On December 21, the Bankruptcy Court for the Southern District of New York recognized and agreed to enforce the unopposed foreign restructuring plan of oil exploration company C.G.G. S.A. (“C.G.G.,” or the “Company”) under Chapter 15 of the Bankruptcy Code.  C.G.G.’s restructuring marks one of the few times a U.S. bankruptcy court has been asked to enforce a French court-sanctioned bankruptcy plan.

C.G.G.’s French Bankruptcy

C.G.G. is a nearly 90-year-old French company specializing in geophysical services.  Its business comes predominantly from the Oil and Gas Exploration and Production (“E&P”) industry.  Like other companies in E&P, as oil and gas prices dropped, C.G.G.’s revenues dropped precipitously, from more than $3.4 billion in 2012 to $1.2 billion in 2016.  C.G.G. simultaneously faced nearly $3 billion in funded indebtedness. C.G.G. initially divested non-core assets and reduced its headcount to save money, but soon determined that those measures were insufficient, and that restructuring was necessary.  The Company initiated restructuring in France in February 2017.  Negotiations with stakeholders eventually resulted in a June 2017 Lock-Up agreement, through which the company’s shareholders agreed not to sell their shares. Negotiations also led to a restructuring support agreement that would swap nearly $2 billion in debt for most of the reorganized Company’s equity.

C.G.G. simultaneously commenced insolvency proceedings in French court through a sauvegarde, or Safeguard proceeding, which halted debt payments, acceleration, and enforcement of securities against the company.  C.G.G. then filed a Chapter 15 petition in the Southern District on June 14. Some of C.G.G.’s subsidiary companies also filed under Chapter 11.  In July 2017, the New York court recognized the French case as a “foreign main proceeding” – occurring in the country of the debtors’ “center of main interests,” as described in section 1520 of the Code, rather than a “nonmain proceeding,” taking place in a country where the debtor only has an “establishment.”

C.G.G. passed the restructuring agreement, called the Safeguard plan, with more than 90% of voting creditors approving.  The French court accepted the plan via a “Sanctioning Order” on December 1.

On December 6, C.G.G., through its Foreign Representative, filed a new motion in the Southern District, requesting the court (a) give full force and effect to the Sanctioning order; (b) permanently enjoin actions against the Safeguard Plan within the U.S.; (c) declare securities given to the creditors under the plan (the “Safeguard Securities”) exempt from Section 1145 registration; (d) authorize C.G.G.’s Foreign Representative to seek entry of a final decree to close the Chapter 15 case under Rule 5009(c); and (e) waive the 14-day stay of effectiveness for the order.

The Order

Bankruptcy Judge Martin Glenn granted the motion on all counts. The court first determined that the Sanctioning Order (the “Order”) fell within “any appropriate relief,” as required under section 1521(a)(7). The court cited the creditors’ overwhelmingly support for the Safeguard Plan and reasoned that the plan’s effectiveness, and the concurrent Chapter 11 cases, was conditioned on the court’s acceptance of the Order.

The court then found that, as required under Section 1522, the interests of creditors and all interested parties in the case were “sufficiently protected.”  The court reasoned that, without the court’s approval of the Order, the Plan might not be fully implemented. Further, the French court had already fully determined, after a hearing with interested parties, that the Safeguard plan gave sufficient protection.  The court also agreed to permanently enjoin actions against the Safeguarding Plan.

The court also determined the Safeguard Securities were exempt from federal and state registration requirements.  It found that section 1145, which allows exemptions from Securities laws, can be applied to Chapter 15 cases through sections 1507 and 1521 as long as the securities (a) were offered or sold under a plan; (b) were securities of the debtor or an affiliate in a joint plan; and (c) were sold in exchange for a claim against the debtor or affiliate, as per section 1145(a)(1).  The court found that all three requirements were satisfied.

Last, the court found that, upon its order becoming final, section 350(a)’s requirements for closing a case were satisfied, and thus the case could be closed following the procedures of rule 5009(c). The court also waived the 14-day stay of effectiveness, in order to allow the restructuring to begin immediately.

