Chapter 15 Practice: U.S. Venue Selection Clause Does Not Trump Distribution Scheme in Italian Restructuring Plan

Because more than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries, Chapter 15 contemplates recognition in the U.S. of both a foreign “main” proceeding — a case pending in whatever country contains the debtor's “center of main interests” (COMI) — and foreign “nonmain” proceedings, which may have been commenced in countries where the debtor merely has an “establishment.”

Upon recognition of a foreign “main” proceeding, §1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including §361, which entitles any entity asserting an interest in the debtor's U.S. assets to “adequate protection” of that interest; §362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets; §363, which restricts the debtor's ability to use, sell, or lease its U.S. property outside the ordinary course of its business; §549, which gives a trustee the power to avoid unauthorized postpetition asset transfers; and §552, which provides that, with certain exceptions (e.g., pledged proceeds and rents), prepetition security interests do not encumber U.S. property acquired by the bankruptcy estate or by the debtor post-petition.

If the bankruptcy court recognizes a foreign proceeding as either a main or non-main proceeding, §1521(a) authorizes the court to grant a broad range of provisional and other relief designed to preserve the foreign debtor's assets or otherwise provide assistance to the court or other entity presiding over the debtor's foreign main proceeding. Under §1521(a)(1), such relief can include “staying the commencement or continuation of an individual action or proceeding concerning the debtor's assets, rights, obligations or liabilities to the extent they have not been stayed under section 1520(a).”

Under §1521(a)(7), the court may also “grant[] any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a).” These excepted sections authorize a bankruptcy trustee to, among other things, avoid and recover transfers that are fraudulent under the Bankruptcy Code and/or, under certain circumstances, “applicable” law (generally state law).

Section 1522 provides that the bankruptcy court may grant relief under §1521 “only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.”

Section 1506 of the Bankruptcy Code sets forth a public policy exception to the relief otherwise authorized in Chapter 15, providing that “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”

Under §1507 of the Bankruptcy Code, in determining whether a U.S. bankruptcy court should provide “additional assistance” to a foreign representative in a Chapter 15 case, the court must consider whether such assistance, “consistent with the principles of comity,” will reasonably assure, among other things: 1) the just treatment of all creditors and interest holders; 2) protection of U.S. creditors “against prejudice and inconvenience in the processing of claims in such foreign proceeding”; and 3) “distribution of proceeds of the debtor's property substantially in accordance with the order prescribed” in the Bankruptcy Code.

Cooperation between U.S. and foreign courts — or a form of comity — is an indispensable element of the Chapter 15 paradigm. Comity is “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” Hilton v. Guyot, 159 U.S. 113, 164 (1895); accord Shen v. Leo A. Daly Co., 222 F.3d 472, 476 (8th Cir. 2000).

In Energy Coal, the bankruptcy court weighed considerations of comity and prejudice to creditors in determining whether to recognize a foreign court's order approving a foreign debtor's debt restructuring plan as well as the plan itself, and to enjoin creditors from proceeding against the debtor's U.S. assets.

Energy Coal

Genova, Italy-based Energy Coal S.p.A. (Energy Coal) markets solid fuels, coal and petroleum coke products for use in steel manufacturing. Certain affiliated independent contractors (the Contractors) sourced Energy Coal's petroleum coke supply in the U.S. pursuant to 2005 and 2007 agreements (the Coke Agreements). One of the Coke Agreements included a Florida choice of law provision and stated that “any suit involving this agreement may only be filed in the state or federal court having jurisdiction within the State of Florida.”

In April 2015, an Italian bankruptcy court granted Energy Coal's petition to commence an arrangement with creditors proceeding, or concordato preventivo, under the Italian Insolvency Law, and appointed a foreign representative for the company.

Energy Coal's foreign representative filed a petition in the U.S. Bankruptcy Court for the District of Delaware on Oct. 2, 2015 seeking recognition of Energy Coal's concordato preventivo under Chapter 15. The U.S. bankruptcy court entered an order on Nov. 12, 2015 recognizing the Italian proceeding as a foreign main proceeding. Subsequently, the foreign representative sent official notice of termination of the Coke Agreements effective March 31, 2016.

After Energy Coal's creditors overwhelmingly approved the company's debt restructuring plan, the Italian bankruptcy court entered a “homologation order” approving the plan in October 2016. The plan provided that administrative expenses would be paid in full while unsecured creditors would receive a distribution of up to 7% of their allowed claims, depending upon classification of their claims. The homologation order provided that, except as specified in the plan, Energy Coal's remaining debts would be discharged.

In January 2017, Energy Coal's foreign representative filed a motion in the U.S. bankruptcy court seeking recognition of the Italian bankruptcy court's homologation order as well as an injunction preventing creditors within the U.S. from proceeding against Energy Coal or its U.S. assets.

