AMERICAN COLLEGE OF BANKRUPTCY/ INTERNATIONAL INSOLVENCY INSTITUTE USE OF CHAPTER 11 BY FOREIGN DEBTORS. April 10, 2018 ZACK A.

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1 AMERICAN COLLEGE OF BANKRUPTCY/ INTERNATIONAL INSOLVENCY INSTITUTE USE OF CHAPTER 11 BY FOREIGN DEBTORS April 10, 2018 ZACK A. CLEMENT, PLLC Retired U.S. Bankruptcy Judge ALLAN L. GROPPER Southern District of New York 1

2 1. WHY WOULD A FOREIGN COMPANY USE CHAPTER 11? Favorable features of Chapter 11 together with the broad reach of U.S. Bankruptcy Law. A. Ability of debtor management to remain in possession B. Possibility of reorganization with a discharge rather than liquidation C. Ability to bind holdouts under a pre-negotiated plan of reorganization D. Ability to stretch out secured debt and convert unsecured debt to equity E. Provisions permitting priority post-petition ( DIP ) financing F. Special provisions relating to executory contracts and leases G. Strong avoiding powers H. US law purports to address assets and creditors of the debtor wherever located. But see discussion below about the extraterritorial effect of the U.S. automatic stay. I. In any event, location of many of the principal financial creditors in the United States, subject to U.S. jurisdiction. 2

3 2. SUFFICIENCY OF CONNECTIONS WITH THE UNITED STATES A. Bankruptcy Code Sections 301 and 303 Who may commence a case? 1. Section 301 provides that voluntary cases can be commenced by an entity that may be a debtor 2. Section 303 provides that involuntary cases can be commenced by three creditors with non contingent, undisputed claims of at least $15, Chapter 15 Section 1511 provides that a foreign representative in a case recognized under Chapter 15 may file a plenary case under either Section 301 or 303 (inconsistent with Section 303?) B. Bankruptcy Code Section 109 Who May Be a Debtor 1. Notwithstanding 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 this title. 2. If an entity has a foreign domicile, how much of a place of business does it need to have in the U.S. to be eligible to be a Chapter 11 debtor? 3. If an entity has a foreign domicile and does not have a place of business in the U.S., how much property in the United States is sufficient for the debtor to be eligible for relief under the Bankruptcy Code? 3

4 C. Case law generally supports a literal reading of Section 109 and there has not been a materiality threshold for the amount of property or the size of the office in the United States required to create eligibility for plenary chapter 11 relief. 1. `In re Axona Int l. Credit & Commerce Ltd., 88 B.R. 597 (Bankr. S.D. N.Y. 1988), aff d 115 B.R. 442 (S.D. N.Y.1990) (bank accounts containing approximately $500,000 were sufficient). 2. In re Global Ocean Carriers Ltd., 251 B.R. 31 (Bankr. D. Del. 200) (a few thousand dollars in U.S. bank accounts and the unearned portion of U.S. counsel s retainer were sufficient). 3. In re Aerovias Nacionales De Colombia S.A. Avianca, 303 B.R. 1 (Bankr. S.D. N.Y. 2003) (Bankr. S.D. 4. N.Y. 2003) (28 employees in the U.S. compared to 4000 in Columbia were sufficient). D. Eligibility for plenary relief in a U.S. Chapter 11 case does not, however, end the inquiry. 4

5 3. EXTRATERRITORIAL REACH OF US BANKRUPTCY LAW A. Bankruptcy Code Section 541 defines property of the estate 1. Appears to cover all property of the debtor without limit as to geographic scope 2. The commencement of a case creates an estate. Property of the estate includes the following property, wherever located and by whomever held [with limited exceptions] all legal or equitable interests of the debtor in property as of the commencement of the case B. Similarly, under 28 U.S.C. 1334e, the District Court in which a case under Title 11 is commenced is granted exclusive jurisdiction over all of the property, wherever located, of the debtor as of commencement of the case C. Early lower court cases gave extraterritorial effect to various provisions of the Bankruptcy Code 1. United States Lines, Inc. v. G.A.C. Marine Fuels, Ltd. (In re McLean Industries, Inc.), 76 Bankr. 291 (Bankr. S.D. N.Y. 1987) (Automatic Stay) 2. In re: Deak & Co., Inc., 63 B.R. 422 (Bankr. S.D. NY 1986) (Avoidance Powers) D. Has extraterritoriality survived Supreme Court authority establishing a presumption against extraterritoriality? See, e.g., EEOC v. Arabian Oil Co. and Aramco Services Co., 499 U.S. 244 (1991). 1. [L]ong-standing principle of American law that legislation of Congress unless a contrary intent appears is meant to apply only within the territorial jurisdiction of the U.S. (quoting Foley Bros., Inc. v. Filardo, 336 U.S. 281). 2. Because of the presumption against territoriality, unless the affirmative intention of the Congress is clearly expressed, a Congressional enactment is presumed to be primarily concerned with domestic conditions. 5

