Chapter 15 Provides Restructuring Avenue for Brazilian Companies
The chapter 15 cases of OAS S.A. ("OAS") and its affiliates represent the second time in less than one year that a U.S. bankruptcy court has been confronted with a serious challenge to the recognition of insolvency proceedings in Brazil by a group of U.S. creditors. The latest challenge focused on two separate lines of attack: (1) whether the "foreign representative" authorized to commence a chapter 15 case can be appointed by the company rather than the foreign insolvency court; and (2) whether Brazilian insolvency law is manifestly contrary to U.S. public policy.
The U.S. Bankruptcy Court for the Southern District of New York ruled in favor of OAS on both issues. In In re OAS S.A., 533 B.R. 83 (Bankr. S.D.N.Y. 2015), the court held that: (i) a foreign representative need not be appointed by a foreign court, but may be authorized to seek chapter 15 recognition by a foreign debtor's board of directors; (ii) OAS's foreign representative successfully established that the debtor's "center of main interests" ("COMI") for purposes of chapter 15 was Brazil rather than its country of incorporation (Austria); and (iii) recognition of the Brazilian proceedings was not manifestly contrary to U.S. public policy.
The decision is an endorsement of Brazilian proceedings and the manner in which they are conducted before Brazilian courts, especially in light of arguments that OAS engaged in fraudulent transfers prior to commencing its Brazilian proceedings. The ruling also underscores how U.S. courts and chapter 15 can play a meaningful role in the restructuring of a Brazilian company whose debt is denominated in U.S. dollars.
Procedures and Relief Under Chapter 15
Enacted in 2005, chapter 15 is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), which was designed to provide effective mechanisms for dealing with cross-border insolvency cases.
Under chapter 15, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." "Foreign representative" is defined in section 101(24) of the Bankruptcy Code 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."
"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 "main" proceeding—a case pending in the country where the debtor's COMI is located—and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment."
The Bankruptcy Code does not define "center of main interests." 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."
Various factors have been deemed relevant by courts in examining COMI, including the location of the debtor's headquarters, managers, employees, investors, primary assets, or creditors, as well as which jurisdiction's law would apply to most disputes. See In re SPhinX, Ltd., 351 B.R. 103, 117 (Bankr. S.D.N.Y. 2006), aff'd, 371 B.R. 10 (S.D.N.Y. 2007). In addition, courts have considered any relevant activities, including liquidation activities and administrative functions. See Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127, 137 (2d Cir. 2013). Courts may also consider the situs of the debtor's "nerve center," including the location from which the debtor's "activities are directed and controlled, in determining a debtor's COMI." Id. at 138. "[R]egularity and ascertainability" by creditors are also important factors in the COMI analysis. Id.
Section 1517 of the Bankruptcy Code provides that, subject to section 1506, "an order recognizing a foreign proceeding shall be entered" if the proceeding qualifies as a foreign main or nonmain proceeding, the foreign representative is "a person or body," and the petition itself complies with the evidentiary requirements set forth in section 1515. Section 1506 states 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."
If a U.S. bankruptcy court recognizes a foreign main proceeding under chapter 15, section 1520(a)(1) of the Bankruptcy Code provides that actions against the foreign debtor or "property of the debtor that is within the territorial jurisdiction of the United States" are stayed under section 362―the Bankruptcy Code's "automatic stay."
Following recognition of a foreign main or nonmain proceeding, the bankruptcy court may also provide "additional assistance" to a foreign representative. This can include injunctive relief or authority to distribute the proceeds of all or part of the debtor's U.S. assets. However, under section 1507(b), in granting such relief, the court must conclude, "consistent with the principles of comity," that such assistance will reasonably ensure, among other things, the just treatment of creditors and other stakeholders, the protection of U.S. creditors against prejudice and inconvenience in pursuing their claims in the foreign proceeding, and the prevention of fraudulent or preferential dispositions of the debtor's property.
The OAS Group is a construction, engineering, and infrastructure investment enterprise headquartered in Brazil, with projects located throughout Latin America, the Caribbean, and Africa. The parent company of the OAS Group is OAS. Its network of subsidiaries and affiliates comprises both engineering and financing companies, including financing subsidiary OAS Investments GmbH ("OAS Investments"), which maintains its registered office in Vienna, Austria.
In 2012 and 2014, OAS Investments issued $875 million in notes due in 2019 (the "2019 Notes"). The 2019 Notes, which are governed by New York law, are guaranteed by OAS and two affiliates, Construtora OAS S.A. ("Construtora") and OAS Investimentos S.A. ("Investimentos").
