In re Rede Energia S.A.

515 B.R. 69

In re: Rede Energia S.A.,¹ Debtor in a Foreign Proceeding.

Case No. 14-10078 (SCC)

United States Bankruptcy Court, S.D. New York.

Signed August 27, 2014

White & Case LLP, 1155 Avenue of the Americas, New York, New York 10036, By: J. Christopher Shore, Esq., Thomas MacWright, Esq., Southeast Financial Center, 200 South Biscayne Blvd., Suite 4900, Miami, Florida 33131, By: John K. Cunningham, Esq., Richard S. Kebrdle, Esq., Attorneys for Foreign Representative, José Carlos Santos

Bingham McCutchen LLP, 399 Park Avenue, New York, New York 10022, By: Timothy B. DeSieno, Esq., Mark W. Deveno, Esq., Attorneys for Ad Hoc Group of Rede Noteholders

In a Case Under Chapter 15 of the Bankruptcy Code

MEMORANDUM DECISION GRANTING PLAN ENFORCEMENT RELIEF PURSUANT TO CHAPTER 15 OF THE BANKRUPTCY CODE

SHELLEY C. CHAPMAN, UNITED STATES BANKRUPTCY JUDGE

TABLE OF CONTENTS

FACTUAL BACKGROUND ... 75

I. The Rede Group ... 75

II. Rede Issues the Perpetual Notes ... 76

III. Events Leading to the Brazilian Bankruptcy Proceeding ... 77

IV. The Brazilian Bankruptcy Proceeding ... 79

A. Competing Plans are Submitted ... 79

B. Creditors Vote on the Brazilian Reorganization Plan ... 81

C. The Brazilian Reorganization Plan is Approved Via Cram–Down ... 82

V. The Terms and Provisions of the Brazilian Reorganization Plan ... 84

A. Substantive Consolidation of the Rede Debtors ... 84

B. Classification of Claims Generally ... 85

C. Treatment of Secured Claims ... 85

D. Treatment of Unsecured Claims ... 86

1. Treatment of Concessionaire Creditor Claims ... 86

2. Treatment of Subsidiary Concessionaire Claims ... 87

3. Treatment of General Unsecured Claims ... 87

VI. The Foreign Representative Commences a Chapter 15 Proceeding in the United States ... 88 DISCUSSION ... 89

I. Applicable Law ... 89

II. The Plan Enforcement Relief is Proper Under Section 1521 of the Bankruptcy Code ... 92

III. The Plan Enforcement Relief is Also Proper Under Section 1507 of the Bankruptcy Code ... 94

A. Creditors Were Treated Justly in Brazil ... 95

B. There is No Prejudice to U.S. Creditors in the Processing of Claims in Brazil ... 96

C. There Were No Preferential or Fraudulent Property Distributions in the Brazilian Bankruptcy Proceeding ... 96

D. The Distribution of Proceeds Under the Brazilian Reorganization Plan Was Substantially in Accordance with U.S. Law ... 97

IV. With Respect to Section 1506, the Brazilian Bankruptcy Proceeding Was Administered in a Manner Consistent With U.S. Public Policy ... 98

A. The Marketing Process of the Rede Debtors' Assets, the Consolidation of the Rede Debtors, and the Confirmation of the Brazilian Reorganization Plan Did Not Violate Creditors' Due Process Rights and Were Not Manifestly Contrary to U.S. Public Policy ... 98

1. The Marketing Process of the Rede Debtors' Assets ... 98

2. The Determination by the Brazilian Bankruptcy Court That the Rede Debtors' Assets and Liabilities Could be Consolidated for Plan Purposes ... 100

3. The Voting Process and Approval of the Plan Through Cram–Down ... 101

B. The Distribution Scheme in the Brazilian Reorganization Plan is Not Manifestly Contrary to U.S. Public Policy ... 103

C. Differing Treatment of Similarly Situated Creditors by the Brazilian Reorganization Plan Was For a Valid Purpose and Is Not Inconsistent With U.S. Law ... 105

D. To the Extent That There is Disparate Treatment, Such Treatment is Not Targeted at U.S.-Based Creditors and There is No Evidence of Protection of Local Creditors to the Detriment of U.S.-Based Creditors ... 106

CONCLUSION ... 107

In this proceeding brought pursuant to chapter 15 of the Bankruptcy Code, José Carlos Santos, the Foreign Representative of Rede Energia S.A., seeks this Court's assistance, pursuant to sections 1507 and 1521, in enforcing the terms of Rede's Brazilian reorganization plan. Specifically, the Foreign Representative requests the following relief: (i) an order granting full faith and credit to (a) the Brazilian reorganization plan and (b) the Brazilian court order confirming the plan, including a continuation of the injunction of acts in the United States in contravention of the confirmation order, and (ii) an order authorizing and directing the Indenture Trusteefor Rede's 11.125 percent perpetual notes and the Depository Trust Company to take the actions necessary to carry out the terms of the Brazilian reorganization plan, including making payments to Rede's noteholders. Certain of Rede's noteholders object to the relief as being contrary to public policy of the United States and urge the Court to allow them to return to Brazil and negotiate for an improvement on the distribution they are to receive under the Brazilian reorganization plan. These noteholders allege that what the Foreign Representative describes as a proceeding that indisputably comports with fundamental principles of U.S. bankruptcy law and civilized jurisprudence is in fact a wholesale trampling of their rights that was conceived of and executed by the Brazilian government and rubberstamped by the Brazilian bankruptcy court. While there are certainly aspects of the Brazilian proceeding that differ in form and substance from what might occur in the United States, the Court nonetheless concludes, for the reasons set forth herein, that Rede's Foreign Representative is entitled to the relief requested.

