A proactive creditor often ends up in a better legal position, and has more negotiating power, than a reactive one. While that may seem obvious, it is a lesson driven home by a 2017 decision in the SunEdison bankruptcy case, which involves issues of international comity, choice of law provisions, and ultimately, the tactics employed by a Korean debtor in connection with its contractual relationship with SunEdison. In SMP Ltd. v. SunEdison, Inc. and GCL-Poly Energy Holdings Limited, 577 B.R. 120 (Bankr. S.D.N.Y. 2017), the SunEdison bankruptcy court refused to apply Korean insolvency law in a contract termination dispute, and enforced a contractual New York choice-of-law provision. Notwithstanding the chapter 15 recognition of the Korean debtor’s rehabilitation, applying New York law, the court upheld the enforcement of an ipso facto (“by the fact itself”) clause against the Korean debtor, thereby allowing termination of a license with SunEdison that was essential to the debtor’s business. Continue reading “Enforcing Ipso Facto Clauses in International Transactions and the Importance of Being Proactive in Dealings with Troubled and Insolvent Entities”
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., 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.
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.” 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. 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. Continue reading “Oi Brasil and Competing Foreign Main Proceedings: Creditors Can’t “Weaponize” Chapter 15″
Mainbrace | March 2018 (No.1)
In a pair of recent opinions from the U.S. Bankruptcy Court for the Southern District of New York, two judges took varying approaches to the issues of 1) their ability to assert personal jurisdiction over foreign defendants, and 2) application of U.S. laws to transactions that occur, at least in part, outside of the United States.
The first opinion, from Judge Sean H. Lane, denied the defendants’ motion to dismiss a lawsuit seeking to avoid and recover money initially transferred to correspondent bank accounts in New York designated by the defendants, before being further transferred outside of the United States to complete transactions under investment agreement executed outside of the United States and governed by foreign law. On remand after a district judge ruled that the defendants’ use of correspondent banks in the United States was sufficient for the bankruptcy court to have personal jurisdiction over them, Judge Lane held that the doctrine of international comity and the presumption against extraterritoriality did not prevent application of U.S. law to avoid transfers under the Bankruptcy Code. The second opinion, from Judge James L. Garrity, Jr., dismissed a bankruptcy trustee’s claims to avoid and recover transfers under U.S. bankruptcy law that occurred entirely outside the territory of the United States. Continue reading “NY Bankruptcy Courts Grapple with Territorial Limits”
Mainbrace | March 2017 (No. 2)
For the most part, the U.S. Bankruptcy Code formally and specifically deals with cross-border cases through chapter 15, a statute based on the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law (“UNCITRAL”) in 1997.1 The purpose of chapter 15 is to enhance cooperation between U.S. and foreign courts in connection with cross-border insolvencies to promote greater legal certainty for trade and investment, fairness, value optimization of a debtor’s assets, and the protection of investment and employment.2 Chapter 15 serves these goals by providing a foreign debtor’s representative with access to U.S. courts to assist a foreign main or non-main proceeding, which has been raised cross-border in a jurisdiction that is either the center of the debtor’s main interests or in which the debtor has an important facility.
Mainbrace | March 2017 (No. 2)
Blank Rome has the distinction of representing the foreign representatives in two recent chapter 15 bankruptcy cases that broke new ground in U.S. law by being the first to recognize foreign insolvency proceedings under the newly revised insolvency law of Italy and a bank insolvency proceeding in Russia.
Revised Italian Insolvency Law (Concordato Preventivo)
Energy Coal is a petroleum coke and specialty fuel merchant and supplier based in Genova, Italy, with substantial business in the United States as well as a complex capital structure. When the Delaware Bankruptcy Court recognized Energy Coal’s concordato preventivo proceeding in Genoa, it was the first U.S. bankruptcy court to recognize a concordato preventivo since the recent amendments to the Italian Insolvency Law that were enacted to facilitate debt restructurings and distressed investing, while binding dissenting creditors to homologated arrangements.
Mainbrace | September 2016 (No. 4)
In chapter 15 practice, recognition of a foreign proceeding (whether a main or nonmain proceeding) focuses on specific statutory bona fides. To prosecute a chapter 15 in the United States, a properly authorized representative of a foreign debtor has to provide a U.S. Bankruptcy Court with straightforward evidence of the raising of a proceeding under foreign insolvency laws, which are designed to create a collective remedy, in a jurisdiction where a foreign debtor either has an “establishment” or a “center of main interests.” 11 U.S.C. §1517(a) (statute mandates recognition where requirements of (a)(1-3) are met). Courts have noted that chapter 15 does not contain a provision for dismissal for cause and that the intentions of the foreign representative in seeking relief generally are not germane to the findings required of an American bankruptcy court under sections 1515 and 1517 of Title 11 of the United States Code, 11 U.S.C. §101, et seq. (the “Bankruptcy Code”).
