The Requirements for Recognition under Chapter 15

Transcription

1 One Debtor, Multiple Countries: A Discussion of Recent Developments in Cross-Border Insolvency Proceedings & Chapter 15 of the Bankruptcy Code By: Lawrence C. Gottlieb Michael Klein Robert Winning Abstract In 2011, about 40% of profits for firms listed in the S&P 500 stock index came from overseas. For General Electric, 54% of revenue came from abroad; for Intel and Exxon-Mobil, it was 85% and 45%, respectively. In turn, foreign companies are constantly breaking into the U.S. and other non-domestic markets, doing substantial business outside of their own borders. It is a wellknown story: as technology has improved, and as communication, coordination and shipping costs have declined, global markets have become increasingly integrated. And yet there is still considerable uncertainty over a fundamental question: What happens when an international business with operations in multiple countries can t pay its creditors, who also happen to be spread all over the world? To help answer that question, in 2005 Congress enacted Chapter 15 of the United States Bankruptcy Code, which provides a mechanism for dealing with cross-border insolvencies. With Chapter 15, Congress wanted to encourage cooperation between U.S. and foreign courts, provide additional legal certainty for trade and investment, and protect and maximize the value of the debtor s assets for the benefits of all parties in interest. Chapter 15 does not provide substantive bankruptcy law, but is rather an attempt to provide a procedural mechanism that facilitates the effective disposition of insolvent companies when the debtor has assets in more than one country. Since the 2005 addition of Chapter 15 to the United States Bankruptcy Code, hundreds of companies have sought recognition of foreign proceedings, and the use of Chapter 15 is occurring with increasing frequency as business and financing becomes more and more global and world events roil global demand and impact capital markets. This article will provide a description of Chapter 15, addressing some of the rights and privileges it affords to international

2 debtors and creditors, while also addressing how the statute is operating in practice and evolving under decisions of U.S. judges. The Requirements for Recognition under Chapter 15 The mechanics of Chapter 15 are designed to be straightforward. To begin, a trustee or other administrator of a bankrupt company that is reorganizing or liquidating under the laws of a foreign jurisdiction (called a foreign representative ) commences a chapter 15 case by filing a petition for recognition of a foreign proceeding. As described in more detail below, a foreign representative typically files the petition for recognition to maintain control of and protect its U.S. assets. However, until a U.S. Bankruptcy Court grants the petition and recognizes the foreign proceeding, the foreign representative cannot employ most of the rights and protections provided by chapter 15 (though interim protections can be provided in certain circumstances). Chapter 15 was designed to make recognition of a foreign proceeding as simple and expedient as possible, so the requirements for recognition are largely procedural, but they still have to be met. First, the proceeding for which recognition is sought must be a foreign proceeding under the meaning of section 101(23) of Bankruptcy Code, which requires the foreign representative to prove (1) the existence of a proceeding, (2) that is either judicial or administrative, (3) that is collective in nature, (4) that is in a foreign country, (5) that is authorized or conducted under a law related to the insolvency of a debtor, (6) in which the debtor s assets and affairs are subject to the control or supervision of a foreign court, and (7) which proceeding is for the purpose of reorganization or liquidation. Second, a foreign proceeding for which recognition is sought must be either (i) a main proceeding, which is a proceeding pending in the country where the debtor has its center of main interests 1 or (ii) a nonmain proceeding, which is a proceeding in a jurisdiction where the debtor has an establishment (i.e., any place of operations where the debtor carries out a nontransitory economic activity). Section 1516 of Chapter 15 provides a presumption that the debtor s place of incorporation is its center of main interest, but Bankruptcy Judges can and do look for actual evidence of economic interest, and have been unwilling to find a location a center of main interest merely because the debtor incorporated in that jurisdiction when other evidence demonstrates a lack of economic activity. See e.g., In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 389 B.R. 325 (S.D.N.Y. 2008) (upholding Bankruptcy Court decision finding that the Cayman Islands was not a center of main interests even though the hedge-fund debtors seeking recognition under Chapter 15 were incorporated there). 1 Center of main interest is not defined in the Bankruptcy Code and there is some uncertainty about its meaning. The center of main interest can generally be thought of as the debtor s principal place of business.

