Fifteen years ago, in 2005, the US became the ninth jurisdiction to adopt the Model Law on Cross-Border Insolvency, which provides a mechanism pursuant to which a foreign insolvency, liquidation, or debt restructuring (known as a "foreign proceeding") may be granted recognition under Chapter 15 of the Bankruptcy Code. The number of jurisdictions adopting a version of the Model Law has been steadily increasing and in 2020, Brazil and Myanmar joined, bringing the total to 53 jurisdictions enacting a version of the Model Law.
Over the course of the past 15 years, US courts have addressed numerous issues in Chapter 15 cases. Given the international origin of Chapter 15, a foreign court may consider a US court's decision in determining whether to grant relief in its home country. There are, however, conflicting decisions on several issues in the US. For example, in the Second Circuit, which includes New York, a foreign proceeding can be recognized only if the foreign debtor satisfies the statutory debtor eligibility requirements applicable to plenary bankruptcy cases in the US. Other jurisdictions, including the bankruptcy courts of Delaware and most recently, the US Bankruptcy Court for the Southern District of Florida, have refused to impose the Bankruptcy Code's debtor eligibility requirements on a Chapter 15 debtor. See In re Viacao Itapemirim, S.A., No. 18-24871-BKC-RAM, 2020 Bankr. LEXIS 634, at *3-4 (Bankr. S.D. Fla. Mar. 10, 2020).
This "year in review" article focuses on some of the significant decisions issued by the US courts in 2020. Part I of this article begins with a discussion of a trio of decisions elaborating on the standards for recognition of a foreign main and foreign nonmain proceeding. Part II examines a bankruptcy court's decision to enforce a foreign debt restructuring. Finally, Part III concludes with a discussion of the implication of Chapter 15 on certain litigation issues.
Under Chapter 15, a foreign proceeding shall be recognized, if (i) the foreign proceeding is a foreign main or foreign nonmain proceeding, (ii) the petition for recognition was filed by a foreign representative, and (iii) the petition satisfies certain procedural requirements. If all three criteria are satisfied, the petition for recognition must be granted, unless recognition would be "manifestly contrary" to US public policy. Many Chapter 15 decisions are focused on the first requirement—whether the foreign proceeding is a foreign main proceeding or a foreign nonmain proceeding. In 2020, the US Bankruptcy Court for the Southern District of New York addressed the issue in the corporate and individual debtor context.
A foreign main proceeding is a foreign proceeding pending in the country where the debtor has the center of its main interest or "COMI." Chapter 15 does not define COMI, but the location of a corporate debtor's registered office is presumed to be its COMI. In certain circumstances, that presumption may be rebutted by other facts, including location of the debtor's headquarters; the location of those who manage the debtor; and the location of the debtor's assets. A foreign nonmain proceeding is a proceeding pending where the debtor has an establishment, which is defined as "any place of operations where the debtor carries out a nontransitory economic activity." In the Second Circuit, which includes New York, a court will generally analyze a debtor's COMI as of the date of the filing of the Chapter 15 petition.
In 2020, the US Bankruptcy Court for the Southern District of New York analyzed requests for recognition of a foreign main proceeding and a foreign nonmain proceeding in connection with the cross-border restructuring of the "Constellation Group," a group of entities that operate offshore and onshore oil and gas rigs and drillships. In the first case discussed below, the bankruptcy court did not find sufficient evidence to rebut the presumption that the company's registered office was the debtor's COMI and granted recognition to a proceeding pending in the British Virgin Islands as a foreign main proceeding and issued an order enforcing its BVI plan that mirrored the terms of its affiliates Brazilian plan. See In re Olinda Star Ltd., 614 B.R. 28, 33 (Bankr. S.D.N.Y. 2020). Likewise, the same bankruptcy court granted recognition to a Brazilian proceeding of a Luxembourg affiliate as a foreign nonmain proceeding. Both cases reflect that it will generally be difficult to overcome the presumption that a debtor's COMI is where it is registered or incorporated.
Olinda Star Ltd. is incorporated in the British Virgin Islands and is a member of the Constellation Group. Certain members of the Constellation Group, including Olinda Star, commenced reorganization proceedings ("recuperação judicial") in Brazil, and filed Chapter 15 cases in the US. Thereafter, the Brazilian court entered an order formally accepting the majority of the members of the group as debtors in Brazil. The Brazilian court, however, dismissed the Brazilian proceedings as to Olinda Star because, according to the court, Olinda Star was not eligible to be a debtor in Brazil. Consequently, the US bankruptcy court dismissed Olinda Star's initial Chapter 15 case.
