To enforce a foreign court’s reorganization plan under chapter 15 that includes nondebtor, third-party releases, the foreign court must give reasons explaining the facts and law permitting the equivalent of a discharge for someone other than the debtor, according to Bankruptcy Judge Sean H. Lane of Manhattan.
Rather than nix the foreign plan outright, Judge Lane is giving the foreign representative a second bite at the apple. In his April 15 opinion, he invited the foreign court to explain the rationale for granting third-party releases. He also suggested that the foreign court should explain why U.S. bondholders were not allowed to vote on the plan.
The Indonesian Debtor
Judge Lane had previously written about the Indonesian telecommunications provider with almost $800 million in debt. In June 2019, he denied the U.S. noteholders’ motion for summary judgment asking for denial of recognition as a foreign main proceeding.
Finding disputed issues of fact, Judge Lane called for a trial on recognition. The April 15 opinion was the culmination of the trial.
The Indonesian company had defaulted in 2013 on $380 million in U.S. dollar-denominated senior notes. The notes were issued by the debtor’s finance subsidiary but guaranteed by the debtor. The documents gave the indenture trustee the right to enforce the obligations on the notes directly against the debtor.
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.
The debtor commenced reorganization proceedings in Indonesia in 2014. The indenture trustee filed a claim and attempted to vote the claim against the debtor’s plan. The Indonesian court allowed the claim on the notes filed by the finance subsidiary and disallowed the claim filed by the indenture trustee. The Indonesian court also barred the indenture trustee from voting on the plan.
The Indonesian court allowed the finance subsidiary to vote the claim on the notes in favor of the plan. Had the indenture trustee’s negative vote been counted instead, the reorganization might not have been approved.
In 2014, the Indonesian court approved a debt-composition plan that restructured the indebtedness on the notes. The plan included nondebtor, third-party releases running in favor of the debtor’s officers, directors and the debtor’s affiliates.
The objecting noteholders had 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 appellate court also reinstated the suit against the individual defendants.
The foreign representatives 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 May 2019, Judge Lane denied the noteholders’ summary judgment motion, finding disputed issues of fact. See In re PT Bakrie Telecom Tbk, 601 B.R. 707 (Bankr. S.D.N.Y. 2019). To read ABI’s report, click here.
At trial, the noteholders asked Judge Lane to withhold recognition of the Indonesian reorganization as a foreign main proceeding under Section 1517. The noteholders also wanted Judge Lane to refuse the debtor’s application for additional assistance under Sections 1507 and 1521 in the form of enforcement of the plan in the territorial U.S., including enforcement of the third-party releases.
Judge Lane Grants Recognition
Judge Lane first addressed recognition.
As he had done on the summary judgment motion, Judge Lane found nothing inherently wrong about the three-year lag in appointing a foreign representative to commence a chapter 15 case in the U.S. After trial, he saw the delay as no reason to deny recognition.
Judge Lane concluded that the proceedings in Indonesia were “collective,” even though the noteholders were not permitted to vote on the plan or assert a claim. The treatment of the claim on the notes in the plan was sufficient to make the proceedings “collective.”
In that regard, Judge Lane observed that the noteholders’ “objection is not really about the collective nature of the proceeding but rather who was allowed to vote a particular debt.” The noteholders’ arguments, he said, “go more to whether their rights as creditors were appropriately protected for the purpose of the additional relief sought here, a topic addressed more fully below.”
With little reservation, Judge Lane granted recognition as a foreign main proceeding under Section 1517. He then turned to the debtor’s request for additional assistance to enforce the plan and releases in the territorial U.S. under Sections 1507 and 1521.
Additional Assistance
Judge Lane said that granting additional assistance is addressed to the court’s discretion “and depends upon principles of comity.”
Pointing to the Fifth, Ninth and Tenth Circuits, Judge Lane noted that third-party releases are not allowed everywhere in the U.S. Even in those circuits where third-party releases are categorically prohibited, Judge Lane cited cases for the proposition that “such relief may be permitted to foreign proceedings under Chapter 15.”
For Judge Lane, enforcing the releases was “more problematic” when “viewed through the prism of comity,” because the release would terminate the ongoing lawsuit in New York against individuals connected with the alleged fraud.
To decide the question of comity, Judge Lane said that “the Court must consider whether the foreign proceeding abided by fundamental standards of procedural fairness as demonstrated by a clear and formal record.”
In that regard, Judge Lane said there was “no clear and formal record that sets forth whether or how the foreign court considered the rights of creditors when considering this third-party release.” He said it was “particularly noteworthy” how the debtor had not rebutted the noteholders’ expert who testified “that a third-party release is not standard for Indonesian [reorganization] proceedings but instead must be justified under Indonesian law.”
By comparison, Judge Lane said there had been a “robust record” in the Canadian court when the U.S. court enforced a Canadian plan with third-party releases.
Judge Lane ruled that the record in Indonesia was inadequate to justify approval of third-party releases. The debtor, he said, was “free to return to the Indonesian Court to further develop the record on this issue, consistent with the substantive and procedural requirements of Indonesian law.”
Judge Lane was careful to say, however, that he was “not [making] a ruling on the permissible scope of third-party releases under Indonesian law.” Rather, he said, granting comity requires “a rudimentary record in the foreign proceeding as to the basis for such releases and procedural fairness of the underlying process.”
Voting in Indonesia
Ending his opinion, Judge Lane turned to the noteholders’ contending that enforcing the Indonesian plan was improper because they had not been allowed to vote.
Examining the record from Indonesia, Judge Lane said that it was “not particularly fulsome on the voting issue.” He mentioned that the debtor had not given him evidence submitted to the Indonesian court supporting denial of the right to vote.
Ultimately, Judge Lane punted, finding no “need to determine whether the voting issue would bar the requested additional relief of enforcing the [Indonesian] Plan because the Court has already denied that relief based on concerns about the third-party release.”
Should the debtor reopen proceedings in Indonesia, Judge Lane said that the debtor “might also take the opportunity to further develop the record on the voting issue.”
Observations
Kudos to Judge Lane for writing a highly diplomatic opinion, even as it exudes skepticism about the fairness of the Indonesian bankruptcy system toward U.S. bondholders.
Rather than refuse to recognize the foreign proceedings outright, he erected a bar to enforcement of the plan in the U.S., at least for the time being. However, the bar he set is no higher than it would be for a reorganization in Canada or elsewhere abroad.
To enforce a foreign court’s reorganization plan under chapter 15 that includes nondebtor, third-party releases, the foreign court must give reasons explaining the facts and law permitting the equivalent of a discharge for someone other than the debtor, according to Bankruptcy Judge Sean H. Lane of Manhattan.
Rather than nix the foreign plan outright, Judge Lane is giving the foreign representative a second bite at the apple. In his April 15 opinion, he invited the foreign court to explain the rationale for granting third-party releases. He also suggested that the foreign court should explain why U.S. bondholders were not allowed to vote on the plan.
The Indonesian Debtor
Judge Lane had previously written about the Indonesian telecommunications provider with almost $800 million in debt. In June 2019, he denied the U.S. noteholders’ motion for summary judgment asking for denial of recognition as a foreign main proceeding.
Finding disputed issues of fact, Judge Lane called for a trial on recognition. The April 15 opinion was the culmination of the trial.
The Indonesian company had defaulted in 2013 on $380 million in U.S. dollar-denominated senior notes. The notes were issued by the debtor’s finance subsidiary but guaranteed by the debtor. The documents gave the indenture trustee the right to enforce the obligations on the notes directly against the debtor.