6 E. Apparently not according to a number of post 1991 opinions. 1. Nakash v. Zur, 190 B.R. 763 (Bankr. S.D. N.Y. 1996) (the reference to assets wherever held in Section 541 was intended to give Bankruptcy Code s automatic stay exterritorial effect; commencement by Israeli receiver of Israeli bankruptcy proceeding violates the automatic stay) 2. In re Rimsat, 98 F.3d 956 (7th Cir. 1996) (injunction in involuntary Chapter 11 trumps previously filed Nevis receivership) 3. In re Simon, 153 F.3rd 991 (9th Cir. 1998) (extraterritorial effect of discharge injunction) 4. Compare In re Gold & Honey, Ltd., 410 B.R. 357 (Bankr, E.D. N.Y. 2009) (denial of Chapter 15 recognition because Israeli case filed in defiance of U.S. stay). 5. Compare In re Maxwell, 170 B.R. 800 (Bankr. S.D. N.Y. 1994; (aff d, 186 B.R. 807 (S.D. N.Y. 1995); aff d, 93 F.3d 1036 (2nd Cir. 1996) (declining to apply U.S. preference avoidance provisions where foreign jurisdiction had primary interest in the transaction in question) F. More recently, the Supreme Court has put increasing emphasis on limiting the extraterritorial effect of U.S. statutes in the absence of a clear Congressional intent that extraterritorial effect is intended. See Morrison v. Nat l. Australia Bank Ltd., 561 U.S. 247 (2010); Kiobel v. Royal Dutch Petroleum Co., 133 S.Ct (2013) (terms like any and every are not enough to rebut the presumption). G. Whether an application of provisions of the U.S. Bankruptcy Code would actually represent an extraterritorial application of our law has resulted in conflicting authority, particularly in cases seeking to avoid prepetition transactions as preferences or fraudulent conveyances.. Compare French v. Liebmann (In re French), 440 F.3d 145 (4th Cir. 2006), cert. denied, 549 U.S. 815 (2006) (application of avoidance provisions of U.S. law to property of U.S. debtor transferred abroad did not constitute extraterritorial application of U.S. law), with In re Midland Euro Exch., 347 B.R. 708 (Bankr. C.D. Cal 2006) (application was extraterritorial and presumption not rebutted). See also Kismet Acquisition LLC v. Icenhower, 757 F.3d 1044 (9th Cir. 2014) (similar to French) 6

7 H. In SIPC v. Bernard L. Madoff Investment Securities, LLC (In re Madoff Securities), 513 B.R. 222 (S.D.N.Y. 2014) (Rakoff, D.J.), the trustee of the Madoff billion-dollar Ponzi scheme estate sought to recover transfers of property that a foreign feeder fund that had invested its property with Madoff had made to its investors as subsequent transfers avoidable under section 550 of the U.S. Bankruptcy Code. The District Court held that funds transferred from a foreign fund to foreign investors were not subject to the extraterritorial jurisdiction of U.S. bankruptcy court as these transfers were made in a foreign country and that nothing in 550 expressed an intent to authorize extraterritorial application. In the Court s view, section 541, providing for jurisdiction over property of the estate wherever located, does not provide such authority because transferred property does not become property of the estate until it has been recovered (according to Second Circuit authority). The Court also found that a court in the British Virgin Islands, where the feeder fund was located, had determined that the feeder fund could not recover the same transfers under BVI law, and it held that they should also be protected from U.S. avoidance provisions under principles of comity. See also subsequent decisions by the Bankruptcy Court for the Southern District of New York to the same effect. Picard, Trustee for Liquidation of Bernard L.Madoff Inv. Sec. LLC v.bureau of Labor Insurance, Adv. No (SMB), 2016 WL (Bankr. S.D.N.Y. Nov. 22, 2016). 7