The Contractors objected to the requested injunction in the U.S., making two primary arguments: 1) they were entitled to payment in full of amounts they were owed under the Coke Agreements pursuant to Energy Coal's debt restructuring plan as administrative claims (i.e., not as unsecured claims receiving up to a 7% distribution) because their claims were based upon services provided after the commencement of the concordato preventivo; and 2) “all their disputes with Energy Coal — including both the liquidation of their claims and any dispute over priority and distribution — should be determined by a Florida court” in accordance with the choice of law and venue provisions in the Coke Agreements.

The foreign representative responded that, although the Contractors' claims under the Coke Agreements were treated as unsecured claims under Energy Coal's debt restructuring plan, the company had established a reserve sufficient to pay the claims in full if the Italian court later ruled that the Contractors' claims were entitled to administrative priority. Moreover, the foreign representative explained, the Contractors had the right to file their claims against Energy Coal in the Italian proceeding. Finally, the foreign representative agreed that the Contractors' claims could be liquidated in a court of competent jurisdiction in the U.S., provided that any judgment must be satisfied in accordance with the debt restructuring plan approved by the Italian bankruptcy court.

The Bankruptcy Court's Ruling

The U.S. bankruptcy court granted the foreign representative's motion for recognition of the homologation order and the restructuring plan and for injunctive relief.

The court explained that §1521(a)(7) empowers a bankruptcy court to grant to a foreign representative any “additional relief available to a trustee,” with certain exceptions. According to the court, this provision gives a bankruptcy court, guided by principles of comity and the mandate to protect the interests of creditors and other stakeholders, the power to issue injunctive relief to enforce the terms of a restructuring plan approved in a foreign proceeding.

The court rejected the Contractors' argument that, due to the choice of law and venue provisions in the Coke Agreements, they were entitled to litigate and to collect their claims in the U.S. without regard to the Italian proceeding:

[The Contractors] cite no case law for the proposition that a choice of law provision in a contract should override the comity afforded foreign main proceedings vis-à-vis distributions on claims. Indeed, taken to its logical conclusion, [their] argument means the distribution scheme of a confirmed plan in a foreign main or non-main proceeding could be litigated in all the fora in which U.S. creditors have contracts containing forum selection clauses. This is not the law, nor is it appropriate or sensible. As recognized by other courts, “U.S. bankruptcy courts have not hesitated to require foreign creditors to file their claims and to litigate in our courts if they wish a distribution from a U.S. Debtor's estate. It is equally appropriate to expect U.S. creditors to file and litigate their claims in a foreign main bankruptcy case.” [footnote omitted]. While the [c]ourt appreciates that there is additional cost to seeking distribution of a claim in Italy, the Foreign Representative's agreement to permit liquidation of the claim in the United States strikes an appropriate balance in this case.

Accordingly, the court ruled that, while the Contractors could liquidate their claims in Florida courts, they must submit to the Italian bankruptcy court for distributions on their liquidated claims in accordance with the approved restructuring plan. This would include allowing the Italian bankruptcy court to determine whether the Contractors' claims were administrative or unsecured.

Outlook

Energy Coal reinforces the importance of comity in cross-border bankruptcy cases under Chapter 15 and other versions of the UNCITRAL Model Law on Cross-Border Insolvency (the Model Law) that have now been enacted by more than 40 nations and territories. To advance comity, Chapter 15 and the Model Law provide a mechanism for courts in jurisdictions other than the venue of the debtor's main proceeding to cooperate with the presiding court. Those laws also permit non-main proceeding courts to provide various forms of assistance designed to, among other things, prevent the debtor's assets in other countries from being seized by local creditors.

Chapter 15 is also premised on the idea that creditor claims against a foreign debtor should be resolved in the debtor's foreign main proceeding. This does not mean that a U.S. court must defer in all cases to the court presiding over the main proceeding. Important safeguards are built into Chapter 15 in cases where public policy (§1506), protection of U.S. creditors against prejudice (§1507(b)) or the best interests of creditors or other stakeholders (§1522) dictate that deference is unwarranted.

However, Energy Coal and other similar rulings indicate that U.S. entities conducting business with a non-U.S. entity must be cognizant that at least certain aspects of claims against the foreign entity may be adjudicated in restructuring proceedings outside the U.S. Further, U.S. creditors with claims against a non-U.S. debtor must monitor and, if necessary, participate in the debtor's foreign main proceeding to safeguard their rights. Because Chapter 15 and relevant court rulings embrace the concept that final claims resolution against foreign debtors should be centralized in a single forum, a foreign main proceeding will likely be the only venue for a U.S. creditor to collect on its claim.

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Dan T. Moss is a Washington, DC-based partner in the Business Restructuring & Reorganization practice of Jones Day. Mark G. Douglas is Jones Day's Restructuring Practice Communications Coordinator. The authors can be contacted at [email protected] and [email protected], respectively. The views stated in this article are solely those of the authors and should not be attributed to Jones Day or its clients.