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Business Restructuring Review

Three-Year Delay in Appointing Foreign Representative Not Fatal to Chapter 15 Recognition

In In re PT Bakrie Telecom Tbk, 601 B.R. 707 (Bankr. S.D.N.Y. 2019), the U.S. Bankruptcy Court for the Southern District of New York provided a primer on several important issues that a court may have to consider in ruling on a petition for recognition of a foreign bankruptcy proceeding under chapter 15 of the Bankruptcy Code. These include the requirement that a foreign debtor have property in the United States before being eligible for chapter 15, the rules regarding the appointment of a "foreign representative" for the debtor, what qualifies as a "collective proceeding" for the purpose of chapter 15 recognition, and the "public policy" exception to recognition. The court ultimately denied a noteholder group's motion for summary judgment denying recognition of a debtor's Indonesian restructuring proceeding because of questions of fact regarding all of these issues.

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 Second Circuit ruled that section 109(a) applies in cases under chapter 15 of the Bankruptcy Code. For purposes of section 109(a), "property in the United States" 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 United States, and contract rights governed by U.S. law, including 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 United States of both a foreign "main" proceeding—a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))—and foreign "non-main" proceedings, which are pending 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).

A "collective proceeding" is a proceeding that considers the rights and obligations of creditors generally, rather than a proceeding instituted for the benefit of a single creditor or class of creditors. See Armada (Singapore) Pte Ltd. (In re Ashapura Minechem Ltd.), 480 B.R. 129, 136 (S.D.N.Y. 2012); British American, 425 B.R. at 902; In re Betcorp Ltd., 400 B.R. 266, 281 (Bankr. D. Nev. 2009).

Such a proceeding "contemplates the consideration and eventual treatment of claims of various types of creditors, as well as the possibility that creditors may take part in the foreign action." British American, 425 B.R. at 902. A collective proceeding is "designed to provide equitable treatment to creditors, by treating similarly situated creditors in the same way, and to maximize the value of the debtor's assets for the benefit of all creditors." Ashapura, 480 B.R. at 136–37 (citation omitted). Other hallmarks of a collective proceeding include adequate notice to creditors, provisions for the distribution of assets in accordance with statutory priorities, and a mechanism for creditors to seek court review of developments. Id. at 137; ABC Learning Centers Ltd., 445 B.R. 318, 328-29 (Bankr. D. Del. 2010); British American, 425 B.R. at 902.

In assessing whether a proceeding is collective, a court should examine "both the law governing the foreign action and the parameters of the particular proceeding as defined in, for example, orders of a foreign tribunal overseeing the action." British American, 425 B.R. at 902.

Section 1509(b) provides that, if the U.S. bankruptcy court recognizes a foreign proceeding, the foreign representative may apply directly to another U.S. court for appropriate relief, and a U.S. court "shall grant comity or cooperation to the foreign representative."

In addition, after recognition of a foreign proceeding, section 1521(a) authorizes the bankruptcy court, upon the request of the foreign representative, to grant a broad range of 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 proceeding. Such post-recognition relief "is largely discretionary and turns on subjective factors that embody principles of comity." In re Bear Stearns High-Grade Structured Credit Strategies Master Fund, Ltd., 329 B.R. 325, 333 (S.D.N.Y. 2008).

However, 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."

Similar to section 1521(a), section 1507 of the Bankruptcy Code states that, post-recognition, the court may provide "additional assistance" to a foreign representative under the Bankruptcy Code "or under other laws of the United States." In determining whether to provide such relief, the court must consider whether such assistance, "consistent with the principles of comity," will reasonably ensure, among other things: (i) 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.

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."

In PT Bakrie, the bankruptcy court considered several of the requirements for chapter 15 recognition, including: (i) the U.S. property requirement in section 109(a); (ii) the rules governing the appointment of a foreign representative under section 101(24) and 1515(a); and (iii) the requirements that a foreign proceeding be collective under section 101(23) and not manifestly contrary to U.S. public policy in accordance with section 1506.

