Motivated by principles of comity, a U.S. court under chapter 15 can enforce a U.K. scheme of arrangement containing non-consensual third-party releases.
In an April 9 opinion, Bankruptcy Judge Martin Glenn of Manhattan recognized that non-consensual third-party releases are “controversial” in chapter 11 and said that the courts are seemingly split on approving schemes in chapter 15 with similar releases.
The case at hand involved a company headquartered and incorporated in the U.K. It had subsidiaries around the world that had guaranteed the company’s $550 million in senior secured notes. Unable to restructure out of court, the company initiated a proceeding and filed a proposed scheme of arrangement in a U.K. court.
The scheme affected only the $550 million in senior secured notes. At a creditors’ meeting, holders of more than 98% of the notes voted in favor of the scheme, which included provisions granting releases to the subsidiaries on their guarantees of the debt. Without the releases, the company could not operate successfully, Judge Glenn said, if the non-filed subsidiaries remained liable on the notes.
The U.K. court approved the scheme, and the company filed a chapter 15 petition in New York, seeking both recognition of the U.K. proceeding as the foreign main proceeding and granting additional relief by enforcing the scheme in the U.S.
Judge Glenn explained that the releases in the scheme were non-consensual because creditors who did not vote would be bound.
Although there were no objections in the U.S., Judge Glenn issued his 26-page opinion to explain the rationale for enforcing a scheme containing non-consensual third-party releases.
Judge Glenn explained that the Fifth, Ninth, Tenth and District of Columbia Circuits prohibit releases in favor of non-debtors in chapter 11. On the other hand, the Second, Fourth, Sixth, Seventh and Eleventh Circuits have allowed non-consensual third-party releases in chapter 11 “in limited circumstances.” He also said that U.S. courts do not agree on what constitutes “consent,” with some judges saying that disclosure alone is not enough.
Judge Glenn established that the company’s proceedings in the U.K. were entitled to recognition as a foreign main proceeding. Next, he analyzed the statutory basis in chapter 15 for enforcing a scheme with non-consensual releases of third parties.
Two provisions in chapter 15 bear on the ability to approve third-party releases. Section 1521(a) enables the court to grant “appropriate relief” when “necessary to effectuate the purpose of this chapter . . . .” Section 1507(a) allows the court to grant “additional assistance.” In deciding whether to provide additional assistance, Section 1507(b) says that the “court shall consider whether such additional assistance, consistent with the principles of comity, will reasonably assure . . . just treatment” of creditors or one of four other enumerated goals.
In deciding whether to grant additional assistance in chapter 15, Judge Glenn said that “courts are guided by principles of comity and cooperation with foreign courts.” He listed six chapter 15 cases in the Southern District of New York where the courts enforced arrangements abroad that included third-party releases.
As possibly contrary authority, Judge Glenn cited In re Vitro S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012), where the Fifth Circuit upheld the bankruptcy court’s refusal to grant comity and sanction a Mexican reorganization that would have released guarantees granted by U.S.-based non-debtor affiliates. However, he said Vitro “had a number of very troubling facts.” Prominently, the Mexican debtor used the votes of affiliates to gain the percentage of acceptances required by Mexican law. It was therefore not clear that the releases alone would have led to the same result in Vitro.
Judge Glenn said that creditors “had a full and fair opportunity to vote on” the scheme and that U.K. law afforded creditors “a full and fair opportunity to be heard in a manner consistent with U.S. due process standards.” He therefore held that the “[p]rinciples of comity permit a U.S. bankruptcy court to recognize and enforce” a U.K. scheme that includes releases of third-party non-debtor guarantors.