United States: Bankruptcy Court Enforces Nonconsensual Third-Party Releases In Chapter 15 Case

In In re Avanti Commc'ns Grp. PLC, 582 B.R. 603 (Bankr. S.D.N.Y. 2018), Judge Martin Glenn of the U.S. Bankruptcy Court for the Southern District of New York entered an order under chapter 15 of the Bankruptcy Code enforcing a scheme of arrangement sanctioned by a court in England that included nonconsensual third-party releases. Judge Glenn determined that such releases should be recognized and enforced consistent with principles of "comity" and cooperation with foreign courts inherent under chapter 15.

Nonconsensual third-party releases in a chapter 11 plan are generally problematic, and as discussed below, such releases are categorically prohibited in certain jurisdictions. Avanti is consistent with certain of Judge Glenn's prior decisions. It may also be a harbinger for future chapter 15 cases in which foreign representatives seek recognition of nonconsensual third-party releases.

Procedures and Recognition Under Chapter 15

Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."

Section 109(a) of the Bankruptcy Code provides that, "[n]otwithstanding any other provision of this section, only a person that resides or has a domicile, a place of business, or property in the United States, or a municipality, may be a debtor under [the Bankruptcy Code]." In Drawbridge Special Opportunities Fund LP v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir. 2013), the U.S. Court of Appeals for the Second Circuit ruled that section 109(a) applies to cases under chapter 15 of the Bankruptcy Code.

"[P]roperty in the United States" for purposes of section 109(a) has been held to include an attorney retainer in a U.S. bank account; causes of action under U.S. law against parties in the U.S.; and contract rights governed by U.S. law, including those in connection with U.S. dollar-denominated debt issued under an indenture governed by New York law with a New York choice-of-forum clause. See In re Cell C Proprietary Ltd., 571 B.R. 542 (Bankr. S.D.N.Y. 2017); In re Berau Capital Resources Pte Ltd, 540 B.R. 80 (Bankr. S.D.N.Y. 2015); In re Octaviar Administration Pty Ltd, 511 B.R. 361 (Bankr. S.D.N.Y. 2014).

"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:

[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the U.S. of both a "foreign main proceeding"—a case pending in the country where the debtor's center of main interest ("COMI") is located (see 11 U.S.C. § 1502(4))—and "foreign nonmain proceedings," which may have been commenced in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)).

The Bankruptcy Code does not define "COMI." However, section 1516(c) provides that, "[i]n the absence of evidence to the contrary, the debtor's registered office, or habitual residence in the case of an individual, is presumed to be" the debtor's COMI.

An "establishment" is defined in section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity." Unlike with the determination of COMI, there is no statutory presumption regarding the determination of whether a foreign debtor has an establishment in any particular location. See In re British Am. Ins. Co., 425 B.R. 884 (Bankr. S.D. Fla. 2010). The debtor's foreign representative bears the burden of demonstrating that the debtor has an establishment in a particular jurisdiction. Id. at 915.

Relief That Can Be Granted Upon Recognition

Upon recognition of a "foreign main proceeding," section 1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including section 361, which entitles any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest; section 362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets; section 363, which restricts the debtor's ability to use, sell, or lease its U.S. property outside the ordinary course of its business; section 549, which gives a trustee the power to avoid unauthorized postpetition asset transfers; and section 552, which provides that, with certain exceptions (e.g., pledged proceeds and rents), prepetition security interests do not encumber U.S. property acquired by the bankruptcy estate or by the debtor postpetition.

If the bankruptcy court recognizes a foreign proceeding as either a main or nonmain proceeding, section 1521(a) authorizes the court to grant a broad range of provisional and other relief designed to preserve the foreign debtor's assets or otherwise provide assistance to the court or other entity presiding over the debtor's foreign main proceeding. Under section 1521(a)(1), such relief can include "staying the commencement or continuation of an individual action or proceeding concerning the debtor's assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520(a)."