PT Bakrie

PT Bakrie Telecom Tbk ("BTEL") is an Indonesian telecommunications company. Prior to 2013, BTEL guaranteed $380 million of senior unsecured notes issued by a subsidiary, which loaned the proceeds of the note offering to BTEL. The note indenture is governed by New York law and contains a New York forum selection clause. The guarantee, which provides for direct recourse against BTEL as guarantor in the event of default, is also governed by New York law.

BTEL and the issuer subsidiary defaulted on the notes beginning in 2013. Three noteholders sued BTEL and certain other defendants in a New York state court in September 2014 seeking to collect on the notes and the guarantee.

In October 2014, another BTEL creditor commenced a suspension of payments proceeding on BTEL's behalf in Indonesia's Central Jakarta Commercial Court. After the Jakarta court appointed administrators in the proceeding, the requisite majority of BTEL's creditors (a majority in number and two-thirds in value) voted in favor of BTEL's restructuring plan, which the Jakarta court approved in December 2014. The noteholders' claims were not recognized in the proceeding because BTEL listed the issuer subsidiary, rather than the noteholders or the indenture trustee, as its creditor with respect to the $380 million debt. The noteholders did not appeal or otherwise challenge the confirmation of BTEL's restructuring plan. An appeal of the order approving the plan filed by a government ministry was denied by the Supreme Court of Indonesia, after which the Jakarta proceeding was concluded.

In September 2014, the noteholders filed a second lawsuit in New York state court against BTEL and certain other defendants alleging fraud and other tortious conduct in connection with the note offering. The two suits were consolidated, and in the consolidated litigation, the state court ruled in favor of the noteholders on the breach of contract and fraud claims but dismissed certain other claims. That ruling was affirmed in part on appeal, and the case was remanded to the lower court for additional discovery.

In December 2017—three years after confirmation of BTEL's restructuring plan—BTEL executed a declaration appointing Jastiro Abi ("Abi"), a director of BTEL and the issuer subsidiary at the time of the note offering, as its foreign representative for the purpose of seeking recognition of the Jakarta proceeding under chapter 15. Abi filed a chapter 15 petition in the Southern District of New York in January 2018. Shortly afterward, BTEL and the other defendants in the state court litigation stipulated to the entry of a judgment in favor of the noteholders in the amount of approximately $160 million. However, the noteholders agreed not to enforce the judgment pending resolution of BTEL's chapter 15 case.

The noteholders moved for summary judgment denying recognition of the Jakarta proceeding under chapter 15. They argued that: (i) BTEL failed to satisfy the Bankruptcy Code's U.S. property requirement; (ii) the appointment of Abi as BTEL's foreign representative was invalid; and (iii) recognition of BTEL's chapter 15 petition must be denied because the Jakarta proceeding was not collective, and recognition would be manifestly contrary to U.S. public policy.

The Bankruptcy Court's Ruling

The bankruptcy court denied the motion for summary judgment.

Addressing the U.S. property requirement under section 109(a), the bankruptcy court explained that the requirement "is satisfied by maintaining even a nominal amount of property in the United States." Here, citing Bereau Capital and similar rulings, the court concluded that a note indenture subject to New York law and containing a New York forum selection clause constituted property in the United States sufficient to satisfy the requirement. The court rejected the noteholders' argument that BTEL did not satisfy section 109(a) because it had disregarded and repudiated its New York law-governed obligations. In doing so, the court declined "to add subjective requirements to the straightforward property requirement found in Section 109."

The noteholders also argued that the court should refuse to recognize the Jakarta proceeding because Abi, having been appointed three years after the conclusion of the Jakarta proceeding, was not a "foreign representative" within the meaning of section 101(24), which requires the representative to be appointed "in" a foreign proceeding. They further contended that the appointment was invalid under Indonesian law because BTEL's board of directors did not have the authority to appoint Abi unilaterally without the consent of BTEL's court-appointed administrators.

