The Enforcement of Consensual Foreign Plans of Reorganization in Chapter 15

• Jurisdiction: United States,Federal
• Publication year: 2019
• Citation: Vol. 35 No. 1

The Enforcement of Consensual Foreign Plans of Reorganization in Chapter 15

Thiago Braga Junqueira

THE ENFORCEMENT OF CONSENSUAL FOREIGN PLANS OF REORGANIZATION IN CHAPTER 15

Thiago Braga Junqueira^*

ABSTRACT

When creditors consent to a plan of reorganization, an auxiliary court can avoid the difficult challenge of balancing between accommodating foreign insolvency regimes and respecting the substantive protections offered creditors under domestic law. Different insolvency regimes use different benchmarks to assess whether creditors have consented to a plan. Some require simple majorities, while others require supermajorities. This Article argues, however, that, within broad parameters, these variations should not affect the deference that these plans should be given. Voting thresholds stand on a different footing than substantive protections such as the absolute priority rule. A plan of reorganization deemed consensual in a foreign jurisdiction should be respected under chapter 15 even if the deliberation process does not meet the supermajority thresholds the U.S. Bankruptcy Code establishes.

[Page 82]

Introduction...............................................................................................82

I. Relief under a Chapter 15 Case....................................................83

A. The Model Law and Relief.......................................................... 83
B. The Interplay Between § 1521 and § 1507 ................................. 88
C. The Enforcement of a Foreign Plan of Reorganization Confirmation Order.................................................................... 90

II. The Absolute Priority Rule and the Consensual Threshold 91
III. The Conflict Of Rules in Cross-Border Insolvency................97

A. Supermajority Voting and Corporate Reorganizations ............ 100
B. The Supermajority Threshold in the Context of Cross-Border Insolvency................................................................................. 108

Conclusion.................................................................................................109

INTRODUCTION

Chapter 15 of the Bankruptcy Code allows representatives of debtors that have obtained insolvency relief in a foreign jurisdiction to secure the help of bankruptcy courts in this country. The foreign representative typically asks the bankruptcy judge to enforce an order entered by a court in the foreign main proceeding. Chapter 15 generally allows bankruptcy courts to enforce those orders even if the relief would not have been available had the case originally been brought in the United States. Courts, however, have the discretion to deny such relief when doing so would violate privacy or due process rights or fundamental values embedded in the Bankruptcy Code itself.

The absolute priority rule is one of the pillars of modern reorganization law.¹ Each class of creditors has the right to insist upon being paid in full before anyone junior may receive anything. It remains an open question whether a bankruptcy court should respect plans of reorganization confirmed in foreign jurisdictions whose bankruptcy regimes do not insist on absolute priority. There is a fundamental tension between the core protection United States bankruptcy law affords creditors and the efficiencies that arise from respecting the insolvency regimes of other countries. Resolving this tension is hard.

But a chapter 11 plan can be consensually confirmed over the objection of dissenting creditors even if it violates the absolute priority rule as long as a supermajority of the affected class votes in favor of it. Consensual chapter 11

[Page 83]

plans that depart from absolute priority are commonplace. In some cases, a foreign plan that does not comply with the absolute priority rule is also arrived at consensually. Foreign jurisdictions similarly allow consensual departures from absolute priority, but sometimes require only a simple majority. This Article shows that deferring to a foreign jurisdiction in such a case is straightforward. No foundational bankruptcy policy is implicated when a U.S. court defers to a foreign jurisdiction's threshold for assessing consent.

The rules for assessing consent among creditors stand on an altogether different footing than the absolute priority rule itself. The absolute priority rule is an architectural feature of United States bankruptcy law. It has existed for nearly eighty years, and its origins stretch back into the nineteenth century.² By contrast, the current rules governing a waiver of absolute priority emerged only with the Bankruptcy Reform Act in 1978. No strong bankruptcy policy lies behind using a supermajority rather than some lower threshold.

In this respect, the supermajority requirement in chapter 11 lacks the same normative underpinning as, for example, the requirement of unanimity for most criminal convictions. Because no strong bankruptcy policy stands behind the voting thresholds, courts should defer to principles of comity when a plan has gained the support of creditors as measured by the foreign jurisdiction's rules, even if it has not gained such support to the same extent required under the chapter 11 voting thresholds.

