Corrupt managerial behavior has been a driver in the collapse of the cryptocurrency market. Enforcing and defending claims against directors and officers, where the directors and officers are not living in the United States and may not be U.S. citizens, is a current judicial focus in the U.S. litigation system. In the Three Arrows Capital (“Three Arrows”) chapter 15 case, the U.S. Bankruptcy Court for the Southern District of New York (the “U.S. Bankruptcy Court”) addresses founder misconduct and defines the limits of the United States’ broad discovery tools to aide a letterbox jurisdiction, like the British Virgin Islands (“BVI”), in corralling bad actors and subjecting them to forensic examination.
The Collapse of Three Arrows and the Obfuscations of its Founders’ Location
Three Arrows managed and invested digital assets. It was founded by Kyle Davies and Su Zhu. Davies was born in the United States, but he holds Italian and Singaporean passports. It is not known whether Davies renounced his U.S. citizenship but, as a matter of law, a person born in the United States is presumed to be a U.S. citizen. Zhu was born in China and lived in San Francisco for some period of time in the last decade. Zhu, however, currently does not reside in the United States and his current residence is unknown. Zhu listed his nationality as Singaporean in company records.
On June 27, 2022, Three Arrows commenced an insolvency proceeding in the BVI. The BVI court appointed joint liquidators to investigate and recover assets for Three Arrows’ creditors. Prior to its liquidation, Three Arrows allegedly had over three billion dollars in assets under its management. At the direction of Davies and Zhu, these assets funded deals with cryptocurrency companies globally, including in the United States and Singapore. According to a Singaporean government agency, Three Arrows’ investment arm breached asset management protocols for a prolonged period, calling into question Three Arrows’ solvency and provided the agency with false and misleading information about its assets, liabilities, and value.
Chapter 15 of the U.S. Bankruptcy Code provides a streamlined process for recognition (a form of comity) of a foreign insolvency proceeding. However, courts are divided as to whether a foreign debtor must satisfy the general definition of “debtor” as that term is used in section 109(a) of the Bankruptcy Code, which requires a debtor seeking bankruptcy relief to reside or have a domicile, a place of business, or property in the United States.
On February 28, 2022, the U.S. District Court for the Middle District of Florida (the “Florida District Court”) ruled that section 109(a) does not apply in chapter 15 cases. Talas Qais Abulmunem Al Zawawi v. Diss, et al. (In re Talas Qais Abdulmunem Al Zawawi), Case No. 21-894-GAP (M.D. Fla. Feb. 28, 2022). The court relied on a straightforward interpretation of section 1517(a)’s mandatory criteria, finding that chapter 15 “provides the sole requirements for recognition” and that recognition is not premised upon a foreign debtor meeting section 109(a) requirements for eligibility. The Florida District Court’s opinion conflicts with an opinion rendered in 2013 by the U.S. Court of Appeals for the Second Circuit (the “Second Circuit”) in the case Drawbridge Special Opportunities Fund L.P. v. Barnet (In re Barnet), 737 F.3d 238 (2d Cir 2013), which held that section 109(a) is applicable in chapter 15. Al Zawawi is the latest in a string of judicial opinions and scholarly articles, disagreeing with the Second Circuit’s decision in Barnet. See In re Bemarmara Consulting a.s., Case No. 13-13037 (Bankr. D. Del. Dec. 17, 2013); Daniel M. Glosband and Jay Lawrence Westbrook, Chapter 15 Recognition in the United States: Is a Debtor “Presence” Required?, 24 Int’l Insolv. Rev. 28 (2015). See also, Douglas G. Baird, Revisions to Chapter 15 of the Bankruptcy Code, at 4–7 (letter from National Bankruptcy Conference to Congress proposing Bankruptcy Code revision to clarify that section 109(a) does not apply in chapter 15 cases).
In 2005, the United States adopted the Model Law on Cross-Border Insolvency, promulgated by the United Nations Commission on Internal Trade, under chapter 15 of the United States Bankruptcy Code. In so adopting, Congress intended chapter 15 “to be the exclusive door to ancillary assistance to foreign proceedings.” H.R.Rep. No. 109–31, at 110–11 (2005). Notwithstanding the express congressional intent, not all courts have required chapter 15 relief as a prerequisite to seeking relief in a pending civil litigation against a debtor. Two district court decisions highlight the divergent views.