Following the dismissal of its Brazilian restructuring proceeding and the initial Chapter 15 case, Olinda Star filed a "soft-touch" provisional liquidation in the BVI to implement a scheme of arrangement that mirrored the Brazilian restructuring plan. Generally, in a soft-touch provisional liquidation, the directors retain the day to day control of the company, but court-appointed liquidators are entrusted with the pursuit of actions outside of the ordinary course of business, including a restructuring. In connection with its restructuring efforts and the BVI proceeding, Olinda Star filed a new Chapter 15 case and requested (i) recognition of the BVI proceeding as a foreign main proceeding and (ii) an order enforcing the BVI scheme in the US.
As an initial matter, the bankruptcy court noted that because Olinda Star was incorporated in the BVI, Olinda Star's COMI was presumed to be the BVI. There were, however, certain facts that supported a finding of COMI elsewhere. In particular, the operational management team was located in Brazil, the company's treasury function was in Panama, its sole director resided in the Cayman Islands, and its primary asset was an oil drilling rig vessel then drifting in the Bay of Bengal. Nevertheless, the court found that, as of the date of the Chapter 15 filing, the BVI court-appointed joint provisional liquidators actively managed Olinda Star's assets, as evidenced by, among other things, the fact that the provisional liquidators regularly hosted meetings with creditors and the debtors' sole director, all in the BVI. Moreover, the company was subject to the BVI's laws, regulations, and jurisdiction. According to the court, this fact weighed in favor of finding COMI in the BVI. Further, the court found that creditors and third parties' expectations supported finding COMI in the BVI. In particular, the debt documents reflected that Olinda Star was incorporated in the BVI and expressly included references to the BVI's insolvency laws. Finally, creditor support for the BVI scheme further bolstered a finding that the BVI was Olinda Star's COMI.
Upon recognition of the BVI proceeding, the bankruptcy court issued an order enforcing the BVI scheme in the US The US court determined enforcement of the scheme was necessary and appropriate as required under Chapter 15. Further, according to the court, the decision whether to enforce a foreign debt restructuring "boils down to a question of the appropriateness of granting comity" to the restructuring. In this instance, the court, noting that the US and the BVI share common law traditions and similar due process values, concluded that creditors had notice of the BVI proceedings and had a full and fair opportunity to be heard on scheme related issues.
US courts have regularly held that the distinction between foreign main and foreign nonmain proceeding may not be significant because a court can grant substantially the same relief in both instances. In that regard, the same judge from the US Bankruptcy Court for the Southern District of New York in the Olinda Star decision also issued an order enforcing a Brazilian restructuring plan of a Luxembourg member of the Constellation Group after recognizing its Brazilian proceeding as a foreign nonmain proceeding. See In re Serviços De Petróleo Constellation S.A., 613 B.R. 497, 513 (Bankr. S.D.N.Y. 2020).
In contrast to Olinda Star, the Brazilian court concluded that Arazi S.à.r.l, a company registered in Luxembourg, was a proper debtor in Brazil. Accordingly, the US bankruptcy court addressed Arazi's Chapter 15 petition for an order granting recognition to the Brazilian proceeding as a foreign main or foreign nonmain proceeding. In this instance, the court could not recognize the restructuring proceeding as a foreign main proceeding because the debtor's COMI was not in Brazil. Indeed, Arazi's COMI was presumed to be in Luxembourg, where it was registered. Moreover, according to the US court, there were insufficient facts to rebut the presumption. In particular, the court found that the COMI factors mentioned above weighed in favor of finding COMI in Luxembourg. In particular, the court emphasized that Arazi was a special purpose holding and financing company for the Constellation Group whose nerve center was in Luxembourg. In addition, its headquarters and the people that managed Arazi were located in Luxembourg. Moreover, Luxembourg law was the most relevant law governing Arazi's disputes because Arazi, as a Luxembourg corporation, was subject to Luxembourg laws, regulations, and jurisdiction. Finally, creditors reasonably expected that Arazi would be subject to a Luxembourg insolvency proceeding given statements made in Arazi's debt documents. Accordingly, Luxembourg (and not Brazil) was Arazi's COMI. However, all of Arazi's assets, which, as an investment vehicle, included its equity interests in joint ventures and associated entities that own and operate floating production, storage, and offloading vessels, were located in Brazilian waters. According to the court, these non-transitory ties were sufficient to find an establishment in Brazil. Therefore, the court recognized the Brazilian proceeding as a foreign nonmain proceeding. Following recognition of the Brazilian proceeding, the bankruptcy court summarily issued an order enforcing the Brazilian restructuring plan, noting that the relief requested by Arazi is not limited by the fact that Arazi's bankruptcy is recognized as a foreign nonmain proceeding.
