US: Chapter 15 Courts Eliminate Barriers to Entry and Impediments to Exit for Foreign Debtors in Chapter 15
In contrast to current US foreign policy, Chapter 15 of the US Bankruptcy Code (Chapter 15 and the Bankruptcy Code respectively) has, since its enactment in 2005, stood for principles of globalisation and cross-border cooperation. Indeed, as the statute itself states, Chapter 15 exists specifically to 'provide effective mechanisms for dealing with cases of cross-border insolvency' by, inter alia, encouraging cross-jurisdictional cooperation and providing mechanisms to encourage successful reorganisations and thereby protecting both creditors and debtors.1 In recent years, the use and importance of Chapter 15 has grown and all indications point to further acceleration in the future.
However, in many ways Chapter 15 is still in its infancy. Over the past 13 years courts have grappled with just how far to extend the principles of comity and cooperation that underpin Chapter 15 before running the risk of enforcing foreign restructuring plans in the United States that stray too far from the policies and principles embedded in Chapter 11. Ultimately, when faced with difficult choices, Chapter 15 courts have consistently chosen the side of comity and cooperation, recognising the reality of what it means to be part of – if not one of the centres of – a globalised economy.
This said, the path was not always so clear. In 2012 and 2013, two controversial circuit-level decisions in the United States raised difficult questions about the sort of barriers foreign debtors face in a filing under Chapter 15 and the enforcement of reorganisations approved in non-US courts. Specifically, in 2012, in In re Vitro SAB de CV,2 the United States Court of Appeals for the Fifth Circuit (the Fifth Circuit) affirmed the decision of a lower court and refused to enforce certain affiliate non-debtor releases in a Mexican debtor's concurso plan, and in 2013, in Drawbridge Special Opportunities Fund LP v Barnet (In re Barnet),3 the United States Court of Appeals for the Second Circuit (the Second Circuit) overturned a lower court decision and held that Chapter 15 filers must have, at minimum, property in the United States to obtain relief under Chapter 15.
Although some predicted that Barnet and Vitro would result in higher barriers to entry and stronger limitations on Chapter 15 relief, these concerns have not come to fruition. Instead, Chapter 15 courts have effectively mooted the potential fallout from Barnet and relied on principles of comity and cooperation to make clear that Vitro, although generally understood to be a correct decision, presented a 'troubling'4 set of facts that most foreign restructuring regimes would not allow to be replicated. As a result, Chapter 15 continues to develop in such a way that the US continues its role as a critical forum for foreign debtors to implement complicated cross-border restructurings.
Lowering the drawbridge again: New York courts' broad interpretation of Chapter 15's jurisdictional requirements since 2013
It is axiomatic that if a foreign debtor is not eligible for Chapter 15, then it cannot seek and receive relief under Chapter 15. Although eligibility was an afterthought in the early years of Chapter 15's implementation, in 2013 it was pushed to the forefront owing to a controversial decision concerning an Australian liquidation proceeding that came to be known as the Drawbridge matter.
The Drawbridge saga began in 2008, when Octaviar Administration Pty Ltd (Octaviar), a Queensland, Australia incorporated entity, was placed into 'external administration' in Australia, and then into liquidation in 2009. An investigation into Octaviar's assets and affairs followed, including into Australian affiliates of Drawbridge Special Opportunities Fund LP (Drawbridge). Eventually a lawsuit was commenced against such affiliates in early 2012.5
Shortly thereafter, Octaviar's foreign representatives filed a Chapter 15 proceeding in the United States Bankruptcy Court for the Southern District of New York (the SDNY Bankruptcy Court) and sought recognition of the Australian proceeding as a foreign main proceeding in the United States. The foreign representatives also sought discovery against Drawbridge. On 6 September 2012, the SDNY Bankruptcy Court issued an order recognising the Australian proceeding as a foreign main proceeding (the Octaviar Recognition Order).6 In the Octaviar Recognition Order, the SDNY Bankruptcy Court made all the typical findings necessary to recognise a foreign main proceeding (ie, that the Australian proceeding was a foreign proceeding, that Octaviar had its centre of main interests in Australia, that the foreign representatives were properly appointed and that the Chapter 15 proceeding was properly commenced).7 However, the SDNY Bankruptcy Court did not mention section 109 of the Bankruptcy Code, which states that '[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States . . . may be a debtor under [the Bankruptcy Code].'8
The omission was intentional, as it was the SDNY Bankruptcy Court's position that section 109 did not apply in Chapter 15 proceedings.9 That said, the SDNY Bankruptcy Court noted that its views were not based on any controlling precedent.10
