Comity in Chapter 15 - and Its Limits
A pair of rulings recently handed down by Delaware and New York bankruptcy courts have contributed to the ongoing debate about the role of “comity” (the recognition that one sovereign nation extends within its territory to the legislative, executive, or judicial acts of another sovereign, with due regard for the rights of its own citizens) in cross-border bankruptcy cases under chapter 15 of the U.S. Bankruptcy Code. Recourse to chapter 15 generally, and the utilization of section 363 of the Bankruptcy Code in chapter 15, can be especially valuable in cases where the representative of a foreign debtor wants to monetize assets located in the U.S. and the foreign insolvency scheme involved does not provide for “free and clear” sales or may be limited in jurisdiction. However, these tools are not without limits.
Coming down on the side of broad access, the court in In re Elpida Memory, Inc., 2012 BL 302570 (Bankr. D. Del. Nov. 16, 2012), ruled that both the express language of chapter 15 and its legislative intent permit the representative of a foreign debtor to use chapter 15 and section 363 to sell assets located in the U.S. free and clear of all claims, liens, and other competing interests. By contrast, in In re Fairfield Sentry Limited, 2013 BL 8090 (Bankr. S.D.N.Y. Jan. 10, 2013), the court sounded a cautionary note, emphasizing the pre-eminent role of comity in chapter 15 and concluding that plenary review under section 363 of a sale transaction approved by a foreign tribunal was not appropriate.
On February 27, 2012, Elpida Memory, Inc. (“Elpida”), a manufacturer of dynamic random-access, or DRAM, products, commenced reorganization proceedings under the Japanese Corporate Reorganization Act (Kaisha Kosei Ho) in a Japanese court. Thereafter, the foreign representatives of Elpida sought and obtained from the Delaware bankruptcy court an order recognizing the Japanese proceeding as a foreign “main proceeding” under chapter 15.
After an auction was conducted in Japan, Elpida’s bankruptcy trustees determined that Micron Technology, Inc. (“Micron”) would serve as the sponsor for Elpida’s plan of reorganization. In connection with the sponsor agreement, the trustees also sought authority to enter into various technology transfer agreements between Elpida and Micron, as well as agreements with Rambus Inc. to sell certain Elpida patents and to continue to cross-license others (collectively, the “Agreements”). Each of the Agreements was approved by the Japanese court.
However, each of the Agreements contemplated a sale of Elpida property located in the U.S. Accordingly, Elpida’s foreign representatives sought U.S. bankruptcy court approval under sections 363 and 1520 of the Bankruptcy Code of that portion of the Agreements involving the sale of U.S. assets. A group of Elpida’s bondholders objected.
Although all parties agreed that section 363 was available to Elpida as a means of effecting a sale of U.S. assets, it was unclear how the provision should be applied and, in particular, what standard should be employed by the bankruptcy court in ruling on Elpida’s request. Therefore, the court considered whether it should decide the issue on the basis of principles of comity (i.e., by deferring to the Japanese court’s approval of the transaction) or instead independently review the sale transaction under the “business judgment” standard applied under section 363(b) to a proposed use, sale, or lease of property outside the ordinary course of business.
The Delaware Bankruptcy Court’s Decision
The bankruptcy court began its analysis by looking to section 1520(a)’s plain meaning—the “default entrance” when interpreting a statute. This analysis, it determined, was straightforward: section 1520(a) unequivocally states that section 363 applies “to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States to the same extent that the section would apply to property of an estate.” From this, the court concluded that, by extension, the standard applied to nonordinary-course transactions under section 363(b) must also apply in chapter 15 and that the foreign representatives bore the burden of demonstrating that the Agreements represented a sound exercise of business judgment.
The court also examined the legislative history of section 1520, observing that “[n]otwithstanding the Supreme Court’s repeated admonition that courts are to interpret statutes according to their plain meaning, one could argue that in Chapter 15 cases plain meaning should be subservient to legislative history or more general principles of comity.” Noting that section 1520 is adopted from Article 20 of the U.N. Commission on International Trade Law’s Model Law on Cross-Border Insolvency (the “Model Law”), the court looked to the Model Law “as part of its interpretive task.”
