Florida Bankruptcy Court Defers to Brazilian Court in Dismissing Chapter 15 Adversary Proceeding | Jones Day

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The foundation of chapter 15 of the Bankruptcy Code and similar legislation enacted by other countries to govern cross-border bankruptcy cases is “comity” and cooperation among U.S. and foreign courts. The importance of these concepts was recently illustrated by a ruling handed down by the U.S. Bankruptcy Court for the Southern District of Florida. In In re Varig Logistica S.A., 2021 WL 5045684 (Bankr. S.D. Fla. Oct. 29, 2021), the court dismissed an adversary proceeding commenced in the chapter 15 case of a bankrupt Brazilian air carrier due to the pendency of litigation in a Brazilian bankruptcy court

In Varig, the Brazilian debtor’s foreign representative sued the debtor’s former private-equity owners in the Brazilian bankruptcy court for, among other things, veil-piercing and breach of fiduciary duty. The defendants sought to enjoin the foreign representative from prosecuting those claims, arguing that the debtor released them from liability. After the Brazilian bankruptcy court entered an order stating that it should adjudicate the release issue, the Florida bankruptcy court determined as a matter of comity that the Brazilian bankruptcy court was the better forum for the litigation.

Procedures, Recognition, and Relief Under Chapter 15

Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (“Model Law”), which has been enacted in some form by more than 50 countries.

Both chapter 15 and the Model Law are premised upon the principle of international comity, or “the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws.” Hilton v. Guyot, 159 U.S. 113, 164 (1895).

Section 1501(a) of the Bankruptcy Code states that the purpose of chapter 15 is to “incorporate the [Model Law] so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of,” among other things, cooperation between U.S. and foreign courts, greater legal certainty for trade and investment, fair and efficient administration of cross-border cases to protect the interests of all stakeholders, protection and maximization of the value of a debtor’s assets, and the rehabilitation of financially troubled businesses.

Section 1508 requires U.S. courts interpreting chapter 15 to “consider its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions.” 

Under section 1515, the “foreign representative” of a foreign debtor may file a petition in a U.S. bankruptcy court seeking “recognition” of a “foreign proceeding.”

Section 101(24) defines “foreign representative” as “a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor’s assets or affairs or to act as a representative of such foreign proceeding.”

“Foreign proceeding” is defined in section 101(23) of the Bankruptcy Code as:

[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.

More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign “main” proceeding—a case pending in the country where the debtor’s center of main interests (“COMI”) is located (see 11 U.S.C. §§ 1502(4) and 1517(b)(1))—and foreign “nonmain” proceedings, which may be pending in countries where the debtor merely has an “establishment” (see 11 U.S.C. §§ 1502(5) and 1517(b)(2)). A debtor’s COMI is presumed to be the location of the debtor’s registered office, or habitual residence in the case of an individual. See 11 U.S.C. § 1516(c). An establishment is defined by section 1502(2) as “any place of operations where the debtor carries out a nontransitory economic activity.”

Upon recognition of a foreign main proceeding, section 1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including section 362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets. If the bankruptcy court recognizes a foreign proceeding as either a main or nonmain proceeding, section 1521(a) authorizes the court to grant a broad range of provisional and other relief designed to preserve the foreign debtor’s assets or otherwise provide assistance to the court or other entity presiding over the debtor’s foreign proceeding.

Section 1506 sets forth a public policy exception to any of the relief otherwise authorized in chapter 15, providing that “[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States.”

Varig

São Paulo, Brazil-based Varig Logistica S.A. (“debtor”) operated an international cargo airline from 2000 to 2012. In 2006, a network of private-equity companies acquired the debtor through a special-purpose entity called Volo Logistics, LLC (“Volo”), whose subsidiaries held 100% of the debtor’s stock (Volo, its direct subsidiaries, and the private-equity companies are collectively referred to as the “MP Entities”).

In 2006 and 2007, the MP Entities loaned approximately $250 million to the debtor through a series of intercompany loans. However, the debtor’s financial condition worsened. In February 2008, aircraft lessor Pegasus Aviation II, Inc. and certain affiliates (collectively, “Pegasus”) sued the debtor in Florida state court for nonpayment of aircraft lease amounts. In October 2008, Pegasus also sued the debtor and the MP Entities (under a veil-piercing theory) in New York state court for breach of contract (“NY state action”).

In December 2008, the debtor and the MP Entities entered into two debt assumption agreements (“DAAs”) whereby certain MP Entities transferred the debtor’s obligation to repay more than $250 million in debt to other MP Entities in exchange for the debtor providing the MP Entities with a general release from all claims held by the debtor for any “act, omission, transaction, event or other occurrence taking place on or prior to” December 2008. The DAAs included a New York state or federal court forum selection clause, but provided that Volo and its direct subsidiaries could bring suit to enforce the DAAs in a Brazilian court. The DAAs also included a New York choice of law provision. 

In March 2009, the debtor filed for the Brazilian equivalent of chapter 11 relief in Brazil. After the Brazilian bankruptcy court entered an order for relief, Volo provided the debtor with $7.5 million in debtor-in-possession financing. As part of the financing transaction, the debtor released Volo and the other MP Entities from any claims arising from transactions with the debtor.

On March 31, 2009, the debtor’s foreign representative filed a petition in the U.S. Bankruptcy Court for the Southern District of Florida (“Florida bankruptcy court”) seeking recognition under chapter 15 of the debtor’s Brazilian bankruptcy case. He also commenced an adversary proceeding seeking to enjoin Pegasus from commencing or continuing any U.S. litigation against the debtor and the MP Entities. However, the debtor agreed to permit Pegasus to proceed with the NY state action, after which the Florida bankruptcy court dismissed the Pegasus adversary proceeding without prejudice and granted Pegasus relief from the automatic stay.

