Relevant Documents:Performance Sports Group ProtocolNortel ProtocolHanjin Call Recording (embedded in PDF)
In recent chapter 15 cases such as Ocean Rig and Hanjin Shipping, U.S. courts have used section 1525 of the Bankruptcy Code to divest, at least partially, the debtor company of some of its power to control the pace and flow of its own bankruptcy proceedings. In light of these examples, other chapter 15 debtors may need to carefully consider their strategies for how they present their cases to U.S. courts.
Section 1525 of the Bankruptcy Code contains a seemingly innocuous directive for U.S. bankruptcy courts presiding over chapter 15 cases that are ancillary to foreign insolvency proceedings; this directive may cede some unintended control or discretion to U.S. bankruptcy court judges.
Under section 1525, U.S. bankruptcy courts are directed to “cooperate to the maximum extent possible with a foreign court or a foreign representative” and, in the service of that missive, are “entitled to communicate directly with, or to request information or assistance directly from, a foreign court or a foreign representative, subject to the rights of a party in interest to notice and participation.”
For comparison purposes, in the cross-border chapter 11 cases of Nortel Networks and Performance Sports Group, court-to-court protocols have been used to great effect to run simultaneous court proceedings in the U.S. and in a foreign jurisdiction. This has led to largely uniform court decisions and more efficient case administration.
In Ocean Rig, the debtors filed for chapter 15 protection to seek recognition of a foreign main insolvency proceeding in the Cayman Islands. However, various creditor groups asserted that the debtors did not cooperate in providing requested due diligence, did not provide a clear timeline for the Cayman proceedings and had not been open to negotiations. As a result, Bankruptcy Judge Martin Glenn said that “no one” had been able to tell him “what’s going on” with the Cayman proceeding, and he ordered the parties to draft a cross-border protocol so that he could communicate directly with the judge presiding over the Cayman proceedings.
In Hanjin Shipping, the company filed for chapter 15 to recognize main insolvency proceedings in Korea and sought to sell certain port assets located in the U.S. However, U.S. creditors asserted that they held Korean law “common benefit claims” and objected to certain aspects of the sale, including repatriation of the proceeds to Korea as mandated by the Korean court. Bankruptcy Judge John Sherwood held a direct call with the Korean judge to clarify the exact process and law that pertain to such common benefits claims and their treatment in the Korean proceeding. Ultimately, Judge Sherwood sided with Hanjin and permitted the sale as requested by the company.
In both of these chapter 15 cases, the debtors were forced to relinquish some control over their bankruptcy processes because of the power of the U.S. bankruptcy judge under section 1525. Although the Ocean Rig debtors had sought to maintain control of their Cayman proceedings and their own restructuring timeline, the result was a negative reaction from the U.S. bankruptcy court at the murkiness of the debtors’ progress. The debtors were ordered to provide a cross-border protocol specifically to clear away that opacity.
Similarly in Hanjin, when no parties were able to provide a satisfactory response to the U.S. court’s queries regarding aspects of the Korean proceeding, the court determined that the best solution was to communicate directly with the Korean court. Although Hanjin itself urged the U.S. court to do so, that invitation may have resulted in negative consequences for the company if the Korean court’s communications to the U.S. court were not entirely in Hanjin’s favor.
For companies seeking protection under chapter 15, the implications could be broad. Chapter 15 debtors may have to carefully review how much important information must be disclosed and when to disclose it, and whether their creditors could eventually use section 1525 against them.
Cross-Border Court Proceedings in Chapter 11
In both Nortel Networks and Performance Sports Group, cross-border protocols were used to run simultaneous court proceedings in the U.S. and Canada. On Jan. 24, at a joint confirmation hearing, Judge Kevin Gross of the Delaware bankruptcy court and Justice Frank Newbould of the Ontario Superior Court of Justice
approved the distribution plans put forward by the U.S. and Canadian debtor groups. There had been multiple joint hearings between the two courts in the case. Coordination was made possible by a cross-border court-to-court protocol which was
approved in 2009, shortly after Nortel filed for bankruptcy. In particular, the protocol allowed for a “telephone or video link” to be established so that the courts could be able to “simultaneously hear the proceedings in the other Court.” Additionally, the two judges were permitted to “communicate with each other during or after any joint hearing, with or without counsel present,” to determine whether they could make consistent rules, coordinate the terms of the respective rulings and address any other procedural or administrative matters.