OAS is one of the many companies implicated in "Operação Lava Jato" ("Operation Carwash"), a government anti-corruption investigation in Brazil involving Petrobras—the state-owned oil company—and certain of its contract counterparties. In November 2014, Petrobras announced that it was temporarily suspending the ability of 23 companies, including the OAS Group entities, to compete for new contracts. This development and a general slowdown in the Brazilian economy created liquidity and credit difficulties for the OAS Group.
In documents later filed in various courts, certain holders of the 2019 Notes (the "2019 Noteholders") alleged that, in December 2014, OAS engaged in a series of transactions which were fraudulent or otherwise impaired their ability to collect on the 2019 Notes. OAS Investments defaulted on the 2019 Notes shortly after the challenged transactions occurred. The 2019 Noteholders commenced litigation in New York state and U.S. federal court, alleging, among other things, that the transactions were fraudulent.
On March 31, 2015, OAS, Construtora, OAS Investments, and certain other OAS affiliates filed for bankruptcy protection in Brazil. In its April 1, 2015, order approving commencement of the joint reorganization proceedings, the Brazilian bankruptcy court observed that, although Brazil has not yet adopted the Model Law, the COMI of OAS is Brazil, and the remaining debtors, including those incorporated abroad, are part of the same economic group controlled from Brazil.
The 2019 Noteholders asked the Brazilian court to administer the cases of each debtor separately, arguing that joint administration and/or consolidation of the cases would be prejudicial. The court denied the request. That ruling was affirmed by an appellate court, which noted that the challenge was premature because the debtors had not yet proposed a plan, no creditors' meeting had been convened, and the bankruptcy court could still modify its order after examining the debtors' affairs.
In April 2015, OAS's board of directors granted Renato Fermiano Tavares ("Tavares") power of attorney to represent the debtors in connection with their Brazilian proceedings. The OAS board also appointed Tavares as the debtors' attorney and agent for the purpose of seeking relief under chapter 15.
Tavares filed petitions in the U.S. bankruptcy court in April 2015 that sought recognition of the Brazilian reorganization cases of OAS, Construtora, and OAS Investments as "foreign main proceedings" under chapter 15. The petitions were accompanied by a motion to enjoin the state and federal court litigation commenced by the 2019 Noteholders.
Opposing recognition, the 2019 Noteholders argued that: (i) Tavares was not a qualified foreign representative; (ii) the Brazilian proceeding of OAS Investments should not be recognized under chapter 15 because the company's COMI is not in Brazil, but in Austria; and (iii) recognition should be denied because certain aspects of Brazilian bankruptcy law, or the Brazilian bankruptcy cases themselves, are "manifestly contrary to public policy."
The Bankruptcy Court's Ruling
Foreign Representative Need Not Be Judicially Appointed
The bankruptcy court ruled that Tavares is a valid "foreign representative" for purposes of chapter 15 of the Bankruptcy Code. Adopting the reasoning of the Fifth Circuit Court of Appeals in Ad Hoc Grp. of Vitro Noteholders v. Vitro S.A.B. de C.V. (In re Vitro S.A.B. de C.V.), 701 F.3d 1031 (5th Cir. 2012), the OAS court rejected the argument that Tavares had to be authorized by a Brazilian court, rather than a debtor's board of directors, to qualify as a foreign representative. Although section 101(24) of the Bankruptcy Code provides that a foreign representative must be "authorized in a foreign proceeding," the bankruptcy court, like the Fifth Circuit in Vitro, concluded that the phrase is ambiguous and could be read to mean "authorized in the context of a foreign proceeding." The OAS court also noted that, in an unpublished ruling, the bankruptcy court in In re Compania Mexicana de Aviacion, S.A. de C.V., No. 10-14182 (MG) (Bankr. S.D.N.Y. Nov. 8, 2010), held that a Mexican corporation could authorize a person to act as its foreign representative in a chapter 15 case because, under Mexican law, the debtor essentially acted as a debtor-in-possession.
Foreign Representative Duly Qualified and Authorized to Act on Debtors' Behalf
The court rejected the argument that the foreign representative must be authorized by the foreign court to administer the assets and affairs of the debtors. Neither the Bankruptcy Code nor the Model Law, the court noted, explains what it means to "administer the reorganization or the liquidation of the debtor's assets or affairs," as required by section 101(24). However, the Guide to Enactment of the Model Law on Cross-Border Insolvency (the "UNCITRAL Guide") states that the "foreign representative may be a person authorized in the foreign proceeding to administer those proceedings, which would include seeking recognition, relief and cooperation in another jurisdiction." Tavares, the court explained, was authorized by the debtors' board to represent the debtors and act as their agent in administering their reorganization in the Brazilian proceedings. He was also authorized to exercise the authority available to a foreign representative under chapter 15. Thus, the court ruled that Tavares had the powers necessary to qualify as the OAS debtors' foreign representative.