First, in HFOTCO LLC v. Zenia Special Maritime Enterprise, the United States District Court for the Southern District of Texas (the “HFOTCO Court”), denied a motion for summary judgment seeking dismissal, based on German insolvency law, of all claims against a debtor that had a pending insolvency proceeding in Germany. Following the majority view, the HFOTCO Court found that it is powerless to afford comity to the movant because its insolvency proceeding had not been formally recognized under chapter 15.
Second, in David Moyal v. Münsterland Gruppe GmbH & Co. KG (the “New York Action”) the United States District Court of the Southern District of New York (the “Moyal Court”) dismissed a lawsuit against a German debtor, Münsterland Gruppe GmbH & Co. KG (“MGKG”), based on the pendency of its insolvency proceeding and the application of German law. The Moyal Court applied an outdated ad hoc comity analysis and summarily rejected as “absurd” the need for recognition under chapter 15. And, by implication, treated chapter 15 as a kind of discretionary alternative to general comity.
In December 2018, the Frank LoBiondo Coast Guard Authorization Act (the “LoBiondo Act”) was enacted to, among other things, improve and support the operation and administration of the Coast Guard and update maritime and environmental policy. Section 713 of the LoBiondo Act directs the Comptroller General of the United States to “conduct a study that examines the immediate aftermath of a major ocean carrier bankruptcy and its impact through the supply chain.” In accordance with that mandate, in January 2020, the U.S. Government Accountability Office (“GAO”) published a report on the role of the Federal Maritime Commission (the “FMC”) and Department of Commerce (“Commerce”) in an ocean carrier’s bankruptcy case.
The study was prompted by supply chain disruption at sea and at numerous ports caused by the bankruptcy of Hanjin Shipping Co., Ltd. in August 2016. At the time, Hanjin was one of the world’s largest integrated logistics and container shipping companies transporting cargo to and from ports throughout the world. The GAO concluded that the FMC and Commerce played an important monitoring function in the industry, but did not recommend any changes to either agency’s role in an ocean carrier bankruptcy. This is because the GAO found that industry participants have already taken steps to mitigate the effects of another ocean carrier bankruptcy and current law does not authorize these agencies to have a more active role.
The Ocean Carrier Industry
The maritime transport industry is the backbone of globalized trade and the manufacturing supply chain. According to the United Nations Conference on Trade and Development’s Review of Maritime Transport 2019, more than four-fifths of world merchandise trade by volume is carried by sea. Annually, more than one trillion dollars in U.S. exports and imports are moved by ocean vessels. Prior to the current pandemic, the industry was already coping with low-freight rates, reduced earnings, and oversupply as a result of increased global tariffs, volatility in demand, and new environmental regulations. These market conditions have led to the continued consolidation of ocean carriers. “In February 2019, the [top] 10 deep-sea container-shipping lines represented 90 per cent of deployed capacity and dominated the major East-West trade routes through three alliances.” This consolidation in the industry increases the risk of disruption that the financial instability of any one shipping company can have on the global supply chain.
Scope of the GAO Study
To address the objectives mandated in the LoBiondo Act, the GAO reviewed documents filed in Hanjin’s bankruptcy case and documents provided by the FMC and Commerce. Additionally, the GAO interviewed 15 industry stakeholders representing various roles in the supply chain including representatives from four ports, two ocean carriers, one association representing carriers, one association representing freight forwarders and customs brokers, five associations or companies representing transportation and equipment providers, one association representing retailers, one association representing agricultural cargo owners, and officials with the FMC and Commerce. Continue Reading
In EMA GARP Fund v. Banro Corporation1 (the “U.S. Action”), the U.S. District Court for the Southern District of New York dismissed a lawsuit filed by shareholders of an insolvent Canadian company, Banro Corporation (“Banro”), and its former CEO, finding that, under the principles of comity, an approved Canadian plan of reorganization released all claims against the defendants. In so ruling, the court summarily rejected a longstanding principle that recognition of a foreign bankruptcy proceeding under chapter 15 of the U.S. Bankruptcy Code is a prerequisite to the enforcement by a U.S. court of a judgment entered in a foreign bankruptcy proceeding.