In the court’s view, the Model Law has two essential purposes: (i) stopping actions against the debtor’s assets in all jurisdictions; and (ii) preventing the debtor from transferring or disposing of assets without a court order. In order to achieve these ends, the court explained, Article 20 and the Model Law as a whole follow an in rem division of labor between the sovereigns—i.e., by giving domestic courts responsibility for the assets located within their borders and by imposing “the laws of the ancillary forum—not those of the foreign main proceedings—on the debtor with respect to transfers of assets located in such ancillary jurisdiction.”
Lastly, the court examined the general precept that a U.S. court should grant comity to a recognized foreign representative in insolvency matters. Acknowledging that court rulings in chapter 15 cases routinely refer to this concept, the bankruptcy court in Elpida cautioned that “it is not the end all be all of the statute. To require this Court to defer in all instances to foreign court decision[s],” the court wrote, “would gut section 1520,” which itself is mandatory.
Moreover, the court explained, the only two provisions in chapter 15 that specifically mention comity—sections 1507(b) and 1509(b)(3)—did not apply to the situation before it. Section 1507(b) was not relevant because Elpida’s foreign representatives were not requesting “additional assistance” (e.g., an order preventing preferential or fraudulent transfers of a debtor’s assets). Similarly, section 1509(b) was inapplicable because, in the court’s view, the provision’s direction that a bankruptcy court, post-recognition, “grant comity or cooperation to the foreign representative” does not require a U.S. court to grant comity to the orders of the foreign court.
Therefore, because principles of comity did not alter the court’s interpretation of both the plain meaning and the legislative history of section 1520, the court ruled that section 363(b)’s business-judgment test controls.
Subsequent History—The Merits
On January 16, 2013, the Delaware bankruptcy court approved the Agreements, ruling that the asset sales satisfied the business-judgment standard under section 363(b). Although the court took judicial notice of the fact that the transactions at issue involved certain assets that were outside its jurisdiction, the court nonetheless subjected the Agreements to plenary review. It found that Elpida had demonstrated a sound business purpose, a fair sale price, fair and reasonable notice, and good faith on the part of the purchasers. Moreover, the court determined that, although (i) the transactions were not made public until after the Agreements were executed and (ii) much of the Japanese proceeding was conducted ex parte or under seal, leading to concerns about notice and transparency, the requirements of the Bankruptcy Code and due process were ultimately satisfied.
On January 30, 2013, certain Elpida bondholders filed a motion for reconsideration of the order approving the Agreements. The court denied the motion on February 15, 2013. On February 27, 2013, the Japanese court approved Elpida’s reorganization plan, leaving recognition of the plan by the Delaware bankruptcy court as the last major hurdle for approval of the Micron deal.
Fairfield Sentry Limited (“Fairfield Sentry”) was established for the purpose of allowing mainly non-U.S. persons and certain tax-exempt U.S. entities to invest with Bernard L. Madoff Investment Securities (“BLMIS”). Shortly after Madoff’s Ponzi scheme came to light and BLMIS collapsed, Fairfield Sentry was placed into liquidation in a British Virgin Islands (“BVI”) court. On July 22, 2010, a New York bankruptcy court issued an order recognizing the BVI proceeding as a foreign main proceeding under chapter 15.
Fairfield Sentry filed three customer claims in the U.S. liquidation proceeding commenced on behalf of BLMIS under the Securities Investor Protection Act (“SIPA”). Litigation in the proceeding resulted in a settlement whereby Fairfield Sentry’s claims were allowed in the amount of $230 million. In 2010, following a competitive auction, Fairfield Sentry’s foreign representative accepted an offer from Farnum Place, LLC, to purchase the claims for 32.125 percent of their allowed amount. In December 2010, shortly after the parties signed a trade confirmation (the “Trade Confirmation”) (with the assistance of U.S. counsel), the pool of assets available for distribution to BLMIS customers was augmented by approximately $7.2 billion due to a separate settlement, leading to a sharp increase in the prices offered for claims against BLMIS.