Further, the United States Court of Appeals for the Second Circuit in Morning Mist Holdings Ltd. v. Krys (In the Matter of Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013) has held that a foreign debtor’s “center of main interests” (“COMI”) is to be determined as of the commencement of the chapter 15 case. This has permitted foreign debtors in liquidation in so-called “letterbox” jurisdictions—places where a liquidating or liquidated debtor did not operate, but where the debtor is registered as a business organization—to obtain recognition of foreign liquidation proceedings pending in the “letterbox” jurisdictions. There is nothing generally improper about this, as a liquidation in bankruptcy can serve a collective purpose and can be very complex.
Public Policy and Abstention Limits on Recognition Obtained in Extraordinary Circumstances
Chapter 15 does restrain improper uses of ancillary proceedings by refusing recognition and other actions that are “manifestly contrary to the public policy of the United States.” 11 U.S.C. §1506.2 And Bankruptcy Code section 305 expressly states that a bankruptcy court can either suspend or dismiss a recognized chapter 15 case if the purposes of chapter 15 would be fulfilled by such dismissal or suspension or if such abstention is sought by the foreign representative. 11 U.S.C. §305(a)(2), (b). But these constraints on recognition are extraordinary. Courts do not lightly find that international law contravenes the fundamental policy of the United States, and abstention requires a court to find that the pendency of a chapter 15 case actually frustrates the purposes of chapter 15 itself—an extraordinary finding.
“Bad faith” bankruptcy filings on the other hand, while not exactly commonplace in plenary bankruptcy practice in the United States, are not extraordinary. Generally, “bad faith” exists where the use of bankruptcy itself is futile, and thus, the debtor cannot or will not create a fair, collective remedy. A “bad faith” filing constitutes “cause” under the Bankruptcy Code, see, e.g., 11 U.S.C. §1112, to dismiss a case. “Bad faith” actions in using bankruptcy are also cause for the appointment of an independent fiduciary in American bankruptcy, a trustee. In chapter 11 practice, for example, if “bad faith” use of bankruptcy is at issue, creditors and other stakeholders will often litigate with debtors, seeking to force dismissal or the appointment of a trustee.
Quintessential “bad faith” is the use of bankruptcy to ratify or obscure a prior fraudulent act. And Judge Gerber, the author of the Millard decision cited in fn 1, confronted this quintessence in In re Creative Finance Ltd. (In Liquidation), 543 B.R. 498 (Bankr. S.D.N.Y. 2016), a chapter 15 case.
Insider Strips Creative Finance and Cosmorex of All Assets on the Eve of Marex Judgment
The Creative Finance case arose from litigation in the United Kingdom. Marex brought suit against Creative Finance and Cosmorex (foreign exchange traders) in the English High Court of Justice and succeeded in obtaining a USD$5.6 million judgment against the companies. On the eve of the final entry of judgment, and weeks after the High Court had circulated a draft of its judgment to the parties, the Creative Finance/Cosmorex principal, Carlos Sevillja, transferred all of the companies’ cash (USD$9.5 million) out of the United Kingdom, where Creative Finance/Cosmorex had operated, to accounts in Dubai and Gibraltar. Marex was the two companies’ only non-insider creditor. Primary remaining company assets were significant and valuable claims in the chapter 11 cases of In re Refco, Inc., Bankr. Case No. 05-60006 (Bankr. S.D.N.Y.) and the proceeds of those claims. Interim distributions on the Refco claims appear to have been diverted by Sevillja away from Creative Finance/Cosmorex.
A BVI Liquidation Proceeding Commences, and Chapter 15 Relief Is Sought and Contested in New York
Marex domesticated its U.K. judgment in the New York Supreme Court and immediately began process to capture future Refco distributions.
Sevillja then caused Creative Finance/Cosmorex to file a voluntary liquidation proceeding in the British Virgin Islands (where each of Creative Finance and Cosmorex were organized). In the BVI proceeding, a liquidator was appointed and the liquidator was funded by Sevillja. The liquidator did the statutory minimum in respect of the Creative Finance/Cosmorex debtors (limited notices to creditors, formal establishment of BVI bank accounts, and basic establishing process before the BVI court and reporting, etc.). He never obtained the debtors’ books and records and the liquidator never investigated the Sevillja-controlled transfer of debtor cash or Refco distribution proceeds.
