Release Me!: New York Bankruptcy Court Enforces Third Party Releases by UK Debtor

The United States Bankruptcy Court for the Southern District of New York recently entered an order enforcing a UK scheme of arrangement[1] that contained provisions – non-consensual third-party releases – that might not necessarily have been permissible under U.S. bankruptcy law. In re Avanti Commc’ns Group plc, No. 18-10458 (MG), (Bankr. S.D.N.Y. Apr. 9, 2018) (see here for opinion). The Avanti decision enhances chapter 15 as a forum for U.S. courts to enforce foreign law reorganizations so long as there are the appropriate procedural protections in place and the substantive provisions are not in conflict with major principles of U.S. bankruptcy law.

Chapter 15 of the Bankruptcy Code permits foreign debtors to obtain the protection of the United States bankruptcy courts in support of a foreign insolvency proceeding and is discussed further in our prior alert on In re Berau.

For a foreign proceeding to be eligible for chapter 15 protection, the debtor must meet the threshold qualification test and be an entity that “resides or has a domicile, a place of business, or property in the United States” per 11 U.S.C. § 109(a). The debtor in Avanti met this test easily, with Judge Glenn relying on the same basis for jurisdiction as he did in the Berau case. Specifically, the advance retainers that Avanti had paid to its New York attorneys were considered property interests in New York. In addition, as we anticipated in our prior alert, Judge Glenn cited to his earlier decision in Berau and again found that legal rights under New York law indentures were sufficient New York property interests to create jurisdiction in the United States. In re Avanti, at 16.

The Avanti court also needed to determine whether it was appropriate for the United States courts to enforce the terms of the foreign scheme of arrangement. Chapter 15 provides for U.S. enforcement in support of foreign proceeding subject to an analysis of the relief being sought and the nature of the foreign proceeding and its similarity to U.S. insolvency proceedings. Significantly, Avanti’s UK scheme of arrangement contained releases of certain third-party claims although, as Judge Glenn noted, such releases are not always permissible in U.S. bankruptcy proceedings.[2] As a result they have not always been enforced in the chapter 15 context. Most notably, the Fifth Circuit, in In re Vitro S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012) affirmed a chapter 15 bankruptcy court decision not to grant comity and enforce a Mexican reorganization that improperly released guarantees made by certain non-debtor affiliates because of the impropriety of the releases and procedures followed in the reorganization. In Avanti, rather than analyze whether or not the specific releases would be acceptable under U.S. bankruptcy law, Judge Glenn instead turned to Section 1507(b) of the Bankruptcy Code and principles of comity to conclude that “schemes of arrangements sanctioned under UK law that provide third-party non-debtor guarantor releases should be recognized and enforced under chapter 15 of the Bankruptcy Code.” In re Avanti, at 24. Most importantly, what mattered was not whether the third-party releases would be allowable under U.S. law, but that the “proceedings under UK law in the UK courts afford creditors a full and fair opportunity to be heard in a manner consistent with US due process standards.” In re Avanti, at 24, citing, Society of Lloyd’s v. Reinhart, 402 F.3d 982, 987-88 (10th Cir. 2005)[3]. The procedural and factual circumstances in Avanti thus made it easily distinguishable from Vitro. As Judge Glenn noted, in Vitro there was significant creditor opposition to the Mexican reorganization, which had to rely on the votes of insiders to gain approval, something that would not be permitted under U.S. law. In contrast, in Avanti, the only class of creditors compromised by the Avanti UK proceeding not only had an opportunity to be heard, but voted overwhelmingly in favor of the scheme. In re Avanti, at 25. That was sufficient for Judge Glenn to conclude that the Avanti scheme of arrangement was entitled to comity and it releases could be enforced, regardless of how the releases might have fared under a U.S. bankruptcy analysis.

The Avanti decision is notable for two reasons. First, it reinforces the sufficiency of retainer funds and New York law debt documents for creating a property interest in the U.S. for chapter 15 jurisdiction purposes, at least in the New York bankruptcy courts. Second, it makes clear that foreign insolvency law need not be substantively identical to U.S. bankruptcy law in order for a foreign proceeding to be recognized and its outcomes enforced. So long as the proceeding is deemed procedurally fair and affords appropriate creditor protections it can permit certain provisions, like non-consensual third-party releases, that might not be allowed under U.S. law. But both debtors and creditors should understand that Avanti is not a carte blanche allowing anything and everything in a foreign insolvency so long as there are procedural safeguards. Rather, it provides assurance that a court will exercise judgment in looking at the foreign proceeding and its substantive procedural protections rather than focusing only on its similarity, or not, to U.S. law.

Distressed non-U.S. businesses and their creditors should consult with experienced bankruptcy attorneys as early as possible when considering restructurings that involve U.S. creditors since the use of a chapter 15 bankruptcy proceeding could have significant impacts on the terms of the restructuring and the rights of creditors.

[1] A “scheme of arrangement” is, roughly, the UK equivalent of a U.S. bankruptcy plan of reorganization.
[2] The treatment of third-party releases is well-beyond the scope of this client alert, but it is worth noting that there are significant differences among the judicial circuits as to whether non-consensual third-party releases are permissible at all or under what circumstances.
[3] Note that the result may very well have been different if the substantive issue was not third-party releases but instead rooted in one of the areas enumerated by Section 1107(b), e.g., just treatment of all holders of claims, protection and convenience of claim holders in the U.S., prevention of preferential or fraudulent transfers, priority of distributions, and, if appropriate, opportunity for a fresh start.