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...
