As cross-border restructurings proliferate, especially in the wake of the global COVID-19 pandemic, companies with global assets and operations may utilize chapter 15 of the U.S. Bankruptcy Code (the “Bankruptcy Code”) to facilitate cooperation between U.S. and foreign bankruptcy courts and protect assets located in the U.S.  One doctrine central to relief under chapter 15 is the principle of comity, which refers to the recognition one nation’s legal system accords to another nation’s judicial proceedings.  In chapter 15 proceedings, U.S. bankruptcy courts routinely invoke the principle of comity to give assistance to representatives of foreign debtors, to preserve foreign debtors’ U.S. assets, or to protect their creditors’ interests.  One example of such assistance that is available upon recognition of a foreign proceeding is section 1521(a)(4) of the Bankruptcy Code, which authorizes discovery “concerning the debtor’s assets, affairs, rights, obligations, or liabilities.”¹

In a recently issued decision, In re Comair Ltd.,² the United States Bankruptcy Court for the Southern District of New York (the “Bankruptcy Court”) held that the foreign representative of Comair Limited (“Comair”), whose foreign proceeding was substantially consummated (but not yet terminated), was nonetheless entitled to obtain pre-litigation discovery against The Boeing Company (“Boeing”) in Comair’s chapter 15 proceeding, to investigate potential causes of action Comair may have against Boeing.  Specifically, the Bankruptcy Court ruled that the discovery was authorized under section 1521(a)(4) of the Bankruptcy Code because it: (i) promoted the principle of comity and effectuated the purpose of chapter 15; (ii) was necessary to protect Comair’s assets; and (iii) sufficiently protected Boeing’s interest.

Although other bankruptcy courts have granted pre-litigation discovery in chapter 15 proceedings, the Bankruptcy Court’s decision is noteworthy because it stands for the proposition that comity applies to, and pre-litigation discovery is available to the foreign representative of, a foreign proceeding that had essentially concluded.  Further, it illustrates that chapter 15 courts can provide broad and flexible relief to foreign debtors whose creditors and other interested parties are sufficiently protected.

Background

Comair was one of the largest regional commercial airline companies in southern Africa, employing more than 2,000 employees and operating a fleet of 27 aircraft in or about May 2020.³  Due to a combination of mounting debt obligations and COVID-related flight restrictions, Comair commenced a business rescue proceeding in South Africa (the “South African Proceeding”) under Chapter 6 of the South African Companies Act 71 of 2008 and appointed Richard Ferguson and Shaun Collyer as joint business rescue practitioners (the “Business Rescue Practitioners”).⁴

The Business Rescue Practitioners obtained approval of a business rescue plan (the “Rescue Plan”) in the South African Proceeding on September 18, 2020.⁵  On February 16, 2021, one of the Business Rescue Practitioners, as the foreign representative (the “Foreign Representative”) of the South African Proceeding, commenced a chapter 15 proceeding in the Bankruptcy Court, seeking recognition of the South African Proceeding and various other relief.⁶

The implementation of the Rescue Plan, however, was complicated by further COVID-related travel restrictions imposed by the South African government.⁷  As a result, Comair was forced to ground its fleet and was prevented from generating any significant revenue.⁸  To account for such financial and operational challenges and ensure Comair’s feasibility as a going concern upon emergence from business rescue, the Business Rescue Practitioners sought additional funding and negotiated amendments to the Rescue Plan.⁹ 

One such amendment was the termination of a purchase agreement (the “Purchase Agreement”) by and between Comair and Boeing for the manufacture, sale, and delivery of eight 737 MAX 8 aircraft.¹⁰  Pursuant to the Purchase Agreement, Boeing delivered and received payment for the first 737 MAX 8 aircraft.¹¹  Delivery and payment of the remaining 737 MAX 8 aircraft stalled due to the grounding of all 737 MAX 8 aircraft worldwide.¹²  On February 12, 2020, prior to the explosion of COVID-19 and the commencement of the South African Proceeding, Comair purportedly cancelled and terminated the Purchase Agreement for all eight 737 MAX 8 aircraft.¹³  Although Boeing disputed the alleged cancellation, the Business Rescue Practitioners attempted to reaffirm the alleged cancellation on February 16, 2021.¹⁴  On March 5, 2021, the Business Rescue Practitioners amended the Rescue Plan to authorize the Business Rescue Practitioners to, among others, reject the Purchase Agreement.¹⁵           

