Source: https://www.internationallawoffice.com/Newsletters/Insolvency-Restructuring/USA/Caplin-Drysdale-Chartered/Current-issues-in-Chapter-15-discovery
Timestamp: 2019-04-24 11:58:21+00:00

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Unlike Chapter 7 liquidations and Chapter 11 reorganisations, cases filed under Chapter 15 of the US Bankruptcy Code are ancillary – essentially functioning in aid of recognised foreign insolvency proceedings. Once a US bankruptcy court recognises a foreign proceeding under Chapter 15, the court may grant the representative of the foreign proceeding assistance and 'appropriate relief'.(1) Such relief can include authorising the foreign representative to examine witnesses under oath and obtain information regarding the foreign debtor's assets, affairs, rights, obligations or liabilities.(2) In other words, foreign representatives may be empowered to pursue discovery in the United States under Chapter 15.
the recent decision in Platinum Partners, which, among other things, addressed the extent to which foreign law can limit discovery in Chapter 15.
Chapter 15 includes a provision specific to discovery – Section 1521(a)(4). This section authorises the court, on recognition of a foreign proceeding, to grant relief "providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations, or liabilities".(7) The plain language of Section 1521(a)(4) does not limit the subjects of inquiry to only the debtor's assets, affairs and other matters that are connected with the United States.(8) Moreover, because Chapter 15 "is not an independent in rem proceeding but an ancillary proceeding designed to assist a foreign representative in administering the foreign estate", Chapter 15 discovery "need not concern assets in the U.S. to be permissible under § 1521(a)(4)".(9) Section 1521(a)(4) and the relief provided thereunder can serve as a basis for conducting Rule 2004 examinations in Chapter 15,(10) although this use is not entirely without controversy (discussed further below).
Chapter 15 imposes limits on the ability of foreign representatives to obtain discovery. Section 1522(a) provides that a court may grant appropriate relief, including discovery-related relief, under Section 1521 only if the interests of creditors and other interested entities are sufficiently protected.(14) In other words, Section 1522(a) requires that there be a balance between the relief that may be granted to a foreign representative and the interests of other persons who may be affected by that relief. Thus, parties can seek to curtail or bar discovery by arguing that their interests would not be sufficiently protected if broad discovery were allowed to go forward.
There is also the public policy exception set out in Section 1506. In a nutshell, Section 1506 provides that a court may refuse to take action – including recognition of a foreign proceeding – if that action would be manifestly contrary to the public policy of the United States.(16) The words 'manifestly contrary' set a high threshold and have led courts to conclude that this exception should be invoked only under the narrowest of circumstances.(17) Nevertheless, the public policy exception has been invoked in at least one case involving discovery: In re Toft.(18) In Toft, the foreign representative asked the US bankruptcy court to grant ex parte recognition of a German mail interception order in order to capture the foreign debtor's emails from two US-based internet service providers. However, the court determined that the proposed action to capture emails would, if granted, violate US wiretap and privacy laws and was therefore manifestly contrary to US public policy.(19) The court in Toft thus rejected the proposed relief.
Since cash and other assets can move quickly across international boundaries, foreign insolvency fiduciaries searching for assets often wish to conduct discovery in secret so as not to tip off the targets of an investigation that inquiries are underway and thereby prompt the targets to remove or hide the assets. Other considerations may also call for secret discovery, such as the risk that records will be destroyed or witnesses tampered with if the targets catch wind of the discovery.
To achieve stealth in their investigations or asset tracing, a few foreign representatives have asked US bankruptcy courts to issue seal-and-gag orders. Under these types of order, the court typically places discovery-related motions, discovery demands and third-party subpoenas under seal and thus outside the public record. In addition, these orders bar the recipients of the discovery demands or subpoenas from disclosing to anyone the contents of these demands and subpoenas, which is the so-called 'gag' aspect of these orders.
the due-process rights of the investigation's ultimate targets.
based on non-specific and speculative assertions that documents would be disposed of and assets fraudulently transferred if the seal-and-gag protections were not in place.