OAS Investments' COMI Is in Brazil
The bankruptcy court found that OAS Investments' COMI is in Brazil. Initially, the court acknowledged that "the COMI analysis when applied to a special purpose financing vehicle proves less straightforward than the typical case." Although the COMI of OAS Investments was presumed to be in Austria, where it was incorporated, the evidence showed that the company maintains only a post office box there and does not conduct business, own assets, have a physical location, or employ anyone in Austria. Also, the company's predominant creditors are the 2019 Noteholders, which are located worldwide.
"Having issued the 2019 Notes," the court wrote, "OAS Investments had no other business except to pay them off." Moreover, the only source of repayment to satisfy those obligations must come from the Brazilian proceedings. Consistent with the legitimate expectation of its creditors, the court found that OAS Investments' "nerve center" is Brazil and that the company's COMI was located in Brazil when Tavares filed its chapter 15 petition.
Recognition Not Manifestly Contrary to Public Policy
Perhaps most important, the court found that Brazilian insolvency law and the Brazilian proceedings are not manifestly contrary to U.S. public policy. The court explained that both applicable precedent and resources interpreting a corresponding provision in the Model Law suggest that the public-policy exception set forth in section 1506 of the Bankruptcy Code should be invoked only under exceptional circumstances (citing In re Fairfield Sentry Ltd., 714 F.3d 127 (2d Cir. 2013), and UNCITRAL Guide ¶ 104). U.S. lawmakers recognized this idea in enacting chapter 15, noting in the legislative history that "[t]he word 'manifestly' in international usage restricts the public policy exception to the most fundamental policies of the United States." H.R. Rep. No. 109-31, pt. 1, at 109 (2005).
Rejecting the 2019 Noteholders' arguments in this regard, the court ruled that objections based on, among other things, "speculation" that the Brazilian court "will approve a plan or plans that permit substantive consolidation, unfair distributions or the elimination of creditor fraudulent transfer claims are premature."
Also, the court explained, having participated in the Brazilian bankruptcy cases, the 2019 Noteholders received due process in Brazil. Furthermore, they will have an opportunity to object to any plan proposed in the Brazilian cases and may challenge any attempt to enforce the terms of a plan in the U.S.
According to the court, the practice in Brazil in which opposing parties meet ex parte with a Brazilian judge is not manifestly contrary to the public policy of the U.S., which recognizes exceptions to the general rule forbidding ex parte communications.
Finally, the bankruptcy court noted, even a "definitive" substantive consolidation order is not manifestly contrary to U.S. law because the remedy is expressly authorized under U.S. law. "Although Brazilian law may impose different requirements for substantive consolidation," the court wrote, "the different standards, standing alone, do not signify that Brazilian Bankruptcy Law is manifestly contrary to our own public policy." The only requirement is that the foreign law must be "substantially similar and not repugnant to United States law" (quoting In re Compania de Alimentos Frago, S.A., 376 B.R. 427, 437 (Bankr. S.D.N.Y. 2007)).
The ruling in OAS is not the end of the story for OAS's ongoing disputes with the 2019 Noteholders. In accordance with the court's ruling, the 2019 Noteholders are, among other things, free to renew their complaint that recognition of any plan which substantively consolidates the OAS debtors' estates would be manifestly contrary to public policy.
In addition, recognition of OAS's Brazilian insolvency proceedings does not end the ongoing state court litigation commenced by the 2019 Noteholders against OAS and certain affiliates. The recognition order (as well as the automatic stay) applies only to OAS entities for which chapter 15 petitions were filed—certain OAS Group defendants in the state court litigation are not chapter 15 debtors.
The significance of the decision lies principally in its message that foreign bankruptcy proceedings (and the laws governing them) need not be identical to their U.S. counterparts in order to qualify for chapter 15 relief.
Jones Day publications should not be construed as legal advice on any specific facts or circumstances. The contents are intended for general information purposes only and may not be quoted or referred to in any other publication or proceeding without the prior written consent of the Firm, to be given or withheld at our discretion. To request reprint permission for any of our publications, please use our "Contact Us" form, which can be found on our website at www.jonesday.com. The mailing of this publication is not intended to create, and receipt of it does not constitute, an attorney-client relationship. The views set forth herein are the personal views of the authors and do not necessarily reflect those of the Firm.