Under section 1521(a)(7), the court may also "grant[] any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)." These excepted sections authorize a bankruptcy trustee to, among other things, avoid and recover transfers that are fraudulent under the Bankruptcy Code and/or, under certain circumstances, "applicable" law (generally state law).

Section 1522 provides that the bankruptcy court may grant relief under section 1521 "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."

Section 1506 of the Bankruptcy Code sets forth a public policy exception to the relief otherwise authorized in chapter 15, providing that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States."

Under section 1507 of the Bankruptcy Code, in determining whether a U.S. bankruptcy court should provide "additional assistance" to a foreign representative in a chapter 15 case, the court must consider whether such assistance, "consistent with the principles of comity," will reasonably ensure, among other things: (i) the just treatment of all creditors and interest holders; (ii) protection of U.S. creditors "against prejudice and inconvenience in the processing of claims in such foreign proceeding"; and (iii) "distribution of proceeds of the debtor's property substantially in accordance with the order prescribed" in the Bankruptcy Code.

Cooperation between U.S. and foreign courts—a form of "comity"—is an indispensable element of the chapter 15 paradigm. Comity is "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895); accord Shen v. Leo A. Daly Co., 222 F.3d 472, 476 (8th Cir. 2000).

Validity of Nonconsensual Third-Party Releases in Chapter 11 Plans Under U.S. Law

The U.S. circuit courts of appeals are split as to whether a bankruptcy court has the authority to approve chapter 11 plan provisions that, over the objection of creditors or other stakeholders, release specified nondebtors from liability and/or enjoin dissenting stakeholders from asserting claims against such nondebtors. The minority view, held by the Fifth, Ninth, and Tenth Circuits, bans such nonconsensual releases on the basis that section 524(e) of the Bankruptcy Code, which provides generally that "discharge of a debt of the debtor does not affect the liability of any other entity on, or the property of any other entity for, such debt," prohibits them. See Bank of N.Y. Trust Co. v. Official Unsecured Creditors' Comm. (In re Pac. Lumber Co.), 584 F.3d 229 (5th Cir. 2009); In re Lowenschuss, 67 F.3d 1394 (9th Cir. 1995); In re W. Real Estate Fund, Inc., 922 F.2d 592 (10th Cir. 1990).

On the other hand, the majority of circuits to consider the issue—the Second, Fourth, Sixth, Seventh, and Eleventh Circuits—have found such releases and injunctions permissible under certain circumstances. See In re Drexel Burnham Lambert Grp., Inc., 960 F.2d 285 (2d Cir. 1992); In re A.H. Robins Co., Inc., 880 F.2d 694 (4th Cir. 1989); In re Dow Corning Corp., 280 F.3d 648 (6th Cir. 2002); In re Airadigm Commc'ns, Inc., 519 F.3d 640 (7th Cir. 2008); SE Prop. Holdings, LLC v. Seaside Eng'g & Surveying, Inc. (In re Seaside Eng'g & Surveying, Inc.), 780 F.3d 1070 (11th Cir. 2015). For authority, these courts generally rely on section 105(a) of the Bankruptcy Code, which authorizes courts to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." Moreover, as the Seventh Circuit held in Airadigm, the majority view is that section 524(e) does not limit a bankruptcy court's authority to grant such releases.

The First and D.C. Circuits have suggested that they agree with the "pro-release" majority. See In re Monarch Life Ins. Co., 65 F.3d 973 (1st Cir. 1995) (a subsidiary was collaterally estopped by a plan confirmation order from belatedly challenging the jurisdiction of the bankruptcy court to permanently enjoin lawsuits against the debtor's attorneys and other nondebtors not contributing to the debtor's reorganization); In re AOV Industries, 792 F.2d 1140 (D.C. Cir. 1986) (a plan provision releasing liabilities of nondebtors was unfair because the plan did not provide additional compensation to a creditor whose claim against the nondebtor was being released; adequate consideration must be provided to a creditor forced to release claims against nondebtors). The Third Circuit declined to decide the issue in In re Continental Airlines, 203 F.3d 203 (3d Cir. 2000), ruling that a plan release provision did not pass muster under even the most flexible tests for the validity of nondebtor releases.