By its terms, the Trade Confirmation was subject to: (i) approval by the BVI court; and (ii) an order of both the BVI court and the U.S. bankruptcy court approving the assignment of Fairfield Sentry’s claims. The BVI court approved the Trade Confirmation and the claim assignment after a three-day evidentiary hearing. Approval was then sought from the New York bankruptcy court, which was faced with, among other things, the question of whether it was bound to review the assignment under section 363 to determine whether the transaction was in the best interests of Fairfield Sentry’s estate.
The New York Bankruptcy Court’s Decision
Noting that “[t]his is a pure and simple case of seller’s remorse,” the court concluded that plenary review of the claims assignment was not warranted under section 1520(a)(2) (which, as noted previously, makes section 363 applicable in chapter 15 cases) because the property was not “within the territorial jurisdiction of the United States.”
The court considered whether this conclusion comports with chapter 15’s “governing concept of comity.” At the outset, it noted that the origin of chapter 15 rests in section 304 of the Bankruptcy Code (repealed in 2005) and the Model Law. Integral to both of those, the court explained, is the governing concept of comity. The primacy of that concept is demonstrated by its inclusion in the preamble of section 1507(b), as well as by chapter 15’s deferential framework for international judicial cooperation.
The court determined that Fairfield Sentry’s SIPA claims were “located” in the BVI and that the BVI court had the paramount interest in the sale of the claims, whereas the New York court lacked any meaningful interest at all. Under circumstances where U.S. interests are minimal, the court reasoned, comity dictates deference to the BVI court and its judgment. Simply put, the court wrote:
Chapter 15 was not designed to permit parties to mix and match multiple countries’ laws, which would lead to “haphazard, erratic, or piecemeal” adjudication of the distribution of assets . . . , as the administration and disbursement of the same assets would be handled by “different tribunals in different countries according to different laws.”
Moreover, the court emphasized the extent to which such “inharmonious legal approaches” threaten the predictability of cross-border cases and the administration of the assets—exactly the outcome chapter 15 was designed to prevent.
Elpida builds on an earlier decision in In re Qimonda AG, 462 B.R. 165 (Bankr. E.D. Va. 2011), which likewise confirmed that foreign debtors may avail themselves of the protections of or remedies in the Bankruptcy Code. In that case, two U.S. patent licensees, Samsung and Elpida, whose licenses were repudiated under German law in Qimonda’s German insolvency proceeding, asserted that they were entitled to the protections of section 365(n) of the Bankruptcy Code with respect to their licenses. The court held that the failure of German insolvency law to afford patent licensees the safeguards which they would enjoy under section 365(n) was “manifestly contrary” to the public policy of the U.S. and did not ensure that licensees of the debtor’s U.S. patents were “sufficiently protected.” According to the court, the failure to apply section 365(n) would “severely impinge” on an important statutory protection afforded to licensees of U.S. patents, and uncertainty attendant upon the exercise of German law would “slow the pace of innovation, to the detriment of the U.S. economy.” The court accordingly denied the foreign representative’s motion to strike section 365(n) from the recognition order and clarified that section 365(n) applies in the chapter 15 case with respect to the foreign debtor’s U.S. patents.
By contrast, the court in Fairfield Sentry distanced itself from Elpida, noting that it “disagrees with the Elpida court’s downplay of the role of comity in Chapter 15.” Moreover, the Fairfield Sentry court emphasized, “Elpida is on entirely different footing from the instant case” due to the existence in Elpida of a modified recognition order that explicitly prohibited the foreign representative from selling Elpida’s U.S. assets without bankruptcy court approval. In Fairfield Sentry, there was no such order from either the U.S. court or the BVI court—all that existed was “a similar but gratuitous approval requirement present in the Trade Confirmation.”
These rulings shed further light on the extent to which a foreign debtor (as well as its creditors) may rely on the provisions and protections of the Bankruptcy Code. Stakeholders in cross-border bankruptcy cases should benefit from the growing body of case law regarding this issue, particularly where the protections provided by the Bankruptcy Code are different from, and often greater than, those provided by the law of the foreign forum. However, the availability of U.S. courts (and relief under U.S. law) is not unlimited. Comity remains an important and vibrant principle, particularly where assets and interests are clearly centered in a foreign proceeding. Participants would be well advised to recognize the complicated interplay that exists in cross-border cases.