3 Are the Requirements for Recognition Met?: In re Ashapura Minechem Ltd. A recent decision from the United States District Court for the Southern District of New York in In re Ashapura Minechem Ltd. demonstrates how courts apply the requirements for recognition of a foreign proceeding, and shows that recognition may be warranted even when the foreign proceeding provides for a restructuring process quite different than the one set forth in the Bankruptcy Code. See Armada v. Shah (In re Ashapura Minechem Ltd.), Case No (JMP), No. 12 civ 257 (SAS) (S.D.N.Y. June 28, 2012). Ashapura is an Indian mining company that initiated a restructuring proceeding in India in The proceeding was administered under an Indian statute which had been repealed after substantial criticism, and which provided for a very limited role in the reorganization process for unsecured creditors. 2 Nevertheless, the District Court affirmed an order of the Bankruptcy Court granting Ashapura Minechem Ltd. s petition for recognition of its Indian insolvency proceeding as a foreign main proceeding under Chapter 15 of the Bankruptcy Code. A foreign representative for Ashapura sought recognition of the Indian proceeding as a foreign main proceeding in order to stay execution of a judgment against its U.S. assets. The judgment creditor, a shipping company headquarted in Singapore, objected to any recognition of the proceeding, arguing, among other things, that (1) the Indian proceeding was not collective (i.e., all creditors interests were not considered in the proceeding because the statute did not require participation of any unsecured creditors), and (2) the debtor s assets and affairs were not subject to the foreign court s control and supervision. On the first issue, the Court concluded that the Indian proceeding was collective because the Indian governmental body administering the restructuring (the BIFR ) had impleaded several unsecured creditors into the proceeding (even though the statute did not require it to do so). In addition, the Court held that unsecured creditors could participate in the reorganization because they could (i) apply to implead themselves as parties in interest (and denials of such applications are appealable) and (ii) appeal the debtor s rehabilitation or distribution scheme. On the second issue, the District Court, noting that control over the day-to-day operations of the debtor is not required, found that the foreign proceeding had control and supervision over the debtor s assets and affairs because the statute provided the BIFR with authority to regulate against fraudulent and preferential transfers and to suspend the operations of contracts and settlements. Accordingly, the debtor had met its low burden of proving that its assets were under the supervision and control of the Indian proceeding. Ultimately, the District Court in Ashapura (and the Bankruptcy Court before it) was willing to look past considerable differences between the Indian law and U.S. law because the mechanical requirements of Chapter 15 were met. Even the fact that the foreign proceeding was being conducted under an Indian law which had been repealed after facing substantial criticism was 2 The foreign proceeding was going forward under the repealed statute because the Indian government had not yet passed a new statute to replace the old one.

4 immaterial because the foreign representative had met his burden and demonstrated that the Indian proceeding was a collective, administrative proceeding with the purpose of reorganization. The Exception to a Formulaic Approach: Manifestly Contrary to U.S. Policy Even if the somewhat formulaic requirements for recognition of a foreign proceeding are met, however, a court may refuse to recognize a proceeding (or an order arising under that proceeding) under section 1506 of Chapter 15 if such recognition would be manifestly contrary to the public policy of the United States. This public policy exception is typically interpreted narrowly, and is only invoked in exceptional circumstances. Bankruptcy courts tend to give great deference to the insolvency proceedings of foreign countries and have been generally unwilling to find enforcement of foreign insolvency orders manifestly contrary to U.S. public policy. Despite the general deference afforded foreign proceedings and judgments, the Bankruptcy Court for the Northern District of Texas in In re Vitro S.A.B. recently refused to recognize a plan of reorganization entered into in a foreign main proceeding in Mexico because the plan discriminated against certain creditors in a manner manifestly contrary to U.S. policy. See Vitro S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro S.A.B. de C.V.), Case No HDH- 15, Adv. No (Bankr. N.D. Tex. June 13, 2012). Vitro SAB is a Mexican holding company whose numerous subsidiaries collectively represent one of the largest manufacturers of glass in Mexico. Vitro issued approximately $1.2 billion of unsecured notes pursuant to indentures governed by U.S. law, and its subsidiaries (some of which are U.S. entities) guaranteed the notes. When Vitro initiated a voluntary reorganization in Mexico, its guarantorsubsidiaries were not put into bankruptcy, but the Mexican court administering the foreign proceeding nonetheless approved a plan of reorganization which provided for the nondebtor guarantors to be released from their guarantees. Asked to enforce that plan, the Texas Bankruptcy Court found that the release would not be permissible under U.S. law, and concluded that the plan failed to sufficiently protect all creditors. The Judge held that because the protection of third-party claims in a bankruptcy case is a fundamental policy of the United States[,] enforcement of the Mexican plan would be contrary to U.S. public policy. It is difficult to predict how courts in the future will determine whether recognition of a foreign proceeding or enforcement of an order entered therein is manifestly contrary to U.S. policy. Interestingly, the Vitro case provides an important example of a related issue that may come up in the future. In addition to the non-debtor releases, the plan approved in the Mexican proceeding also provided for the debtor s existing shareholders to retain equity valued at approximately $500 million, even though the bondholders would not be paid in full. In a reorganization under Chapter 11, such a scheme would be a violation of the so called absolute priority rule, which requires all creditors to be paid in full before equity holders are permitted to retain an interest in the debtor. The Court in Vitro did not consider whether a violation of the absolute priority rule would preclude recognition of a foreign insolvency order because it had already concluded the non-debtor releases were contrary to U.S. public policy, but the issue raises important question for cases going forward, and it remains to be seen whether U.S. Bankruptcy Courts will recognize and enforce a foreign insolvency plan that provides a recovery for equity even though creditors have not been fully paid.