In order to restrain Marex process against Refco distributions, the liquidator filed a voluntary petition under chapter 15 in the New York Bankruptcy Court, seeking provisional and permanent relief staying Marex in the United States from enforcing its judgment and entrusting the liquidation estate with the Refco distributions. Provisional relief was resolved by an agreement by and among the liquidator, Marex, and the Refco liquidating fiduciary to deposit Refco distributions in the New York Bankruptcy Court registry (a form of interpleader).
The Recognition Battle
The liquidator then pressed his petition for recognition, which was opposed by Marex. The liquidator focused on chapter 15 basics. BVI liquidation laws are intended to benefit a creditor collective. The debtors’ registered offices are in the BVI. Formal process had been raised under the BVI liquidation laws and the status of the liquidation case was evidenced by certified orders of the BVI court. Likewise, after the commencement of the BVI liquidation, the liquidator was now the sole person authorized to act for the debtors. And per Fairfield Sentry, as of the chapter 15 commencement date, the debtors had no operations or business activity anywhere but the BVI.
The purpose of the chapter 15 was to capture and ratably share the Refco distributions with multiple creditors, including Marex. In the liquidator’s view, all 1517 requirements were met and recognition was required. The liquidator argued that chapter 15 does not contemplate “bad faith” dismissal as a form of relief and that such relief exists to be had only in plenary American bankruptcy proceedings.
Marex argued that the BVI liquidation should not be recognized because the act of recognition would violate fundamental U.S. public policy given Sevillja’s actually fraudulent conduct, apparent influence over the liquidator, and the liquidator’s complete failure to investigate Sevillja and his bad acts. Marex also sought dismissal of the chapter 15 case as a “bad faith” filing and under Bankruptcy Code section 305 for the same reason.
Finally, Marex contested whether the liquidator could establish that the BVI liquidation was either a foreign main or nonmain proceeding since BVI could not be considered a “center of main interests” for either debtor, nor did either debtor have an “establishment” in BVI. In so doing, Marex drew the New York Bankruptcy Court’s attention to its ability to consider pre commencement facts that demonstrated COMI or the establishment of a facility was manipulated by a foreign debtor to frustrate the goals of a collective remedy under Fairfield Sentry.
Judge Gerber and the Bankruptcy Court’s Ruling
Judge Gerber, who just retired, is one of the most distinguished bankruptcy judges in the United States, having sat in one of the preeminent U.S. jurisdictions for complex bankruptcies, the Southern District of New York. He has encountered every species of fraudulent conduct that commercial legal practice can produce. For the judge to characterize the Creative Finance chapter 15 as part of “the most blatant effort to hinder, delay and defraud a creditor” that he and the New York Bankruptcy Court had ever seen is notable (this is, after all, the same court that administered the Enron, Adelphia, and WorldCom chapter 11 cases, which all dealt with various kinds of fraud on a grand, systemic scale).
The court found that Sevillja defrauded Marex by stripping the debtors of all of their assets. In doing so, Sevillja defied the orders and judgments of the High Court in the U.K. and the New York Supreme Court, while violating all applicable laws relating to the Marex claims and judgments. Per the court, he then traduced the international insolvency system, using BVI insolvency laws to stop Marex enforcement, while controlling the liquidator and asserting that the claims of companies he controlled against the debtors should dilute Marex recoveries.
Acknowledging the important case law favoring efficient recognition of foreign liquidations and the need for swift ancillary relief to support international restructuring and liquidation process, Judge Gerber, however, was clear that the New York Bankruptcy Court does not and will not tolerate schemes that use chapter 15 to implement actual fraud. He, however, refused to conflate a finding that the Creative Finance chapter 15 was part of such a scheme as evidence that BVI insolvency law is unfair and “manifestly contrary to the public policy of the United States.” He did this because the invidious aims and schemes of Carlos Sevillja and the administrative failures of the liquidator do not impugn the essential fairness of the BVI law.
The court also did not explore the U.S. bankruptcy law on abstention or how it might enforce a rule of essential good faith as a prerequisite to recognition. In important dicta, the court noted that the abstention/dismissal/good faith question remained open for another day, and that even if there is no “bad faith” dismissal right per se in a chapter 15 case, the court can always limit the effect of the stay upon recognition and limit a foreign debtor’s access to the protections of U.S. bankruptcy laws or courts if chapter 15 is being used in bad faith. In his decision, the judge focused on a narrower and more limited question under the Bankruptcy Code: whether the liquidator had failed to demonstrate that the debtors properly raised a foreign main or nonmain proceeding in BVI.
