Restructuring

Chapter 15 recognition of a foreign main proceeding can be a useful tool for a foreign debtor seeking to protect property in the United States. The protections of chapter 15, however, are subject to the bankruptcy court’s discretion and guided by a host of potentially conflicting policy considerations. Chapter 15 is designed to promote, among other things, the “fair and efficient administration of cross-border insolvencies that protects the interests of all creditors, and other interested entities, including the debtor.” This means that the court in chapter 15 must balance parties’ competing interests to a greater degree than in cases under other chapters of the Bankruptcy Code.
A directive to balance parties’ interests generally does not lend itself to commercial certainty, and so judicial decisions explaining how courts balance parties’ interests tend to be welcome developments in chapter 15 law. In a recent decision in the chapter 15 case In re Cozumel Caribe, S.A. de C.V., the United States Bankruptcy Court for the Southern District of New York established principles for balancing parties’ interests when a U.S. creditor alleges misconduct by the foreign representative.
Cozumel Caribe and CT Investment Management
Cozumel Caribe is a Mexican company that owns and operates the Hotel Park Royal Cozumel, an all-inclusive resort in Cozumel, Mexico. It is reorganizing in a concurso mercantile proceeding in Mexico. In 2010, Cozumel Caribe commenced a chapter 15 case in the Southern District of New York and obtained recognition of its concurso proceeding as a foreign main proceeding.
Cozumel Caribe’s reorganization has involved significant litigation over a claim and other rights asserted by CT Investment Management, the special servicer of securitized notes backed by $103 million in secured loans made to Cozumel Caribe. CTIM holds $8 million in cash in the U.S. as security for those loans and has been seeking to exercise remedies against that cash. It has not only asserted a $103 million claim against Cozumel Caribe’s concurso estate, but also commenced an action in the United States against Cozumel Caribe’s non-debtor affiliates and certain non-debtor guarantors of the secured loans. So far, CTIM’s efforts have been unsuccessful.
CTIM’s Motion to Terminate Recognition of the Foreign Main Proceeding
CTIM moved to terminate the recognition of Cozumel Caribe’s foreign main proceeding on the basis that continued recognition of the proceeding “would be manifestly contrary to U.S. public policy.” CTIM asserted that, among other things,

• the foreign representative took inconsistent positions in the concurso proceeding and the chapter 15 case “on the key issue of the amount of CTIM’s claim”;
• the foreign representative used the recognition order to block enforcement of a non-debtor guarantee in a U.S. district court, and then Cozumel Caribe sought to invalidate that guarantee by obtaining a default judgment in a Mexican court;
• Cozumel Caribe attempted to transfer assets out of the concurso estate for no consideration; and
• the foreign representative failed to inform the U.S. bankruptcy court of material developments in the concurso proceeding.

These and other actions, CTIM contended, were so contrary to U.S. public policy that they justified terminating the bankruptcy court’s recognition of the concurso proceeding.
The Bankruptcy Court Denied CTIM’s Motion
The bankruptcy court denied CTIM’s motion primarily because “any decisions made in the Concurso Proceeding may be subject to further proceedings in the Mexican courts.”  The court explained the problem as follows:

CTIM is not entitled to relief in this Court [just] because it feels slighted by decisions or actions in Mexican court proceedings — proceedings that remain open and ongoing, with multiple parties pursuing ancillary or appellate relief. Dissatisfaction with rulings of the lower Mexican courts is the proper subject for Mexican appellate proceedings, but does not implicate the Recognition Order.

For CTIM, however, good things may indeed come to those who wait. The court explained that, although it was upholding recognition of the foreign main proceeding, Cozumel Caribe would still need to obtain the court’s recognition of orders entered in that proceeding to gain any substantive relief in the U.S. “Granting comity to orders of a foreign court is not an all or nothing exercise,” the court reasoned. “[S]ome orders or judgments in the same case or proceeding may merit comity while others may not.”
As for the foreign representative’s taking inconsistent positions in the concurso proceeding and the chapter 15 case, the bankruptcy court held that sanctions — which CTIM was not seeking — were the appropriate remedy. Such conduct did not implicate the recognition of the foreign main proceeding.
Finally, the bankruptcy court ordered the foreign representative to file status reports of all material developments in the concurso proceeding at least every three months. CTIM has an opportunity to file responses to each of those reports.
How a Bankruptcy Court Balances Parties’ Competing Interests in Chapter 15
Cozumel Caribe illustrates one way that a bankruptcy court in chapter 15 may attempt to “protect[ ] the interests of all creditors, and other interested entities, including the debtor” by balancing those interests:

• Although potentially unfair results in foreign lower-court proceedings do not justify terminating recognition of the foreign main proceeding, the U.S. bankruptcy court need not recognize the substantive orders entered in the foreign main proceeding unless those orders comport with U.S. public policy.
• Although the foreign representative’s failure to comply with his chapter 15 disclosure obligations to the U.S. bankruptcy court do not justify terminating recognition of the foreign main proceeding, a stricter reporting requirement in the chapter 15 case is an appropriate remedy.
• Although the foreign representative’s taking inconsistent positions in the concurso proceeding and the chapter 15 case did not justify terminating recognition of the foreign main proceeding, sanctions in the chapter 15 case may be an appropriate remedy.

Implications for Parties in Chapter 15 Cases
Cozumel Caribe suggests that foreign representatives face a relatively low bar to obtaining and maintaining recognition of a foreign main proceeding. But by the same token, recognition of the proceeding may be of limited use to a foreign debtor seeking to enforce that proceeding’s outcomes in the U.S. unless those outcomes generally comport with U.S. public policy.
For U.S. creditors of foreign debtors, Cozumel Caribe may provide a basis to challenge the U.S. validity of every final order entered in the foreign proceeding on public policy grounds.  Finality, though, may be the key: A creditor that perceives a foreign proceeding as unfair may need to wait for some measure of finality in that proceeding before it can seek relief in chapter 15.  This could be viewed as similar to the general prohibition on interlocutory appeals in the U.S. judicial system.
Finally, for foreign debtors making use of chapter 15, Cozumel Caribe serves as an admonishment to make the foreign proceeding’s process and substantive results consistent with U.S. public policy. Foreign debtors that ignore U.S. public policy in their foreign proceedings risk becoming unable to enforce that proceeding’s outcomes in the U.S.