Conclusion

The Southern District has frequently recognized and enforced foreign court orders in approval of a foreign debtor’s restructuring plan – including recent plans from Hong Kong, Australia, Canada, the Caymans, and South Africa.  But as Judge Glenn remarks in his opinion, French Safeguard plans have rarely been brought to U.S. bankruptcy courts for recognition and enforcement.  The ruling suggests that French plans that are widely approved by creditors will receive a stamp of approval from the Southern District.  It suggests moreover that the court will defer to the findings of French courts that have fully heard all parties to the restructuring on issues like section 1522 sufficient protection.

On Wednesday, January 14th, 2015, the Second Circuit declined to grant an en banc review of its holding requiring a full Section 363 review of a claims sale in a Chapter 15 proceeding in the case of In Re: Fairfield Sentry Ltd.  This decision left intact the Second Circuit’s earlier holding that dramatically expanded the ability of a bankruptcy court in a Chapter 15 proceeding to weigh in on issues related to the disposition of property within the United States and sharply curtailed the required deference to the foreign court in these proceedings.

The underlying dispute centered on the sale of a $230 million claim by the bankruptcy estate of Fairfield Sentry Limited to Baupost Group LLC, a hedge fund.  Fairfield was an investment fund that had invested 95% of their assets in the Madoff ponzi scheme that collapsed in 2008, and following the Madoff bankruptcy Fairfield entered into its own liquidation in the British Virgin Islands, which was recognized under Chapter 15 in 2010.  Subsequently, Fairfield sold its claims in the Madoff liquidation for approximately 32 cents on the dollar, but three days after the signature of the trade confirmation, the announcement of new recoveries in the Madoff liquidation increased the value of the claim to over 50 cents on the dollar.

Following approval of the sale in the British Virgin Islands over the objections of the Fairfield Trustee, the Bankruptcy Court denied an application for section 363 review on the basis that the SIPA claim was not property within the United States, and that comity dictated deferring to the British Virgin Islands court that had approved the sale.  The District Court, on appeal, affirmed the Bankruptcy Court.

The Second Circuit’s initial decision on September 26, 2014 held that the claim in the Madoff proceeding was property within the United States and subject to Chapter 15 review as the claim was subject to attachment or garnishment by US courts, and accordingly under Section 1502(8) constituted property within the jurisdiction of the United States.  Furthermore, the Second Circuit held that the Bankruptcy Code clearly required a section 363 review due to the language that stated that section 363 applied in a Chapter 15 proceeding “to the same extent” as a Chapter 7 or Chapter 11 proceeding.  Accordingly, the Second Circuit held that the principle of comity remained strongly applicable in Chapter 15 proceedings, it did not override the requirement for an independent section 363 review of the sale.

Furthermore, the Second Circuit noted that the section 363 review must include the significant increase in the value of the claim following the sale rather than merely analyzing the transaction at the moment of the sale.  This requirement, given the significant increase in the value of the claim, makes it significantly more difficult for the buyer, Baupost Group, to secure approval of the sale.

Following the original order, Baupost moved for reconsideration en banc or, in the alternative, a an amendment of the decision to preserve Baupost’s alternative arguments that no section 363 hearing was required.  Specifically, Baupost argued (i) that section 363 was discretionary rather than mandatory, (ii) that the bankruptcy court, in its recognition of the British Virgin Islands proceeding order, had entrusted to the Fairfield Trustee the “administration or realization of any property located in the United States” making review unnecessary, and (iii) that the sale of the SIPA claim was in the ordinary course of business.  The Second Circuit directed the Fairfield Trustee to respond to these three alternative arguments.  The response argued that each of these three arguments had been presented to the Bankruptcy Court or the District Court and either explicitly or implicitly rejected.  Following this response, the Second Circuit denied Baupost’s motion without further comment.

