Oi Brasil and Competing Foreign Main Proceedings: Creditors Can’t “Weaponize” Chapter 15

Michael B. Schaedle and Rick Antonoff

A Fight over the Effect of Consolidation

According to the Manhattan Bankruptcy Court’s thoughtful and well-written December 4, 2017, decision in In re Oi Brasil Cooperatief U.A.,[1] a bondholder, Aurelius Capital Management (“Aurelius”) forced the straight Dutch liquidation of Oi Brasil Cooperatief (“Coop”) in order to revoke the prior recognition as a foreign main proceeding in the Manhattan Bankruptcy Court of a broader Brazilian reorganization of Coop and its operating affiliates, the Oi Group, a Brazilian telecommunica­tions consortium. In that Brazilian reorganization, Coop was to be consolidated substantively with other Oi Group members. This consolidating effect, according to the court, would limit Aurelius recoveries to a single pathway in a unitary capital structure and prevent additive recoveries for the holder on bond guaranties.[2]

Aurelius Criticized for Insisting on Dutch Recognition in Order to Preserve Guaranties

Specifically, the court found that Aurelius was an active participant in the hearing on the Oi Group’s Brazilian proceeding’s recognition in June and July of 2016, negotiating rights reservations to act in the Netherlands in its own interest, but never challenging the propriety of Brazil as the Oi Group’s (and Coop’s) “center of main interest” or “COMI.”[3] At the same time, the court ruled that even as Aurelius participated in the first-filed New York Oi Group chapter 15, it intended to challenge the Brazilian recognition of Coop by seeking to liquidate Coop in the Netherlands through a Dutch trustee.[4] According to the court, these Dutch-centered tactics were in aid of an Aurelius strategy to achieve higher recoveries at the Coop level of the Oi Group restructuring in the Netherlands outside of the Brazilian reorganization (where ratable recoveries for Aurelius would be lower after consolidation), while intercompany claims for the benefit of Coop and in aid of this Netherlands-centered strategy were pursued by a Dutch trustee in a Dutch home court.[5]

Creditors Can Be Found to Manipulate COMI

Per the court, Aurelius, in the wake of Brazilian recognition in New York, successfully caused the appointment of Mr. Jasper Berkenbosch, a well-respected fiduciary in the Netherlands and in the European Union, as an independent trustee for Coop in a straight Dutch liquidation proceeding. According to the court, Aurelius then pressured Mr. Berkenbosch to resist the Brazilian consolidating reorganization and to file his own competing chapter 15 for Coop in New York, asserting that Coop’s COMI was in the Netherlands.[6] On the record established at trial, the court, among other things, found that in the context of Mr. Berkenbosch’s chapter 15 petition for Coop seeking recognition of the Dutch liquidation, Aurelius’ conduct in promoting the Dutch liquidation and the chapter 15 itself, all for the purpose of reversing the court’s earlier Brazilian COMI determination, was inconsistent with the principles of chapter 15 and was a basis to deny reconsideration of the Brazilian recognition deci­sion under U.S. Bankruptcy Code section 1517(d).[7] The court ruled, therefore, that recognition of the Coop proceeding in the Netherlands and termination of the Brazilian proceeding’s prior recognition was not appropriate under section 1517(d).[8]

The court noted that its focus on a creditor’s conduct, as opposed to that of a foreign debtor or its insiders or a foreign representative, in deciding whether to recognize a foreign proceeding was unusual.[9] Indeed, Aurelius, a well-known and important distressed investor, has, as the court acknowledged, no fiduciary duty to Oi Group or Coop or any court-appointed fiduciary for such entities.[10] Further, in response to this decision, it should be noted that Aurelius immediately and very publicly asserted its entire good faith in prosecuting a bankruptcy and litigation strategy predicated on maintaining corporate separateness and the integrity of its guaranteed bonds, working as part of an ad hoc committee.[11] Aurelius went so far as to move the court to reconsider or vacate its findings as to Aurelius (reconsideration/vacatur was denied).[12]

Universalist Approach to International Insolvency Enforced; Weaponizing Comity

Emphasizing its broad discretion over any revocation of rec­ognition, the court analyzed the two-prong standard stated in Section 1517(d) closely. It ruled that the original record supporting Brazilian recognition was sufficiently complete to maintain the court’s first finding that Coop’s COMI was in Brazil. And even while acknowledging that 1) Berkenbosch had aggressively fulfilled his fiduciary duties, taking multiple concrete steps to administer Coop’s affairs in the Netherlands, and 2) in some circumstances, a liquidator’s administration can administration did not alter Coop’s status as a SPV dependent on the Brazilian Oi Group nerve center, financially and oper­ationally. In support of this finding, the court noted that the Dutch fiduciary had to involve himself materially in the Brazilian reorganization because the administration of Coop required such involvement given Coop’s dependence on and relation­ship to the Oi Group as a whole and that the Dutch trustee’s intercompany action in the Netherlands amounted to little more than the assertion of a claim against the Brazilian estates (an act that could be taken in Brazil as part of the claims recon­ciliation process in that jurisdiction).[13]

Again, the court clearly viewed the Dutch trustee’s petition for recognition and his 1517(d) action to be, in important part, an attempt by Aurelius (an active participant in the original pro­cess of recognizing the Brazilian reorganization) to spike the Brazilian reorganization as it related to Coop. The court was both turning back what it found was an inappropriate collateral challenge to its own original order recognizing the Oi Group Brazilian proceeding, while fulfilling its duty to do comity to the Brazilian proceeding in the United States—a duty that arose as a result of the original recognition of the Brazilian proceeding.