8 4. LIMITS TO THE EXTRATERRITORIAL REACH OF US BANKRUPTCY LAW? A. Dismissal for insufficient 109 connections with U.S. Thus not qualified to be a debtor. B. Dismissal Under Section 1112 C. Dismissal under Section 305(a) in deference to foreign proceedings previously or subsequently commenced 1. Dismissal under 305(a)(1) because the interests of creditors and the debtor would be better served. 2. Concepts developed under old Sections 304 that continue under amended Section Dismissal under Section 305(a)(2) because the purpose of chapter 15 would be best served. 8

9 5. LIMITS ON PLENARY JURISDICTION OLD SECTION 304 AND NEW SECTION 305 A. Section 304 was repealed in 2005 and replaced by Chapter 15 B. Section 305 was amended in 2005 to provide for the possibility of abstention when a foreign proceeding has been recognized and the purposes of Chapter 15 would be best served by dismissal or suspension. C. New 305. Abstention. (a) the Court, after notice and a hearing, may dismiss a case under this title, or may suspend all proceedings in a case under this title, at any time if (1) the interests of creditors and the debtor would be better served by such dismissal or suspension; or (2) (A) a petition under section 1514 for recognition of a foreign proceeding has been granted; and (B) the purposes of chapter 15 of this title would be best served by such dismissal or suspension. (b) a foreign representative may seek dismissal or suspension under subsection (a)(2) of this section 9

10 D. Section 305(a)(1) was not changed in 2005 and continues to provide an independent ground to dismiss a case filed in the U.S. concerning a foreign company. 1. In re Globo Communicacoes E Participacoes SA, 317 B.R. 235 (S.D. N.Y. 2004). a. In Globopar, a Brazilian holding company owned television assets in Brazil and had some U.S. subsidiaries. b. It was engaged in negotiations for a consensual restructure. c. One of the creditors who had made strong demands in the restructure negotiations filed an involuntary Chapter 11 case in New York. d. The District Court reversed the Bankruptcy Court s dismissal of the involuntary Chapter 11 and remanded for further consideration of a number of issues presented by 304(a)(1), including: (1) whether there was an ongoing out of court restructuring; (2) whether the petition was filed by a few disgruntled creditors; (3) further analysis of the Court s power over foreign assets; and (4) whether the debtor s and creditors interests would be furthered by dismissal. 10

11 2. In re Compania de Alimentos Fargo, S.A., 376 B.R. 427 (Bankr. S.D. N.Y. 2007) a. In Fargo, the Bankruptcy Court applied Section 305(a)(1) to dismiss an involuntary Chapter 11 case that had been brought in New York against the largest bread maker in Argentina which was already in a bankruptcy case in Argentina. b. Even though the U.S. case was filed after Chapter 15 became effective, the Court never considered whether a foreign debtor had to be recognized in order to move to dismiss. c. The Court cited seven factors to be taken into account in deciding whether to abstain. The court s discretion [to abstain] is generally informed by several factors, including: (1) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court; (2) economy and efficiency of administration; (3) `whether federal proceedings are necessary to reach a just and equitable solution; (4) whether there is an alternative means of achieving an equitable distribution of assets; (5) whether the debtor and the creditors are able to work out a less expensive out-ofcourt arrangement which better serves all interests in the case; (6) whether a non-federal insolvency has proceeded so far that it would be costly and time consuming to start afresh with the federal bankruptcy processes; and (7) the purpose for which bankruptcy jurisdiction has been sought. 11

12 d. The Court then noted that comity is quite important when a foreign insolvency case is already pending. The pendency of a foreign insolvency proceeding alters the balance by introducing considerations of comity into the mix. The Second Circuit, in this regard, has frequently underscored the importance of judicial deference to foreign bankruptcy proceeding. Deference to foreign insolvency proceedings will, in many cases, facilitate equitable, orderly and systematic distribution of the debtors assets. Maxwell Commun. Corp., 93 F.2d at 1048 (quoting Cunard S.S. Co., 773 F.2d at 458); accord J.P. Morgan Chase Bank v. Altos Hornos de Mexico, S.A. de C.V., 412 F.3d 418, 424, (2d Cir. 2005) ( We have repeatedly held that U.S. Courts should ordinarily decline to adjudicate creditor claims that are the subject of a foreign bankruptcy proceeding In such cases, deference to the foreign court is appropriate so long as the foreign proceedings are procedurally fair and, consistent with the principles of Lord Mansfield s holding, do not contravene the law or public policy of the United States. ) e. The Court decided to abstain because it concluded that the Argentine Courts can determine and adjust the parties rights in a fair and equitable manner. f. As to running a parallel Chapter 11 case in the U.S. 1. The Court noted that it would be very difficult to enforce its orders against the company s primary assets in Argentina, especially because there was already an Argentinean insolvency proceeding pending. 2. This appeared to be quite important to the Court. 3. A similar conclusion was reached in Yukos under Section See below. 12

