Chapter 15

Second Circuit Affirms Dismissal of Chapter 15 Appeal by Purported Shareholder on Standing Grounds

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In a March 19, 2019 summary order, the U.S. Court of Appeals for the Second Circuit affirmed the district court’s dismissal of a purported shareholder’s appeal challenging the chapter 15 recognition of a Cayman Islands restructuring of an offshore drilling contractor. See In re Ocean Rig UDW Inc., No. 18-1374, 2019 WL 1276205 (2d Cir. Mar. 19, 2019). The Court of Appeals affirmed the district court’s dismissal of that appeal for lack of appellate standing. An Orrick team handled the chapter 15 proceedings in the bankruptcy court, as well as the appellate proceedings in the district court and Court of Appeals.

Background

The appeal was brought by a self-described shareholder of debtor Ocean Rig UDW Inc. (“UDW”). The appellant sought review of an order issued by U.S. Bankruptcy Judge Martin Glenn granting recognition of provisional liquidation and scheme of arrangement proceedings in the Cayman Islands of UDW and three of its subsidiaries as “foreign main proceedings” under section 1517 of the Bankruptcy Code. That recognition order gave rise to various forms of relief, including an automatic stay with respect to the Debtors and their property within the territorial jurisdiction of the United States.

In the ancillary proceedings in the bankruptcy court, the appellant had opposed the Debtors’ petition for recognition on numerous grounds, including on the basis that venue was improper in the Southern District of New York, that the Debtors failed to meet their burden of proving that their center of main interests (“COMI”) was in the Cayman Islands, that the Debtors improperly manipulated their COMI, and that granting recognition would violate the public policy objectives of chapter 15. The bankruptcy court overruled those objections and granted recognition and other related relief under sections 1520 and 1521 of the Bankruptcy Code. See In re Ocean Rig UDW Inc., 570 B.R. 687 (Bankr. S.D.N.Y. 2017).

Appellant timely noticed an appeal to the district court, but did not seek a stay of the recognition order. Thus, the Debtors moved forward with their restructuring via four interrelated schemes of arrangement under Cayman Islands law (the “Schemes”). The Schemes involved the exchange of more than $3.7 billion of existing financial indebtedness for $450 million in new secured debt, approximately $288 million in cash, and new equity in UDW. Under the Schemes, existing shareholders of UDW retained a nominal amount of equity in the reorganized UDW (0.02%), but this token amount was provided solely to facilitate UDW’s ability to maintain its NASDAQ listing and was not an indication of UDW’s solvency. In fact, the indicative value of the consideration distributed to the creditors under the Schemes was significantly less than the face amount of their claims.

Appellant did not object to the provisional liquidation proceedings or the Schemes, which were later sanctioned (i.e., approved) by the Grand Court of the Cayman Islands. Similarly, appellant did not object to a motion in the chapter 15 proceedings for entry of an order granting comity and giving full force and effect to the Schemes and Cayman court’s ruling in the United States, which the bankruptcy court subsequently granted. Promptly upon the bankruptcy court’s issuance of this “enforcement order,” the Debtors consummated the restructuring in accordance with the Schemes.

Thereafter, in the district court, before U.S. District Judge John G. Koeltl, the Debtors and their authorized foreign representative moved to dismiss the appeal, arguing that the appellant’s purported shareholder status was insufficient to give her appellate standing, and that in any event, her appeal had been rendered equitably moot by the consummation of the restructuring. The district court granted the motion on both alternative grounds. See In re Ocean Rig UDW Inc., 585 B.R. 31 (S.D.N.Y. 2018).

Appellant then sought review of the district court’s dismissal in the Second Circuit. While that appeal was pending, a third-party company (Transocean Ltd.) acquired UDW in a cash and stock transaction valued at approximately $2.7 billion.

The Second Circuit’s Ruling

The Second Circuit affirmed the district court’s dismissal of the appeal for lack of standing. The Court of Appeals began its analysis by reiterating the settled legal standard for bankruptcy appellate standing: “To have standing to appeal from a bankruptcy court ruling in this Circuit, an appellant must be an ‘aggrieved person,’ a person directly and adversely affected pecuniarily by the challenged order of the bankruptcy court.” 2019 WL 1276205 at *1 (quoting In re Gucci, 126 F.3d 380, 388 (2d Cir. 1997)). “The stringency of our rule,” the Court explained, “is rooted in a concern that freely granting open‐ended appeals to those persons affected by bankruptcy court orders will sound the death knell of the orderly disposition of bankruptcy matters.” Id.

