Delay in Appointment of a Foreign Representative Isn’t Fatal to Chapter 15 Recognition

Bankruptcy Judge Sean H. Lane of Manhattan used a messy Indonesian bankruptcy to clarify some of the finer points regarding recognition of a foreign proceeding under chapter 15.

The debtor was an Indonesian telecommunications provider with almost $800 million in debt. It had defaulted in 2013 on $380 million in U.S. dollar-denominated senior notes. The notes were governed by New York law and issued in the U.S., with a U.S. bank serving as indenture trustee. The indenture contained a New York forum selection clause.

In 2014, the Indonesian court approved a debt composition plan that restructured the indebtedness on the notes. However, a group of senior noteholders contended that they were improperly prevented from participating in the proceedings and voting on the Indonesian plan.

The objecting noteholders filed suit in New York state court around the time that the Indonesian plan was being approved. Upheld in the intermediate appellate court, the New York trial court granted judgment in favor of the noteholders as to liability on the notes and for fraud in the issuance of the notes.

The purported foreign representative filed a chapter 15 petition in New York in December 2017. Although the noteholders had a stipulated judgment for $161 million on their breach of contract claim, they agreed not to enforce the money judgment pending resolution of the chapter 15 case.

The noteholders filed a motion for summary judgment in bankruptcy court, seeking denial of chapter 15 recognition. The foreign representative did not cross move for summary judgment.

In an opinion on May 30, Judge Lane denied the noteholders’ summary judgment motion.

The U.S. Property Requirement

The noteholders contended that the debtor did not have property in the U.S. in compliance with Section 109. Breaking no new ground, Judge Lane ruled that the U.S. issued notes and the New York forum selection clause satisfied the U.S. property requirement.

However, the noteholders went on to argue that the bankruptcy court should weigh equitable principles and deny recognition because the debtor had allegedly repudiated its U.S. obligations. Relying on two precedents from the New York bankruptcy court, Judge Lane refused “to add subjective requirements to the straightforward property requirement found in Section 109.”

The Foreign Representative Requirement

Next, the objecting noteholders contended that the foreign representative was not properly appointed under Section 101(24) because his appointment did not occur until three years after conclusion of the Indonesian proceedings.

Judge Lane concluded that the noteholders were not entitled to summary judgment because the record was not sufficiently developed. He went on to say there was no “authority explicitly precluding appointment of a foreign representative . . . after the foreign proceeding has been closed.” He added, “it would be hard to imagine why such action would be categorically prohibited.”

Judge Lane held that the delay in appointment of the foreign representative after the foreign proceeding “has been closed — in and of itself — does not preclude a finding that the foreign representative was properly appointed.” Instead, he called for a trial “to examine the circumstances surrounding the timing of the foreign representative’s appointment and the significance, if any, of the delay.”

The Collective Proceeding Requirement

Finally, the noteholders contended that the Indonesian bankruptcy did not qualify as a “collective proceeding” under Section 101(23), largely because they were denied the right to vote.

Judge Lane identified unresolved questions of fact regarding the allowance of the claims of the objecting noteholders and their right to vote. He said, among other things, that the noteholders and the indenture trustee “were able to put their positions before the officials overseeing the Indonesian proceedings.”

In response, the noteholders pointed to a report by the U.S. State Department alleging that the Indonesian courts were influenced by corruption. According to Judge Lane, the noteholders provided no evidence about corruption “in general or with respect to this proceeding in particular.”

Alone, Judge Lane ruled that the State Department report was “an insufficient basis on which to grant summary judgment for the Objecting Noteholders.”