FACTUAL BACKGROUND

An understanding of the structure of Rede Energia S.A. (“ Rede ” or the “ Debtor ”), the events leading to Rede's Brazilian bankruptcy proceeding (the “Brazilian Bankruptcy Proceeding ”), and the Brazilian Bankruptcy proceeding itself, including the terms of Rede's reorganization plan and its treatment of Rede's creditors, is essential to the Court's consideration and analysis of the relief requested by José Carlos Santos, the authorized foreign representative of Rede (the “ Foreign Representative ”) and the objections to such relief. The uncontroverted facts and summary of applicable Brazilian law set forth below are taken from (i) the Stipulation of Facts for Purposes of a Hearing on the Objection by the Ad Hoc Group of Rede Noteholders to Relief Related to Recognition of a Foreign Proceeding [Docket No. 26] (“ Stipulation of Facts ” or “ Fact Stip. ”) and (ii) the Stipulation of Brazilian Law for Purposes of a Hearing on the Objection by the Ad Hoc Group of Rede Noteholders to Relief Related to Recognition of Foreign Proceeding [Docket No. 27] (“ Stipulation of Law ” or “ Law Stip. ”).²

I. The Rede Group

Rede is one of the largest electric power companies in Brazil; it is the parent company of a group of operating and non-operating subsidiary entities (collectively, with Rede, the “ Rede Group ”). (Foreign Representative's Petition for Recognition of Brazilian Bankruptcy Proceeding and Motion for Order Granting Related Relief Pursuant to 11 U.S.C. § 105(a), 1507(a), 1509(b), 1515, 1517, 1520 and 1521) [Docket No. 2] (the “ Petition ” at 3.) Through its operating subsidiaries, the Rede Group distributes electricity to millions of customers throughout Brazil, including customers in the States of São Paulo, Minas Gerais, Paraná, Mato Grosso, and Tocantins. (Petition at 3.) By 2012, the Rede Group had become one of Brazil's largest electricity distributors, providing electricity to 578 municipalities in seven states in Brazil, serving approximately five million consumer units, 165 indigenous villages, and 787 rural settlements. (Fact Stip. at ¶ 1.)

Five members of the Rede Group are debtors in the Brazilian Bankruptcy Proceeding(collectively, the “ Rede Debtors ”), consisting of:

• Rede, an intermediate holding company, holding interests in fourteen subsidiaries;

• Empresa de Eletricidade Vale Paranapanema S.A. (“ EEVP ”), a holding company that is the direct parent and controlling shareholder of Rede;

• Denerge Desenvolvimento Energético S.A. (“ Denerge ”), another holding company that is the direct parent and controlling shareholder of EEVP and the indirect parent of Rede;

• Companhia Técnica de Comercialização de Energia (“ CTCE ”), an electricity-trading subsidiary of Rede; and

• QMRA Participações S.A., a subsidiary of Rede and the former intermediate holding company parent of Centrais Elétricas Do Pará S.A. (“ CELPA ”).³

(Fact Stip. at ¶ 2.)

The Rede Debtors have eight electricity distribution operating subsidiaries, known as the “Rede Concessionaires,” ⁴ that are not debtors in the Brazilian Bankruptcy Proceeding.⁵ (Fact Stip. at ¶ 3.) Rede holds the equity in the Rede Concessionaires, and substantially all of the Rede Group's business activities are conducted through them. The electricity distribution activities of the Rede Concessionaires are subject to extensive regulation by the Brazilian government through various regulatory authorities, including Agência Nacional de Energia Elétrica (“ ANEEL ”). (Fact Stip. at ¶ 8.)

II. Rede Issues the Perpetual Notes

Pursuant to an indenture dated April 2, 2007 (the “ Indenture ”), Rede issued 11.125 percent notes in the aggregate principal amount of USD$400 million ⁶ that have no fixed final maturity date and are not subject to any mandatory redemption provisions (the “ Perpetual Notes ”). (Fact Stip. at ¶ 4.) In September 2007, Rede exercised its right under the Indenture to issue additional Perpetual Notes in the aggregate principal amount of USD$175 million. Approximately USD$496 million of the Perpetual Notes remained outstanding as of the date of the commencement of the Brazilian Bankruptcy Proceeding on November 23, 2012. (Fact Stip. at ¶ 4.)

The Perpetual Notes are general unsecured obligations of Rede and are not guaranteed by any of Rede's operating subsidiaries or other affiliates. (Fact Stip. at ¶ 5.) The notes are held in global note form (the “ Global Note ”) with the Depository Trustee Company (“ DTC ”). The Bank of New York Mellon is the indenture trustee for the Perpetual Notes (the “ Indenture Trustee ”). Interest payments on the Perpetual Notes...