Bankruptcy Judge James L. Garrity, Jr., authorized the foreign representative of a South African airline to take discovery from Boeing under Section 1521(a)(4) regarding claims and defenses related to a purchase agreement for eight 737 MAX 8 aircraft.
The airline had 27 aircraft and 2,000 employees. In 2013, the airline contracted to buy the eight aircraft from Boeing.
The airline’s finances were deteriorating even before the pandemic. Eventually, the airline was forced to ground all aircraft.
Under the aegis of joint business rescue practitioners, or BRPs, the airline commenced business rescue proceedings in South Africa in May 2020 under Chapter 6 of the South African Companies Act of 2008. Later, the BRPs obtained approval of a business rescue plan.
Before the airline’s insolvency proceedings, the airline had paid for and Boeing had delivered the first of the eight new aircraft. The new aircraft was delivered just before the second crash of a 737 MAX 8, which resulted in the grounding of the MAX 8 fleet worldwide. The airline had also made pre-delivery payments for additional aircraft.
Before the insolvency proceedings, the airline had purported to cancel the purchase agreement for all eight aircraft. The BRPs confirmed the airline’s cancellation. The rescue plan also authorized the cancellation of the purchase agreement.
The BRPs commenced a chapter 15 case in New York in February 2021. The bankruptcy court granted foreign main recognition and recognized the BRPs as foreign representatives. The recognition order authorized the foreign representatives to exercise the powers of a trustee provided by Sections 1520 and 1521.
In March 2021, the foreign representatives sent a letter to Boeing outlining claims for breach of contract and fraudulent inducement. Boeing responded by confirming that the purchase agreement was terminated but otherwise reserved its rights against the airline.
In August 2021, the foreign representative filed a motion in bankruptcy court under Section 1521 and Bankruptcy Rule 2004 to take discovery from Boeing. The aircraft manufacturer objected on a variety of grounds, but Judge Garrity granted the motion in an opinion on November 14.
Judge Garrity explained how Section 1521(a) contains a non-exclusive list of relief available to a foreign representative. “[T]o effectuate the purpose of this chapter and to protect the assets of the debtor,” the section provides that “the court may, at the request of the foreign representative, grant any appropriate relief, including . . . (4) providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor’s assets . . . or liabilities.”
Section 1522(a) provides that the court may grant relief under Section 1521 “only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.”
Bankruptcy Rule 2004 provides that the court may allow an examination, but it “may relate only to the acts, conduct, or property or to the liabilities and financial condition of the debtor, or to any matter which may affect the administration of the debtor's estate.”
The grant of chapter 15 recognition did not “bar the requested relief,” Judge Garrity said, because the foreign representatives have a statutory duty under South African law to investigate the company’s affairs. He therefore ruled that “the requested discovery is necessary to facilitate his efforts to assess the viability, strength, and magnitude of potential causes of action against Boeing and the likelihood and extent of a monetary recovery.”
Section 1521, Judge Garrity said, authorizes discovery “without any limitation based on how the foreign representative intends to use the fruits of the requested discovery.” He therefore found that the requested discovery would “effectuate the purpose” of chapter 15.
The aircraft manufacturer contended there was no need to protect the airline’s assets because it was preserving the evidence that the foreign representatives might seek to discover when there is a lawsuit. Boeing also argued that the foreign insolvency proceeding was “essentially complete” because the plan had been approved.
Judge Garrity said there had been no “Termination Events” under South African law. “Accordingly,” he said, “the Rescue Plan and South African law do not foreclose the Foreign Representative from pursuing claims against Boeing in furtherance of his effort to rescue the company.”
“Moreover,” Judge Garrity said, “the fact that the Debtor can seek discovery under the applicable rules of civil procedure if it ultimately commences litigation against Boeing . . . is not a bar to the relief sought in the Motion.” [Reference omitted.] Ruling otherwise, he said, “would completely eviscerate the investigatory function that section 1521(a)(4) is designed to serve.”
Judge Garrity therefore concluded that discovery was “necessary to protect [the airline’s] assets.” He said that the foreign representatives were pursuing discovery to satisfy their duties under South African law and had “established grounds under section 1521(a)(4) to conduct discovery of Boeing relating to causes of action that [the airline] may hold against Boeing and the extent of [the airline’s] potential monetary recovery from Boeing.”
Last, Judge Garrity held that Boeing’s interests were “sufficiently protected,” although Boeing argued that the foreign representatives’ 40 document requests were “massively overbroad.”
With regard to Boeing’s contention that the document requests were overbroad, Judge Garrity directed the parties to meet and confer. In the absence of agreement, he called on them to arrange a discovery conference under the district’s local rules.
Boeing argued that Rule 2004 does not apply in chapter 15 cases. Judge Garrity said the issue was “academic” because the foreign representatives were entitled to discovery under Section 1521(a)(4).
Judge Garrity granted the motion allowing the foreign representatives to conduct discovery.
Bankruptcy Judge James L. Garrity, Jr., authorized the foreign representative of a South African airline to take discovery from Boeing under Section 1521(a)(4) regarding claims and defenses related to a purchase agreement for eight 737 MAX 8 aircraft.
The airline had 27 aircraft and 2,000 employees. In 2013, the airline contracted to buy the eight aircraft from Boeing.
The airline’s finances were deteriorating even before the pandemic. Eventually, the airline was forced to ground all aircraft.
Under the aegis of joint business rescue practitioners, or BRPs, the airline commenced business rescue proceedings in South Africa in May 2020 under Chapter 6 of the South African Companies Act of 2008. Later, the BRPs obtained approval of a business rescue plan.
Before the airline’s insolvency proceedings, the airline had paid for and Boeing had delivered the first of the eight new aircraft. The new aircraft was delivered just before the second crash of a 737 MAX 8, which resulted in the grounding of the MAX 8 fleet worldwide. The airline had also made pre-delivery payments for additional aircraft.