In Re Netia Holdings S.A.

Citations: 277 B.R. 571; 2002 Bankr. LEXIS 519; 2002 WL 1008929Docket: 18-14083

Court: United States Bankruptcy Court, S.D. New York; April 29, 2002; Us Bankruptcy; United States Bankruptcy Court

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Kjell-Ove Blom and other members of the management board of Netia Holdings S.A., along with its subsidiaries, initiated a case under section 304 of the Bankruptcy Code, which is an ancillary proceeding to a foreign insolvency case involving the Polish corporations. The bondholders, including SISU Capital Limited and Triage Capital Management, moved to dismiss the case, arguing that Netia did not fulfill the requirement for the U.S. proceeding to assist a "foreign proceeding" as defined in Bankruptcy Code section 101(23).

The court found that the underlying facts were largely undisputed, although the parties disagreed on their implications. Netia Holdings is a telecommunications provider in Poland, with SISU holding significant debt instruments issued by its subsidiaries. Among these is a series of 13-3/4% Senior Notes due 2010, which are tied to an alleged escrow arrangement intended to secure initial interest payments for the noteholders. While Netia acknowledges a default on these notes, it contests the existence of the alleged escrow.

Under Polish law, if a debtor cannot meet its obligations, the management board must initiate insolvency proceedings to avoid personal liability. Polish insolvency law allows for either liquidation or debt restructuring through designated legal frameworks. The court ultimately denied the bondholders' motion to dismiss the U.S. case, indicating that it met the necessary criteria for a supportive proceeding.

A creditor can seek an involuntary bankruptcy declaration against a company even if the company has initiated proceedings under Poland's insolvency laws, before a court decides on the debtor's application to open Arrangement Proceedings. The Polish court reviews both the debtor's Arrangement Proceedings application and the creditor's bankruptcy petition to determine whether to proceed with Arrangement Proceedings or liquidate the debtor's assets. No bankruptcy petitions have been filed against Netia Holdings, Netia Telekom, or Netia South.

Arrangement Proceedings in Poland involve collaboration between the debtor, creditors, and the court to achieve a settlement that is confirmed by a majority of creditors and requires court approval to take effect. These proceedings are initiated by the debtor's application and are managed by the district business court where the debtor is registered. The process includes several stages: filing the application, court consideration, court decision granting the application, court approval of the settlement, implementation of the settlement, and potential repeal of the settlement. It is important to note that Arrangement Proceedings do not automatically begin upon application filing, and the court does not grant applications as a matter of course.

While the application is pending, the court can take protective measures for the debtor's estate, schedule hearings, and require testimonies from the debtor's representatives, adhering to the Civil Procedure Code of Poland, which ensures due process and other legal protections. Creditors may participate in this evaluation by supporting or opposing the debtor's application or by filing for liquidation of the debtor’s assets under bankruptcy law. The court must assess whether to open Arrangement Proceedings after receiving the application.

The Arrangement Proceeding Act mandates that a court must decide to open arrangement proceedings within two weeks of a debtor's motion, although this timeframe can be extended, particularly if expert opinions are necessary for clarification. Polish law prohibits appeals against decisions to grant applications for opening arrangement proceedings, but allows appeals against rejections. Once arrangement proceedings are opened, an automatic stay against debt enforcement occurs for debts incurred prior to this opening. During the application review, the court can stay creditor actions if enforcement may hinder the debtor's restructuring efforts. Before the application is filed, creditors can pursue claims freely. Post-filing, creditors can object to the application and present evidence in court. If the court approves the application, it appoints a court supervisor to oversee the debtor's business and a judge-commissioner to direct the proceedings and supervise the supervisor’s actions. The court's involvement typically does not restrict the debtor's business operations or asset management prior to the arrangement proceedings being opened.

Opening an Arrangement Proceeding triggers several key consequences that persist until a settlement decision is finalized: (a) the debtor faces restrictions on asset disposal; (b) initiation or continuation of enforcement actions to satisfy debts covered by the Arrangement Proceedings is prohibited; (c) any prior enforcement actions are suspended; and (d) the debtor is barred from repaying debts covered by the Arrangement Proceedings, with additional prohibitions on repayment that contradict the approved settlement. 