The Banro Insolvency Proceeding
Banro was a public corporation headquartered in Canada and incorporated under Canadian law. Banro was involved in the exploration, development, and mining of gold in the Democratic Republic of the Congo. Banro faced liquidity challenges in 2017, eventually becoming insolvent and in need of additional liquidity to fund operations. On December 22, 2017, under the Canadian Companies’ Creditors Arrangement Act (“CCAA”), Canada’s equivalent to chapter 11 of the U.S. Bankruptcy Code, Banro initiated a restructuring proceeding (the “CCAA Proceeding”) in the Ontario Superior Court of Justice (Commercial List) (the “Canadian Court”). On that same date, trading in Banro’s securities on the New York Stock Exchange was suspended. Continue reading “Enforcement of an Insolvency-Related Judgment Does Not Require Recognition under Chapter 15”
In complex long-term charters for vessels or finance leases in respect of vessels under the U.S. Uniform Commercial Code (“UCC”) and its Article 2A (governing commercial matters relating to finance leases) and under other similar law, a charterer’s or lessor’s damages under a charter or lease—both generally upon a payment default or in the event of a casualty—are often liquidated in stipulated loss value (“SLV”) provisions. These provisions ensure that the lessor/charterer gets the benefit of its bargain. It insulates the lessor/charterer, in part, from unusual market downturns impacting vessel value or casualties.
A typical SLV calculation enables the present value recovery of the charterer’s/lessor’s unrecovered investment, residual value in the vessel, and the recapture of tax benefits and certain fees and costs, less a credit for the value of the vessel, if the stipulated loss value is repaid by the charter party/lessee, a net proceeds measure.1 Schedules to identify the stipulated loss are a common feature of such charters and leases.2 Now, any SLV provision under Article 2A of the U.S. U.C.C., for example, must be reasonable as of lease/charter commencement.3 Oftentimes, these kinds of charters and leases are backed by absolute, unconditional guaranties of such loss value from affiliates of the charter parties.4Continue reading “Vessel Charters and the Stipulated Loss Value Clauses in U.S. Chapter 11 Reorganization”
The Insolvency Working Group of the United Nations Commission on International Trade Law (“UNCITRAL”)1 has been busy this past year, working on three new model laws and developing work on at least two possible future projects.2 The Insolvency Working Group is responsible for drafting the Model Law on Cross-Border Insolvency (the “CBI Model Law”) in 1997, which has since been adopted in 46 countries and is under consideration in several others. In 2005, the United States adopted the CBI Model Law as Chapter 15 of the United States Bankruptcy Code.
In May 2018, the Insolvency Working Group completed its work on a Model Law on Recognition and Enforcement of Insolvency-Related Judgments (the “IRJ Model Law”). The Insolvency Working Group determined that there was a need for the IRJ Model Law after judicial decisions in certain countries declined to recognize judgments related to foreign insolvency proceedings. In addition, the Insolvency Working Group noted that many international treaties addressing foreign judgments exclude insolvency-related judgments, and countries that do recognize foreign insolvency-related judgments have inconsistent rules about when a judgment is related to an insolvency proceeding. (For more information, please read our article published in INSOL International’s Special Report (March 2019), UNCITRAL’s Model law on Recognition and Enforcement of Insolvency-Related Judgments—A Universalist Approach to Cross-Border Insolvency.) Continue reading “Update on UNCITRAL Insolvency Working Group”
An increasingly global economy and the ease with which money and other property is transferred across national borders has led to more cross-border litigation and a call for greater cooperation and communication between foreign courts. But the ability for courts to communicate across borders has its limits. Recently, in In re Zetta Jet USA, Inc.,1 a chapter 7 trustee asked a U.S. bankruptcy court to authorize sending a letter from the U.S. court to an Australian court, under 28 U.S.C. § 1781, asking the Australian court to continue an injunction against moving a vessel located in Australia pending the resolution of an avoidance action in the United States against the vessel’s purported owner. The U.S. court refused to issue such a letter after concluding that a letter from a U.S. court requesting the Australian court to continue an injunction would be an unwarranted interference by the U.S. court in the Australian proceeding, and would offend principles of international comity by suggesting how the Australian court should rule on the injunction as well as preempting the Australian court’s consideration of whether to vacate the injunction.2
