Third-party releases remain a hot-button issue in U.S. bankruptcy cases and are carefully scrutinized in chapter 15 cases, where such releases originate in a foreign restructuring case or process. In PT Bakrie Telecom Tbk, the chapter 15 court refused to enforce third-party releases authorized by an Indonesian court, and articulated an analytical framework that courts and practitioners can employ when considering a foreign representative’s request for additional assistance, i.e., approval of a foreign restructuring with third-party releases.
In 2010 and 2011, Bakrie Telecom Pte. Ltd. issued $380 million in notes and loaned the proceeds to PT Bakrie Telecom Tbk (BTEL), its Indonesian parent company, which guaranteed repayment of the notes. After BTEL defaulted, a group of noteholders obtained a New York state court judgment against it. However, BTEL was subject to a reorganization proceeding before the Indonesia Commercial Court, which subsequently approved BTEL’s composition plan, including third-party releases of BTEL’s liability on the notes.
In BTEL’s chapter 15 case, the court recognized the Indonesian proceeding as a “foreign main proceeding,” but denied the foreign representative’s request to enforce third-party releases.
The twin “gating issues” regarding the releases were whether (a) the Indonesian court had authority to grant the releases, and (b) enforcing the releases would be appropriate as a matter of comity or under §§ 1507 and 1521(a) of the Bankruptcy Code. The bankruptcy court found that the comity analysis overlapped with the requirements of §§ 1507 and 1521(a). Indeed, bankruptcy courts may provide a foreign representative with “additional assistance” under § 1507 where such assistance is “consistent with principles of comity” and the court is satisfied that, inter alia, it will provide for the “just treatment of all holders of claims” and protect U.S. claimants from “prejudice and inconvenience” in the foreign proceeding, and may grant a foreign representative “any appropriate relief” under § 1521(a) if necessary to, inter alia, “protect the assets of the debtor or the interests of the creditors.” Because of these findings, its decision turned largely on whether the foreign proceeding (1) abided by fundamental standards of procedural fairness, (2) violated fundamental U.S. public policy, and (3) was affected by fraud.
The bankruptcy court found that the Indonesian proceeding had not established a “clear and formal record” showing that fundamental standards of procedural fairness ensuring the just treatment and protection of U.S. claimants against prejudice had been observed. Most important was the absence from the record of any “justification” for the releases, which may have been less concerning, but for unrebutted testimony that third-party releases were not standard for Indonesian proceedings. Holding that the parties could not rely on mere post-hoc rationalizations, the court therefore would not enforce the releases granted by the Indonesian court without at least a “rudimentary record” as to their basis and the procedural fairness of the underlying process.
PT Bakrie is a decision about fairness, process, and procedure. While the court refused to enforce the third-party releases under chapter 15, its analysis does not appear to depart from prior precedent considering and enforcing foreign third-party releases in the U.S. Thus, parties benefiting from a foreign court’s order—particularly where there are significant creditor objections or little precedent as to the fairness and procedural safeguards employed by the court—should urge the foreign court to make detailed findings and conclusions concerning its jurisdiction, the notice and opportunity to object afforded to interested parties, and the basis for its decision.
The full article in its original form can be found here.
Matthew E. Kaslow (LAW ’15) is an associate at Blank Rome LLP in Philadelphia, Pennsylvania. He concentrates his practice on corporate finance, restructuring, and bankruptcy matters, and related litigation. He represents secured and unsecured creditors, creditors’ committees, liquidating trustees, and chapter 11 debtors.
Ira L. Herman is a partner at Blank Rome LLP in New York, New York. Herman concentrates his practice on restructuring and bankruptcy matters with emphasis on distressed public debt issues, secured and unsecured loans, cross-border insolvency matters, distressed M&A, and corporate governance.
Evan J. Zucker is of counsel at Blank Rome LLP in New York, New York. Zucker concentrates his practice on corporate reorganizations and related complex litigation in national and cross-border matters. He routinely publishes and speaks on bankruptcy topics.