On appeal, in an opinion that relied almost exclusively on statutory analysis, the Second Circuit vacated the Octaviar Recognition Order and remanded for further proceedings, holding that section 109 applied in Chapter 15 just as it did in Chapter 11, and that to be granted relief under Chapter 15 of the Bankruptcy Code, the foreign debtor must have a domicile, place of business or property in the United States.11 In particular, the Second Circuit relied on the plain language of section 103(a) of the Bankruptcy Code, which, inter alia, makes section 109 of the Bankruptcy Code applicable in Chapter 15.12
The decision was controversial in that it seemed to impose a barrier to entry into Chapter 15 proceedings that had not existed in the first eight years of its existence. Moreover, the impact of the decision was expected to be significant given New York's popularity as a destination for Chapter 15 filers.13 Confusion and controversy only grew when less than one week later the United States Bankruptcy Court for the District of Delaware (the Delaware Bankruptcy Court) expressly rejected the Second Circuit's interpretation of section 109. Essentially adopting the arguments raised by the appellants in the Octaviar appeal, in In re Bemarmara Consulting, AS, No. 13-13037 (Bankr D Del 17 December 17, 2013), ECF No. 38, the Delaware Bankruptcy Court held in an oral order that section 109 did not apply in Chapter 15.14
Following the Bemarmara ruling, at least some commentators foresaw a significant increase in Chapter 15 filings in Delaware and a significant decrease in Chapter 15 filings in New York.15 While a sound logical prediction, at least anecdotally, this has not borne out at all. For example, in 2017, there were 22 Chapter 15 filings in New York, and only five in Delaware.16 Although there are a number of possible explanations for this (eg, many Chapter 15 debtors actually have tangible assets in the United States, and so the Second Circuit's decision was not as impactful as initially predicted), the much more important factor has been liberal construction of the term 'property' as used in section 109, which has effectively mooted any meaningful impact that could have resulted.
First, the Second Circuit's decision did not ultimately have an impact on the Octaviar Chapter 15 filing. In 2014, on remand, the New York Bankruptcy Court held that the claims and causes of action that Octaviar had under United States law against Drawbridge, as well as a retainer in a New York bank account, were sufficient to meet the section 109 'property' burden.17
Just over a year later, in 2015, the SDNY Bankruptcy Court again expanded its interpretation of the term 'property' as applied in Chapter 15 proceedings. Noting at the outset '[t]he [Second Circuit's] Barnet decision continues to be a frequent subject of discussion and criticism at international insolvency conferences', in In re Berau Capital Resources Pte Ltd,18 the SDNY Bankruptcy Court first found that the retainer in place was sufficient to satisfy section 109's 'property' requirement, but then went on to note that 'it is apparent that another substantial (and frequently recurring) basis for Chapter 15 eligibility exists here.'19 Specifically, the court found that the foreign debtor having issued US$450 million in bonds, governed by an indenture that provided for New York choice of law and forum selection clauses, was sufficient to place situs for the debtor's intangible property rights arising thereunder in New York.20
Other decisions have reinforced the broad interpretation of 'property' and the SDNY Bankruptcy Court's view that section 109 should not serve as a bar to successful cross-border restructurings. For example, in In re Suntech Power Holdings Co, Ltd,21 the SDNY Bankruptcy Court reinforced that a retainer was sufficient to satisfy section 109. More importantly, in rejecting the contention that the retainer was somehow an attempt to manipulate jurisdiction, the Court returned to the text of Chapter 15 and underlying principles of cooperation, explaining emphatically that:
Interpreting the Bankruptcy Code to prevent an ineligible foreign debtor from establishing eligibility to support needed chapter 15 relief will contravene the purposes of the statute to provide legal certainty, maximize value, protect creditors and other parties in interests and rescue financially troubled businesses. See 11 U.S.C. § 1501(a). The Debtor oversees a multi-national group of corporations engaged in the solar energy business. Despite the lack of a United States presence, it owes a substantial amount of United States debt and requires recognition as a condition to the enforcement of the scheme of arrangement in the United States that the JPLs hope to achieve in the Foreign Proceeding. Absent the enforcement of the scheme, which will presumably include a form of discharge or injunction restraining the collection of some or all of the pre-scheme debts, the Debtor will be hindered from ever establishing a United States presence or conducting future business in the United States for fear that creditors will seize its United States assets. Shutting the door on the Debtor, where it has no other access, will hinder the restructuring of this multi-national business as contemplated by chapter 15.22