If a company has a COMI in the BVI or in any foreign state, subject to the other requirements of Bankruptcy Code section 1517, then the company’s foreign proceeding can be recognized as a foreign main proceeding. To prove that COMI exists in a foreign state, the foreign representative ultimately has to demonstrate that the foreign debtor’s known center of financial, legal, and business decision-making is located in that state. If a company has an “establishment” in the BVI or in any foreign state, subject to the other requirements of Bankruptcy Code section 1517, then the company’s foreign proceeding can be recognized as a foreign nonmain proceeding. To prove that an establishment is located in a foreign state, the foreign representative has to show that the foreign debtor conducts non-transitory, local business in the state.
In Creative Finance, although the court reflected that a liquidation in a “letterbox” jurisdiction can and often is properly recognized, here the liquidator had done so little work, so little administration of assets, so little investigation into debtor assets and liabilities and Sevillja, that the debtors could not be said to have COMI or an establishment in the BVI. Accordingly, recognition as either a foreign main or foreign nonmain proceeding was denied. Upon denial of recognition, Marex was relieved of its duties under the order for provisional relief and authorized to seek recovery of Refco interim distributions to satisfy its judgment.
In Creative Finance, Judge Gerber acted vigorously to protect the integrity of judicial processes in the United Kingdom, the British Virgin Islands, and in the United States from fraud, including bankruptcy fraud, but he did so in a conservative manner that preserves the 1517 mandate to order recognition by reference to a straightforward evidentiary standard, focusing his ruling on the definition of COMI.
Mainbrace | June 2016 (No. 3)
United States maritime law offers a maritime plaintiff two principal means of obtaining security for its claims: Rule B attachment in respect of maritime claims, and Rule C arrest in respect of maritime liens. These rules are superficially similar, but each has different criteria and serves a different purpose. Each also gives the defendant the opportunity to obtain countersecurity on related counterclaims. But what happens when the plaintiff is in bankruptcy, subject to a bankruptcy court’s automatic stay of proceedings against it? Can a debtor be compelled to give countersecurity in such a case? This article discusses a recent decision from a bankruptcy court in Colorado (of all places) that helps answer this question.
The Admiralty Rules of Arrest and Attachment
First, the rules: maritime attachment and arrest remedies in the United States are as old as the general maritime law, which predates the Constitution, but in present times the applicable rules are contained in special maritime rules that supplement the Federal Rules of Civil Procedure. Rule B of those rules pertains to maritime attachment, which is available where a plaintiff has an in personam maritime claim against a party. Rule B allows the plaintiff to attach property belonging to that party in any district where the party is not subject to jurisdiction, but where its property can be found. (This quirky jurisdictional rule arises from the notion that Rule B is intended to serve twin aims: allowing a party to obtain jurisdiction over a defendant at least to the extent of property attached, and also to obtain security for its claim. Thus, it is only available in jurisdictions where the defendant is not otherwise subject to the court’s in personam jurisdiction.) Establishing a right to a Rule B attachment is quite simple: the plaintiff must show (1) that it has a prima facie maritime claim, i.e., a claim within the court’s admiralty and maritime jurisdiction; (2) that the defendant can- not be “found” in the district; (3) that the defendant has property within the district; and (4) that no statute bars maritime attachment in the circumstances.
Rule C of the Supplemental Admiralty Rules governs maritime arrest, which arises where a party seeks to enforce a maritime lien against an in rem defendant. This is most commonly a vessel, but a maritime lien can arise against cargo and other maritime property as well. Maritime liens are themselves a creature of U.S. maritime law and arise, for instance, in cases of maritime tort such as collision or crew injury, salvage, breach of certain maritime contracts such as charter parties, and for nonpayment for “necessaries” provided to a vessel.
Rules B and C are augmented by Supplemental Rule E, and the three rules together set out the procedures governing maritime attachment and arrest actions. Rule E is essentially a “mechanics” rule that governs such issues as when and how a party may challenge an arrest or attachment, how and in what amount alternate security may be posted to obtain release of attached or arrested property, and when property may be sold by interlocutory sale before judgment, such as when the attached or arrested property is perishable.
Rule E also grants the defendant the right to seek counter- security. Specifically, Rule E(7)(a) provides as follows:
When a person who has given security for dam- ages in the original action asserts a counterclaim that arises from the transaction or occurrence that is the subject of the original action, a plaintiff for whose benefit the security has been given must give security for damages demanded in the counterclaim unless the court, for cause shown, directs otherwise. Proceedings on the original claim must be stayed until this security is given, unless the court directs otherwise.
The premise of Rule E(7) is to place the parties on equal footing with respect to disputes arising out of the same “transaction or occurrence,” and though the rule does allow the district court some discretion where the plaintiff can show “cause” why it should not be required to post countersecurity (or why countersecurity should be posted in some amount other than the full amount of the counter-claims), an order directing countersecurity is very much the rule rather than the exception.
