This article was originally published by LatinFinance on November 25, 2014.
A rise of cross-border insolvencies in recent years has generated substantial litigation. In some cases, US bondholders, perceiving their treatment under a foreign reorganization plan to be inequitable, have sought a second chance by opposing the plan in the US on the grounds that its enforcement would be contrary to domestic public policy.
These cases require courts to balance the importance of comity with the need to protect public policy to decide whether to recognize the foreign plan as binding in the US.
With certain limited exceptions, US courts have been reluctant to allow dissatisfied creditors a second bite at the apple, even where a foreign plan achieves a result that would be impermissible under the US Bankruptcy Code.
For example, after a Brazilian court confirmed the reorganization plan of Sáo Paulo-based electric power company Rede Energia, US bondholders attacked it for preserving value for minority Rede shareholders—something that is prohibited under the Bankruptcy Code without creditor consent. In considering Rede’s plan, the Bankruptcy Court for the Southern District of New York nevertheless ruled in favor of enforcing the plan. Although the plan did not square with the Bankruptcy Code, it was not “manifestly contrary to US public policy” and must be respected and enforced as an exercise of the Brazilian government’s legal and regulatory power, the court found.
In a similar case, a New York Bankruptcy Court enforced a Canadian plan that released obligations of certain non-debtor third parties. Despite recognizing that such releases run counter to the letter and spirit of the Bankruptcy Code, because the Canadian proceedings comported with US standards of due process—the issues were fully and fairly litigated—enforcement of the plan provision could not be denied on public policy grounds, the court found.
The Bankruptcy Court for the Northern District of Texas reached the opposite result, and did not honor the release of third parties contained in the confirmed plan of Mexican glass-manufacturer Vitro. Nevertheless, it declined to question the validity of the Mexican court’s procedures. Although the court found that extinguishing liabilities of non-debtors “manifestly contravenes the public policy of the United States”, it was unperturbed by allegations of corruption in the underlying proceedings. Such challenges, the court determined, were more properly addressed in the Mexican court, where an appeal was already pending.
A recent non-bankruptcy dispute over Chevron’s alleged oil pollution in Ecuador demonstrated that an extremely high showing of fraud in the foreign court is necessary to upend a foreign court’s order. After an Ecuadorian court entered a multi-billion dollar verdict against Chevron for alleged oil pollution in Ecuador’s Amazon forests, Chevron sued plaintiffs’ counsel Steven Donziger and certain clients to prevent the verdict’s enforcement in the US. After a seven-week trial during which Chevron presented a mountain of evidence that the underlying proceedings were infected by corruption, fabricated evidence and blackmail, the court ruled in Chevronís favor, ordering Donziger and his clients to transfer to Chevron any amounts received as a result of the Ecuadorian judgment. This suit was a massive undertaking and it is still the subject of a pending appeal to the US Second Circuit.
In light of the high showing required to avoid enforcement of a foreign plan in the US, investors are well-served to protect their investments through other forms of security. They should assume that US courts will not permit them to mount a collateral attack on the plan or the process abroad. US creditors should protect their foreign investments through credit enhancements—such as security over the company’s assets, a letter of credit or a guarantee from the Overseas Private Investment Corporation, or another institution.
Another method to avoid potentially unfamiliar foreign court proceedings—though not necessarily bankruptcy proceedings—is by insisting upon a choice of law and/or mandatory arbitration provision in their agreements with foreign counterparties.
Including such provisions at the outset of the relationship may ensure that disputes are resolved under a legal system or extra-judicial process that is mutually selected by the parties—rather than in a foreign forum applying unfamiliar bankruptcy laws.