On July 13, 2015, the United States Bankruptcy Court for the Southern District of New York refined the qualifications of “foreign representative” for purposes of granting recognition in a Chapter 15 proceeding.
Caught up in the Petrobras corruption scandal infecting the oil and gas industries of Brazil and the country’s political leadership and causing further challenges for an already struggling Brazilian economy, OAS and a number of its domestic and foreign affiliates and subsidiaries, which together form one of Brazil’s largest construction companies, sought protection under Brazil’s judicial reorganization laws. The OAS Group’s commencement of judicial reorganization proceedings followed unsuccessful efforts to restructure out of court, which included several transactions in which changes were made to the corporate structure of the OAS Group and assets were transferred among members.
Prior to and following the commencement of the reorganization proceeding, the OAS Group restructuring transactions were fiercely opposed by two principal holders of the approximately $875 million of senior notes issued and guaranteed by certain members of the OAS Group. The holders assert the restructuring transactions improperly caused assets to be transferred from guarantors to non-guarantors of the note indebtedness and effected a merger of two guarantors that resulted in the surviving entity having a materially diminished ability to satisfy its guaranty obligations and, therefore, violated the holders’ rights under the governing agreements to secure repayment of the notes. The holders initiated litigation against the OAS Group in New York state courts.
In response to the holders’ successful efforts in the state court litigation to attach the OAS Group’s liquid assets located in the United States, the OAS Group sought recognition of its Brazilian reorganization proceedings under Chapter 15 of the Bankruptcy Code in the Southern District of New York. By resolution, the OAS Group’s boards of directors empowered Renato Tavares, legal officer for several members of the OAS Group, to administer the reorganization of the OAS Group’s assets and affairs in the Brazilian proceedings and appointed him as the OAS Group’s agent and attorney-in-fact for purposes of filing petitions for recognition in foreign jurisdictions.
The holders opposed recognition of the Brazilian proceedings on several grounds, including Tavares’s qualification as a “foreign representative.” In support, the holders emphasized the fact that the term foreign representative is defined in the Bankruptcy Code to mean “a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.” 11 U.S.C. § 101(24) [emphasis added]. In addition, the holders noted that a petition for recognition must be accompanied by:
- a certified copy of the decision commencing such proceeding and appointing the foreign representative;
- a certificate from the foreign court affirming the existence of such foreign proceeding and of the appointment of the foreign representative; or
- in the absence of evidence referred to in paragraphs (1) and (2), any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative.
11 U.S.C. § 1515(b) [emphasis added]. From the holders’ perspective, the plain meaning of these provisions compelled the conclusion that Tavares did not have the requisite authority to seek recognition because he was not appointed as a foreign representative by the Brazilian court.
In rejecting the tacit “appointment” requirement, which the Bankruptcy Court found to be ambiguous, the Bankruptcy Court instead focused on the phrase “authorized in a foreign proceeding” under Section 101(24). The Bankruptcy Court followed an earlier interpretation of the phrase adopted by the Northern District of Texas and approved by the Fifth Circuit, holding that “authorized in a foreign proceeding” essentially meant “authorized in the context of or in the course of a foreign proceeding” with the result that where the foreign law allows a debtor to act as a debtor-in-possession and manage its own affairs, the debtor itself can provide the applicable authorization.
This interpretation, the Bankruptcy Court held, was consistent with the legislative intent. Unique to Chapter 15 of the Bankruptcy Code is its source. While adopted by Congress to facilitate the protection of debtor and creditor rights in cross-border insolvencies, the language used, including the definition of foreign representative was lifted, almost entirely, from the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law. As reflected in the reports of the Working Group on Insolvency Law responsible for drafting the Model Law, which the courts have considered and relied upon in interpreting Chapter 15, the drafters rejected the requirement that the foreign representative be specifically authorized by statute or court order to seek recognition.
The Bankruptcy Court then interpreted Brazil’s bankruptcy law to determine whether the OAS Group’s boards of directors could authorize Tavares to obtain recognition of the Brazilian proceeding. That determination turned on whether the provisions of Brazil’s bankruptcy law under which the OAS Group was operating functionally made the OAS Group a debtor-in-possession. In this analysis, the Bankruptcy Court focused on Article 64 of Brazil’s bankruptcy law, which provides: “[d]uring the in-court restructuring procedure, the debtor and his officers shall be kept in the management of the business activity, overseen by the Committee, if any, and by the judicial administrator.” Relying on the affidavit of the OAS Group’s Brazilian counsel, the Bankruptcy Court concluded that Brazil’s bankruptcy law allowed the OAS Group’s management to retain full control over its business and assets subject to the oversight of a judicial administrator, which may step in to liquidate a debtor’s assets under certain conditions. While not the mirror image of a debtor-in-possession under U.S. bankruptcy law, Brazil’s bankruptcy law met the qualifications under the Model Law for a debtor-in-possession, which was all that was required to give the OAS Group management authority to empower Tavares with authority to seek recognition in the U.S. courts.
Although, arguably, the OAS decision breaks no new ground, it does signal a unified theme emerging in disputes over a foreign representative’s authority to seek recognition and provides helpful insight as it relates to the interpretation of Brazil’s bankruptcy law. Under the OAS holding, foreign jurisdictions with insolvency laws that leave control of the operation of the debtor’s business in the hands of management, even where the law, like Brazil’s bankruptcy law, does not implement the Model Law, provide the debtor with sufficient authority to appoint its own foreign representative. Given the dispute that erupted in OAS, however, U.S. counsel for foreign debtors should be mindful of opportunities to preempt challenges to recognition like the one employed by the holders. U.S. counsel may want to inquire of foreign counsel whether, for example, it would be permissible and advisable to seek a court order at the outset of the foreign case that would preemptively resolve any ambiguity about the board-selected representative’s ability to file recognition petitions.