Just in time for the fifth anniversary of the enactment of chapter 15 of the Bankruptcy Code, which allows foreign debtors to administer assets located in the U.S. or stay the actions of U.S. creditors – Judge Martin Glenn of the Bankruptcy Court for the Southern District of New York has issued a decision reaffirming the broad utility and scope of chapter 15.
In Metcalfe & Mansfield Alternative Investments, Judge Glenn considered whether a chapter 15 debtor that had obtained extraordinary injunctive and other relief in its Canadian bankruptcy proceeding was entitled to enforce that relief in the U.S., even though the relief could not have been granted under U.S. law.1 Judge Glenn indicated that under chapter 15 the issue to be decided in granting relief to enforce a foreign court order is not whether similar relief is available under U.S. law, but whether principles of comity support enforcement of the foreign court order. Judge Glenn found that the Canadian proceeding had been litigated fairly according to procedures similar to those available to U.S. litigants, and therefore, the Canadian judgment was entitled to recognition and res judicata effect in the U.S. This decision has the potential to broaden the types of relief available to foreign debtors under chapter 15.
Chapter 15 of the Bankruptcy Code
The purpose of chapter 15, which is based upon UNCITRAL’s Model Law on Cross-Border Insolvency, is to harmonize U.S. bankruptcy law with the insolvency laws of foreign jurisdictions. Under chapter 15, the representative of a foreign debtor that is involved in a foreign insolvency proceeding may file a petition in a U.S. Bankruptcy Court to obtain “recognition” of its foreign proceeding.2 If the U.S. Bankruptcy Court recognizes the foreign proceeding, the foreign debtor may receive various forms of relief available to U.S. debtors, such as implementation of the automatic stay, the turnover of all assets owned by the debtor and held by third-parties, and authorization to operate the debtor’s business in the U.S.
Following the enactment of chapter 15 in 2005, most chapter 15 cases focused on whether a foreign debtor’s foreign insolvency proceeding was entitled to recognition by a U.S. Bankruptcy Court. Few courts analyzed the various types of relief a chapter 15 debtor may receive following recognition. Although chapter 15 provides a list of relief that is automatically granted upon recognition of a foreign main proceeding and a list of relief that may be awarded upon request,3 and directs U.S. Bankruptcy Courts to “consider its international origin” and to “cooperate to the maximum extent possible with a foreign court”5 when interpreting the statute, chapter 15 also allows U.S Bankruptcy Courts to refuse to take an action that “would be manifestly contrary to the public policy of the United States.”6 Accordingly, although chapter 15 suggests that once a U.S. Bankruptcy Court has recognized a foreign proceeding it should defer to the substantive legal determinations of the foreign court supervising that proceeding, until the recent decision in Metcalfe, it was not clear how deferential U.S. Bankruptcy Courts would be in granting such relief.
The application of foreign law in U.S. courts has become a hot-button issue in recent years, and U.S. Bankruptcy Judges could find that foreign insolvency laws that deviate, even slightly, from widely accepted U.S. practice are “contrary to the public policy of the United States.” In Metcalfe, Judge Glenn was mindful of the dangers of applying a foreign nation’s laws in the U.S. Nevertheless, after a considerable review of the central precepts of chapter 15 and comity, Judge Glenn enforced Canadian law in full and articulated the clearest expression yet of chapter 15’s outer boundaries.
The Court’s Opinion in Metcalfe
In Metcalfe, the debtor’s Canadian insolvency proceeding was initiated to restructure CAN $32 billion in Asset Backed Commercial Paper (“ABCP”) notes. ABCP is short-term secured debt that generally matures in less than 270 days. Financial institutions first issued ABCP in the mid-1980s as a convenient source of short-term funding for corporations. Because ABCP is of such short duration, many ABCP programs, including the Metcalfe debtor’s program, paid the principal on maturing notes with the funds received from the issuance of new notes (otherwise known as “rolling over” the notes) in order to delay paying the obligations in full upon maturity. However, during the week of August 13, 2007, the ABCP market froze due to fears in the U.S. relating to the quality of residential sub-prime mortgages, which constituted a sizeable portion of the collateral backing ABCP. Investors ceased purchases of ABCP, and Metcalfe and other large issuers of ABCP were unable to rollover their ABCP obligations through the issuance of new notes. Because Metcalfe was unable to pay the principal on the ABCP notes as they matured, it faced imminent liquidation.