The Scenario: A Plaintiff in Bankruptcy
Now, back to our issue: suppose a dispute arises between an owner and a time charterer of a vessel, where the char- ter is governed by U.S. maritime law. The charterer has various breach of charter claims, but the owner also has a counterclaim for non-payment of hire. Further suppose the charterer files a petition for bankruptcy protection under Chapter 11 of the U.S. Bankruptcy Code, thereby invoking the automatic stay provisions under Section 362 of the Bankruptcy Code. That section bars creditors from pursuing claims or process against the debtor and its estate outside the bankruptcy case, including seeking security from the debtor without authorization under the Bankruptcy Code.
Further assume that the charterer, after commencement of the Chapter 11 case, avails itself of the right under Section 365 of the Bankruptcy Code to reject the charter. That section allows a debtor to exercise its business judgment to determine that an executory contract is burdensome to the estate and of no value. Rejection is treated under the Bankruptcy Code as a repudiation of the con- tract, returning the vessel to the owner’s service and giving the owner an accelerated prepetition damages claim for the balance of the charter period.
Then, following rejection, the charterer arrests the vessel, asserting its maritime lien claim and pressing for a judicial sale. Faced with this whipsaw, the owner wants to pursue countersecurity for its counterclaim, but can it do so in the face of the bankruptcy court’s automatic stay?
Those are the basic relevant facts in In re Haimark Line Ltd., 15-22180-JGR (Bankr. Col. 2015), a Chapter 11 bankruptcy case pending in the Bankruptcy Court for the District of Colorado. After commencing its Chapter 11 case, the charterer arrested the vessel in Florida, and Blank Rome’s maritime and bankruptcy groups worked together to assist the owner in pursuing the right to seek countersecurity in the Florida arrest action.
The Arguments on Owner’s Motion for Relief from the Automatic Stay
To pursue countersecurity, the owner first had to obtain relief from the bankruptcy court’s automatic stay. In its motion for such relief, the owner argued that Rule C and Rule E are part and parcel of the same remedy of maritime arrest and that the charterer, having knowingly invoked that remedy, should not be allowed to hide behind the bankruptcy court’s automatic stay to avoid the litigation “cost” associated with the arrest right—namely, the obligation to give countersecurity. The charterer countered by arguing that allowing the owner to obtain countersecurity on its claim would unfairly elevate the claim in status from an unsecured claim to a secured claim, thereby prejudicing other creditors of the bankruptcy estate.
The bankruptcy court granted the owner’s motion in an oral ruling on March 16, 2016, (transcript at Dkt No. 220). In rejecting the charterer’s arguments, the judge observed as follows:
Even if it’s found somehow that by allowing the stay to be lifted to allow the request for counter-security to be made and counter-security to be ultimately ordered, even if somehow that does convert some sort of unsecured claim to a secured claim, the Court finds that it’s difficult for the debtor to make that argument when the pursuit of the Florida [arrest action] was due to its own business judgment.
The debtor initiated the action. And in this Court’s view, it’s unfair to cut off [Owner’s] rights to defend itself in any manner provided by law, especially when the asset seized is a four-million-dollar vessel. [Tr. at pp. 13-14.]
The charterer thereafter filed a motion for reconsideration, contending that the court misconstrued the nature of the counterclaims and the countersecurity sought. In an (as yet) unpublished written ruling dated April 15, 2016, (Dkt. 246), the bankruptcy court denied the charterer’s motion, holding as follows:
The Debtor’s present motion is premised upon the argument that this Court held a fundamental misapprehension of “esoteric maritime law concept of countersecurity.” The Debtor, in effect, argues that while it [is] proper for this Court to allow the Arrest Action initiated by the Debtor to proceed, the District Court should be prevented from considering whether countersecurity is required. The Court respectfully disagrees.
The automatic stay under 11 U.S.C. § 362(a) should not be used to unilaterally deny [Owner] the benefit of traditional maritime security devises to which it may be entitled.
This holding—which appears to be a ruling of first impression in the United States—represents an important clarification of the scope of protection that should (or should not) be afforded a debtor by the Bankruptcy Code’s automatic stay when, post-petition, it seeks to pursue claims against parties who also hold claims against the bankruptcy estate. Any debtor should take this ruling into account when deciding whether to pursue arrest or attachment actions where the target is also a creditor of the estate on a related counterclaim, and any such creditor may take heart that the bankruptcy stay is not an automatic bar to obtaining countersecurity in such circumstances.