Although majority-view courts employ various tests to determine whether such releases are appropriate, courts generally approve third-party plan releases or injunctions when they are essential to the reorganization, the parties being released are making a substantial financial contribution to the reorganization, and the affected creditors overwhelmingly support the plan. See Dow Corning Corp., 280 F.3d at 658 (listing factors).

Recognition and Enforcement of Nondebtor Releases in Chapter 15 Case

In a chapter 15 case, unlike in a chapter 11 case, a U.S. bankruptcy court is not asked to confirm a plan of reorganization or liquidation. However, the court may be asked to recognize and enforce a plan, composition with creditors, scheme of arrangement, or court order sanctioned or issued by a foreign court presiding over a foreign debtor's main proceeding. Such a plan or order may enjoin creditors from suing or otherwise proceeding against parties other than the foreign debtor. In such a case, whether a release or injunction should be enforced by a U.S. bankruptcy court is a more nuanced issue.

For example, in In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010), bankruptcy judge Martin Glenn, to provide "additional assistance" in a chapter 15 case involving a Canadian debtor, enforced a Canadian court's order confirming a restructuring plan that contained nondebtor releases and injunctions, even though it was uncertain whether a U.S. court would have approved the releases and injunctions in a case under chapter 11 of the Bankruptcy Code. Judge Glenn reasoned that such uncertainty was of little consequence in the case before it, which involved not the propriety of nondebtor injunctions and releases in a plenary bankruptcy case, but rather, a request to enforce a foreign judgment in a chapter 15 case. The court concluded that "principles of enforcement of foreign judgments and comity in chapter 15 cases strongly counsel approval of enforcement in the United States of the third-party non-debtor release and injunction provisions included in the Canadian Orders, even if those provisions could not be entered in a plenary chapter 11 case."

By contrast, in Vitro S.A.B. de C.V. v. ACP Master, Ltd. (In re Vitro S.A.B. de C.V.), 473 B.R. 117 (Bankr. N.D. Tex.), aff'd, 701 F.3d 1031 (5th Cir. 2012), the bankruptcy court ruled that releases of nondebtor affiliates included in a Mexican debtor's reorganization plan were unenforceable as contrary to U.S. public policy. On appeal, the U.S. Court of Appeals for the Fifth Circuit ruled that the prohibition of such releases under Fifth Circuit precedent (citing Pac. Lumber) did not necessarily mean that a U.S. bankruptcy court could not enforce them under section 1507 as a permissible form of "additional assistance" not otherwise available under the Bankruptcy Code or U.S. law. However, the Fifth Circuit concluded that the bankruptcy court did not abuse its discretion in refusing to enforce the nonconsensual releases where affected creditors were not given any alternative means to recover and would receive only a tiny fraction of what was owed to them, and where the votes in favor of the Mexican debtor's reorganization plan comprised largely insider votes (which are not counted as acceptances under chapter 11 pursuant to section 1129(a)(10) of the Bankruptcy Code). Because it concluded that relief was not warranted under section 1507 and would not be available under section 1521, the Fifth Circuit did "not reach whether the [Mexican reorganization] plan would be manifestly contrary to a fundamental public policy of the United States" within the meaning of section 1506.

In In re Sino-Forest Corp., 501 B.R. 655 (Bankr. S.D.N.Y. 2013), Judge Glenn employed his rationale in Metcalfe in recognizing as a form of "additional assistance" under section 1507 a Canadian court-approved settlement containing a global release provision. In addition, he noted that, in the Second Circuit, "where the third-party releases are not categorically prohibited, it cannot be argued that the issuance of such releases is manifestly contrary to public policy" within the meaning of section 1506 (citing In re Metromedia Fiber Network, Inc., 416 F.3d 136, 141 (2d Cir. 2005)).