Metcalfe’s ABCP noteholders, most of which were large financial institutions, realized that an immediate liquidation of Metcalfe’s ABCP portfolio would lead to massive value destruction. The financial markets rapidly weakened and there were few buyers for such a large portfolio of assets. Accordingly, the noteholders agreed to forego payment in order to give Metcalfe time to develop a plan to restructure the notes. However, Metcalfe’s ABCP program was particularly complicated, and it soon became apparent that a successful restructuring of the notes would require the cooperation of the noteholders and numerous other participants in Metcalfe’s ABCP program, such as trustees, brokers, asset providers, sponsors, and conduits. After several months of extensive negotiations, a restructuring plan was developed that, among other things, (i) extended the maturity date for the ABCP notes, (ii) reduced the amount of margin calls that Metcalfe would have to make under certain derivative transactions that were part of Metcalfe’s ABCP program, and (iii) included a global release and injunction that would protect all plan participants from any liability stemming from their involvement in the restructuring.
On March 17, 2008, Metcalfe’s insolvency proceeding was commenced in the Ontario Superior Court of Justice by a committee of noteholders in order to effectuate the agreed restructuring plan. The Ontario Court did not take issue with the first two elements of the plan. However, the Ontario Court carefully considered several objections indicating that it did not have the power under Canadian law to issue a global release and injunction that protected third-parties that were not creditors of the debtor. The Ontario Court noted that the plan was the product of extensive negotiations, was the only option available to restructure Metcalfe’s ABCP, and was designed to benefit all noteholders, 96% of which had expressed support for the plan. The Ontario Court also recognized that the plan was unique because it sought to restructure Canada’s entire ABCP market and not simply the debts of one company. Even though several of the plan participants were financial institutions that were not creditors of the debtor, and therefore not normally entitled to benefit from a release and injunction, these financial institutions had made important concessions that constituted consideration for the third-party releases. Furthermore, the sheer size and importance of the plan justified their protection under a release and injunction that absolved them of any liability relating to their participation in the plan. Accordingly, on June 5, 2008, the Ontario Court issued an order approving the plan in full. The order was affirmed on appeal by the Ontario Court of Appeal on August 18, 2008.
On November 10, 2009, Metcalfe filed a petition under chapter 15 of the Bankruptcy Code requesting recognition of its Ontario insolvency proceeding so that it could implement its ABCP restructuring plan in the U.S. – including the third-party release and injunction. After reviewing the Canadian decisions, Judge Glenn examined the availability of third-party non-debtor releases and injunctions under U.S. bankruptcy law. Although several U.S. courts had approved such relief, they had done so only when “truly unusual circumstances render the release terms important to success of the plan.”7
Judge Glenn noted that the standard for issuing a non-debtor release had been further restricted in the Second Circuit in In re Johns- Manville Corp., which held that a “bankruptcy court only has jurisdiction to issue a non-debtor release where the released claims ‘directly affect the res of the bankruptcy estate.’” However, Johns-Manville had been remanded on other grounds by the U.S. Supreme Court and, thus, it was not clear if the part of the opinion relating to non-debtor releases remained binding law. If it did, the Metcalfe plan and its third-party releases could not be approved because it would prevent an investor from asserting a claim against a plan participant that did not affect the res of Metcalfe’s estate. Nevertheless, Judge Glenn stated that the proper issue before the Court was not whether the plan approved by the Canadian courts was appropriate, but whether the Canadian proceedings were conducted in such a way that their rulings should be enforced in the U.S. under chapter 15 of the Bankruptcy Code. Judge Glenn noted that under principles of comity “[a] U.S. bankruptcy court is not required to make an independent determination about the propriety of individual acts of a foreign court.”9 Instead, “[t]he key determination . . . is whether the procedures used in Canada meet [U.S.] standards of fairness.”10
