Foreign Representatives “Discover” Another Chapter 15 Tool

Recently, the U.S. Bankruptcy Court for the Southern District of New York was asked to decide whether an auditor was required to provide its work papers to a foreign representative who sought to compel such production pursuant to certain provisions of the Bankruptcy Code and the Bankruptcy Rules, including Bankruptcy Code § 1521. Despite the auditor’s objections to the discovery request, the bankruptcy court held that the arbitration clause in the underlying engagement letter did not limit the requested relief, and there was no evidence that Cayman law prohibited the bankruptcy court from granting such relief.

Facts and Procedural Background

The central dispute in In re Platinum Partners Value Arbitrage Fund L.P.[1] was whether an outside auditor (CohnReznick LLP) for the chapter 15 debtors, which were being liquidated in the Cayman Islands, was required to turn over its work papers to the Cayman liquidators pursuant to a discovery request made in the bankruptcy court. The auditor argued that the subpoena (1) sought documents that the liquidators could not otherwise obtain under applicable Cayman law, and (2) impermissibly sought pre-suit discovery concerning potential claims that would fall within the scope of the arbitration provisions contained in the auditor’s engagement letter.[2]

By way of background, a hedge fund, Platinum Partners Value Arbitrage Fund L.P. (the “Master Fund”), and its two feeder funds[3] — Platinum Partners Venture Arbitrage Fund (International) Ltd. (the “International Fund”) and Platinum Partners Value Arbitrage Intermediate Fund Ltd. (the “Intermediate Fund”; together with the International Fund and the Master Fund, the “Funds”) — were placed in liquidation by order of the Grand Court of the Cayman Islands in 2016.[4] Cayman law obligates a liquidator to “collect, realise, and distribute” the liquidating entity’s assets and “investigate the ‘promotion, business, dealings and affairs’ of the Funds, including the causes of their failure.”[5] The recognition order entered by the bankruptcy court authorized the liquidator to

‘examine witnesses, take evidence, and seek the production of documents within the territorial jurisdiction of the United States concerning the assets, affairs, rights, obligations or liabilities of the Funds, the Funds affiliates and the Funds’ subsidiaries,’ including ‘upon written request, obtaining turnover of any and all documents ... that are property of, concern or were made or issued on behalf of the Funds.’[6]

CohnReznick provided audit services to the Funds for calendar years 2014 and 2015, and CohnReznick’s engagement letter contained an arbitration clause requiring that “any dispute, controversy, or claim arising out of or relating to the services ... shall be finally resolved by arbitration....”[7] Liquidators for both the Master Fund and the International Fund made informal document requests to CohnReznick, which responded by providing that the documents it maintained were property of the Funds, but did not include “audit work papers, engagement documents, communications, representations, invoices, and other relevant documents within its audit file.”[8] The liquidators then subpoenaed CohnReznick and sought “‘[a]ll documents and communications concerning [CohnReznick’s] engagement to perform and/or [its] performance of auditing, accounting, or other services for, on behalf of, or in relation to any Fund’ and ‘[a]ll documents concerning the assets, liabilities, and other financial affairs of [any] Fund, whether provided by the Fund or obtained from other sources.’”[9] The parties could not resolve CohnReznick’s objections to the subpoena, and the liquidators moved to compel CohnReznick’s compliance pursuant to 11 U.S.C. §§ 105(a), 542(e) and 1521(a), as well as Rule 2004 of the Federal Rules of Bankruptcy Procedure.

The In re Platinum Partners Value Arbitrage Fund L.P. Decision

Bankruptcy Code § 1521(a) permits a bankruptcy court, at the request of a foreign representative, to “grant any appropriate relief ... where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors.”[10] The liquidators asserted that the relief was both necessary and appropriate because CohnReznick possessed unique documents and analyses related to the Funds’ assets, liabilities and financial affairs that would “assist the Liquidators’ investigation and understanding of the Funds’ affairs for the two years immediately prior to the Funds’ liquidations,” especially since the Funds’ former executives asserted their Fifth Amendment rights.[11] CohnReznick did not dispute the significance of its documents nor the liquidators’ authority to obtain the documents. Instead, it argued that the statute only allows for such relief to be granted “where necessary to effectuate the purpose of [chapter 15].”[12]

Comity

CohnReznick argued that since its work papers were not discoverable under Cayman law, the liquidators could not obtain broader discovery rights under chapter 15 than they would otherwise be entitled to in their home forum, because to do so would not be protecting the interests of comity and parity.[13] The bankruptcy court disagreed and noted that “it is well established that comity does not require that relief available in the United States be identical to the relief sought in the foreign bankruptcy proceeding; it is sufficient if the result is comparable and that the foreign laws are not repugnant to our laws and policies.”[14]

After examining the Cayman-law cases cited by the parties’ respective declarants on the issue, Judge Chapman was not convinced that Cayman law prohibited the discovery being sought in the subpoena.[15] It was Judge Chapman’s belief that the Cayman courts take a permissive and solicitous view of a Cayman litigant’s efforts to utilize U.S. discovery procedures, and so long as the Cayman litigant is not “acting oppressively or abusively in seeking to reply on the right which it enjoys under U.S. law,”[16] then the principle of comity “decisively weigh[s] in favor of granting the [motion to compel discovery from CohnReznick].”[17]

Applicability of Arbitration Clauses

CohnReznick also argued that the liquidators’ pre-suit discovery requests were governed by the arbitration clause in its engagement letter, which applied to “‘any dispute, controversy, or claim’ arising out of or related to the rendering of CohnReznick’s services.”[18] CohnReznick relied on Daisytek,[19] wherein the court held that creditors’ pre-suit discovery against the accountant (whose engagement had an arbitration clause similar to CohnReznick) would be governed by the arbitration clause if “the potential claims arising from the discovery would be subject to arbitration.”[20] However, if “the Bankruptcy Court determined that such proceeding derived exclusively from the Code, then the Bankruptcy Court would have discretion to refuse to enforce the applicable arbitration agreement if arbitration would conflict with the purposes of the Code.”[21] The liquidators argued that the arbitration provisions were irrelevant because no claim was being asserted against CohnReznick; rather, the liquidators were only gathering information about the company’s affairs. The bankruptcy court agreed and noted that “one of the significant objectives of chapter 15 is to provide judicial assistance to foreign representatives in gathering information that will enable them to comply with their duties.” The relief sought by the liquidators derived exclusively from multiple provisions of the Bankruptcy Code: §§ 542(e), 1521(a)(4) and 1521(a)(7). As a result, the bankruptcy court was reluctant to read the arbitration clause too broadly and thereby eliminate the foreign representative’s right to seek discovery pursuant to § 1521.[22]

Conclusion

In the end, the bankruptcy court narrowly interpreted the terms of CohnReznick’s arbitration clause in order to facilitate the liquidators’ mandate under Cayman law and allow them to obtain critical financial information that was otherwise unavailable to them. The bankruptcy court’s decision was thorough and well-reasoned and is just one more example of how chapter 15 can be a valuable tool for foreign representatives’ efforts to administer insolvent estates.