Applying that standard, the Second Circuit readily concluded that the appellant was not an “aggrieved person.” Although the appellant was subject to injunctions set forth in the bankruptcy court’s recognition order, she had not “pursued any action against UDW that has been stayed because of the injunctive relief, and her brief [did] not identify any action that she plans to pursue.” Id. Relatedly, the Second Circuit noted that the district court had found UDW was significantly insolvent at the time the Debtors initiated the Cayman proceedings, a finding which appellant had not challenged. Because Cayman Islands law provides that creditors must be made whole before shareholders can recover in a “winding up” proceeding, the Second Circuit concluded that shareholders, including appellant, lacked any pecuniary interest in those proceedings and the U.S. order recognizing those proceedings. Id. (citing Cayman Islands Companies Law § 140(1)).

The Second Circuit also treated as inapposite a prior chapter 15 decision invoked by appellant, Morning Mist Holdings Ltd. v. Krys (In re Fairfield Sentry Ltd.), 714 F.3d 127 (2d Cir. 2013). That decision arose from an appeal brought by shareholders of a feeder fund that invested in the Madoff fraud. The shareholders there challenged the bankruptcy court’s chapter 15 recognition of liquidation proceedings that were ongoing in the British Virgin Islands. But as the Second Circuit’s summary order here explained, standing was not at issue in that case, and the facts were distinguishable. The shareholders in Fairfield Sentry had filed a New York shareholder derivative suit that was stayed as a result of chapter 15 recognition, whereas here, the appellant could not identify any way that recognition caused her to be aggrieved.

The Second Circuit did not explicitly address the district court’s alternative basis for dismissal: i.e., that the consummation of the Debtors’ restructuring, combined with the appellant’s failure to seek a stay, rendered the appeal equitably moot. In re Ocean Rig UDW Inc., 585 B.R. at 39-41. Noting simply that it had considered the appellant’s remaining arguments and concluded that they were without merit, the Court of Appeals did not discuss the appellant’s contention that the equitable mootness doctrine is inapplicable to chapter 15 proceedings. The district court had previously rejected appellant’s arguments that equitable mootness did not apply under chapter 15, concluding that the same “principles of finality and fairness” that pertain to “domestic reorganizations” and the same “concerns of comity” that animated former section 304 of the Bankruptcy Code apply in the chapter 15 context. Id. at 41.

If you have any questions about any of the topics discussed in this opinion, please contact your Orrick attorney or any of the following attorneys:

Evan Hollander

Daniel Rubens

The Rule in Gibbs: Safeguarding Creditors’ Rights or Aiding and Abetting “Hold Out” in Foreign Insolvencies?

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There is an English common law rule that a debt governed by English law cannot be discharged or compromised by a foreign insolvency proceeding. This rule is derived from a Court of Appeal case: Antony Gibbs and sons v La Société Industrielle et Commerciale des Métaux (1890) 25 QBD 399.

The rule has been heavily criticised. Many do not consider it to be relevant in modern day cross-border insolvency proceedings following the continuing trend towards recognition of foreign insolvency proceedings (and their effects). As explained further below, some commentators see the rule as assisting creditors to “hold out” from participating in collective insolvency measures which are designed to benefit the creditor class as a whole.

The English court recently had the opportunity to review whether Gibbs still applied in Bakhshiyeva v Sberbank of Russia [2018] EWHC 59 (Ch). The court considered an application by a foreign representative to the English court on behalf of a debtor, International Bank of Azerbaijan, for a permanent stay on a creditors’ enforcement of claims in England under an English law governed contract contrary to the terms of the foreign insolvency proceeding. Under local law, the English creditors were purportedly bound. The Azerbaijani proceedings were not “terminal” liquidation proceedings and therefore, any stay would need to apply beyond the duration of the proceedings to properly bind the English creditors and to permanently give effect to the insolvency proceedings.

The foreign proceedings were conducted in Azerbaijan and had been recognised in England under the Cross-Border Insolvency Regulations 2006 (the “CBIR“) (implementing UNCITRAL Model Law). The CBIR are a procedural mechanism whereby foreign insolvency proceedings (conducted outside the EU) can be recognised and foreign representatives can seek “assistance” from courts in other jurisdictions to effect the insolvency proceedings (subject to any restrictions on the exercise of such power under local law).

The English High Court found that the rule in Gibbs did apply to prevent the court granting a permanent (or indefinite) stay on the enforcement of creditors’ English law governed contractual claims. Any stay granted by the court would be more than simply procedural and would go to the substance of creditors’ claims – the court would, in effect, be ordering the discharge of the creditor’s claim and was prohibited from doing this, following the rule in Gibbs.

The message for creditors with English law claims which are purportedly extinguished under a foreign (non-EU) insolvency process is therefore, to adopt a “hold out” position. Following the expiry of the foreign proceedings (and any related stay on creditor action), objecting creditors may then take steps to enforce English law governed contractual claims provided however, that they have not participated in the foreign insolvency proceedings (they may otherwise be deemed to have accepted the jurisdiction of the foreign proceeding).