5 The Effects of Recognition Under Chapter 15 Once a foreign representative obtains recognition of a main foreign proceeding, section 1520 of chapter 15 automatically provides the foreign debtor with many of the same rights and protections given to domestic debtors who obtain relief under Chapter 11, including the following: The foreign representative has the capacity to sue and be sued in U.S. courts; The automatic stay is applied to the debtor s property located in the U.S.; and Court approval is required before the debtor can sell assets located in the United States outside of the ordinary course of business. When a court recognizes a nonmain proceeding, similar relief may be, but is not automatically, granted. In addition, Bankruptcy Courts have substantial discretion to provide additional relief in main and nonmain cases. For instance, under Section 1521 of Chapter 15, Bankruptcy Courts can, among other things: Stay the commencement or continuation of an action (to the extent not already stayed); Stay execution against the debtor s assets (to the extent not already stayed); Provide for the examination of witnesses, taking of evidence or delivery of information regarding the debtor s assets, affairs, rights, obligations or liabilities; Entrust the administration of all or part of the debtor s assets within the U.S. to the foreign representatives or some other person authorized by the Court; and Grant additional relief available under the Bankruptcy Code in a Chapter 11 case, such as authorizing the foreign representative to assume or reject contracts or leases, obtain postpetition financing, or settle claims and disputes. Indeed, the Court can empower a foreign representative to take these actions even if those powers are not available to the representative under foreign law. The Bankruptcy Court s discretionary power is not, however, unlimited. A court cannot, for example, stay the exercise of any right that is excluded from the automatic stay in a domestic bankruptcy case or authorize a foreign representative to pursue preference or fraudulent transfer actions (unless there is a case concerning the debtor pending under chapter 11 or 7). While Chapter 15 can therefore increase the powers and rights of a foreign debtor in certain circumstances, it can also limit the power of a foreign debtor in other situations. For instance, in the Chapter 15 case of the Japenese chipmaker Elpida Memory Inc., Delaware Bankruptcy Judge Christopher Sontchi limited Elpida s foreign representative s ability to sell assets located in the United States. In re Elpida Memory, Inc., Case No (CSS) (Bankr. D. Del. 2012). In Elpida, the debtor is currently in the process of selling its assets to Micron Technology Inc. in the foreign proceeding pending in Japan. A group of U.S. bondholders with concerns regarding the value of the sale asked the Bankruptcy Court to limit the disposition of U.S. property unless they were given additional information about the sale and the debtor s assets. While no opinion was issued (before a hearing on the issue was held, the foreign representative agreed to the relief

6 sought by the bondholders), Judge Sontchi entered an order limiting the debtor s ability to sell its assets without notice to the bondholders and/or approval by the Court. Judge Sontchi also required the Elpida to give the bondholders confidential reports on a monthly basis that provide detailed information about the debtor s U.S. assets. The Elpida case demonstrates that Chapter 15 is not only a source of rights for foreign debtors, but also a potential source of protection to a foreign debtor s creditors. And while U.S. Courts have not aggressively used Chapter 15 to influence foreign restructuring proceedings, after Elpida, foreign debtors will have to investigate carefully the potential risks inherent in submitting to a U.S. Bankruptcy Court s jurisdiction when seeking recognition of their foreign proceeding. Nevertheless, cases like Vitro and Elpida are generally the exception to the rule. While they are certainly not the only instances of U.S. judges taking an active role in a foreign reorganization through Chapter 15, plans arising in foreign proceedings are regularly recognized and respected by U.S. courts. The enforcement of these plans generally provides for the disposition of U.S. assets and potentially has a big effect on U.S. creditors, even though the plans were not necessarily promulgated under a procedure comparable to U.S. restructuring laws. Chapter 15 is a statute of comity, designed to respect the result of foreign jurisdictions, and the result is that U.S. courts do enforce plans that would not be approved in a U.S. reorganization. For instance, in In re Ephedra Products Liability Litigation, a District Court in the Southern District of New York recognized a foreign proceeding in Canada and enforced a plan arising therein even though it restricted certain creditors right to a trial by jury, a right they would have been afforded in the U.S. 349 B.R. 333 (S.D.N.Y. 2006). Similarly, while under different circumstances than the Vitro case discussed above, U.S. courts have enforced orders promulgated in foreign proceedings even though those plans provide for third-party releases. See In re Metcalfe & Mansfield Alt. Invs., 421 B.R. 685 (Bankr. S.D.N.Y. 2010); In re Grant Forest Prods. Inc., 440 B.R. 616 (Bankr. D. Del. 2010). Conclusion Chapter 15 is still in its infancy, but it is becoming more and more important as the world continues to become increasingly interconnected. As a result, we can expect additional case law interpreting Chapter 15 to develop in the future, and Chapter 15 will continue to be an important source of rights and protections for foreign debtors seeking to reorganize across boundaries. But, as can be seen from the discussion above, access to the U.S. Courts also means the interposition of a U.S. judge, and while the statute demands cooperation between U.S. Bankruptcy Courts and their foreign counterparts, Bankruptcy Judges will undoubtedly operate within that framework to try and protect all parties in interest, not just act as a rubber-stamp for decisions rendered by foreign courts.