Zetta Jet USA, Inc. (“Zetta US”) and Zetta Jet PTE (“Zetta Singapore,” and together with Zetta US, collectively, the “Zetta Entities”) operated an international luxury travel business that fell into financial distress largely due to allegedly fraudulent activity of its principal, Geoffrey Owen Cassidy. On September 15, 2017, Zetta US and Zetta Singapore each filed a voluntary petition for relief under chapter 11 of the U.S. Bankruptcy Code in the U.S. Bankruptcy Court for the Central District of California (the “U.S. Bankruptcy Court”). The cases were subsequently converted to chapter 7 cases and Jonathan King (the “Trustee”) was appointed the chapter 7 trustee. Continue reading “Court-to-Court Communication and Letters of Request in Cross-Border Litigation and Asset Tracing”
A proactive creditor often ends up in a better legal position, and has more negotiating power, than a reactive one. While that may seem obvious, it is a lesson driven home by a 2017 decision in the SunEdison bankruptcy case, which involves issues of international comity, choice of law provisions, and ultimately, the tactics employed by a Korean debtor in connection with its contractual relationship with SunEdison. In SMP Ltd. v. SunEdison, Inc.and GCL-Poly Energy Holdings Limited, 577 B.R. 120 (Bankr. S.D.N.Y. 2017), the SunEdison bankruptcy court refused to apply Korean insolvency law in a contract termination dispute, and enforced a contractual New York choice-of-law provision. Notwithstanding the chapter 15 recognition of the Korean debtor’s rehabilitation, applying New York law, the court upheld the enforcement of an ipso facto (“by the fact itself”) clause against the Korean debtor, thereby allowing termination of a license with SunEdison that was essential to the debtor’s business. Continue reading “Enforcing Ipso Facto Clauses in International Transactions and the Importance of Being Proactive in Dealings with Troubled and Insolvent Entities”
According to the Manhattan Bankruptcy Court’s thoughtful and well-written December 4, 2017, decision in In re Oi Brasil Cooperatief U.A., a bondholder, Aurelius Capital Management (“Aurelius”) forced the straight Dutch liquidation of Oi Brasil Cooperatief (“Coop”) in order to revoke the prior recognition as a foreign main proceeding in the Manhattan Bankruptcy Court of a broader Brazilian reorganization of Coop and its operating affiliates, the Oi Group, a Brazilian telecommunications consortium. In that Brazilian reorganization, Coop was to be consolidated substantively with other Oi Group members. This consolidating effect, according to the court, would limit Aurelius recoveries to a single pathway in a unitary capital structure and prevent additive recoveries for the holder on bond guaranties.
Aurelius Criticized for Insisting on Dutch Recognition in Order to Preserve Guaranties
Specifically, the court found that Aurelius was an active participant in the hearing on the Oi Group’s Brazilian proceeding’s recognition in June and July of 2016, negotiating rights reservations to act in the Netherlands in its own interest, but never challenging the propriety of Brazil as the Oi Group’s (and Coop’s) “center of main interest” or “COMI.” At the same time, the court ruled that even as Aurelius participated in the first-filed New York Oi Group chapter 15, it intended to challenge the Brazilian recognition of Coop by seeking to liquidate Coop in the Netherlands through a Dutch trustee. According to the court, these Dutch-centered tactics were in aid of an Aurelius strategy to achieve higher recoveries at the Coop level of the Oi Group restructuring in the Netherlands outside of the Brazilian reorganization (where ratable recoveries for Aurelius would be lower after consolidation), while intercompany claims for the benefit of Coop and in aid of this Netherlands-centered strategy were pursued by a Dutch trustee in a Dutch home court.Continue reading “Oi Brasil and Competing Foreign Main Proceedings: Creditors Can’t “Weaponize” Chapter 15″