13 6. LIMITS ON PLENARY JURISDICTION IMPACT OFCHAPTER 15 A. There is an explicit limitation on the scope of a U.S. plenary Title 11 proceeding if it is commenced after a foreign main proceeding has previously been recognized under Chapter Section 1528 (Commencement Of A Case Under This Title After Recognition of a Foreign Main Proceeding). After recognition of a foreign main proceeding, a case under another chapter of this title may be commenced only if the debtor has assets in the United States. The effects of such a [plenary U.S.] case shall be restricted to the assets of the debtor that are within the territorial jurisdiction of the United States and, to the extent necessary to implement cooperation and coordination to other assets of the debtor that are within the jurisdiction of the court to the extent that such other assets are not subject to the jurisdiction and control of a foreign proceeding that has been recognized under this chapter. 2. However, relief under Chapter 15 is subject to and must be consistent with the relief granted in a previously filed plenary Title 11 case. Section 1529(1)(a). a. Is this inconsistent with the Section 1528 explicit limitation on a domestic plenary proceeding that is commenced after a foreign main proceeding has been recognized? b. Why a first to file rule? What happened to comity or to the 1525(a) requirement to cooperate with a foreign proceeding to the maximum extent possible? 13

14 B. However, despite 1529(1)(a) s requirement that a later filed Chapter defer to what has been ordered in an earlier filed Chapter 11 case, the 2005 amendment to Section 305(a)(2) now provides an additional basis on which to dismiss a previously filed Chapter 11 case. 1. Amended Section 305(a)(2) provides that: (a) The court, after notice and a hearing, may dismiss a case under this title or may suspend all proceedings in a case under this title, at any time if (A) a petition under section 1515 for recognition of a foreign proceeding has been granted; and (B) the purpose of chapter 15 of this title would be best served by such dismissal or suspension. (b) A foreign representative may seek dismissal or suspension under subsection (a)(2) of this section. 2. Amended Section 305(a)(2) thus provides a general standard to dismiss a plenary U.S. Chapter 11 case ( if the purpose of chapter 15 would be best served ) similar to the facts and circumstances analysis that has been applied under Section 305(a)(1) (see above) and Section 1112 (see below). 3. Must a foreign representative first obtain an order of recognition before it can bring a motion to dismiss? This was not required in In re Compania de Alementos Fargo, S.A., supra. 4. Is it contrary to the purposes of Chapter 15 to accept jurisdiction over solitary nonmain proceedings under the Bankruptcy Code? In a recent decision, the Second Circuit noted the limited purpose of Chapter 15, to provide for the coordination of domestic and foreign proceedings into a single bankruptcy and... [allow] foreign representatives appointed in foreign proceedings to seek recognition of those proceedings in the United States as a means of requesting U.S. assistance in administering the main liquidation. See Trikona Advisors Ltd. v. Chugh, 2017 WL (2d Cir. Jan. 18, 2017) 14

15 In Trikona the Court held that there was no requirement in chapter 15 that recognition for the foreign proceeding be obtained in order for a party to a foreign insolvency proceeding to use a finding in that proceeding in a U.S. lawsuit as preclusive for res judicata or collateral estoppel purposes. The Court therefore left standing a long line of authority that holds that a foreign insolvency case may be given effect in the United States on preclusion grounds or on grounds of comity. See, e.g., JP Morgan Chase Bank v. Altos Hornos de Mexico S.A. de C.V., 412 F.2d 418 (2d Cir. 2005); Cunard Steamship Co. Ltd. v. Salen Reefer Svcs. AB, 773 F.2d 452 (2d Cir. 1985); Oui Fin. LLC v. Dellar, 2013 WL (SDNY Oct. 9, 2013). 15

16 C. Once recognition of a foreign main proceeding is granted, will abstention from an already pending plenary U.S. proceeding be granted on grounds of comity pursuant to Section 305(a)(2)? 1. In re Monitor Single Lift I, Ltd., et al., 381 B.R. 455 Bankr. S.D. N.Y ) a. Monitor Oil PLC (PLC) and two subsidiaries (MSL I and FinCo) commenced chapter 11 cases in New York b. PLC, the parent, was headquartered in London; MLS I was a Cayman corporation headquartered in NY; FinCo was a Delaware corporation with an office in NY c. The debtors supplied oil and gas production support services, focusing on operations in the North Sea d. Cayman Islands insolvency proceedings commenced but not served due to the U.S. automatic stay 16