The bankruptcy court rejected both arguments. Initially, it explained that the requirement that a foreign representative be authorized in a foreign proceeding "is not an onerous one." The court wrote that it "is unaware of any authority explicitly precluding the appointment of a foreign representative for purposes of pursuing Chapter 15 relief after the foreign proceeding has been closed … [and] given the policy underlying Chapter 15, it would be hard to imagine why such action would be categorically prohibited." In fact, the court emphasized, in each of the other three cases that it had previously granted chapter 15 recognition to a similar Indonesian restructuring, the proceeding had been formally closed before a foreign representative had been appointed. Even so, the court concluded that, although the delay in seeking chapter 15 relief after a foreign proceeding has been closed alone does not preclude a finding that a foreign representative was properly appointed, the significance of the delay in this case was a matter for trial.

With respect to the second argument, the bankruptcy court noted that, in Ad Hoc Grp. Of Vitro Noteholders v. Vitro, S.A.B. de C.V. (In re Vitro, S.A.B. de C.V.), 470 B.R. 408 (N.D. Tex. 2012), aff'd, 701 F.3d 1031 (5th Cir. 2012), the courts rejected the same argument regarding a foreign representative appointed by the debtor's board of directors without the consent of a court-appointed administrator. According to the bankruptcy court, the "ultimate issue"—to be decided at trial—will be whether Abi's appointment comported with sections 101(24), 1515, and 1517 of the Bankruptcy Code, rather than Indonesian law.

The bankruptcy court also denied summary judgment on the assertion that it should refuse to recognize the Jakarta proceeding because it was not "collective." The noteholders argued that, because the issuer subsidiary, rather than the indenture trustee, was permitted to cast a vote on BTEL's restructuring plan, BTEL manipulated the proceeding to orchestrate the failure to recognize their claims. More specifically, the noteholders contended, BTEL misled the administrators and the Jakarta courts by failing to include the indenture trustee and the noteholders among its creditors of record.

The bankruptcy court noted evidence that: (i) the noteholders and the indenture trustee were permitted to present their views to the administrators and the Jakarta courts; (ii) Indonesian law provides for additional procedural and substantive safeguards; and (iii) the Jakarta proceeding and BTEL's plan restructured claims of various types of creditors, all of which suggested that the Jakarta proceeding was "collective" within the meaning of section 101(23) of the Bankruptcy Code. This evidence and questions of fact involving the administrators' consideration of the noteholders' claims, the independence of the administrators and the Jakarta court, and whether BTEL's restructuring plan would have been rejected if the indenture trustee had been permitted to vote, led the bankruptcy court to deny the noteholders' motion for summary judgment.

Finally, the bankruptcy court denied summary judgment on the noteholders' argument based on the public policy exception in section 1506, noting that the exception is "narrowly construed." According to the court, the key determination under section 1506 is not whether the acts of a foreign court are proper, but whether the procedures involved meet U.S. fundamental standards of fairness. On the basis of its previous discussion of the factual questions unresolved in this case, the court ruled that summary judgment was inappropriate on this issue.

Outlook

Although PT Bakrie involved a motion for summary judgment rather than a ruling on the merits, the decision illustrates several important aspects of the analysis involved in determining whether a U.S. bankruptcy court should recognize a foreign proceeding under chapter 15. One notable conclusion by the court is that merely because a foreign proceeding has concluded does not prevent the later appointment of a foreign representative. An examination of all of the issues highlighted by PT Bakrie entails a detailed factual analysis and careful application of the provisions of chapter 15 consistent with its underlying principles and purpose in providing assistance to foreign tribunals overseeing cross-border bankruptcy cases.

A version of this article was published in the Lexis Practice Advisor. It has been reprinted here with permission.

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