On February 20, 2002, the Foreign Debtors filed applications to commence Arrangement Proceedings in the District Court for the Capital City of Warsaw. The Polish Court acknowledged the initiation of proceedings and issued a certification. On the same day, the Petitioners filed a petition in this Court for a section 304 case, requesting a temporary restraining order (TRO) against various actions concerning the Alleged Escrow and other matters related to Netia and State Street, the indenture trustee. The Court granted the TRO on February 20, 2002, and extended it by consent until April 30, 2002.

Hearings on the Foreign Debtors' applications began shortly after the filings, with testimonies presented on March 5 and March 14, 2002. During the March 14 hearing, the Foreign Debtors introduced a Restructuring Agreement, which had received approval from over 80% of Netia's creditors and about 92% of public debt holders. The Polish court appointed an examiner to assess Netia's eligibility for opening an arrangement, with a report expected by April 29, 2002. As of the hearing, the applications of two Foreign Debtors remained unresolved, while Netia Telekom's application was granted. There was no indication of scheduled future hearings regarding the unresolved applications, nor had any interim relief been sought from the Polish court during the pending applications.

The Court finds that during the period between the filing of an application for the Arrangement Proceeding and the determination of its grant, Polish judges engage in judicial activities, including hearings, witness examination, and consideration of requests and objections from both debtors and creditors. This involvement indicates substantial judicial proceedings, allowing for creditor participation. The Court also notes that the Moving Bondholders' characterization of the Arrangement Process is incomplete, failing to capture the ongoing nature of the proceedings, which starts with the application and includes the possibility of appeal if denied. Even before the application is granted, the process constitutes a "judicial proceeding" under the Bankruptcy Code for purposes of "adjusting debts by composition" or "effecting a reorganization." 

Section 304(a) of the Bankruptcy Code allows for ancillary cases to commence with a petition by a foreign representative, and defines a "foreign proceeding" broadly in section 101(23) to include various types of judicial or administrative processes related to insolvency or reorganization. For a proceeding to qualify as a "foreign proceeding," it must meet three criteria: it must involve an administrative or judicial process regarding insolvency, be conducted with the aim of liquidating an estate or adjusting debts, and be pending in the foreign country where the debtor resides or has significant business interests.

The Arrangement Proceeding involving Netia in Poland satisfies the necessary criteria for being recognized as a "foreign proceeding." This judicial process is focused on reorganizing Netia's debts and restructuring its operations, taking place in the debtor's country of domicile. The Court emphasizes that substantial judicial involvement, including hearings, witness examinations, and the availability of injunctive relief, occurs even before the proceeding is formally "opened." Creditors retain the right to present their objections, and any adverse decisions can be appealed, demonstrating a high level of judicial oversight.

The Court rejects SISU's argument that the Arrangement Proceeding's current status precludes it from being classified as a "foreign proceeding." Citing case law, it asserts that a "proceeding" encompasses all steps from initiation to execution of judgment. The Court finds that the initiation of the Arrangement Proceeding represents the beginning of an ongoing process, qualifying as a "foreign proceeding." The lack of certain actions by the Polish court or creditor participation does not impact this conclusion. The Moving Bondholders' reliance on earlier cases is not persuasive against the established facts in this instance.

Judge Garrity ruled in Tam that the voluntary winding up of a Cayman Islands Corporation did not qualify as a foreign proceeding under section 101(23) due to a lack of judicial or administrative oversight and minimal creditor involvement. In contrast, the Polish court overseeing Netia's situation has provided regulatory supervision, conducted hearings, examined witnesses, appointed an examiner for investigations, and allowed for potential appeals against adverse decisions. Unlike the circumstances in Tam, where creditor participation was negligible, creditors have the opportunity to challenge Netia's application, though opposition has been limited.

Judge Garrity later differentiated Tam in In re Ward, where he recognized the voluntary winding up of Zambia Airways as a foreign proceeding due to significant court oversight, access for creditors, and adherence to due process, despite the absence of a court proceeding. The judicial activity and rights available to parties interested in Netia's case are stronger than those found sufficient in Ward. Similarly, former Chief Judge Brozman in Hopewell I classified a Bermuda arrangement as a foreign proceeding, despite less court activity than in the current case, emphasizing the mandatory court appearances involved.

Judge Chin, affirming Brozman's decision in Hopewell II, noted the court supervision of the Bermuda scheme, reinforcing its classification as a foreign proceeding. The Moving Bondholders' request to apply the Master Home decision to this case is rejected by this Court, as that case involved a pending reorganization application without court approval at the time of consideration.

The Master Home court determined that the Taiwanese proceeding did not qualify as a foreign proceeding under section 304(a) due to several factors: the lengthy investigative procedure for reorganization (six to nine months), the interim decree that restricted the bank group from seeking payments but allowed MHF to pay trade creditors, the absence of judicial oversight in the corporation's operations, and the lack of equivalency between the Taiwanese interim decree and the automatic stay protection in the U.S. Netia and the Ad Hoc Committee argue that Master Home is distinguishable and wrongly decided, asserting that the factors cited are irrelevant to sections 304(a) and 101(23), although this Court refrains from fully addressing that claim.

The Court contrasts the factual findings of Master Home with its own, noting that while Master Home found no court oversight during the Taiwanese reorganization application, it has found substantial court involvement and creditor participation in the Polish Arrangement Proceeding. The Court agrees with Netia that the Polish process offers significantly more judicial engagement and creditor access than the Taiwanese proceeding. It expresses doubts about whether the Master Home court would reach the same conclusion today under the laws of the Southern District of New York and Second Circuit, referencing cases such as Tam, Ward, MMG, and Hopewell I and II. These cases reveal a pattern of broad interpretation of section 304(a), where courts have found adequate judicial involvement and creditor access, even when that involvement was less than what was present in Master Home or the current Polish proceeding. The Court notes that Judge Garrity's decision in Ward upheld the Zambian Airlines winding-up despite it not being a strictly judicial proceeding, while Judge Brozman in Hopewell I identified "significant judicial involvement" based on minimal court appearances.

Judge Brozman highlighted that creditors had ample opportunities to object to the proposed scheme prior to its approval and noted that the court had never disqualified a proceeding under section 304(a) due to the absence of an automatic stay or a foreign court's lack of supervisory authority over a company’s operations. The judge emphasized that section 304(a) does not stipulate these as requirements, and it would be inappropriate to impose such stipulations now. The court plans to analyze section 304(a) issues in alignment with precedents set by other judges in the district and refrains from extending the Master Home precedent inconsistently with those rulings.

The Second Circuit clarified that section 304 aims to facilitate U.S. courts' deference to foreign insolvency proceedings and prevent the fragmented distribution of a debtor's estate. The Moving Bondholders' request, according to the court, would undermine this purpose and could lead to a rush on local assets by creditors following a foreign relief application. The court supports the Ad Hoc Committee's view that extending Master Home would invite such harmful actions.

In affirming the broad interpretation of section 101(23) within the district and the longstanding practice of honoring foreign proceedings that meet section 304(c) criteria, the court finds it unjust to deny assistance to the Polish Arrangement Proceeding. After confirming the necessary criteria of section 101(23) were met, the court believes that any proceedings unsuitable for assistance should be evaluated based on section 304(c) factors.

Ultimately, the court denied the Moving Bondholders' motion and also denied a motion to vacate a temporary restraining order (TRO) that had been put in place. The court concluded that Netia demonstrated irreparable harm and serious merit issues favoring its position. The motion faced opposition not only from Netia but also from various bondholder entities that are part of an Ad Hoc Committee.

An Investment Agreement referenced by Netia stipulates that no pledge, security interest, or lien shall be created or recognized under the agreement, rendering any such provisions void if declared by a court. The Investment Interest is classified as a general asset of the Payors, available to creditors in case of insolvency according to relevant laws. The Court refrains from making determinations regarding differing interpretations of "Arrangement" Proceedings versus "Composition" Proceedings, concluding they are essentially the same due to translation discrepancies. The Court will use "Arrangement" Proceedings for clarity. Additionally, it is noted that the debtor's actions must remain within the scope of day-to-day management, and any unauthorized actions, such as acknowledging claims or settlements without court consent, would lack legal effect for creditors. Netia obtained a temporary restraining order (TRO) without prior notice, justifying this lack of notice during the application hearing. While the Moving Bondholders claim they were not notified of the TRO until weeks later, the Court acknowledges that Netia took reasonable steps to inform them.