The dispute in Platinum Partners presented two principal issues for the bankruptcy court to decide. First, can the discovery limitations of the foreign or home jurisdiction control the scope of discovery in Chapter 15? The auditors asserted that their work papers were not discoverable under Cayman law and therefore should not be discoverable in the Chapter 15 case. In other words, they argued, international comity prevented the Cayman liquidators from using the discovery tools under Chapter 15 to circumvent limitations under Cayman law. The second issue pertained to arbitration clauses that appeared in the engagement letters between the auditors and the debtors. The former auditors claimed that the arbitration clauses prohibited discovery in the bankruptcy case and made the discovery dispute with the liquidators subject to arbitration.
The court emphasised that the discovery sought by the liquidators "clearly [fell] within the scope of relief set forth in sections 542(e), 1521(a)(4), and 1521(a)(7) of the Bankruptcy Code and Bankruptcy Rule 2004".(36) Further, the liquidators' need for discovery was "particularly acute given the anticipated lack of cooperation by the Funds' executives and the alleged criminal fraud with respect to the Funds".(37) On these grounds, the court concluded that the arbitration clauses did not limit the discovery relief sought by the liquidators.
The Platinum Partners decision was recently affirmed on appeal by the federal district court in an unpublished order.(38) The auditors have taken a subsequent appeal to the US Court of Appeals for the Second Circuit, which is currently pending.
Chapter 15 can provide foreign representatives with broad tools for pursuing discovery in the United States, and the decision in Platinum Partners signals a judicial willingness to accommodate and assist foreign representatives in their discovery endeavours once the foreign insolvency proceeding has been granted recognition. However, as Toft and Petroforte demonstrate, there are limits as to how far the courts can accommodate and assist a foreign representative's discovery efforts, particularly when constitutional or privacy rights are at stake.
For further information on this topic please contact Jeffrey A Liesemer at Caplin & Drysdale, Chartered by telephone (+1 202 862 5000) or email (jliesemer@capdale.com). The Caplin & Drysdale website can be accessed at www.capdale.com.
(1) See 11 USC §§ 1507, 1521.
(3) Fed R Bankr P pt VII, 9014(c).
(4) 11 USC § 542(e).
(5) Fed R Bankr P 2004(a),(b); see, for example, In re Dinubilo, 177 BR 932, 939 (ED Cal 1993) (describing the range of discoverable information in a Rule 2004 examination as "unfettered and broad" and tantamount to a "fishing expedition").
(6) See, for example, In re Enron Corp, 281 BR 836, 840 (Bankr SDNY 2002), which states that, under the pending proceeding rule, "once an adversary proceeding or contested matter is commenced, discovery should be pursued under the Federal Rules of Civil Procedure and not by Rule 2004".
(7) 11 USC § 1521(a)(4).
(8) Compare Section 1521(a)(4), which does not require a US connection, to 11 USC 1520(a)(2), which specifically refers to transfers "of an interest of the debtor in property that is within the territorial jurisdiction of the United States".
(9) In re Millennium Glob Emerging Credit Master Fund Ltd, 471 BR 342, 347 (Bankr SDNY 2012) (citations omitted).
(10) See In re Pro-Fit Int'l Ltd, 391 BR 850, 860 (Bankr CD Cal 2008).
(11) 11 USC § 1521(a)(7).
(12) See In re AJW Offshore Ltd, 488 BR 551, 564 (Bankr EDNY 2013).
(13) See Millennium Glob Emerging Credit Master Fund Ltd, 471 BR at 346-47.
(14) 11 USC § 1522(a) (providing that the court may grant relief to a foreign representative under Section 1521 "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected").
(16) Id § 1506. The public policy exception is not unique to Chapter 15; it originates from the Model Law on Cross-Border Insolvency, promulgated by the United Nations Commission on International Trade Law (UNCITRAL). See HR Rep 109-31, at 109 (2005) (stating that Section 1506 "follows the Model Law article 5 exactly, is standard in UNCITRAL texts, and has been narrowly interpreted on a consistent basis in courts around the world"), as reprinted in 2005 USCCAN 88, 172.
