Chapter 15 By Debtor Representatives

Last Updated: September 27 2018
Article by Gerald C. Bender and Oscar N. Pinkas

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.

About Dentons

Dentons is the world's first polycentric global law firm. A top 20 firm on the Acritas 2015 Global Elite Brand Index, the Firm is committed to challenging the status quo in delivering consistent and uncompromising quality and value in new and inventive ways. Driven to provide clients a competitive edge, and connected to the communities where its clients want to do business, Dentons knows that understanding local cultures is crucial to successfully completing a deal, resolving a dispute or solving a business challenge. Now the world's largest law firm, Dentons' global team builds agile, tailored solutions to meet the local, national and global needs of private and public clients of any size in more than 125 locations serving 50-plus countries. www.dentons.com.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Events from this Firm
25 Oct 2018, Other, New York, United States

Once again, Dentons is proud to bring together insurance industry leaders, lawyers and regulators for a full-day examination of the most current issues.

26 Oct 2018, Other, New York, United States

Selling your company may be the most important and complicated transaction of your life. To achieve an optimal outcome, you need to get educated.

Similar Articles
Relevancy Powered by MondaqAI
Moritt, Hock & Hamroff LLP
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Moritt, Hock & Hamroff LLP
Related Articles
 
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions