Florida Bankruptcy Court Refuses to Recognize Pre-Judgment Asset Freeze Order of Brazilian Bankruptcy Court as Being Manifestly Contrary to U.S. Public Policy
The expansion of global commerce in recent years has been accompanied by a significant increase in the volume of cross-border bankruptcy cases. Many of those cases involve "recognition" of foreign bankruptcy or insolvency proceedings under chapter 15 of the Bankruptcy Code and enforcement in the United States of the terms of foreign restructuring plans approved by non-U.S. courts. A decision handed down by the U.S. Bankruptcy Court for the Southern District of Florida illustrates some of the nuances and limitations of chapter 15 recognition. In In re Nexgenesis Holdings LTDA, 662 B.R. 406 (Bankr. S.D. Fla. 2024), the bankruptcy court, which had previously granted chapter 15 recognition to a Brazilian debtor's bankruptcy case, denied a request by the debtor's foreign representative to enforce an ex parte pre-judgment order issued by the Brazilian bankruptcy court in corporate veil piercing litigation. The ex parte order purported to freeze the assets of certain non-debtor defendants that had no contacts with Brazil and were not properly subject to the Brazilian court's jurisdiction. According to the U.S. bankruptcy court, it refused to enforce the asset freeze order under principles of international comity because the relief sought was both repugnant to U.S. law and manifestly contrary to U.S. public policy.
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 (the "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.
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code 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."
Section 1502 provides that "for the purposes of [chapter 15] … 'debtor' means an entity that is the subject of a foreign proceeding."
The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in section 1515(b).
"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 foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). 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) of the Bankruptcy Code provides that certain provisions of the Bankruptcy Code automatically come into force, including: (i) the automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets (section 362, subject to certain enumerated exceptions); (ii) the right of any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest (section 361); and (iii) restrictions on use, sale, lease, transfer, or encumbrance of the debtor's U.S. assets (sections 363, 549, and 552).
Following recognition of a foreign main or nonmain proceeding, section 1521(a) provides that, to the extent not already in effect, and "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors," the bankruptcy court may grant "any appropriate relief," including a stay of any action against the debtor or its U.S. assets not covered by the automatic stay, an order suspending the debtor's right to transfer or encumber its U.S. assets, and "any additional relief that may be available to a trustee," with certain exceptions. Under section 1521(b), the court may entrust the distribution of the debtor's U.S. assets to the foreign representative or another person, provided the court is satisfied that the interests of U.S. creditors are "sufficiently protected."
Section 1507(a) of the Bankruptcy Code provides that, upon recognition of a main or nonmain proceeding, the bankruptcy court may provide "additional assistance" to a foreign representative "under [the Bankruptcy Code] or under other laws of the United States." However, the court must consider whether any such assistance, "consistent with principles of comity," will reasonably assure that: (i) all stakeholders are treated fairly; (ii) U.S. creditors are not prejudiced or inconvenienced by asserting their claims in the foreign proceeding; (iii) the debtor's assets are not preferentially or fraudulently transferred; (iv) proceeds of the debtor's assets are distributed substantially in accordance with the order prescribed by the Bankruptcy Code; and (v) if appropriate, an individual foreign debtor is given the opportunity for a fresh start. See 11 U.S.C. § 1507(b).
Section 1522(a) provides that the bankruptcy court may exercise its discretion to order the relief authorized by sections 1519 and 1521 upon the commencement of a case or recognition of a foreign proceeding "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."
Section 1506 of the Bankruptcy Code sets forth a public policy exception to 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." However, section 1506 requires a "narrow reading" and "does not create an exception for any action under Chapter 15 that may conflict with public policy, but only an action that is 'manifestly contrary.'" In re Fairfield Sentry Ltd., 714 F.3d 127, 139 (2d Cir. 2013); accord In re ABC Learning Ctrs. Ltd., 728 F.3d 301, 309 (3d Cir. 2013) (the public policy exception should be invoked only under exceptional circumstances concerning matters of "fundamental importance" to the United States). The public policy exception is applicable "where the procedural fairness of the foreign proceeding is in doubt or cannot be cured by the adoption of additional protections" or where recognition or other chapter 15 relief "would impinge severely a U.S. constitutional or statutory right." In re Qimonda AG Bankr. Litig., 433 B.R. 547, 570 (E.D. Va. 2010).
Nexgenesis
In February 2020, after an unsuccessful turnaround effort, three São Paulo-based, Brazil registered companies—Nexgenesis Holdings Ltda., Gencomm Logistics Services do Brasil Ltda., and Gencomm Logistics Services do Brasil Ltda. (collectively, the "debtors")—that were part of the Brazilian operations of Japan-based global technology conglomerate Rakuten Group, Inc. ("RGI") filed a request for joint judicial reorganization in a Brazilian bankruptcy court. The court granted the petition on February 7, 2020, but later converted the reorganization to a liquidation proceeding at the debtors' request.
In December 2021, the debtors' court-appointed administrator commenced litigation in the Brazilian bankruptcy court seeking both to pierce the corporate veil and an award of damages against 15 corporate and individual defendants, including Rakuten USA Inc. ("Rakuten USA"), an RGI subsidiary, various companies comprising the Delaware-incorporated investment company the Ten Oaks Group (collectively "Ten Oaks"), Ten Oaks president and co-founder Mike Hahn, and Reginald Rasch, an in-house attorney for Rakuten USA. The administrator's initial pleading in the case alleged mismanagement of the debtors, self-dealing, and other fiduciary infractions. The initial pleading did not include any allegations of misconduct committed by Hahn, nor did it even mention him.
In March 2022, the Brazilian bankruptcy court granted an ex parte pre-judgment asset freeze order preliminarily enjoining the defendants from transferring up to approximately $29 million in assets, wherever located. The asset freeze order, which expressly stated that it was preliminary and would be confirmed (or not) after consideration of evidence at trial, did not require the administrator to post a bond and contained no findings with respect to Hahn or Rasch individually. It did not include any findings that the frozen assets were part of the debtors' Brazilian bankruptcy estate, and acknowledged that the assets in question belonged to the defendants. The asset freeze order was entered in accordance with a provision in Brazilian bankruptcy law that has the effect of holding a non-debtor liable for damages.
With respect to anticipated foreign proceedings seeking recovery from the defendants, the ex parte order provided in relevant part that:
In relation to procedures abroad, I authorize the filing, by the Bankruptcy Estate, of the appropriate and necessary procedures, including in the United States of America, so that the decisions handed down in the Brazilian Courts are recognized and complied with, as well as the adoption of procedures that may be necessary, so that the order of preliminary attachment and freezing of cash … and all other assets of the defendants, including the trademarks they own, is also complied with by the respectable Foreign Jurisdiction in relation to assets and valuables under the jurisdiction of those countries.
On May 23, 2022, the administrator, as the debtors' foreign representative, filed a petition in the U.S. Bankruptcy Court for the Southern District of Florida seeking recognition of the debtors' Brazilian liquidation as a foreign main proceeding under chapter 15. The U.S. bankruptcy court granted the petition in June 2022. At the time the court entered its recognition order, the Brazilian bankruptcy court had not entered any final judgment against the defendants, and the asset freeze order was subject to appeal.
More than 16 months later, the foreign representative filed a motion seeking an order recognizing and enforcing the asset freeze order in the United States. Certain of the defendants in the Brazilian veil piercing litigation (collectively, the "objectors") objected to the motion.
According to the undisputed facts, Rakuten USA never conducted business or had employees, market presence, or assets in Brazil, other than a 0.01% equity interest in a Brazilian limited liability company over which it had no management control and sold in October 2019. Rakuten USA was never a shareholder, creditor, or asset transferee of the debtors.
Objector Rasch—a Rakuten USA employee who held a small number of shares of RGI pursuant to an employee stock option program—never resided in or had any regular contact with Brazil and did not own any Brazilian assets.
Hahn, a California resident, was a shareholder in a Ten Oaks Brazilian subsidiary that purchased an interest in the debtors in 2019. He never directly owned an interest in the debtors and had no other contacts with Brazil.
The U.S. Bankruptcy Court's Ruling
The U.S. bankruptcy court denied the foreign representative's motion for recognition and enforcement of the asset freeze order.
U.S. Bankruptcy Judge Laurel M. Isicoff explained that although section 1509 provides that, upon recognition of a foreign proceeding under section 1517, a U.S. bankruptcy court "shall" grant comity or cooperation to the foreign representative, it "does not equate the foreign representative with the foreign court or the foreign proceeding." Nexgenesis, 662 B.R. at 412 (citations and internal quotation marks omitted). Accordingly, she emphasized, despite chapter 15 recognition, the foreign representative was obligated to demonstrate that the relief requested beyond recognition was warranted under the applicable provisions of chapter 15, including the principle of comity.
The debtors' foreign representative sought enforcement of the asset freeze order under sections 1507(a) and 1521(a). As noted previously, the former authorizes the court to grant "additional assistance" to a foreign representative provided that the relief is consistent with principles of comity and satisfies the fairness consideration set forth in section 1507(b). The "catch-all" provision in section 1521(a) authorizes a court to "grant any appropriate relief" needed to effectuate chapter 15's purpose and protect the debtor's assets or the interests of creditors, including "any additional relief that may be available to a trustee, except for relief available under section 522, 544, 547, 548, 550, and 724(a)." 11 U.SC. § 1521(a)(7).
Judge Isicoff observed that "[t]he relationship between sections 1507 and 1521 'is not entirely clear.'" Nexgenesis, 662 B.R. at 413 (citation omitted). Nevertheless, she explained, section 1521(a)(7)'s express language "indicates that any 'additional relief' not specifically enumerated in the preceding subsections is constrained to that which would be available to a bankruptcy trustee under the Bankruptcy Code, and the language of section 1507 makes clear that any 'additional assistance' must be guided by principles of comity." Id. Moreover, Judge Isicoff emphasized, the relief sought under either provision is subject to the public policy caveat in section 1506.
The U.S. bankruptcy court concluded that the foreign representative's request for recognition and enforcement of the asset freeze order was both not authorized under sections 1507 and 1521 and unwarranted as "manifestly contrary" to U.S. public policy. Although chapter 15 is properly utilized as a vehicle to identify and administer a foreign debtor's U.S. assets or to pursue the debtor's claims, Judge Isicoff wrote, "here the Foreign Representative asks this Court to enforce a pre-judgment attachment against non-debtors' assets in furtherance of unadjudicated claims for damages against those non-debtors." Id.
According to Judge Isicoff, the foreign representative failed to demonstrate a basis for recognition and enforcement of the asset freeze order under principles of comity. Among other things, she noted, the foreign representative failed to establish the existence of "minimum contacts" between the Objectors and Brazil sufficient for the Brazilian court to assert personal jurisdiction over them. Neither the initial pleading in the veil piercing litigation nor the asset freeze order contained any allegations or findings that would establish such personal jurisdiction.
Judge Isicoff further concluded that a pre-judgment attachment to secure a potential money judgment is expressly prohibited by the U.S. Supreme Court's ruling in Grupo Mexicano de Desarrollo v. Alliance Bond Fund, Inc., 527 U.S. 308, 330 (1999), where the Court observed that "[t]he requirement that the creditor obtain a prior judgment is a fundamental protection in debtor-creditor law—rendered all the more important in our federal system by the debtor's right to a jury trial on the legal claim." The Court in Grupo Mexicano also emphasized that allowing a pre-judgment asset freeze pending adjudication of damages would "radically alter the balance between debtor's and creditor's rights which has been developed over centuries through many laws—including those relating to bankruptcy, fraudulent conveyances, and preferences." Grupo Mexicano, 527 U.S. at 331.
According to Judge Isicoff, in accordance with Grupo Mexicano and Eleventh Circuit precedent rejecting pre-judgment attachments pending an adjudication of damages, the foreign representative's request for enforcement of the asset freeze order—which was entered ex parte in litigation seeking to hold the defendants liable for damages after piercing the corporate veil—must be denied. She rejected the foreign representative's argument that dicta in Grupo Mexicano suggests that a bankruptcy court has the equitable power to enforce such asset freezes under the circumstances in the case before her. "Although this Court has equitable powers," she wrote, "such powers do not provide this Court with the power to do something forbidden to Article III courts," and the foreign representative failed to identify "any set of facts that would warrant the exercise of any kind of equitable relief, let alone this extraordinary 'equitable relief.'" Nexgenesis, 662 B.R. at 416 (footnote omitted).
In addition, the U.S. bankruptcy court noted that the foreign representative had not identified any apposite court decision in which a bankruptcy trustee was automatically granted an ex parte pre-judgment attachment to secure money damages from non-debtor assets. Judge Isicoff wrote that "[a]s recognized by Grupo Mexicano and argued by the Objectors, such relief is manifestly contrary to the fundamental protection of the substantive rights of property owners under longstanding judicial precedent." Id. at 418.
Importantly, Judge Isicoff explained that the asset freeze order did not in fact grant an injunction per se, but merely authorized the foreign representative to seek an injunction in the United States. By its terms, she noted, "the foreign representative would need to file 'appropriate and necessary procedures' in the United States, such as a complaint ultimately supported by evidence, establishing that a pre-judgment asset freeze is appropriate." However, having already declined to give comity to the asset freeze order due to lack of personal jurisdiction, the U.S. bankruptcy court declined to decide whether, if such an asset freeze were requested by the foreign representative, she would grant such relief. Id.
The U.S. bankruptcy court also concluded that the asset freeze order was not entitled to comity because it was not a final order or judgment and was entered ex parte.
Finally, the court found that enforcing the asset freeze order would be manifestly contrary to U.S. public policy. According to Judge Isicoff, the order violated basic U.S. public policies by: (i) purporting to exercise personal jurisdiction over the objectors without alleging and demonstrating their minimum contacts with Brazil; and (ii) violating the general rule that, pending the adjudication of a claim for money damages, the assets of U.S. citizens and companies may not be frozen prior to the entry of a judgment. Moreover, she wrote, "[r]ecognizing a foreign ex parte asset freeze order against the assets of U.S. citizens when there is no factual basis to do so is manifestly contrary to the public policy of the United States." Id. at 419.
Outlook
Nexgenesis is a significant ruling for a number of reasons. First, the decision underscores the principle that chapter 15 recognition of a foreign bankruptcy or insolvency proceeding in accordance with the requirements set forth in chapter 15 does not necessarily mean that a U.S. bankruptcy court is obligated to recognize or enforce each and every order or judgment of the foreign tribunal under principles of comity. Indeed, each order or judgment of the foreign tribunal will be evaluated independently and will be enforced only in the territorial jurisdiction of the United States if the relevant elements of chapter 15 are satisfied. Chapter 15 is premised on the idea that recognition and other forms of relief, including "additional assistance," are premised on basic notions of substantive and procedural fairness. If relief requested by a foreign representative offends those principles, a U.S. bankruptcy court has the discretion to deny the request, either because it violates fundamental U.S. law or is manifestly contrary to U.S. public policy—or both.
Second, Nexgenesis highlights the idea that a foreign bankruptcy regime need not be identical to U.S. bankruptcy law to justify foreign main or nonmain recognition. See In re Platinum Partners Value Arbitrage Fund L.P., 583 B.R. 803, 115 (Bankr. S.D.N.Y. 2018) ("[I]t is well-established that comity does not require that the relief available in the United States be identical to the relief sought in the foreign bankruptcy proceeding; it is sufficient if the result is comparable and that the foreign laws are not repugnant to [U.S.] laws and policies.").
A recent example concerns the validity and enforceability of nonconsensual non-debtor releases in restructuring plans. Even though the U.S. Supreme Court ruled in Harrington, United States Trustee, Region 2 v. Purdue Pharma L.P., ___ U.S. ___, 144 S. Ct. 2071 (2024), that such releases may not be included in non-full payment plans confirmed under chapter 11 of the U.S. Bankruptcy Code, it did not rule out the possibility that such releases in a foreign debtor's restructuring plan could be recognized and enforced in the United States in a chapter 15 case. Despite the controversial nature of such releases—even before Purdue Pharma—many U.S. bankruptcy courts recognized and enforced foreign restructuring plans providing for third-party releases in chapter 15 cases. See, e.g., In re Vitro S.A.B. de CV, 701 F.3d 1031, 1062 (5th Cir. 2012) ("We conclude that, although our court has firmly pronounced its opposition to [non-debtor] releases, relief is not thereby precluded under § 1507, which was intended to provide relief not otherwise available under the Bankruptcy Code or United States law."); In re Agrokor d.d., 591 B.R. 163 (Bankr. S.D.N.Y. 2018); In re Sino-Forest Corp., 501 B.R. 655 (Bankr. S.D.N.Y. 2013); In re Metcalfe & Mansfield Alternative Investments, 421 B.R. 685 (Bankr. S.D.N.Y. 2010).
Given the Supreme Court's disinclination in Purdue Pharma to weigh in on the litigants' public policy arguments, it seems unlikely that a U.S. bankruptcy court would conclude—at least based on Purdue Pharma—that enforcement in the United States of third-party releases in a foreign restructuring plan would be "manifestly contrary" to U.S. public policy. In fact, shortly after Purdue Pharma was handed down, a U.S. bankruptcy court entered an order and decision recognizing and enforcing under chapter 15 a Brazilian debtor's bankruptcy plan that permitted nonconsensual third-party releases, without, however, any legal analysis or mention of Purdue Pharma. See In re Americanas S.A., 2024 WL 3506637 (Bankr. S.D.N.Y. July 22, 2024).
Finally, Nexgenesis reinforces the idea that, although U.S. bankruptcy courts were originally conceived as instruments of equity, their equitable powers are not limitless and are constrained by U.S. law and public policy.