Similarly in the chapter 11 case of Performance Sports Group, a cross-border protocol was used to coordinate between Judge Kevin Carey of the Delaware bankruptcy court and Justice Newbould of Superior Court of Justice. The protocol allowed the courts to establish a telephone or video link for joint hearings and to communicate with each other before or after any joint hearing regarding the administration of the case. At a joint U.S. and Canadian
sale hearing in February, both judges overruled objections and approved the debtors’ proposed sale of all their assets to a stalking horse bidder. The two judges had previously held a
joint hearing in November 2016 to approve the bid procedures relating to the sale.
In both of these chapter 11 cases, cross-border protocols permitted the debtors to achieve consistent results, potentially saving time and administrative costs. Additionally, control of the cases largely remained in the debtors’ hands, and the debtors determined the circumstances under which joint hearings would be required.
Cross-Border Court Proceedings in Chapter 15Ocean Rig
On March 27, Ocean Rig commenced
chapter 15 proceedings in the Southern District of New York, to recognize foreign main insolvency proceedings in the Cayman Islands. When Ocean Rig filed, it had a restructuring support agreement in place that was supported by about 73% of what it called “scheme indebtedness” (i.e., funded debt to be restructured under the Cayman Island schemes). Ocean Rig’s restructuring schemes did not have the support of Highland Capital (the holder of a majority of unsecured notes issued by parent UDW) or the support of an ad hoc group of holders of secured notes issued by subsidiary DRH.
Just days after Ocean Rig filed for chapter 15, Highland Capital filed an
objection, asserting that it had the right to file an involuntary petition for relief against the debtors under chapter 11 of the U.S. Bankruptcy Code and seeking to bring a state court action against Ocean Rig relating to certain allegedly fraudulent transfers. Similarly, the ad hoc group of secured noteholders objected. The ad hoc group argued that the debtors’ schemes had little likelihood of success and that the group should be allowed to engage in discovery regarding the propriety of the debtors’ chapter 15 filing.
On April 20, Bankruptcy Judge Martin Glenn of the Southern District of New York conducted a
hearing on Highland’s request to file an involuntary chapter 11 petition against Ocean Rig. At the hearing, counsel for Highland and the ad hoc group of noteholders repeatedly asserted that they had attempted to negotiate with Ocean Rig regarding the terms of the scheme but that Ocean Rig had refused to engage in discussions. According to counsel for the noteholders, the debtors had taken a “perfunctory” approach that “this is our deal and our creditors have to take it or leave it.” In response, counsel for the debtors argued that the debtors had agreed to provide Highland and the ad hoc noteholder group with the formal scheme of arrangement four weeks before it would be provided to any other creditors, at which time the debtors would engage in negotiations.
Separately, Judge Glenn took issue with Highland’s attempt to file an involuntary chapter 11 petition against Ocean Rig. He commented to Highland: “What you’re trying to do is totally screw up the proceedings in the Caymans.” The judge stated it was “clear as day” that Highland was trying to stop the Cayman proceedings by filing an involuntary against Ocean Rig in the U.S. and asserting the worldwide automatic stay in the Cayman proceedings, to the effect of, “Too bad, Cayman judge, you’re stuck.” The judge added that he would like to have direct communications with the Cayman judge “so that he understands that I understand.” Judge Glenn remarked that no one at the hearing had been able to tell him “what’s going on” with the Cayman proceeding, and that he was “not averse to having court-to-court communications with the Cayman judge” before deciding whether to permit an involuntary petition to be filed.
Although Judge Glenn ultimately denied Highland’s request, the judge expressed concern about the debtors’ apparent unwillingness to provide information and diligence to their creditors, remarking that all of the parties appeared to be engaged in a “food fight” in which Judge Glenn did not wish to partake. The judge ordered the parties to draft a protocol for direct court-to-court communications between the U.S. and Cayman Island bankruptcy courts, which has not yet been filed on the docket.