Following the Rescue Plan amendment, the Business Rescue Practitioners sent a letter to Boeing addressing the parties’ dispute over the Purchase Agreement and asserting various causes of action against Boeing, based on publicly available information.¹⁶  The Business Rescue Practitioners also maintained that publicly available information did not provide a full picture of the universe of Comair’s potential claims against Boeing.¹⁷  As a result, the Business Rescue Practitioners sought to bolster their claims through discovery against Boeing, a U.S.-based company, in Comair’s chapter 15 proceeding.¹⁸

After the Bankruptcy Court entered an order recognizing the South African Proceeding as a “foreign main proceeding” under chapter 15 on April 14, 2021, the Foreign Representative moved for discovery of Boeing in connection with the Purchase Agreement, arguing that such discovery was necessary to assess potential causes of action against Boeing and the likelihood and extent of recovery.¹⁹  Boeing opposed the Foreign Representative’s motion.

Decision

The Bankruptcy Court authorized discovery of Boeing relating to Comair’s potential causes of action and monetary recovery, ruling that such discovery was authorized under section 1521(a)(4) of the Bankruptcy Code because it: (i) effectuated the purpose of chapter 15; (ii) was necessary to protect Comair’s assets; and (iii) sufficiently protected Boeing’s interest.

The Bankruptcy Court noted that, as a preliminary matter, section 1521(a)(4) of the Bankruptcy Code permits discovery “concerning the debtor’s assets, affairs, rights, obligations or liabilities” “where necessary to effectuate the purpose of [] chapter [15] and to protect the assets of the debtor or the interests of the creditors.”²⁰  In addition to satisfying these requirements, section 1522(a) of the Bankruptcy Court requires that “the interests of the creditors and other interested entities are sufficiently protected.”²¹  After discussing each of these statutory requirements, the Bankruptcy Court ultimately concluded that the Foreign Representative’s discovery request met every requirement.

First, the Bankruptcy Court ruled that the requested discovery effectuated the purpose of chapter 15 by furthering the principle of comity, which “is the recognition [that] one nation allows within its territory to the legislative, executive, or judicial acts of another nation . . . . ”²²  Although the principle of comity is not expressly mentioned in section 1521(a)(4), the Bankruptcy Court observed that whether relief under the same section is warranted “turns on subjective factors that embody the principle[] of comity.”²³  Here, the requested discovery promoted comity because it facilitated the discharge of the Foreign Representative’s statutory duty under South African law to “investigate [Comair’s] affairs, business, property, and financial situation.”²⁴  Despite Boeing’s contention that the requested discovery did not concern comity because Comair had not commenced litigation against Boeing and the Rescue Plan was not conditioned on the prosecution or estimation of Comair’s potential claims, the Bankruptcy Court held that relief under section 1521(a)(4) of the Bankruptcy Code was still available because the plain language of such section neither precluded pre-litigation discovery nor limited how any future litigation proceeds might be used.²⁵