Accordingly, the SDNY Bankruptcy Court's decisions in Barnet on remand, as well as in Berau and Suntech, together with other more recent decisions reinforcing the same principles,23 have all but mooted any potential fallout from the Second Circuit's Barnet decision in the Drawbridge saga. Six years later, section 109 eligibility has become little more than a pro forma procedural box to check in seeking relief under Chapter 15 and, contrary to the predictions in 2012, has not served as an impediment at all to the effective administration of cross-border restructurings.24
Not a debtor? Not a problem. The allowance of third-party releases in a post-Vitro world
While section 109 concerns access to Chapter 15, courts have also embraced principles of comity to provide debtors relief under Chapter 15 where such relief was once in doubt. In a decision quite familiar within the restructuring community, in 2012, the Fifth Circuit affirmed the decision of the United States Bankruptcy Court for the Northern District of Texas (the Texas Bankruptcy Court), holding that it was not an abuse of discretion for the Texas Bankruptcy Court to deny enforcement of a Mexican debtor's concurso plan where the plan provided for affiliate non-debtor releases.
Espousing what is now commonly understood by most United States courts as the framework in which to evaluate post-recognition relief under Chapter 15 of the Bankruptcy Code,25 the court in In re Vitro SAB de CV26 affirmed the Texas Bankruptcy Court's decision not to enforce non-consensual affiliate releases under Vitro's Mexican consurso plan, explaining in effect that the relief diverged too far from relief that could be available under Chapter 11 of the Bankruptcy Code. Although Vitro was an outlier in many ways (as discussed further below) and in fact precipitated changes in Mexican concurso law, the initial reaction among scholars, practitioners and news outlets was that Chapter 15 was a dangerous place for foreign debtors to come if the plan they sought to enforce included non-consensual affiliate non-debtor releases.27
However, since 2012, no other Chapter 15 court, even in the Fifth Circuit, has published an opinion in which it declined to enforce non-consensual affiliate non-debtor releases in a Chapter 15 Court. To the contrary, a slew of decisions, relying on principles of international comity and cooperation and the growing refrain among Chapter 15 courts that relief granted in a foreign proceeding need not be identical to relief that could be granted in a Chapter 11 so long as basic tenets of due process have been met, have enforced foreign plans that grant non-consensual affiliate non-debtor releases.
Most recently, in In re Avanti Communications Group PLC,28 the SDNY Bankruptcy Court enforced a UK scheme of arrangement that granted similar releases emphasising Vitro's outlier status. The SDNY Bankruptcy Court explained that 'Vitro had a number of very troubling facts . . . [m]ost significantly, the plan created only a single class of unsecured creditors and the necessary creditor votes to approve the plan were only achieved by counting the votes of insiders [([whereas] [i]nsider votes are not counted under the Bankruptcy Code)]. . . .'29
Even more significantly, although noting that affiliate non-debtor releases are controversial in the United States,30 the Avanti court explained that in the Chapter 15 context, '[t]he failure of a US bankruptcy court to enforce [non-consensual affiliate guarantor releases] could result in prejudicial treatment of creditors to the detriment of the Debtor's reorganization efforts and prevent the fair and efficient administration of the [r]estructuring. Principles of comity permit a US bankruptcy court to recognize and enforce [the U.K. scheme of arrangement].'31
Against this backdrop, although Vitro has historically stood for the proposition that such controversial releases may not be enforced in Chapter 15, a closer examination reveals that, notwithstanding the Fifth Circuit's blanket ban on non-consensual non-debtor releases in Chapter 11 proceedings, principles of comity would likely allow for such releases in a foreign plan to be enforced in the Fifth Circuit under circumstances less egregious than those in Vitro. Specifically, the Vitro court's holding was not that such releases were always impermissible in Chapter 15, but actually entailed a much more measured analysis:32
Vitro has not met its burden of showing that the relief requested under the [concurso plan]—a non-consensual discharge of non-debtor guarantors—is substantially in accordance with the circumstances that would warrant such relief in the United States. In so holding, we stress the deferential standard under which we review the bankruptcy court's determination. It is not our role to determine whether . . . [we would come] to the same conclusion. Our only task is to determine whether the bankruptcy court's decision was reasonable.