Hanjin Shipping
In the chapter 15 case of Hanjin Shipping, which had filed foreign main insolvency proceedings in Korea, Bankruptcy Judge John Sherwood of the District of New Jersey used section 1525 of the Bankruptcy Code to clarify issues of Korean law and disputes relating to the Korean proceeding in ruling on the debtors’ motion to authorize a sale of certain U.S. assets. The central issue related to how Korean law-based claims of certain U.S. creditors, known as “common benefit claims,” should be handled.
In December 2016, Hanjin filed a motion seeking to
enforce a Korean sale order that authorized the sale of Hanjin’s ownership interest in Total Terminals International and Hanjin Shipping TEC to Terminal Investment Ltd. and Hyundai Merchant Marine Co. Hanjin and TIL owned 54% and 46%, respectively, of the membership interests in TTI, which operated waterfront container terminals on the West Coast of the U.S. Several U.S. creditors
objected to the motion, asserting that they had common benefit claims. According to certain of the objectors, common benefit claims were similar to U.S. administrative expense claims but were required to be paid on a current basis and could be asserted against Hanjin anywhere in the world. The objectors argued that Hanjin should be required to keep the sale proceeds in a U.S.-based escrow account because if the sale proceeds were repatriated to Korea, the claimants would never have their claims paid, because of what they contended was the untrustworthy conduct of the Korean court.
At a
hearing on the motion in January, after one and a half days of testimony, Judge Sherwood determined that he would try to schedule a call with the Korean court overseeing Hanjin’s Korean insolvency proceeding before making a final decision. Judge Sherwood was invited to schedule a call with the Korean court by counsel for Hanjin, who argued that such a conversation would be “very productive” and would provide Judge Sherwood with the “most definitive” answers regarding the treatment of common benefit claims in Hanjin’s Korean insolvency proceeding.
On Jan. 17, Judge Sherwood used the powers granted under section 1525 to conduct a telephone conference with the Korean insolvency court, during which he asked questions relating to the process for fixing and paying common benefit claims, the implementation of the Korean sale order and whether the repatriation of the sale proceeds to Korea had been a condition for approval of the sale. The Korean court spoke through a translator, and Judge Sherwood was told that any U.S. court decision on common benefit claims may be subject to a recognition procedure in Korea because it would be enforced in Hanjin’s Korean proceedings, and that the repatriation of proceeds was a condition to the sale to ensure a fair and orderly distribution to all creditors both in and outside the U.S. The call lasted slightly over an hour, and Judge Sherwood’s court later uploaded an audio recording of the call to the case docket. “It’s amazing now we’re doing this so far away,” the judge remarked during the call.
With the benefit of the clarity provided on the Korean law questions, Judge Sherwood ultimately granted Hanjin’s motion and permitted the sale. The sale proceeds were subjected to the jurisdiction and administration of the Korean insolvency court overseeing Hanjin's main insolvency proceeding.
Implications
Chapter 15 seeks to encourage cooperation between U.S. and foreign courts involved in cross-border insolvency cases, leading to “greater legal certainty for trade and investment,” “fair and efficient administration,” “protection and maximization of the value of the debtor’s assets” and “facilitation of the rescue of financially troubled businesses, thereby protecting investment and preserving employment.” Nevertheless, the scope and pace of a chapter 15 debtors’ disclosures regarding its foreign proceedings are often left to the chapter 15 debtor in the first instance. This raises challenges and opportunities for both the debtor and case parties.
A debtor that chooses to disclose too little may find that, rather than achieving the control and discretion over its case that it desires, it may be subject to interference by the U.S. court communicating with the foreign court. Similarly, a debtor that is unclear or overly partisan in its disclosures regarding the foreign proceeding may find that its creditors seek to use section 1525 against it by urging the U.S. court to bypass the debtor and speak directly with the foreign court, causing the debtor to lose credibility in the U.S. proceedings.