17 e. Insolvency proceedings in Scotland filed for another subsidiary f. Debtors and second lien creditors (first lien was paid off) supported continuing U.S. chapter 11 proceedings g. Ad Hoc Committee of bondholders opposed continuation of chapter 11 proceedings and asked the Court to abstain under Section 305(a)(1) 1. Sought to have court abstain in favor of a not-yet-filed U.K. insolvency case 2. Court concluded that comity and presumably Section 305(a)(2) --- do not apply where there is no pending foreign proceeding with respect to the debtor (a proceeding with respect to a subsidiary, like the Scottish proceeding not being relevant) 3. Court declined to dismiss the Chapter 11 case, applying a seven factor test to determine whether, under Section 305(a)(1), the interests of creditors and the debtor would be better served by dismissal or suspension. 17

18 2. In re Tradex Swiss AG, 348 B.R. 34 (Bankr. Mass. 2008) a. Swiss corporation operated a foreign exchange trading platform in the U.S. b. Swiss Federal Banking Commission started a proceeding against debtor. c. Involuntary Chapter 7 was then initiated in the U.S. d. Swiss proceeding received Chapter 15 recognition as a foreign non-main proceeding. e. The Chapter 7 case was not dismissed under 305(a); the two cases were not consolidated. 3. In re RHTC Liquidating Co., 424 B.R. 714 (Bankr. W.D. Pa. 2010). a. Canadian company and its U.S. subsidiary both filed a Canadian CCA case. b. Canadian Monitor obtained U.S. Chapter 15 recognition of the Canadian case as the main case. c. U.S. creditors filed an involuntary Chapter 7 against the U.S. company. d. Assets were sold with proceeds mostly attributable to the U.S. Company. e. Canadian Monitor said he would take action to subordinate the Canadian parent s intercompany claim against the U.S. subsidiary company; but it had not been done. f. Canadian Monitor s 305(a) Motion to dismiss was denied because petitioning creditors had raised valid concerns about whether the Canadian case was protecting their interests. 4. JSC BTA Banca, 434 B.R. 354 (Bankr. S.D.N.Y. 2010) D. Are there other implied limits on the reach of U.S. law? 18

19 7. LIMITS ON PLENARY JURISDICTION DISMISSAL UNDER SECTION 1112 A. While requirements of property or place of business in the United States might not be a significant constraints on a plenary U.S. filing, Section 1112 provides for an expansive facts and circumstances inquiry that permits the bankruptcy court to dismiss chapter 11 cases on a series of grounds that may be applicable in cross-border cases, such as 1. Alleged absence of valid reorganization purpose/alleged lack of good faith 2. Alleged manufactured jurisdiction 3. Alleged aims that lie outside of Bankruptcy Code (forum shopping?) 4. Comity and Act of State Doctrine 19

20 B. In re Avianca, 303 B.R. 1 (Bankr. S.D. N.Y. 2003) 1. A Colombian airline filed a Chapter 11 case in New York. 2. Ultimately dismissal was sought by one U.S. creditor, a supplier, who argued that it was unseemly for a U.S. court to take jurisdiction over the reorganization of an enterprise whose main center of activities was abroad. 3. Originally aircraft lessors with large claims had also moved to dismiss, but they dropped their objections. Ultimately dismissal was sought under 305(a)(1) ( if the interests of creditors and the debtor would be better served by dismissal or conversion ) and section Who opposed dismissal? a. The debtor, obviously b. But also the creditors committee, the second largest equipment lessor, employees, and other large creditors, the shareholders and implicitly the Colombian government. 5. The Bankruptcy Court decided not to abstain or dismiss a. Case was governed by Section 305(a)(i) (best interests of debtor and creditors) rather than (a)(2) because no foreign proceeding was pending. Applying this standard, the case was allowed to proceed in the U.S., rather than in effect forcing the debtor to file in Colombia. b. Colombia s bankruptcy law was only four years old and untested. 20