Accordingly, case law relating to affiliate non-debtor releases in the past six years had made clear that absent egregious facts, courts will typically value comity and cooperation and enforce foreign-confirmed plans in the United States.33
Despite a brief period in 2012–2013 when it appeared that Chapter 15 might cease to be an attractive option for effectuating cross-border restructurings, case law over the past five years, particularly in New York, has ensured that Chapter 15 remains a welcoming destination for foreign debtors. The approach of the New York courts has reinforced to foreign debtors that they can trust Chapter 15 courts to respect the terms of their foreign-confirmed plans of restructurings, so long as fundamental principles of due process have been followed and particularly where the restructuring was confirmed consensually in the applicable non-US jurisdiction. Although the outer limits of Chapter 15 relief remain a topic of debate and will continue to be tested and developed in the future, New York case law over the past several years should be viewed positively in that it has held true to the principles of international comity and cooperation upon which Chapter 15 is based.
1 See 11 USC section 1501(a).
2 701 F3d 1031 (5th Cir 2012).
3 737 F3d 238 (2d Cir 2013).
4 In re Avanti Commc'ns Grp. PLC, 582 BR 603, 617 (Bankr SDNY 2018).
5 Drawbridge Special Opportunities Fund LP v Barnet (In re Barnet), 737 F3d 238, 241 (2d Cir 2013).
6 Order Granting Recognition of a Foreign Main Proceeding, In re Octaviar Admin Pty Ltd, No. 12-13443 (Bankr SDNY 6 September 2012), ECF No. 18.
7 For a more fulsome discussion of recognition and enforcement in Chapter 15 proceedings, see James L Bromley and Daniel J Soltman, US – Chapter 15: Overview of Recognition and Enforcement, Global Restructuring Review, Restructuring Review of the Americas 2018 (November 2017), www.globalrestructuringreview.com/insight/the-restructuring-review-of-the-americas-2018/1150715/us-chapter-15-overview-of-recognition-and-enforcement.
8 11 USC section 109.
9 Since the SDNY Bankruptcy Court did not require a showing that Octaviar had a domicile, place of business or property in the United States, Octaviar's foreign representatives presented no evidence that would have allowed the SDNY Bankruptcy Court to make any findings in that regard.
10 See In re Barnet, 737 F3d at 241 (describing and quoting in part from the SDNY Bankruptcy Court's Memorandum Opinion in Support of Certification of Direct Appeal to the Court of Appeals for the Second Circuit, In re Octaviar Admin Pty Ltd, No. 12-13443 (Bankr SDNY 28 November 2012), ECF No. 47, 6, 9 (the 'Direct Certification Memorandum').
11 Direct Certification Memorandum at 6.
12 In re Barnet, 737 F3d at 247. Section 103(a) of the Bankruptcy Code provides that 'Except as provided in section 1161 of this title, chapters 1, 3, and 5 of this title apply in a case under chapter 7, 11, 12, or 13 of this title, and this chapter, sections 307, 362(o), 555 through 557, and 559 through 562 apply in a case under chapter 15.'
