Macdonald | Fernandez LLP

MACDONALD | FERNANDEZ LLP


221 Sansome Street
San Francisco, CA 94104
Telephone: (415) 362-0449
Facsimile: (415) 394-5544
914 Thirteenth Street
Modesto, CA 95354
Telephone: (209)549-7949
Facsimile: (209) 236-0172

Monday, November 4, 2013

The Current Chapter 15 Landscape and International Insolvency

Four recent cases shape the current landscape of international insolvency practice under Chapter 15 of the Bankruptcy Code, namely:  In re Vitro, S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012); Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013); In re Lehman Brothers Holdings Inc., No. 08-13555 (Bankr. S.D.N.Y.) (JMP); and In re Nortel Networks, Inc., No. 09-10138 (Bankr. D. Del.) (KG).

In re Vitro

In re Vitro began with a "concurso mercantil" in Mexico, similar to a chapter 11 reorganization.  Unlike the Bankruptcy Code, the concurso involves only a single class of creditors and provides for the termination of a guarantor's liabilities.  Following approval of a plan in the concurso, Vitro commenced a chapter 15 case in New York for the purposes of enforcing the plan against holders of bonds issues in the United States.  Thereafter, the chapter 15 case was transferred to Texas, where certain creditors had previously commenced involuntary chapter 11 proceedings.

The bondholders objected to recognition of the plan approved in the concurso, arguing that the result was too different from the likely outcome of an American reorganization.  The United States Court of Appeal for the Fifth Circuit agreed, applying a multi-step statutory approach and ultimately concluding that the result of the foregoing proceeding must be compared to the result that could be obtained under the Bankruptcy Code.

First, a the court must decide whether the relief requested by the foreign representative comes within the mandatory items enumerated in Bankruptcy Code Section 1521(a)(1)-(7).  If not, the court must determine whether it can grant “appropriate relief” under the terms of Bankruptcy Code Section 1521(a), which the Fifth Circuit held is limited to relief that is permissible under Bankruptcy Code Section 304 or would otherwise be available under United States bankruptcy or non-bankruptcy law.  

If not, the court next must consider whether “additional assistance” is appropriate under Bankruptcy Code Section 1507.  In making this determination, the court must consider whether the grant of additional assistance will “reasonably assure”:

     1.  The just treatment of all holders of claims against or interests in the debtor’s property;

     2.  Protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding;

     3.  Prevention of preferential or fraudulent dispositions of property of the debtor;

     4.  Distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by the Bankruptcy Code; and

     5.  If appropriate, the provision of an opportunity for a fresh start for the individual that such foreign proceeding concerns.

Finally, relief otherwise available under the foregoing analysis must also satisfy Bankruptcy Code Section 1506.  

The court found that the treatment of creditors in the Mexican proceedings was too different from the results that would have been obtained under the Bankruptcy Code.

Vitro is subject to significant criticism.  Some critics suggest that it defeats the interests of international comity, which chapter 15 was designed to support.  More particularly, the principals applied in enforcing an ordinary foreign judgment focus upon whether the requested relief is manifestly contrary to the public policy of the United States; this standard is embodied in Bankruptcy Code Section 1506.  Critics suggest that the court should start with Section 1506, and it would be hard to say that the United States has a public policy against third-party releases because the circuit courts themselves are split on the issue.  It remains to be seen whether Mexican courts will retaliate by refusing to recognize American chapter 11 plans.

Morning Mist Holdings

In Morning Mist Holdings Ltd., the debtor was subject to liquidation proceedings under the British Virgin Islands Insolvency Act and a subsequent chapter 15 bankruptcy case in the Southern District of New York.  The United States Court of Appeals for the Second Circuit held that the time for determining the debtor's center of main interest ("COMI") was the date on which the chapter 15 petition was filed.

Determination of the COMI is important.  If the COMI is within the country where the foreign proceeding is pending, then the proceeding will be recognized as a "foreign main proceeding" under Bankruptcy Code Section 1517, and certain relief will become effective, including the automatic stay.

The bankruptcy court's recognition of the foreign proceeding triggered the automatic stay against all actions in the United States, including a prepetition shareholder derivative action.  The plaintiffs argued that the COMI should be determined by reference to the debtor's 18-year history of operations.  The plaintiffs also argued that recognition the foreign proceeding would be manifestly contrary to United States public policy because the court records in the foreign proceeding were sealed.  The court concluded that the right to access court documents is not absolute and is not so fundamental that recognition of the foreign proceeding would trigger the public policy exception of Bankruptcy Code Section 1506.

The Second Circuit concluded that the time for determining the COMI is the petition date, although consideration of prior activity may be appropriate to ensure there has been no manipulation.  The clear holding in Morning Mist Holdings is likely to aid attorneys and courts in determining whether to recognize foreign insolvency proceedings.

Lehman Brothers

The plan confirmed in the Lehman Brothers cases resulted from a cooperative, streamlined procedure that could serve as a model for other complex international insolvency proceedings.  

In June, 2009, Judge Peck of the United States Bankruptcy Court for the Southern District of New York adopted a protocol for international cooperation that involved 16 jurisdictions.  Most such protocols are bilateral arrangements between courts of two countries.

The protocol encouraged notice, communication and data sharing; permitted insolvency representatives in one country to appear and be heard at meetings and hearings in other countries, to communicate among courts and committees and to maximize the realization on the assets in each country; and allowed the courts and parties to deal with complex issues arising from extensive intercompany claims.

The protocol, among other things, is credited with fostering the consensual chapter 11 plan ultimately confirmed in the Lehman Brothers cases, which at the time constitutes the larges and most complex bankruptcy in history.

Nortel Networks

By contrast, Nortel Networks, Inc. provides and example in which lack of cooperation has delayed the distribution of funds in an otherwise successful case.

In Nortel Networks, the debtor's assets were sold for more than $7 billion, which process itself involved successfully overcoming significant challenges.  The funds were deposited to escrow, where they remain today.

Thereafter, the case became complicated by the apparent existence of three COMI's.  Currently, the United States and Canadian courts involved intend to conduct a joint trial in early 2014 to determine how to divide the sale proceeds. Both rejected a demand from the United Kingdom interests to arbitrate the dispute.  This decision is on appeal by the U.K. interests.


No comments:

Post a Comment