The Florida bankruptcy court entered an order recognizing the debtor’s Brazilian bankruptcy case as a foreign main proceeding under chapter 15 in May 2009.

In September 2012, the Brazilian bankruptcy court converted the debtor’s reorganization proceeding into a liquidation proceeding and appointed a new foreign representative (“FR”) to liquidate the debtor’s assets.

The parties settled the NY state action in September 2017 for $41 million. 

In 2017 and 2018, the FR sought discovery in the chapter 15 case from the MP Entities regarding their relationship and loan transaction history with the debtor. In 2019, the FR also sought discovery from Pegasus of relevant information provided to Pegasus by the MP Entities in connection with the NY state action. He requested discovery of the same information from Volo in 2020.

In May 2020, the FR filed a breach-of-fiduciary duty and veil-piercing action against the MP Entities in the Brazilian bankruptcy court alleging that the defendants looted the debtor and forced it into bankruptcy (“Brazilian action”).

The MP Entities responded in June 2020 by commencing an adversary proceeding (“MP adversary proceeding”) in the Florida bankruptcy court seeking: (i) a determination that the claims asserted in the Brazilian action were released by the debtor in the DAAs (“MP claim release”); (ii) an injunction barring the FR from continuing the Brazilian action; and (iii) in the alternative, relief from the automatic stay to file an action for declaratory and injunctive relief in the NY court.

In July 2020, Volo sought an order from the Florida bankruptcy court quashing the FR’s discovery requests. The FR then filed a motion seeking dismissal or abatement of the MP adversary proceeding. The FR also asked the Brazilian bankruptcy court to enjoin the MP Entities from prosecuting the MP adversary proceeding, arguing that the Brazilian bankruptcy court had exclusive jurisdiction to determine the impact of the releases in the DAAs.

In July 2021, the MP Entities (including Volo) filed for chapter 11 protection (“NY bankruptcy case”) in the U.S. Bankruptcy Court for the Southern District of New York (“NY bankruptcy court”). At the request of both the FR and the MP Entities, the Brazilian bankruptcy court stayed the Brazilian action. However, although the parties acknowledged that Volo’s pending motion to quash was stayed by the chapter 11 filing, the FR argued that the automatic stay did not prevent the Florida bankruptcy court from ruling on his motion to dismiss the MP adversary proceeding. The Florida court agreed, reasoning that its ruling, albeit not determinative on issues that might impact the parties in the MP Entities’ chapter 11 cases, might provide guidance regarding the issues that would be useful to the NY bankruptcy court.

In September 2021, the Brazilian bankruptcy court ruled that the claims asserted by the MP Entities in the MP adversary proceeding violated its “absolute jurisdiction” and that the validity and impact of the releases should be adjudicated in Brazil. However, the Brazilian bankruptcy court denied the FR’s request for injunctive relief because such relief “would end up unduly intervening in another country’s jurisdiction.”

The Bankruptcy Court’s Ruling

Bankruptcy Judge Robert A. Mark denied Volo’s motion to quash the FR’s subpoena as moot due to the automatic stay that arose upon the filing of the NY bankruptcy case. However, his ruling was without prejudice to renewal of the motion if the FR obtained relief from the stay.

Judge Mark then held that comity considerations warranted dismissal of the MP adversary proceeding and denial of the MP Entities’ alternative request for relief from the automatic stay. According to Judge Mark, the fundamental issue presented in the proceeding was which court—the Brazilian bankruptcy court, the Florida bankruptcy court, or the NY state court—should determine whether the claims asserted in the Brazilian action were barred by the release in the DAAs.

Because the Brazilian bankruptcy court found that: (i) it had absolute and exclusive jurisdiction to hear the Brazilian action; (ii) the MP adversary proceeding violated the Brazilian bankruptcy court’s absolute and exclusive jurisdiction; and (iii) the impact of the MP claim release should be determined by the Brazilian bankruptcy court as a defense to the Brazilian action, Judge Mark, as an exercise of comity, concluded that the Brazilian bankruptcy court was the appropriate forum to adjudicate the Brazilian action. Judge Mark stated that he was exercising discretion out of respect for “the Brazilian bankruptcy court’s sovereign interpretation of the claims and defenses that are pending before it.” In so ruling, Judge Mark reiterated the emphasis that section 1501(a)(1) of the Bankruptcy Code places on the importance of cooperation between courts in cross-border bankruptcy cases, and the directive in section 1525(a) that U.S. bankruptcy courts “shall cooperate to the maximum extent possible with a foreign court.”

Finally, Judge Mark ruled that the MP Entities’ alternative request for relief from the automatic stay was moot and therefore must be denied.

Outlook

Varig is an interesting case, and one that is emblematic of the challenges confronted by courts presiding over cross-border bankruptcy and restructuring cases. It involves four different courts in the United States and Brazil and bankruptcy filings in the United States not only on behalf of the foreign debtor but also by its private-equity sponsors. It also involves a more-than-decade-long chapter 15 case that lay relatively dormant for many years until a (then-liquidated) debtor’s foreign representative sought discovery from entities alleged to have looted the company.

Varig highlights that chapter 15 cases are increasingly being relied upon as an effective mechanism to facilitate a foreign debtor’s discovery into the assets or affairs of the debtor in the U.S. Parties must be aware of the entire litigation landscape and be prepared to appear in multiple jurisdictions to protect and assert their rights. 

Varig also illustrates the importance of cooperation and coordination among parties and courts involved in complex cross-border restructurings. Chapter 15 was designed to make such efforts possible, particularly when coupled with cross-border protocols that are agreed upon by parties and endorsed by the courts involved.

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