The Second Circuit explicitly addressed and rejected a number of arguments made by Octaviar's foreign representative, including that (i) Section 109 should not apply because the foreign debtor is not actually a debtor under Chapter 15, and instead the foreign representative is simply seeking recognition of the foreign proceeding and (ii) Chapter 15's definition of 'debtor' ('for the purposes of this chapter . . . an entity that is the subject of a foreign proceeding', see 11 USC section 1502(a)) should supersede the requirements set forth in section 109. With respect to the first argument, the Second Circuit found that '[t]his argument fails . . . because the presence of a debtor is inextricably intertwined with the very nature of a Chapter 15 proceeding, both in terms of how such a proceeding is defined and in terms of the relief that can be granted. It stretches credulity to argue that the ubiquitous references to a debtor in both Chapter 15 and the relevant definitions of Chapter 1 do not refer to a debtor under the title that contains both chapters.' In re Barnet, 737 F3d at 248. With respect to the second argument, the Second Circuit explained that Chapter 15's definition of 'debtor' is fundamentally different than section 109's definition, in that section 109 provides access to the Bankruptcy Code generally while section 1502(a), instead of supplanting section 109, is a modification to the definition of 'debtor' in other chapters of the Bankruptcy Code. Id. at 249. Moreover, the Second Circuit found it significant that in 2005, when Chapter 15 was enacted, Congress could have excluded it from section 109(a)'s reach, but chose not to. Id. ('Congress' silence is particularly inexplicable in light of the fact that Congress did expressly restrict the application of Section 109(b) to Chapter 15 by removing a prohibition on application to foreign insurance companies. 11 U.S.C. § 1501(c) (“This chapter does not apply to—(1) a proceeding concerning an entity, other than a foreign insurance company, identified by exclusion in [S]ection 109(b).”)'.)
13 Considering jointly administered proceedings to be a single filing, nearly half (18/42) of the Chapter 15 petitions filed in 2013 were filed in New York, which would be bound by the Second Circuit's ruling.
14 See Hearing Tr, In re Bemarmara Consulting, AS, No. 13-13037 (Bankr D Del 17 December 2013), ECF No. 38, at 8:14-9:18. ('The Debtor also self-disclosed a recent decision from the Second Circuit Court of Appeal, which found that the absence of assets in the United States disqualifies a Chapter 15 filing . . . the Second Circuit Court of Appeals held that a Debtor which is the subject of a foreign proceeding must meet the requirements of Section 109(a) of the Bankruptcy Code which requires that a Debtor have assets. The decision of the Second Circuit is not controlling on this Court. And this Court does not agree with the decision of the Second Circuit. And it is the Court's belief that there is a strong likelihood that the Third Circuit, likewise, would not agree with that decision. Section 109(a) provides for Debtors under this title, and it is a Foreign Representative who is petitioning the Court, not the Debtor in the foreign proceeding. The Foreign Representative is asking for recognition in aid of that foreign proceeding. And the requirements of Section 109(a) do not control. Commentators have reflected on the possibility that it was a scrivener's error and that the intent was that Section 109(a) not apply. And I would also read to you from Section 1502 which is the definition section for Chapter 15, and 109(a) again some Courts have said is applicable. But . . . Section 1502 defines Debtor as an entity that is the subject of a foreign proceeding. And there was nothing in that definition in Section 1502 which reflects upon a requirement that Debtor have assets. A Debtor is an entity that is involved in a foreign proceeding, which is what we have here.')
15 See, eg, Maria Chutchian, 2nd Circ's Strict Ch 15 Rule Will Drive Cases To Delaware, Law360 (3 March 2014), available at https://www.law360.com/articles/514599/2nd-circ-s-strict-ch-15-rule-will-drive-cases-to-delaware ('Although they issued starkly different rulings in December on who may be a debtor under Section 109(a) of the Bankruptcy Code, Delaware's bankruptcy court and the Second Circuit have provided one easy decision for foreign companies that want protection in the U.S. but don't have assets here: Forget New York and file in Delaware.')
16 Numbers consider jointly administered proceedings to be a single filing.
17 See In re Octaviar Admin Pty Ltd, 511 BR 361 (Bankr SDNY 2014). Notably, with respect to the claims and causes of action, the SDNY Bankruptcy Court undertook an extensive analysis, based on a 'common sense appraisal of the requirements of justice and convenience', and concluded that the situs of the claims and causes of action were 'property' within the United States. In doing so, the Court relied on the claims and causes of action being brought under United States law and that the potential defendants were located in the United States. Id. at 371-72 (internal quotation and citation omitted).
18 540 BR 80, 81 (Bankr SDNY 2015).