After reviewing the decisions of the Canadian courts, which were reached after an exhaustive analysis of the issues in the highly contested proceedings, Judge Glenn concluded that “principles of enforcement of foreign judgments and comity in chapter 15 cases strongly counsel approval of enforcement in the United States of the third-party non-debtor release and injunction provisions included in the Canadian Orders.”11
Had Judge Glenn stopped there, the opinion in Metcalfe would be notable for its pronouncement that in deciding whether to award relief under chapter 15 of the Bankruptcy Code, a bankruptcy judge should focus on whether the foreign court employed fair methods in reaching the determination and not on whether the result would be the same under U.S. law. Judge Glenn went further though, and also stated that a chapter 15 debtor in fact could receive relief that “could not be entered in a plenary chapter 11 case.”12 This statement – sure to be a favorite of bankruptcy attorneys seeking extraordinary relief under chapter 15 in the future – reflects the essence of chapter 15’s internationalist origins and indicates that chapter 15 may provide avenues for relief that are not otherwise available in the Bankruptcy Code.
The Reach of the Metcalfe Decision
Despite the important legal pronouncements in Metcalfe, the Court’s decision may be distinguished by those parties wishing to avoid its potentially broad reach. The most obvious is the extraordinary circumstances that gave rise to the facts of the case. The world-wide financial crisis that started in 2007 caused unprecedented dislocations in financial markets.13 The entire Canadian ABCP market had frozen and a broad and innovative solution was required to prevent billions of dollars in losses and to ensure the success of the largest restructuring in Canadian history. Accordingly, Metcalfe’s detractors will likely argue that it is a one-off case carrying little precedential value because it arose during unique circumstances.
Another important aspect of Metcalfe that might limit its applicability to future chapter 15 cases is that the relief requested by the foreign debtor – a third-party non-debtor release – previously had been awarded in U.S. cases. Although third-party non-debtor releases are rare in the U.S. and the Second Circuit has placed restrictions on their applicability, they by no means violate U.S. public policy. Accordingly, had the foreign debtor in Metcalfe requested a type of relief that was entirely without precedent in the U.S., it is not clear that the outcome would have been the same.
Lastly, the importance of Metcalfe’s status as a Canadian debtor cannot be overstated. Principles of comity stretching back many years indicate that the decisions of Canadian courts should be accorded the utmost respect in U.S courts. Throughout the Metcalfe opinion, Judge Glenn repeatedly referred to the competence and fairness of Canadian judicial proceedings and quoted several cases repeating these sentiments. 14 Accordingly, in Metcalfe, it is not clear the outcome would have been the same had the foreign proceeding taken place in a country that does not employ judicial procedures as respected as those in Canada.
Chapter 15 is the newest chapter of the Bankruptcy Code and decisions rendered in its infancy will shape the statute’s interpretation for years to come. Metcalfe is in keeping with the universalist approach that underlies the purpose of chapter 15 and UNCITRAL’s Model Law on Cross-Border Insolvency. Just as the growth of national businesses in the late 19th century necessitated a comprehensive federal system of bankruptcy in the U.S., increasing globalization has led to a need for an international system of bankruptcy in the 21st century. Chapter 15 and similar insolvency regimes in foreign countries based on the Model Law help ensure that the insolvencies of international corporations are carried out consistently and pursuant to a transparent set of rules. In Metcalfe, Judge Glenn achieves a result that respects foreign law without rubberstamping it, and thus strengthens the nascent international insolvency regime embodied in chapter 15.