This broad and aggressive approach[14] to protect the Brazilian reorganization and its U.S. ancillary proceedings from collateral challenges is consistent with the evolving development of an implicit “good faith” finding requirement to support chapter 15 recognition under the Creative Finance decision recently discussed in our September 2016 Mainbrace publication. Further, the court’s decision sends a very important signal to the market.

Once a foreign main proceeding is recognized, the Manhattan Bankruptcy Court will act to implement the foreign reorga­nization with universalist vigor. The court’s commitment to universalist international reorganization can directly impact non-fiduciaries like Aurelius when carrying out otherwise straightforward recovery strategies (such as resisting consoli­dation and enforcing guaranties at different levels of complex capital structures) across borders. The stakes at a recognition hearing can be high indeed.

[1] 578 B.R. 169 (Bankr. S.D.N.Y. 2017) reconsideration/vacatur in part. den’d, 582 B.R. 358 (Bankr. S.D.N.Y. 2018).

[2] It should be noted that there is nothing illegal or inappropriate about a creditor resisting the consolidation of members of a corporate group and the collapse of complex capital structures. Nor is the assertion of guaranty claims at multiple levels of a capital structure inappropriate under applicable U.S. bankruptcy law. See In re Owens Corning, 419 F.3d 195, 211-12 (3d Cir. 2007) (citations omitted) (substantive consolidation under U.S. law is an “extreme” remedy; “respecting entity separateness is a ‘fundamental ground rule [].’”); see also In re Tribune Co., 464 B.R. 126, 203-04 (Bankr. D. Del. 2011) aff’d in pert. part 799 F.3d 272 (3d Cir. 2015) cert. denied 136 S.Ct. 1459 (2016) (non-consensual impairment of third-party guaranty claims denied because such relief is “extraordinary” under the law).

[3] Oi Brasil, 578 B.R. at 185. “COMI” is not specifically defined in the U.S. Bankruptcy Code, but is a determination made by bankruptcy courts. The decisional law looks at various factors, but an essential way of short-handing the analysis is to say that in finding COMI, a bankruptcy court is identifying the “nerve center” of a foreign debtor. See id. at 185, 195-96. In the first-filed Brazilian chapter 15, Judge Lane found that Coop’s specific “nerve center” was in Brazil because Coop was a so-called “special purpose vehicle” designed only to act as an Oi Group bond issuer and as an intercompany lender, managed from Brazil, directed by Oi Group management designees, with only a nominal office presence in the Netherlands. Id. at 185, 235.

[4] Coop had been the subject of involuntary petitions by Aurelius and other holders for straight liquidation prior to the commencement of the Oi Group’s chapter 15 to implement the Brazilian restructuring. After recognition of the Brazilian proceeding, Coop responded to the involuntary filings by commencing its own follow-on voluntary Dutch insolvency (a suspension of payments case) to implement the Brazilian plan when approved. Id. at 186, 208-09.

[5] Id. at 238-39.

[6] Id. at 240-44.

[7] Section 1517(d) of the U.S. Bankruptcy Code states: The provisions of this subchapter do not prevent modification or termination of recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist, but in considering such action the court shall give due weight to possible prejudice to parties that have relied upon the order granting recognition … .

[8] Indeed, counsel for the Steering Committee of the Ad Hoc Group of Bondholders (a holder group supporting Brazilian reorganization and opposing Dutch pro­ceeding recognition) suggested in argument and papers that Aurelius was “manipulating COMI” in violation of chapter 15’s blackletter and policy. Oi Brasil, 582 B.R. at 366. This is an interesting argument, which is usually raised in connection with the conduct of foreign debtors and their insiders and foreign represen­tatives in seeking recognition of a specific foreign proceeding.

[9] Oi Brasil, 578 B.R. at 240.

[10] Id.

[11] See Bloomberg.com, “Aurelius Can’t ‘Weaponize’ Law in Global Debt Dispute Judge Says” (Dec. 5, 2017) (referencing and linking to Aurelius statement that it did not deserve criticism for a public strategy launched prior to Brazilian recognition); see also Oi Brasil, 582 B.R. at 363.

[12] Id. at 369-70.

[13] Oi Brasil, 578 B.R. at 240-44.

[14] It is important to reflect that the Manhattan Bankruptcy Court’s opinion addresses a number of other important issues under the chapter 15 law. For exam­ple, the contest arose in the context of Mr. Berkenbosch’s motion for recognition of the Dutch liquidation and his basic position was that he had satisfied the categoric requirements of U.S. Bankruptcy Code section 1517(a) for recognition of Coop’s straight Dutch liquidation. Berkenbosch’s position was that 1517(a) mandated recognition for Coop if 15 basics are established (the collective nature of the Dutch proceeding, the existence of a Dutch COMI based on the location of a registered office and Coop employees, etc.), superseding any prior recognition order. The court rejected this position as inconsistent with 1517(d), ruling that Berkenbosch’s suggestion that 1517(a) could be used to narrow a prior corporate group recognition finding would write (d) out of the law entirely. Id. at 198-203.