CHAPTER 3, H. Asymmetric Discovery in Chapter 15

• Jurisdiction: United States

H. Asymmetric Discovery in Chapter 15

ABI Journal

September 2019

Patricia B. Tomasco

Quinn Emanuel Urquhart & Sullivan, LLP

Houston, Texas

Sara C. Clark

Quinn Emanuel Urquhart & Sullivan, LLP

Houston, Texas

More than 14 years on, chapter 15 remains relatively underutilized, with only 86 cases filed in 2017 and 28 in the first half of 2018.¹ Practitioners might find the option more attractive with a better understanding that chapter 15 can be a powerful — but underexploited — tool that international debtors can leverage to conduct discovery.

Overview

Congress enacted chapter 15 to promote the fair and efficient administration of international bankruptcies, as well as to protect and maximize of the foreign debtor's assets.² The availability of broad discovery under § 1521 of the Bankruptcy Code enhances these goals but might be overlooked by practitioners.

Recognition as Foreign Main or Non-Main Proceeding

Without repeating the chapter 15 procedure in full, some overview of the process will set the scene. The petitioned court must grant recognition if the petition meets the requirements set out in § 1515.³ Where possible, debtors should seek recognition as a foreign main proceeding, not only because of the automatic relief provided to a debtor in a foreign main proceeding, but because of the limitations that a non-main proceeding imposes on the discovery available to a debtor.⁴

Relief

Provisional Relief: A chapter 15 petition does not impose an automatic stay, but a foreign debtor may petition the court for temporary relief under § 1519⁵ pending a decision on recognition.⁶ The most critical of the available remedies is a stay of execution against the debtor's assets, but § 1519 also includes pre-recognition discovery.

Courts can grant pre-recognition relief, including pre-recognition discovery, only if the foreign debtor satisfies the requirements of a preliminary injunction — namely, the likelihood of success on the merits⁷ and threat of irreparable harm.⁸ This exacting standard does not apply to post-recognition discovery.⁹

Few foreign debtors use pre-recognition discovery. Because decisions on recognition are made quickly (courts are instructed to decide recognition "at the earliest possible time"¹⁰), usually relatively little harm ensues from waiting for recognition. Thus, while pre-recognition discovery is, in theory, as broad as post-recognition discovery, pre-recognition discovery more often focuses on issues directly relevant to recognition rather than discovery of assets, misconduct or potential claims.¹¹

Post-Recognition Relief: Whether a proceeding is main or non-main significantly impacts the availability of the "appropriate relief provided by § 1521.¹² This relief encompasses much of what is automatically available to a debtor in a foreign main proceeding, as well as discretionary relief, including discovery.¹³

For example, chapter 15 limits the scope of discretionary relief when the underlying proceeding is non-main. Debtors must show that any discretionary relief relates to either (1) assets that should be administered in a non-main proceeding, or (2) information required in the non-main proceeding.¹⁴ In the discovery world, these conditions significantly limit the scope of discovery that a foreign representative can seek under § 1521.

Discovery Under § 1521(a) vs. Rule 2004

Discovery in a chapter 11 case proceeds under Bankruptcy Rule 2004,¹⁵ but discovery in a chapter 15 foreign main proceeding falls under § 1521(a)(4). Section 1521 allows the court to authorize examination of witnesses and production of documents. This aspect of chapter 15 provides a unique avenue for foreign debtors to investigate potential claims of the estate.

Asymmetric Discovery

Chapter 15 discovery, like all discretionary relief under § 1521, remains one-sided, as it can only be granted at the request of the foreign representative.¹⁶ The few courts that have been presented with the issue have denied requests to take discovery made by parties other than the foreign representative.

For example, in In re China Medical Technologies,¹⁷ the court denied a shareholder's request to take discovery from the foreign representative¹⁸ and explained that "the authority under 1521 and 1507 gives benefits to foreign representatives that, by their terms, don't extend to other parties-in-interest."¹⁹ In In re Perforadora Oro Negro, S. de R.L. de CV, the court also denied a request by the foreign debtors' bondholders to take affirmative discovery from the foreign representative, although without elaborating on its reasoning.²⁰

Only in cases concerning adequate-protection challenges have courts authorized discovery from the foreign debtor. For example, in In re SNP Boat Serv. SA, the court authorized discovery of the foreign debtor on the narrow issue of whether entrustment of maritime assets could be provided with "sufficient protection" of a creditor, and whether the foreign proceeding even provided due process.²¹

Scope of Chapter 15 Discovery

Courts interpret Bankruptcy Rule 2004 to authorize extremely "broad and unfettered" discovery, "in the nature of a fishing expedition" into the "nature and extent of the bankruptcy estate" and to "discover ... assets, examin[e] transactions, and determin[e] when wrongdoing has occurred."²² Section 1521 defines the scope of discovery in chapter 15 slightly differently than Rule 2004, allowing discovery of "information concerning the debtor's assets, affairs, rights, obligations or liabilities."²³ In practice, these nuanced interpretations prove to be a distinction without a difference...