Chapter 15 provides that an individual's habitual residence is presumed to be its COMI. In a case involving a Russian citizen, the US District Court for the Southern District of New York, affirmed a finding by the bankruptcy court denying recognition of a Russian insolvency proceeding as a foreign main proceeding. See Rozhkov v. Pirogova (In re Pirogova), 612 B.R. 475, 479 (S.D.N.Y. 2020). In this matter, a creditor commenced an insolvency proceeding in a Russian court against an individual, a Russian citizen who had been a permanent US resident since 2008. Following his appointment, the Russian trustee filed a petition under Chapter 15 for recognition of the Russian proceeding as a foreign main or foreign nonmain proceeding. The bankruptcy court dismissed the petition finding that the debtor did not have sufficient ties to Russia. In 2020, the district court affirmed the bankruptcy court's decision that the Russian trustee failed to demonstrate the debtor's COMI was in Russia. The court noted that the debtor had business dealings in Russia, but they occurred long before the commencement of the Chapter 15 case. Indeed, according to the court, the debtor's residency in the US, lack of travel to Russia since she fled the country years prior, and minimal remaining contacts with Russia, underscored the fact that Russia was no longer her COMI. For similar reasons, the court affirmed the bankruptcy court's finding that the debtor did not have an establishment in Russia. Specifically, the US court noted that the trustee failed to demonstrate that the debtor had a "place of operations" or carried out "nontransitory economic activity" in Russia as of the date of the Chapter 15 petition. Although the debtor still owned an apartment in Russia, she neither lived in, visited, nor managed the apartment as of the date of the Chapter 15 filing.
As noted above, a bankruptcy court may, following recognition of the foreign proceeding, enter an order enforcing a foreign debt restructuring in the US if the relief is appropriate and necessary to effectuate the purposes of Chapter 15 and to protect the assets of the debtor and the interests of creditors. In addition, a court may grant such relief only if the interests of creditors and other interested entities, including the debtor, are "sufficiently protected." A US court will generally give significant weight to the due process accorded to creditors in the foreign proceeding. US courts have generally been receptive to issuing orders enforcing Brazilian restructurings, and did so again in 2020. See In re Lupatech S.A., 611 B.R. 496, 497 (Bankr. S.D.N.Y. 2020).
In 2016, a Brazilian court approved a restructuring plan for Lupatech S.A. and certain affiliates, a group of oil and gas service and component providers. Thereafter, the US Bankruptcy Court for the Southern District of New York issued an order recognizing the Brazilian proceeding as a foreign main proceeding and enforcing the Brazilian plan in the US. Following an appeal in Brazil, the Brazilian plan was annulled. Consequently, the US court suspended its order enforcing the plan in the US. Lupatech, however, proposed a modified plan that was approved by creditors and the Brazilian court. The US bankruptcy court, in turn, issued an order enforcing the modified plan and granting additional relief, including authorizing certain US parties to take any "ministerial actions" required under the amended plan. Thereafter, the Lupatech debtors entered into new debt documents and obtained Brazilian court orders (i) adjusting the flow of distributions to creditors under the modified plan, (ii) implementing a new arrangement for the payment of fees and expenses of certain US parties, and (iii) modifying the form of certain distributions contemplated under the plan. The debtors requested an order from the US court enforcing the orders from the Brazilian court.
According to the US court, the enforcement of those Brazilian court orders was necessary to effectuate the purposes of Chapter 15 and to protect the interests of creditors. In particular, the Brazilian orders provided for the payment of the indenture trustee's fees and expenses. Absent the relief requested, it was unclear whether the indenture trustee would take the necessary steps under the plan to facilitate distributions to creditors. Thus, Lupatech's plan could not be fully consummated without a US court order enforcing the Brazilian court orders.
Upon recognition of a foreign proceeding, the foreign representative will have access to the courts in the US. Consequently, a foreign representative may pursue claims against other parties in US federal and state courts. As demonstrated by the district court's decision in Principal Growth Strategies v. Platinum Management, 615 B.R. 529, 533 (D. Del. 2020), US courts appear willing to defer to a foreign representative's choice of forum. Following recognition of certain Cayman Island proceedings as a foreign main proceeding by the Bankruptcy Court for the Southern District of New York, the foreign representatives asserted fraudulent transfer and constructive trust claims under Delaware state law and similar claims under Cayman Island law against certain defendants in Delaware state court.
