The Global Reach of U.S. Bankruptcy Courts: The Real Impact of Bankruptcy Courts’ Orders Outside of U.S. Borders

The application of U.S. laws to transactions and conduct outside of the U.S. has always been a topic of interest for U.S. and foreign persons and businesses alike. Section 541 of the U.S. Bankruptcy Code shows clear intent for the Code to be applied abroad, as it explicitly states that the bankruptcy estate includes all legal and equitable rights and interests of the debtor in property as of the commencement of the case, wherever located and by whomever held. [1] “It would be hard to imagine language that would be more encompassing.” [2]

The extraterritorial application of U.S. laws in the bankruptcy arena becomes more controversial when a non-U.S. business seeks to take advantage of chapter 11 reorganization mechanisms and pulls into the U.S. bankruptcy court’s purview a number of other non-U.S. parties. In the last few years, foreign companies have turned more frequently to U.S. bankruptcy courts because what they can accomplish here is typically not possible in their home jurisdictions. Recent examples of foreign companies that chose to reorganize in the U.S. are the various airlines that were forced into bankruptcy due to the pandemic, including LATAM Airlines, AeroMexico and Scandinavian Airlines.

Among the often-cited reasons as to why the U.S. is the jurisdiction of choice for foreign companies are (1) it has the most well-developed law of any insolvency regime in the world, (2) it allows management to stay in control, and (3) debtors can confirm a reorganization plan with less than unanimous stakeholder support. Another essential feature of the U.S. bankruptcy regime is the debtor’s right to assume or reject executory contracts and leases with binding effect on the counterparties.

When non-U.S. counterparties are pulled into a chapter 11 proceeding, an important threshold consideration is the court’s determination of whether it may properly exercise jurisdiction over a non-U.S. party. Bankruptcy courts deal regularly with the issue of personal jurisdiction over non-U.S. parties in the context of adversary proceedings. Over the past year, however, we’ve seen two interesting examples of how bankruptcy judges have approached the exercise of jurisdiction over foreign counterparties in the main bankruptcy proceeding.

This past January, the U.S. Bankruptcy Court for the Southern District of New York granted Avianca’s unopposed motion for sanctions against hundreds of foreign creditors for violating the injunction terms of its confirmed chapter 11 plan. [3] In the spring of 2022, on the other hand, the U.S. Bankruptcy Court for the District of Delaware denied Alto Maipo’s motion to assume and assign a contract with a foreign counterparty, because a dispute regarding defaults under the agreement prevented the court from relying on its in rem jurisdiction only. [4]

Avianca

Avianca and its affiliates sought bankruptcy protection in May 2020 after governments around the world imposed unprecedented travel restrictions due to the COVID-19 pandemic. According to the debtors’ submissions, Avianca is the second-largest airline group in Latin America and the largest airline in the Republic of Colombia, operating an extensive network of routes from its primary hubs in Bogotá and San Salvador. Before the filing, it offered passengers services on more than 5,350 weekly flights to more than 76 destinations in 27 countries. On Nov. 2, 2021, the court entered an order confirming Avianca’s chapter 11 plan. [5]

A year after confirmation, the reorganized debtors asked the court to impose sanctions on foreign creditors that continued to litigate in Colombia and Brazil actions either commenced pre-petition or based on pre-petition claims. Judge Glenn held in civil contempt these foreign creditors for violations of § 524(a)(2) of the U.S. Bankruptcy Code and certain provisions of the approved chapter 11 plan of Avianca Holdings S.A. and its affiliated debtors. [6]

The court held that it had jurisdiction over the foreign creditors because all of them had filed proofs of claim in the chapter 11, which subjected them to the jurisdiction of the court. [7]The first-of-its kind sanction imposed by the court was the conditional disallowance of the claims filed in the chapter 11.

Judge Glenn gave the foreign creditors 30 days from the date of his order to discontinue their foreign lawsuits. The court found that the foreign parties were given notice of the debtors’ efforts to gain approval of the disclosure statement, of the confirmation of their plan, and of the violations of the discharge and injunction provisions of the plan. [8] While the court imposed sanctions on foreign creditors, the impact of the sanctions would be limited to their claims in the U.S.

Alto Maipo

Alto Maipo SpA and Alto Maipo Delaware L.L.C. sought bankruptcy protection in Delaware to carry out a prepackaged plan. Alto Maipo SpA is a Chilean company involved in developing, constructing and operating a run-of-river hydroelectric project in Chile.

The counterparty that challenged the court’s authority to approve the assumption of its contract with Alto Maipo SpA, Minera Los Pelambres (“Minera”), is a Chilean company that runs a copper mine. Alto Maipo sought assumption and assignment of the power-purchase agreement as an agreement central to the debtors’ reorganization efforts and the core of their business plan, because Minera was obligated to purchase power from the debtors’ hydroelectric project on favorable, predictable and long-standing terms.

The agreement was governed by Chilean law, was written in Spanish, and required Chilean arbitration. Minera had no presence or business activities in the U.S. and was not subject to general or special jurisdiction in the U.S. In response to the debtor’s Motion for Entry of an Order Pursuant to Sections 363 and 365 of the Bankruptcy Code Approving Assumption of Agreement with Minera, Minera asserted that the court could not grant the requested relief without finding and exercising in personam jurisdiction, because Alto Maipo had defaulted under the agreement.

The debtors’ position, supported by the senior secured lender, the equity owner of Alto Maipo, the parties to a restructuring support agreement and the committee, was that the requested relief was in rem because (1) the court had statutory in rem jurisdiction over all property of the debtors’ estates, wherever located, under 28 U.S.C. § 1334(e)(1), and (2) separately, it had statutory authority to determine questions of contract-breach under § 365(b) of the U.S. Bankruptcy Code. Minera challenged the position that the court had the power to address contract breach questions under § 365(b) exclusively as an in rem matter or concerning anyone, including a nondebtor that is not subject to personal jurisdiction in the U.S.

The court agreed with Minera that the action was not traditionally in rem because the debtors sought findings that, among other things, there were no existing defaults and, thus, no required cure under the agreement to comply with § 365(b). [9] The court held:

Making the requested findings regarding default and cure required a determination of the party’s contractual rights and responsibilities in the agreement and would constitute an in personam action. A breach-of-contract action is a common example of an in personam action and, effectively, the findings sought here would require the same determination whether a breach of contract occurred and the appropriate remedy, if any. [10]

While this was a rather unexpected outcome for many, the circumstances appear to be unique enough to have limited impact on future proceedings. Whether the powerful reach of the bankruptcy courts is undermined remains to be seen. The decision certainly forearmed foreign counterparties with a road map for when faced with a bankruptcy process in the U.S.