Contributed by Andrea Saavedra
In a previous blog post, we examined the Fifth Circuit Court of Appeals’ Vitro decision, in which it upheld the bankruptcy court’s denial of a request by a foreign debtor’s representative for recognition and enforcement of a Mexican plan of reorganization that contained non-consensual third party releases.  Among other things, the Vitro releases were deemed unenforceable because, if upheld, they would have eviscerated certain creditors’ collection rights under separate guaranties issued by Vitro’s U.S. non-debtor affiliates.  In its decision, the Fifth Circuit established a three-step process for courts to apply when faced with the question of granting comity to the orders of a foreign court once a foreign proceeding has been recognized: first, determine whether relief would be available under section 1521(a) or (b) of the Bankruptcy Code; second, if the requested relief is not specifically available thereunder, decide whether the relief can be considered “appropriate relief” under section 1521(a); and, lastly, if the relief is not “appropriate relief,” determine whether the requested relief may be granted under section 1507 of the Bankruptcy Code (which permits the U.S. court to grant such “additional assistance” as is consistent with the principles of comity).  In our entry, we queried whether other courts would follow suit and apply the Fifth Circuit’s three-step process.
Well, ask and you shall receive!
Recently, in the chapter 15 case of In re Sino-Forest Corp., Judge Glenn of the Bankruptcy Court for the Southern District of New York was faced with a foreign debtor representative’s request for recognition and enforcement of certain orders entered in the Canadian debtor’s bankruptcy case.  Specifically, as part of its plan of compromise and reorganization, the debtor and its co-defendants agreed to settle certain securities-related class action cases that were pending in both the U.S. and Canada.  As part of the settlement, the debtor’s auditor agreed that, upon satisfaction of certain conditions precedent (including, among other things, recognition and enforcement of the terms of the settlement in the U.S.), it would pay $117 million into a settlement trust fund to be distributed to class members under the plan.  In return for such payment (and other non-monetary consideration), the auditor was to receive a global release and the benefit of certain injunctions under the plan.  While a small minority of creditors objected to the terms of the settlement and the plan, the majority of stakeholders were supportive, and the settlement and plan were approved by the Ontario court overseeing the debtor’s arrangement.
In granting recognition and enforcement of the settlement order and the debtor’s plan, Judge Glenn noted that the court could grant the requested relief under the “additional assistance” provisions of section 1507.  In so doing, he reasoned that the question was not whether he should approve, in the first instance, the grant of broad third party releases (which he observed are available in “rare” circumstances in the Second Circuit, in contrast to their outright prohibition in the Fifth Circuit), but rather whether the “foreign orders should be entered” in a chapter 15 case.  Because the issue of the propriety of the third party releases had been “fully and fairly” litigated in the Canadian courts, the bankruptcy court found that it could recognize and enforce the releases in the United States under the comity considerations set forth in section 1507.  Because section 1507 provided the court with adequate grounds under which to recognize and enforce the Ontario court’s orders after recognition of the Canadian proceeding, the bankruptcy court did not need to reach the question as to whether such third party releases could be recognized under section 1521 in accordance with the three-step analysis offered by the Fifth Circuit.
Further, the bankruptcy court noted that granting the requested relief was firmly outside the provisions of section 1506 of the Bankruptcy Code, which otherwise would permit it to refuse to “take an action” that would be “manifestly contrary to the public policy of the United States.”  Although the federal circuits are split on the issue of the availability of non-consensual third party releases, Judge Glenn noted that the existence of the split itself demonstrated that third party releases are not “manifestly contrary” to public policy.  He also observed that the Vitro decision did not dictate a different result as the Fifth Circuit specifically declined to reach the application of section 1506, if any, in that case.
The Sino-Forest decision demonstrates that Vitro does not necessarily stand for the per se prohibition against recognition of foreign restructuring plans that grant non-consensual third party releases.  Indeed, so long as granting such relief is not inconsistent with general principles of comity and, among other things, the validity of such releases was fully and fairly litigated in the foreign proceeding, a bankruptcy court may be willing to enforce them in the United States.