21 c. Colombia s law gave the debtor no leverage in dealing with executory contracts and leases. Avianca s reorganization would have ended quickly and in futility had the debtor not been able to deal with its aircraft lessors. d. The case was working. e. Avianca had been able to maintain its routes and continue its business, benefiting the debtor, creditors-including employees-and the public. It had been able to negotiate deals with major suppliers, employees, taxing authorities and others. f. Avianca s most important contract rights-especially its aircraft leases-were centered in the U.S. or Europe, where the lessors were headquartered. g. There was no indication that creditors-including those in the U.S., Colombia, and elsewhere-would be unfairly prejudiced by the application of U.S. bankruptcy principles. h. Colombian creditors had, in fact, participated fully in the U.S. case, and virtually all major creditors supported the filing. 6. The airline, still intact as a going concern, was eventually sold to a Brazilian purchaser in a section 363 sale adhering to international standards. 21

22 C. In re Yukos Oil Co., 321 B.R. 396 (Bankr. S.D. Tex. 2005) 1. Background a. Yukos was a joint stock company organized under the laws of the Russian Federation b. Privatized in early 1990 s c. 20% of Russia s oil production d. 100,000 employees, nearly all in Russia e. Tax assessment -- $27.5 billion allegedly politically motivated to justify seizure of assets. The Russian government then scheduled an auction sale of the Company to apply the proceeds to the alleged debt. f. Chapter 11 proceedings filed in S.D. Texas in 2004 to stay the auction. g. Bankruptcy Court temporarily enjoined the sale of producing assets by nongovernmental defendants but did not issue a TRO against the Russian Federation on which formal service of process had not been effected. 22

23 2. Deutsche Bank, one of the banks which had sought to bid at the auction sale, moved to dismiss the case, asserting multiple grounds for dismissal, including: A. Lack of jurisdictional basis under Bankruptcy Code Section Assets in the U.S.--$480,000 deposited in Southwest Bank of Texas by a subsidiary but in the name of Yukos Oil Company 2. Court concluded this was a sufficient basis for eligibility to file B. Forum Non-Conveniens 1. The Court declined to extend use of the concept of forum non-conveniens to dismiss and entire plenary of Chapter 11 case noting that with respect to [plenary] bankruptcy cases (as opposed to proceedings arising under or related to bankruptcy cases), Congress has statutorily prescribed exclusive jurisdiction and venue,. C. International Comity 1. Does not form an independent basis for dismissal, but a factor to be considered under Section 1112,. 2. Had Chapter 15 been enacted, Section 305 dismissal would not have been appropriate because not in interests of debtor to dismissal under Section 305(a)(1). Section 305(a)(2 would not have applied as there was no foreign proceeding. D. Act of State Doctrine 1. U.S. courts refrain from adjudicating politically sensitive disputes that implicate the legality of sovereign acts of foreign states 2. The fact of filing a U.S. Chapter 11 case did not necessarily require judging the legality of Russian government actions. 23

24 3. However, the case was dismissed pursuant to Section 1112 of the Bankruptcy Code. In re Yukos Oil Co., 321 B.R. 396 (Bankr. S.D. Tex. 2005) A. Based on a totality of the circumstances analysis, B. The Court found that the business and financial reorganization of Yukos as a going concern without the co-operation of the Russian government. 1. Indeed, since most of Yukos assets are oil and gas within Russia, its ability to effectuate a reorganization without the cooperation of the Russian government is extremely limited. 321 B.R. at 411 C. The funds on which jurisdiction was premised were transferred to Houston one week before the Chapter 11 filing. 1. By contrast, the office for Yukos Chief Financial Officer had moved to Houston a week before filing because he had been threatened with jail if he returned to Russia. 24

25 D. Yukos would in effect substitute U.S. law for Russian law 1. Yukos wanted to transfer causes of action to a Trust created pursuant to a Chapter11 Plan of Reorganization so that the Russian government could not shut down their prosecution. E. The U.S. Bankruptcy Court would have to apply foreign law in which it had no expertise. F. Yukos has numerous other legal proceedings pending against the Russian government. G. The Russian government had a significant role in ongoing operations of Yukos The vast majority of the business and financial activities of Yukos continue to occur in Russia. Such activities require the continued participation of the Russian government, in its role as the regulator of production of petroleum products from Russian lands, as well as its role as the central taxing authority of the Russian Federation. 321 B.R. at

26 H. Act of state doctrine like concerns Finally, although the act of state doctrine, standing alone, does not compel dismissal of the instant case, the evidence indicates that Yukos was, on the petition date, one of the largest producers of petroleum products in Russia, and was responsible for approximately 20 percent of the oil and gas production in Russia. The sheer size of Yukos, and correspondingly, its impact on the entirety of the Russian economy, weighs heavily in favor of allowing resolution in a forum in which participation of the Russian government is assured. 321 B.R. at 411 I. This last point amounts to a finding that the COMI for Yukos was in Russia (although this case pre-dated Chapter 15). 26