Second, the Bankruptcy Court ruled that the requested discovery was necessary to protect Comair’s assets.  Under the meaning of section 1521(a)(4) of the Bankruptcy Code, “assets of the debtor” include contingent property interests, which in turn encompass potential causes of action for money damages.²⁶  Nonetheless, Boeing argued that the discovery sought by Comair was not necessary to protect “the assets of the debtor” because the South African Proceeding was “essentially complete.”²⁷  As support, Boeing underscored various milestones achieved in the South African Proceeding, including: (i) the approval of the Rescue Plan; (ii) the repudiation of onerous prepetition obligations; (iii) the completion of Comair’s recapitalization pursuant to the Rescue Plan; and (iv) the full adjudication of creditors’ claims.²⁸  The Bankruptcy Court found such milestones irrelevant, as none of them constituted a “Termination Event” under South African law that could end the South African Proceeding.²⁹  Instead, the fact that the Business Rescue Practitioners were required to publish status updates and were free to amend the Rescue Plan indicated that the South African Proceeding was ongoing and the Rescue Plan incomplete.³⁰  Accordingly, nothing “foreclose[d] the Foreign Representative from pursuing claims against Boeing in furtherance of his effort to rescue the company . . . and the [discovery] that the Foreign Representative s[ought was] plainly necessary to protect Comair’s assets.”³¹

Boeing also attacked the necessity of the requested discovery by arguing that (i) there was minimal risk of evidence spoliation as Boeing was already preserving relevant materials for similar litigation and (ii) Comair could seek discovery outside of its chapter 15 proceeding.³²  However, the Bankruptcy Court found no legal support for either argument, noting that “[t]o find otherwise would completely eviscerate the investigatory function that section 1521(a)(4) is designed to serve.”³³

Third, the Bankruptcy Court held that Boeing was “sufficiently protected” by the requested discovery.  While the Bankruptcy Code does not define the term “sufficiently protected,” the Bankruptcy Court noted that case law clearly required it to (i) balance the Foreign Representative’s need for the requested discovery with Boeing’s interests in avoiding costly discovery and (ii) tailor the relief in a way that did not unduly favor the Foreign Representative over Boeing.³⁴  The Foreign Representative argued he needed the discovery to complete his investigation and comply with statutory obligations under South African law, because publicly available information could not reveal the complete universe of Comair’s potential claims against Boeing.³⁵  Accordingly, the Foreign Representative did not impermissibly “use the bankruptcy laws as a ‘back door’ to benefit ‘pending litigation outside of the bankruptcy court,’” and his requested discovery was not precluded by section 1522(a).³⁶

The Bankruptcy Court did not, however, opine on the extent of Boeing’s alleged interests in avoiding “the massively expensive and lengthy discovery before any suit is filed.”³⁷  Neither did it rule on whether the scope of discovery sought by the Foreign Representative was overbroad.³⁸  Instead, the Bankruptcy Court ordered Comair and Boeing to confer and resolve their discovery disputes, and to return to the Bankruptcy Court if such disputes cannot be resolved.³⁹ 

Conclusion

Notwithstanding that (i) Comair’s Rescue Plan was approved, (ii) Comair was recapitalized, and (iii) its creditors’ claims were adjudicated, the South African proceeding had not been closed and thus pre-litigation discovery was not barred.  From a practical perspective, this decision highlights that the bankruptcy court in a chapter 15 case can give broad assistance to a foreign representative to carry out their duties under foreign law, so long as the foreign proceeding has not yet terminated.  This decision also serves as a reminder that it is important to synchronize proceedings in multiple forums, because the timing of requesting chapter 15 relief can have a significant impact on the type and extent of relief available.

Another interesting facet of this decision is that it does not address whether the type and scope of discovery sought by the Foreign Representative was permitted under South African law.  Although the Foreign Representative asserted that “South African law neither prohibits nor is hostile to the discovery sought here under U.S. law,”⁴⁰ the Bankruptcy Court did not appear to be concerned even if such was the case.  As it observed in In re Platinum Partners Value Arbitrage Fund L.P., the fact that a foreign representative sought discovery “clearly prohibited under [foreign] law . . . is not a valid basis upon which [a] court, in the exercise of its discretion, must limit relief available . . . pursuant to the Bankruptcy Code and Rules.”⁴¹  While both In re Platinum Partners Value Arbitrage Fund L.P. and In re Comair Ltd. demonstrate that the principle of comity may be applied to fashion relief not necessarily permitted under foreign law, it is worth noting that comity cannot justify relief truly contrary to the public policy of the U.S.⁴² or potentially the foreign jurisdiction.