19 Id. at 82.
20 Id. at 83-84 (undertaking an analysis of New York contract law – including portions of New York's General Obligations concerning contractual choice of law and choice of forum and the circumstances under which New York is a proper venue for suits against foreign debtors – and holding that such considerations as they related to the Berau indenture were 'sufficient to fix the situs of the contracts in New York, whether the contract has a situs elsewhere for other purposes. The Court concludes that the presence of the New York choice of law and forum selection clauses in the Berau indenture satisfies the [S]ection 109(a) “property in the United States” eligibility requirement'.). Although not necessary to its decision, the Court also noted that '[o]ther types of contracts, such as patent, trademark or intellectual property licensing agreements' may give rise to the same analysis (though stopping short of whether they might satisfy section 109(a) for Chapter 15 purposes. Id. at 84 n.5.
21 520 BR 399 (Bankr SDNY 2014).
22 Id. at 413.
23 See, eg, In re BCI Finances Pty Ltd, 583 BR 288 (Bankr SDNY 2018) (holding that section 109 was satisfied by a retainer and through breach of fiduciary duty claims that had situs in the United States); In re Avanti Commc'ns Grp PLC, 582 BR 603 (holding that section 109(a) was satisfied with only a retainer in a bank account).
24 In a recent letter, the National Bankruptcy Conference (NBC) – an influential voluntary organisation composed of persons interested in the improvement of the Bankruptcy Code and its administration – made clear its position that 'Barnet is wrong' and recommended revising section 109 of the Bankruptcy Code to exclude its application to Chapter 15. Although it is not clear whether the NBC's proposal will gain any traction legislatively, the proposed revision would bring the Bankruptcy Code with the practical realities that have resulted from case law in the past six years. See Letter from Jane Vris, Chair, Nat'l Bankr Conference, to Tom Marino, Chairman Subcommittee on Regulatory Reform, et al (20 August 2018), available at http://nbconf.org/.
25 As noted in Bromley & Soltman, Overview of Recognition and Enforcement, although the area of law continues to develop, the guiding principles set forth in Vitro are as follows, and the approach has been generally accepted by courts to consider the issue.
• Step 1: determine whether the relief sought is available under section 1521 (either because it is enumerated or is otherwise 'appropriate relief' (ie, where it could have been granted under former section 304, where precedent exists or whether such relief is generally available under US law, including in Chapter 11)), and if so, whether it is nonetheless prohibited by section 1522 (relief appropriate only if the interests of the creditors, the debtor and other interested parties are sufficiently protected).
• Step 2: if the court finds that relief is not available under section 1521, it must then look to section 1507, which independently gives authority to provide 'additional assistance', broader than that allowed under section 1521 but still subject to the limitations of section 1507.
• Step 3: even where a court determines that relief may be available under sections 1521 or 1507, it may nonetheless refuse to grant such relief where it finds that it would be 'manifestly contrary to the public policy of the United States', an exception that is to be narrowly construed.
26 701 F3d 1031 (5th Cir 2012).
27 See, eg, Allison Frankel, 5th Circuit: International Comity Can't Save Flawed Bankruptcy Plan, Reuters (29 November 2012), available at http://blogs.reuters.com/alison-frankel/2012/11/29/5th-circuit-international-comity-cant-save-flawed-bankruptcy-plan/.
28 582 BR 603 (Bankr SDNY 2018).
29 Id. at 617.
30 In Chapter 11 proceedings, US courts are split on the propriety of non-debtor non-consensual releases, with the First, Second, Fourth, Sixth, Seventh, Eleventh, and DC Circuits concluding that they are permitted in certain circumstances, and the Fifth, Ninth and Tenth Circuits holding that they are never permitted.
31 Id. at 619.
32 Vitro, 701 F3d at 1069.
33 Although there may still be some limits on the enforcement of foreign-confirmed plans, case law on other topics has also emphasised the focus on comity over Chapter 11 protectionism, even where the relief sought is different than could be achieved in a Chapter 11 proceeding. See, eg, In re Rede Energia SA, 515 BR 69 (Bankr SDNY 2014) (enforcing a crammed down Brazilian-confirmed plan over the objections of creditors (i) even where the plan did not comply with the absolute priority rule, but leaving open the possibility that it could have ruled differently if prepetition equity obtained substantial recoveries and actual voting results were drastically different than those that would have been necessary to cram down a plan in Chapter 11 and (ii) where Brazilian debtors were substantively consolidated under circumstances where substantive consolidation may not have been appropriate in Chapter 11); In re OAS SA, 533 BR 83 (Bankr SDNY 2015) (substantive consolidation itself is not problematic to the enforcement of a foreign-confirmed plan).