The relevance of the Moving Bondholders' dissent against the Restructuring Agreement is dismissed by the Court, noting it does not affect the legal issues at hand. The Moving Bondholders provided statements to a Polish court on March 5 and March 14, which were not countered by the Petitioners. The court subsequently adjourned the hearing to seek expert opinion regarding Netia Holdings' liquidity issues. Netia's counsel represented to the Court that a Polish Arrangement Proceeding had been initiated, a claim not disputed by the Moving Bondholders. Moreover, the Moving Bondholders did not challenge the characterization of this proceeding as a foreign proceeding under sections 304(a) and 101(23). The Court clarifies that the opening of the proceeding for Netia Telekom was not determinative for the cases of Netia Holdings and Netia South. The definition of "foreign proceeding" is broad, covering various insolvency and debt adjustment processes that must be conducted under judicial or administrative supervision. The Moving Bondholders have refrained from likening Netia's case to scenarios lacking such oversight, as noted in Collier on Bankruptcy.

The Collier discussion highlights that the procedural status of the foreign proceeding is not the primary focus, which is essential for determining whether an ancillary proceeding can be classified as a foreign proceeding under section 304(a). The case of Hopewell I emphasized the involvement of creditors in the proceedings, confirming that creditors can participate in the Polish court's evaluation and file pleadings regarding the debtor's application, meeting necessary criteria for recognition as a foreign proceeding.

Judge Brozman in Hopewell I favored a general definition over Black's Law Dictionary, a stance shared by this Court. Netia argues that the "opening" of the Arrangement Proceeding is similar to the commencement of involuntary bankruptcy cases under section 303 of the Bankruptcy Code, noting that while an automatic stay is immediate in the U.S., the Polish process requires a specific request for such relief post-application. The Court finds this analogy appropriate, citing historical similarities with Chapter XI cases.

The Court asserts that the measure of judicial supervision is based on the accessibility of the court to parties, rather than their actual enforcement of rights. Furthermore, it dismisses concerns raised by the Moving Bondholders regarding the Polish court's lack of oversight over the debtor's operations and the absence of an automatic stay, clarifying that these elements are not mandated by section 304.

Disqualifying a foreign proceeding from being recognized in the U.S. due to a lack of controversy abroad would undermine section 304 doctrine. In Hopewell I, the court noted that the Bermuda court evaluated submitted materials and examined witnesses, similar to the Polish court's role in this case. In MMG, Chief Judge Bernstein affirmed the Cayman Islands insolvency proceeding as a "foreign proceeding" despite arguments against it, emphasizing the judicial oversight and creditor participation involved. The time taken for the MHF insolvency in Taiwan was significantly longer than the current case, and Polish law grants broader authority to prevent obligations that hinder reorganization compared to Taiwanese law. The court will focus solely on factors relevant to section 304(a) without addressing the Moving Bondholders' rights concerning the absence of an automatic stay. The principles from Treco and Koreag remain applicable, indicating that overly restrictive interpretations of section 304(a) could frustrate the purpose of providing assistance to deserving foreign proceedings. Concerns regarding comity and the extent of relief can be managed through judicial discretion under sections 304(b) and 304(c), allowing flexibility in ancillary cases.

The court is urged to make orders based on the specific circumstances of each case rather than adhering to rigid rules. Triage contends that Netia has not satisfied the requirements of section 101(24) for a "foreign representative" due to an alleged lack of authorization for the petition. However, the petition was verified by members of the management board of Netia Holdings, Netia Telekom, and Netia South. It is established in this district that the board members of a foreign corporation can initiate a section 304 proceeding in the U.S. on behalf of the debtor. The court cites precedent that clarifies a board of directors can act as a foreign representative without court appointment, as the definition of "foreign proceeding" includes non-judicial actions. Triage has not demonstrated that the petitioners were unauthorized under Polish law to act on behalf of the corporation. Although it may have been preferable for petitioners to explicitly state their authorization or provide a board resolution, Triage has not offered evidence to suggest they were unauthorized, leaving the court with no basis to conclude otherwise.