27 J. Later, a Russian liquidator sought Chapter 15 recognition trying to use the power of a U.S. Court to stop the sale of a refinery in Lithuania owned by a foreign subsidiary of Yukos. 1. A condition of continuation of the TRO blocking this sale was that the Russian liquidator permit Yukos to present a plan of reorganization in Russia. 2. The Yukos Plan would have paid the Russian tax claims in full and still left billions of value for shareholders. 3. This plan was ignored, and Yukos was liquidated anyway. 4. The New York Chapter 15 Court ultimately permitted the sale of the Lithuanian refinery by Yukos foreign subsidiary 27

28 K. Yukos former management and the Russian liquidator continued to litigate about rights to the proceeds from the sale of the refinery. 1. The parties ultimately agreed to remove this dispute from the U.S. Chapter 15 court and, as of 2014, this litigation continues in the Netherlands. L. In 2013, Yukos obtained a ruling from the European court of Human Rights that Russia had collected its tax claim in such a manner that it had improperly destroyed Yukos equity value. M. Mikhail Khodorkovsky was released from jail in December 2013, just before the Sochi Olympics, and has not returned to Russia. N. In June 2014 Yukos shareholders obtained an $80 billion arbitral award against the Russian government for (1) selling its major asset to an overnight created company and (2) causing Yukos to liquidate even though it had enough remaining assets to reorganize and pay its disputed tax claim in full. 28

29 RECENT CHAPTER 11 CASES E. In re China Fishery Group Limited (Cayman), 2016 WL (Bankr. S.D.N.Y. Oct. 28, 2016) In re China Fishery Group Limited (Cayman) were chapter 11 cases of companies engaged principally in the business of anchovy fishing off the coast of Peru. The business was owned by a series of holding companies incorporated variously in the Cayman Islands, BVI and Bermuda, and financing for the group had been provided through certain of these companies. The ultimate owners were a Chinese family. Several of the principal lenders had commenced liquidation proceedings in the venues of the holding companies and had thereafter entered into an agreement with the family providing for a sale of the Peruvian business by a date certain if defaults were not cured. After the family breached these agreements, and certain of the lenders began to exercise remedies, the family brought Chapter 11 petitions for certain of the companies, seeking to prevent the unfriendly lenders from proceeding. The lenders responded not with a motion to dismiss the proceedings in the U.S. but with a motion to appoint a Chapter 11 trustee for the group. The Court found that the lenders lack of confidence in management is both justified and understandable and that grounds had been shown for the appointment of a trustee. It exercised its discretion, nevertheless, to appoint a trustee over only one of the Chapter 11 debtors. 29

30 F. In recent years, there have been a series of Chapter 11 petitions filed in the United States by foreign shipping companies. In In re Daebo Intl. Shipping Co., Ltd., 2016 WL (Bankr. S.D.N.Y. Feb. 4, 2016), the Court denied leave to appeal from its order vacating maritime attachments on property of the foreign debtor. The Court found that the parties seeking leave to appeal did not have a reasonable prospect of overturning its ruling that the attachments violated the stay that went into effect by virtue of an earlier filing by the debtor in Korea. It thus recognized and gave effect to a Korean stay that preceded its order of recognition of the foreign proceeding. It also held that the appellants arguments with regard to the status of a lease and other issues were within the exclusive jurisdiction of the Korean insolvency court. In another Korean shipping case, In re Hanjin Shipping Co., Ltd., 2016 WL (Bankr. D. N.J. Sept. 20, 2016), a chapter 15 proceeding, the debtor moved on an emergency basis to impose the automatic stay prior to recognition and to recognize the stay order of a Korean insolvency court. Holders of alleged maritime liens sought an order requiring the debtor to post security or other protection that their liens would not be lost on delivery of the cargo. The Court found that the Debtor s foreign main proceeding will be better off if the Debtor s vessels can promptly deliver their cargo and that the Debtor did not have the necessary financial wherewithal to provide immediate security. It held that the maritime lienholders claims could be administered by the court in Korea consistently with due process. A motion to the District Court for an emergency stay pending appeal was denied. In re Hanjing Shipping Co., Ltd., 2016 WL (D.N.J. Sept. 16, 2016). 30