(18) 453 BR 186 (Bankr SDNY 2011).
(20) See In re Glitnir Banki HF, 08-14757, 2011 WL 3652764, at *6 n15 (Bankr SDNY 19 August 2011) (observing that "§ 1521(a)(4) may not authorize the 'fishing expeditions' associated with Rule 2004").
(22) In re Petroforte Brasileiro de Petroleo Ltda, 530 BR 503 (Bankr SD Fla 2015).
(24) In re Transbrasil SA Linhas Aereas, Case 11-19484, 2014 WL 1655990, at *3 (Bankr SD Fla 25 April 2014), aff'd, 644 Fed App'x 959 (11th Cir 2016) (per curiam).
(25) See id at *3. In addition, the bankruptcy court eventually unsealed many of the documents at issue. See Transbrasil SA Linhas Aereas, 644 Fed App'x at 961 n1.
(26) See Transbrasil SA Linhas Aereas, 2014 WL 1655990, at *2.
(27) In re Platinum Partners Value Arbitrage Fund LP, 583 BR 803 (Bankr SDNY 2018), aff'd by unpublished order, 18-cv-5176 (SDNY 29 June 2018), appeal docketed, 18-1958 (2d Cir 2 July 2018).
(28) In addition, an affiliated intermediate fund was placed into liquidation in the Cayman Islands in 2017. See id at 806 n2.
(29) Id at 806 (citing SEC v Platinum Mgmt (NY) LLC, Civ 16-06848, 2016 WL 10731734, ¶ 1 (EDNY 19 December 2016).
(30) More precisely, the liquidators of the feeder fund filed the motion to compel, and the liquidators of the master fund filed a joinder to the motion. For simplicity purposes, this article refers to all of them as the 'liquidators' and does not distinguish between them.
(31) Platinum Partners, 583 BR at 815. The federal rules provide that, in "determining foreign law, the court may consider any relevant source material or source, including testimony, whether or not submitted by a party or admissible under the Federal Rules of Evidence". Fed R Civ P 44.1; see also Fed R Bankr P 9017 (making Civil Rule 44.1 applicable in bankruptcy proceedings). In examining whether auditor work papers were discoverable under Cayman law, the court in Platinum considered the witness declarations submitted by the liquidators and the former auditors and the foreign legal sources accompanying those declarations. See Platinum Partners, 583 BR at 812-13.
(32) Id at 815 (footnote omitted).
(33) Id at 816. A subsidiary issue in Platinum concerned the interplay of Section 1521 of the Bankruptcy Code with Section 1782 of the US Judicial Code. Section 1782 empowers federal district courts to order persons to give testimony or produce documents for use in a proceeding before a foreign or international tribunal (28 USC § 1782). There is case law from the US Supreme Court – namely, the Intel case – suggesting that, in determining whether to grant discovery under Section 1782, the courts should consider, among other factors, whether the discovery would be unavailable in a foreign proceeding. Although the auditors in Platinum argued that this same consideration is relevant in Chapter 15, the point was unavailing. The bankruptcy court acknowledged that courts routinely read Section 1521 in concert with Section 1782 but pointed out that Intel expressly states that apart from safeguarding privileged material, nothing in Section 1782 "limits a district court's production-order authority to materials that could be discovered in the foreign jurisdiction if the materials were located there". Platinum Partners, 583 BR at 816 n38 (quoting Intel Corp v Advanced Micro Devices, Inc, 542 US 241, 261 (2004)).
(38) See supra note 27; see also In re Platinum Partners Value Arbitrage Fund LP, 2018 WL 3207119 (SDNY 29 June 2018) (denying auditors' motion for stay pending appeal).
How will Section 546(e) apply to public securities transactions in wake of Merit Management?

References: § 1521
 § 542
 § 1521
 § 1521
 § 1522
 § 1506
 § 1782