Parts I and II of this Article set out, respectively, the structure of relief under chapter 15 and the absolute priority rule under the Bankruptcy Code. Part III reviews the relevant caselaw and presents an approach for an ancillary court to deal with different consensual approval thresholds. A short conclusion follows.

I. RELIEF UNDER A CHAPTER 15 CASE

A. The Model Law and Relief

The United Nations Commission on International Trade Law ("UNCITRAL") adopted the Model Law on Cross-Border Insolvency ("Model Law")³ to allow courts to provide relief for debtors whose affairs crossed

[Page 84]

international boundaries. It fills the gap that necessarily exists when it is not yet possible to implement an international insolvency regime that is uniform across jurisdictions.⁴

Chapter 15 under Title 11 of the United States Code ("Bankruptcy Code") gives a court the power to grant relief at the request of a foreign representative. The request usually seeks to enforce an order already rendered by a bankruptcy court in the foreign jurisdiction using that jurisdiction's own insolvency rules, rather than a topic that the court must assess as a matter of first impression.

Adopted by the UNCITRAL in 1997, the Model Law consists of a proposed uniform system for cooperation in international insolvency cases.⁵ Designed to provide effective mechanisms for dealing with cross-border insolvency cases, the Model Law promotes legal certainty, cooperation between courts and authorities in different jurisdictions, and the fair and efficient administration of cross-border cases.⁶ More than forty jurisdictions have adopted its terms.⁷ The Model Law brings about coordination by allowing the court that oversees the

[Page 85]

main insolvency proceeding to render decisions that will be enforced in the ancillary court, where a debtor's assets or creditors are located.⁸

Chapter 15 implements much of the Model Law's form and substance. Congress enacted it as part of the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005.⁹ Divided into five subchapters, chapter 15 comprises the general provisions and rules governing (a) the access of foreign representatives and creditors to local courts; (b) the recognition of a foreign proceeding and relief; (c) cooperation with foreign courts and foreign representatives; and (d) concurrent proceedings.

Section 1515 provides that a foreign representative¹⁰ may apply to the court to recognize a foreign proceeding.¹¹ An order recognizing the foreign proceeding must be entered if (a) the proceeding qualifies as a foreign main proceeding¹² or a foreign non-main proceeding;¹³ (b) the foreign representative is properly appointed; and (c) the petition containing the request meets the respective legal requirements.¹⁴

Where relief is urgently needed to protect the assets of the debtor or the interests of creditors, § 1519 allows a court to grant relief requested by the foreign representative on a provisional basis even before the court recognizes the foreign proceeding. Section 1519(a) provides that this provisional relief may

[Page 86]

include a stay of execution against a debtor's assets. In addition, it may entrust the administration or realization of the assets to the foreign representative or other person authorized by the court. The court may also restrain the debtor's ability to dispose of its assets. Moreover, a court may examine witnesses, take evidence, or deliver information about a debtor's assets, affairs, rights, obligations, or liabilities. Finally, the court may, with some exceptions, grant the relief that is ordinarily available to a trustee.¹⁵

Most importantly, recognizing a foreign main proceeding entails certain automatic effects on the debtor's property in the United States. Section 1520(a) establishes that the Bankruptcy Code's adequate protection and automatic stay provisions apply in proceedings brought under chapter 15. The rules governing the use, sale, or lease of property and post-petition transactions will also govern a debtor's property rights. Further, the foreign representative may operate a debtor's business as the trustee would under the Bankruptcy Code. Finally, the limitations regarding the attachment of a security interest in property acquired post-petition apply automatically.¹⁶

Upon recognizing a foreign main or non-main proceeding, a court also enjoys extensive latitude to grant relief the foreign representative requests.¹⁷ Section 1521(a) authorizes relief necessary to achieve chapter 15's purposes and to protect the debtor's assets or the creditor's interest. Such relief might complement the automatic relief granted under § 1520(a) or extend the provisional relief granted under § 1519. A court may also examine witnesses, take evidence...