31 However, whatever the jurisdictional predicate, it may nonetheless be difficult to reorganize a debtor with most or all of its assets outside of the United States by means of a plenary Chapter 11 petition. as illustrated by the facts of In re Navigator Gas Transport PLC, 358 B.R. 80 (Bankr. S.D.N.Y. 2006). The U.S. debtors were registered in the Isle of Man and owned and managed vessels registered in Liberia. The companies were held through a series of holding companies, some with registered offices in the Isle of Man and some in Caribbean nations. The companies were ultimately owned by European businessmen, who initially controlled the Chapter 11 proceedings that they had commenced. However, a creditors committee rejected a plan of reorganization that shareholders had proposed, and the creditors (who included holders of $300 million in bonds that had been issued in the United States) were able to confirm their own plan (divesting the old shareholders of their interests) over the strong opposition of the debtors. When the creditors committee attempted to effectuate its confirmed plan in the Isle of Man, through a Bankruptcy Court letter to the Manx Court which requested that the controlling shares be cancelled and new shares be issued, the shareholders objected, arguing that the immediate controlling shareholding company had not been technically subject to the U.S. court s jurisdiction, and that there was no basis in local law for recognition and enforcement of a U.S. Chapter 11 plan. The shareholders were initially successful before the Isle of Man court, and the creditors committee as a consequence filed a protective scheme of arrangement under Manx law under which it proposed to put into effect the same terms as in the confirmed U.S. plan. On appeal, the English courts reversed and held that as a matter of common law the U.S. plan should be recognized and enforced.76 Cambridge Gas Transport Corp. v. Official Committee of Unsecured Creditors of Navigator Holdings PLC, [2007] 1 A.C. 508, [2006] W.L.R. 689, [2006] UKPC 26, 2006 WL (May 16, 2006).77 In revisiting the issue, however, the U.K. Supreme Court subsequently disapproved this holding. Rubin v. Eurofinance SA, [2012] UKSC 46 (October 24, 2012). 31

32 G. The failure of a massive Spanish company, Abengoa, S.A. that did business in more than 50 countries gave rise to multiple proceedings in the United States, where the group s investment was valued at $3.3 billion. A U.S. holding company, Abeinsa Holding, Inc. and certain affiliates filed Chapter 11 proceedings in Delaware from March to June On March 28, 2016, the parent Abengoa and 24 affiliated Spanish companies filed Chapter 15 petitions and obtained certain recognition as a foreign main proceeding. In the meantime, involuntary proceedings were brought against certain subsidiaries located in Kansas, and the Court there denied motions to transfer the cases to Delaware and to stay its order pending appeal. In re Abengoa Bioenergy Biomass of Kansas, LLC, 2016 WL and 2016 WL (Bankr. D. Kan. April 25, 2016 and May 26, 2016). Eventually, in a lengthy opinion, the Delaware Bankruptcy Court overruled objections and confirmed Chapter 11 plans for the U. S. companies (apparently including at least certain of the Kansas entities) two plans of reorganization and two plans of liquidation. In re Abeinsa Holding, Inc., 2016 WL (Bankr. D.Del. Dec. 14, 2016). H. A highly publicized case in 2015 granted a motion under 305 and abstained from hearing most of the cases filed by the debtors who were engaged in construction of the Baha Mar project in the Bahamas, a huge resort being financed and constructed by Chinese interests. The Debtors had filed the entire group of companies in Delaware after the project could not be completed due to lack of liquidity, and it arranged interim DIP financing. Notwithstanding the automatic stay, the Bahamian government commenced insolvency proceedings there on behalf of all creditors and provisional liquidators were appointed, the Court in the Bahamas finding that the Bahamian government had been carved out of the stay and that it would be inequitable and in violation of domestic law to limit proceedings there to those on behalf of the government. Creditors thereafter moved in the Delaware bankruptcy court to dismiss the Delaware proceedings. In re Northshore Mainland Services, Inc., 537 B.R. 192 (Bankr. D. Del. 2015) 32

33 In its decision in Northshore Mainland Services the Bankruptcy Court found that the totality of the facts and circumstances did not justify dismissal under 1112(b), as the debtors filed chapter 11 cases in an effort to maintain control of the Project and to reorganize, rather than liquidate. It found, nevertheless, that the interests of creditors and the debtor would be better served and the principle of comity vindicated by dismissal of all of the cases except the one filed by Northshore, a Delaware corporation against which a proceeding had not been commenced in the Bahamas. As to the other companies, the Court found, among other things, that creditors would have expected that insolvency proceedings for the Project would take place in the Bahamas, that pursuit of the U.S. cases would only generate additional litigation, and that The central focus of this proceeding is the unfinished Project located in The Bahamas. 537 B.R. at