The defendants argued that the Delaware state court litigation was "related to" the Chapter 15 bankruptcy case, and sought removal of the matter to another forum—US federal district court. The foreign representatives, however, successfully argued that the matter should remain in state court by relying on the mandatory abstention provision found in 28 U.S.C. § 1334(c)(2). That statute, which is "based on comity," essentially provides that a US district court shall abstain from hearing a proceeding based on state law if it can be timely adjudicated in a state forum of appropriate jurisdiction. The Principal Growth court analyzed the factors in Stoe v. Flaherty, 436 F.3d 209, 214 (3d Cir. 2006) to find that it was required to abstain from adjudicating the Delaware litigation because (i) the litigation was based, at least in part, on state law claims; (ii) the litigation did not arise under the Bankruptcy Code or in a case under the Bankruptcy Code because the claims asserted could exist outside the context of a bankruptcy case; (iii) the district court's jurisdiction was premised solely on its jurisdiction over bankruptcy cases or related matters (and not diversity or federal question jurisdiction); (iv) an action was commenced in state court, and (iv) the litigation could be timely adjudicated in state court. Finding that it must abstain, the district court remanded the litigation to the state court, concluding that equitable remand was appropriate.
In 2020, US courts also considered several defenses to lawsuits brought by foreign representatives in 2020. See Link & Assocs. v. Ivany (In re Schonfeld, Inc.), 806 F. App'x 743, 744 (11th Cir. 2020); In re Fairfield Sentry Ltd., No. 10-13164 (SMB), 2020 WL 7345988, at *1 (Bankr. S.D.N.Y. Dec. 14, 2020). In Schonfeld, following recognition of a Canadian proceeding as a foreign main proceeding under Chapter 15, the trustee of a debtor filed a complaint against the debtor's wife and various entities to recover assets under Florida state law that the debtor allegedly transferred to his wife. There, the defendants moved to dismiss the trustee's complaint based on forum non conveniens. The US bankruptcy court agreed and granted the motion, finding that (i) Canada was an adequate and available alternative forum, (ii) private and public interest factors weighed in favor of dismissal, and (iii) the trustee could reinstated its suit in Canada without undue inconvenience of prejudice. On appeal, the US Court of Appeals for the Eleventh Circuit affirmed the lower courts' decision finding that dismissal was appropriate because the Canadian court was an adequate alternative forum to adjudicate the fraudulent transfer dispute.
In Fairfield Sentry Ltd., the liquidators of Bernard L. Madoff Investment Securities LLC brought (i) avoidance claims under British Virgin Islands law to recover "unfair preferences" and "undervalue transactions" and (ii) constructive trust claims against certain defendants. Certain defendants argued that all claims were barred under the so-called "safe harbor" provision found in US Bankruptcy Code section 546(e), which shields settlement payments or a "transfer payment . . . made in connection with a securities contract from avoidance, where such transfer was 'made by or to (or for the benefit of) a . . . financial institution.'" Section 561(d) of the Bankruptcy Code makes the safe harbor applicable in Chapter 15. The motion to dismiss followed in the wake of the US Supreme Court's decision, Merit Mgmt. Grp. LP v. FTI Consulting, Inc., 138 S. Ct. 883, 888 (2018), wherein the Supreme Court held that the "relevant transfer for purposes of the § 546(e) safe harbor inquiry is the overarching transfer that the trustee seeks to avoid under one of the substantive avoidance provisions."1 Ultimately, the Fairfield court determined the avoidance actions "were made by, to, or for the benefit of a qualifying entity such as a 'financial institution' of a type identified in [the safe harbor provision]," and therefore dismissed the avoidance claims. The US bankruptcy court, however, denied the motion to dismiss the foreign representatives' constructive trust claims, because the claims were based on BVI law and the court determined that the transferees had not identified any statutory language that expressly preempted such constructive trust claims.
The cases above represent the continued activity of US Chapter 15 courts and the expanded Chapter 15 jurisprudence now 15 years on since enactment in the US. Insolvency and restructuring laws and cases are truly global in nature. Given the expansion of the Model Law to many jurisdictions and its international origin, it is likely that more foreign courts will consider the US Chapter 15 jurisprudence when considering future requests for recognition or ancillary relief in their own jurisdictions. Consequently, a US court's decisions in the Chapter 15 context will likely have broad ramifications and will impact how other courts interpret the Model Law.
Critically, the Supreme Court in Merit abrogated the then-existing Second Circuit precedent that applied the safe harbor provision even when a qualifying entity acted as a "mere conduit" or intermediary.
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While country risk cannot be avoided in cross-border transactions entirely, it can be effectively mitigated through careful transaction structuring and tailored contractual protections.
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Miranda Cole, Julien Haverals and Emma Clarke of our Brussels/ London offices are the authors of a chapter on procedural issues in merger control that has been published in the third edition of the Global Competition Review’s The Guide to Life Sciences. This covers a number of significant procedural developments that have affected merger review of life sciences transactions.
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