Enforcement of Third-Party Nonconsensual Releases in Avanti

Following his earlier precedent, Judge Glenn recently used similar reasoning in Avanti. Avanti Communications Group PLC ("Avanti"), a public limited company incorporated under the laws of England and Wales with subsidiaries throughout the world, was a satellite operator that provided services in Europe, the Middle East, and Africa. Avanti issued senior secured notes maturing in 2021 and 2023 that certain of Avanti's direct and indirect subsidiaries guaranteed. Because of operational setbacks and an overleveraged balance sheet, Avanti and an ad hoc group of its noteholders entered into a restructuring support agreement, which formed the basis for a scheme of arrangement under English law. Pursuant to the scheme, the parties agreed to equitize the 2023 notes, which, although originally governed by New York law, were amended to be governed by English law, and to amend the terms of the 2021 notes. The scheme also included the grant of releases to, among others, certain third-party guarantors, which prevented dissenting holders of the 2023 notes from pursuing claims against the guarantors.

In February 2018, Avanti initiated a proceeding under the U.K. Companies Act of 2006 before the High Court of Justice of England and Wales. Through this proceeding, the parties sought permission from the High Court to convene a meeting of creditors comprising holders of the 2023 notes—the only impaired creditors under the scheme—to vote on the scheme. The court approved the request, and creditors holding more than 98 percent of the value of the 2023 notes voted in favor of the scheme. Thereafter, the High Court approved the scheme of arrangement.

Later in February 2018, Avanti's foreign representative filed a petition in the U.S. Bankruptcy Court seeking recognition of the U.K. proceeding as a foreign main proceeding under chapter 15. Because Avanti's legal counsel held a retainer in a New York account and because the indenture for the 2023 notes was governed by New York law, Judge Glenn ruled that Avanti satisfied section 109(a)'s "property in the United States" requirement, and the court recognized Avanti's U.K. proceeding as a foreign main proceeding.

The recognition order also provided for enforcement of the scheme's nonconsensual third-party releases. Judge Glenn, after examining the requirements of sections 1507 and 1521 of the Bankruptcy Code, concluded, among other things, that: (i) affected creditors were afforded due process consistent with U.S. standards; (ii) third-party nondebtor releases, particularly for affiliate guarantors of debt adjusted by a scheme of arrangement, are common under English law (and are often enforced in the Second Circuit in chapter 15 proceedings); and (iii) if the scheme were not recognized and enforced in the chapter 15 case, creditors could be prejudiced and could "prevent the fair and efficient administration of the [r]estructuring."

Judge Glenn distinguished Vitro. In particular, he pointed out that the Mexican reorganization plan in Vitro was supported by a significant number of insider votes, in contrast to Avanti, where the scheme received essentially unanimous consent from all impaired creditors.

Outlook

Avanti is welcome news for foreign debtors seeking to obtain enforcement of nonconsensual third-party releases approved by foreign courts as part of restructuring plans. Given this and prior precedents in the Southern District of New York, that venue may be preferred by foreign debtors wishing to grant such releases in their non-U.S. insolvency proceedings.

Under Avanti and some cases in other districts and circuits, the standard for approving nonconsensual third-party releases depends upon whether the debtor is in chapter 11 or chapter 15. As noted by Judge Glenn in Avanti, in chapter 15, the inquiry focuses on, among other things, whether the foreign forum provides:

[A] full and fair trial ... before a court of competent jurisdiction [that was] conduct[ed] upon regular proceedings ... and under a system of jurisprudence likely to secure an impartial administration of justice ... and there is nothing to show either prejudice in the court, or in the system of laws under which it [presides].

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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Mark G. Douglas
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