We note many holders of English law governed bonds issued by the Greek government adopted a “hold-out” strategy knowing that the English courts would not recognise any provision of Greek law extinguishing or amending the sovereign debt.

The “territorial” nature of the rule in Gibbs is, arguably, “out of step” with trends in modern insolvency law. In the US, for example, in proceedings under Chapter 15 of the Bankruptcy Code (the US statute adopting UNCITRAL Model Law) (“Chapter 15“), US courts have enforced foreign court judgements made in foreign proceedings, including judgements which alter or vary US law governed debts or claims. Chapter 15 does however, include important public policy protections for creditors designed to forestall recognition of clearly abusive procedures.

The US has a longstanding policy of recognising restructurings of US law governed financings of foreign companies. The Supreme Court’s 1883 decision in the famous Gebhard case (Canada Southern Railway Co v Gebhard [1883] 109 US 527) set the precedent for US recognition of foreign restructuring processes in which Chief Justice Waite endorsed the recognition of the implementation of a Canadian scheme of arrangement with the words “under these circumstances the true spirit of international comity requires that schemes of this character, legalised at home, should be recognised in other countries“.

The “public policy” exception to recognition under Chapter 15 only applies in “exceptional circumstances” and includes, for example, circumstances where a creditor was denied due process and notice of the foreign insolvency proceedings of the debtor; and the denial of privacy rights. The fact that a creditor may make a more limited recovery, and the fact that the substantive law of the insolvency proceeding was not the same as US law, were not held to be “manifestly contrary” to public policy.

We note the Gibbs rule has been disapplied in the context of EU insolvency proceedings, on the basis that English courts recognise the jurisdiction of courts in respect of insolvency proceedings in Member States under the European Insolvency Regulation (“EIR“); and similar “public policy” exceptions apply. It is difficult to justify the radically different approach English courts take to non-EU insolvency proceedings particularly given the UK’s recent decision to leave the EU.

Our view is that as part of any withdrawal treaty of the UK from the EU, the parties should look to negotiate a process for mutual recognition of insolvency proceedings based on the EIR “recognition” approach. Looking outside of its relationship with the EU, it would also seem sensible for the UK to look to adopt an approach similar to US Chapter 15, for the UK courts to recognise foreign insolvency proceedings with safeguards for creditors to avoid the application of such rules only if limited public policy reasons exist to void the application of the foreign insolvency proceedings. The English court will want to avoid “re-litigating” issues dealt with under foreign insolvency proceedings, and should not examine actual recoveries made by creditors. However, a carve out on “public policy” grounds could protect English creditors if it captured circumstances where the process was evidently “discriminatory” to foreign (English) creditors.

We acknowledge there are strong arguments to retain the Gibbs rule. By entering an English law contract, creditors may feel strongly that they wish to retain the impartiality, commerciality and due process English courts are well known for.

As we near BREXIT, in this issue as in so many others, the UK has a decision to make: adopt English “exceptionalism” or take a more ‘universalist’ view implied by the recognition of foreign insolvency proceedings exemplified by the current arrangements under the EIR? The choice is looming.

Foreign Debtors’ Access to U.S. Bankruptcy Courts: Expansion of “Property in the United States” Definition in Chapter 15 Cases

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When is a foreign entity eligible to file a chapter 15 petition?  This question has been the subject of debate over the last few years, and Judge Martin Glenn’s recent opinion in In re Berau Capital Resources Pte Ltd. will add to this debate.  Although the debtor in the case was foreign and did not have a place of business in the United States, Judge Glenn concluded that the debtor had satisfied the eligibility provisions under section 109(a) of the Bankruptcy Code because the New York choice of law and forum selection clause in the underlying bond indenture rendered the bonds “property in the United States.”  No. 15-11804 (MG), 2015 WL 6507871 (Bankr. S.D.N.Y. Oct. 28, 2015).

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European Revolution vs. English Evolution

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This client alert will focus on three of the key recent cases of the past six months, each of which features the use of English law restructuring tools for non-English companies. Whilst the wave of recent restructurings has slowed in recent times given the uptick in the European economy, these cases are likely to be cited as precedents in the future and the case law developments will be of assistance in the event there is rise in the number of restructurings which may be expected as interest rates rise in the next few years.

In the decade leading up to the Great Recession which commenced in 2008, many European jurisdictions took significant measures to update their antiquated insolvency regimes. The Spanish updated their 1898 insolvency laws in 2003, the Italians updated their 1942 bankruptcy laws in 2005, the French updated their 1984 laws in 2005, the Germans amended their regime in 1999, and finally the UK made radical changes in 2002. The effectiveness of the reforms were mixed and when the stresses of the Great Recession collided with the new regimes, a second wave of reforms, forged by the reality of experience, occurred in every major European country save the UK. In recent years a dichotomy has arisen between European radical change and English gradualism when it comes to restructuring law practice.  Read More.