As a result of this decision, parties should be aware that their transactions with foreign bankruptcy companies will likely be subject to both a standard review in the foreign bankruptcy court, as well as a full section 363 review in the United States.  This will likely be most significant in cases where the foreign court’s review will not take into account subsequent developments, while the Second Circuit’s decision requires the US courts to take those developments into account when determining if approval should be granted.

On December 3, 2013, the Court of Appeals for the Fourth Circuit upheld, in  Jaffe v. Samsung Electronics Co., the power, and the duty, of a United States Bankruptcy Court to condition the grant of Bankruptcy Code section 1521(a)(5) relief to a foreign insolvency administrator on conditions sufficient to protect the interests of all interested parties affected by the relief.

Jaffe v. Samsung concerned approximately 4,000 U.S. patents owned by Qimondo AG when it entered insolvency proceedings in 2009.  These patents related to various kinds of semiconductor technology, and were subject to numerous cross-license agreements with other semiconductor manufacturers that allowed each cross-licensee to design freely without risk of running afoul of the dense “thicket” of overlapping intellectual property rights.  The Fourth Circuit characterized these cross-licenses as, essentially, promises made by Qimondo not to sue the licensors.  In exchange, Qimondo received a similar promise.  The cross-licensees, who were the appellees  (Samsung Electronics Company, Infineon Technologies, IBM, Hynix Semiconductor, Inc. Intel Corporation, Nanya Technology Corporation, and Micron Technology) are among the biggest semiconductor manufacturers in the world.

Michael Jaffe, the German insolvency administrator for Qimondo, successfully petitioned the Bankruptcy Court for the Eastern District of Virginia to recognize the German insolvency proceeding as a “foreign main proceeding” under Chapter 15 of the Bankruptcy Code.  Specifically, Jaffe requested that the Bankruptcy Court entrust to him the administration of all of Qimondo’s U.S. assets, principally consisting of the 4,000 U.S. patents.  The Bankruptcy Court granted Jaffe’s petition, but conditioned this discretionary relief on Jaffe affording the licensees the same treatment they would have received under Bankrupty Code section 365(n).  Section 365(n) allows the licensee of a right to intellectual property under a rejected executory contract to elect to retain its rights under the license, just as they existed immediately before the bankruptcy case commenced.

Jaffe, however, sought to cancel unilaterally the cross-licenses, pursuant to section 105 of the German bankruptcy code, in order to relicense them for annual cash payments that would flow to and benefit Qimondo’s creditors.  The cross-licensees argued that the Bankruptcy Court correctly conditioned Jaffe’s power to administer the U.S. assets of Qimondo on the protections in section 365(n), and that enforcing section 365(n) would not make the U.S. patents valueless, since they could still be sold to entities that had not yet licensed them.

The Fourth Circuit held that Chapter 15 requires courts to weigh the interests both of debtors and creditors, and particularly local creditors, when granting discretionary relief to foreign estate administrators under section 1521.  This is required both by section 1506, which forbids the application of foreign bankruptcy law when granting comity would be manifestly contrary to the public policy of the United States, and by section 1522 which requires the Bankruptcy Court balance the interests of all interested parties before awarding any section 1521 relief.

In reaching this conclusion, the Fourth Circuit weighed the risk that allowing Jaffe to use German law to override section 365(n) and reject the cross-licenses could destabilize the semiconductor industry leading to decreased innovation, confidence, and competition against the benefits of an improved recovery for Qimondo’s other creditors.  The court also posited that other licensors might transfer their patents to German entities created only to allow them to reject the licenses in bankruptcy.  Although these risks were difficult to quantify, the court determined that the Bankruptcy Court’s decision granting the cross-licensees the protection of section 365(n) was a reasonable exercise of its discretion.

Chapter 15 of the Bankruptcy Code strikes an important balance between advancing international comity and providing fair and efficient insolvency proceedings for international businesses and protecting the national interests of the United States.  The Fourth Circuit’s decision in Jaffe v. Samsung shows the result of that balance: the German insolvency administrator was granted control over the U.S. assets of Qimondo, but subject to conditions that protected the public policy of the United States and the interests of Qimondo’s American creditors.