In re Rede Energia S.A.

Citations: 515 B.R. 69; 2014 Bankr. LEXIS 3617; 2014 WL 4248121Docket: Case No. 14-10078 (SCC)

Court: United States Bankruptcy Court, S.D. New York; August 27, 2014; Us Bankruptcy; United States Bankruptcy Court

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A Memorandum Decision has been issued by Judge Shelley C. Chapman in a case under Chapter 15 of the Bankruptcy Code, addressing the reorganization plan for Rede Energía S.A. The document outlines a comprehensive factual background, detailing the Rede Group, the issuance of perpetual notes, events leading to the Brazilian bankruptcy, and the procedural aspects of the Brazilian bankruptcy proceeding, including the submission and approval of competing plans and the voting process.

The Brazilian reorganization plan involves substantive consolidation of the Rede debtors and categorization of claims, specifying how secured and unsecured claims will be treated, including claims from concessionaires and general unsecured creditors. Following the Brazilian proceedings, the Foreign Representative initiated a Chapter 15 case in the U.S.

The discussion section addresses the applicable law and asserts that the plan enforcement relief is justified under Sections 1521 and 1507 of the Bankruptcy Code. Key points include the fair treatment of creditors in Brazil, the absence of prejudice to U.S. creditors, no evidence of preferential distributions, and alignment with U.S. law regarding distribution of proceeds. Section 1506 considerations confirm that the Brazilian proceeding was consistent with U.S. public policy, with due process rights upheld and no manifestly contrary actions noted.

The conclusion highlights the Foreign Representative's request for court assistance to enforce the Brazilian reorganization plan, seeking an order to recognize the plan and court confirmation, along with directives for necessary actions by the Indenture Trustee and the Depository Trust Company to implement the plan's terms, including facilitating payments to note-holders.

Certain noteholders of Rede object to the relief sought by Rede’s Foreign Representative, arguing it contravenes U.S. public policy and asserting the need to return to Brazil for improved distribution negotiations under the Brazilian reorganization plan. They claim that the Brazilian bankruptcy proceedings violate their rights, alleging that these proceedings, sanctioned by the Brazilian court, are fundamentally flawed compared to U.S. bankruptcy principles. Despite acknowledging differences in the Brazilian proceedings, the Court ultimately determines that the Foreign Representative is entitled to the requested relief.

The document also outlines critical background information about the Rede Group, a significant electric power provider in Brazil, which includes Rede and its subsidiaries. The Rede Group has extensive operations across multiple Brazilian states, serving millions of customers. The Brazilian Bankruptcy Proceeding involves five members of the Rede Group, collectively referred to as the Rede Debtors, which include Rede itself and several holding companies and subsidiaries. The Rede Group's operations are heavily regulated by Brazilian authorities, specifically the Agência Nacional de Energia Elétrica (ANEEL).

Rede issued 11.125 percent Perpetual Notes totaling USD$400 million under an indenture dated April 2, 2007, with no fixed maturity or mandatory redemption provisions. In September 2007, Rede added USD$175 million in additional Perpetual Notes, resulting in approximately USD$496 million outstanding as of November 23, 2012, when the Brazilian Bankruptcy Proceeding began. These notes are unsecured and not guaranteed by Rede's subsidiaries, held in global note form with the Depository Trustee Company, and administered by The Bank of New York Mellon as the indenture trustee. Interest payments are made to the trustee in New York and then distributed to the Noteholders, with the indenture governed by New York law. The Ad Hoc Group of Rede Noteholders holds about 37 percent of the Perpetual Notes, primarily from Latin American members, with Merrill Lynch holding 8.1 percent based in the U.S.

On August 29, 2012, Brazil enacted Provisional Measure No. 577, allowing ANEEL to intervene in electricity distribution concessionaires to ensure compliance with standards, which halted their ability to seek bankruptcy restructuring until concession termination. ANEEL intervened in Rede Concessionaires on August 31, 2012, requiring Rede to submit a Correctional Plan for approval to address compliance failures. The Ad Hoc Group raised concerns that the timing of MP 577 and ANEEL's actions indicated favoritism towards local interests, claims disputed by Rede. Following the intervention, financial advisor Rothschild sought purchasers for Rede shares, resulting in binding offers, and Rede selected a joint bid from CPFL Energía and Equatorial Energía.

Rede submitted a Correctional Plan to ANEEL on October 26, 2012. On November 22, 2012, FI-FGTS exercised a put right under its 2010 investment agreement with Rede, which allowed it to exchange 37.1% of EEVP shares for a secured claim against Denerge, amounting to R$712.5 million. The Ad Hoc Group argues that FI-FGTS should still be considered a shareholder, not a secured creditor with voting rights in the Brazilian Reorganization Plan. The Rede Debtors filed for voluntary judicial reorganization under Brazilian bankruptcy law on November 23, 2012.

On December 19, 2012, the Brazilian Bankruptcy Court approved the reorganization proceedings. The Rede Debtors presented a reorganization plan based on a share purchase agreement with Equatorial-CPFL on March 15, 2013, which involved transferring ownership of Rede Group shares to Equatorial-CPFL and restricted marketing to other bidders until June 30, 2013. Creditors could choose between cash representing 15% of their claims or reinstatement of 65% of their claims over 27 years without interest.

On April 4, 2013, objections were filed by the Indenture Trustee and the Ad Hoc Group concerning substantive consolidation of the Rede Debtors and FI-FGTS's voting rights, asserting that FI-FGTS was an insider. Competing interests COPEL and Energisa S.A. also challenged the exclusivity of the Equatorial-CPFL agreement and sought access to bidding information. On May 14, 2013, a preliminary claims list confirmed FI-FGTS's secured claim. On May 27, 2013, FI-FGTS notified the court of its exercised put option and offered the shares for disposal. The court ruled that FI-FGTS was a secured creditor, prompting the Indenture Trustee to appeal the order and seek an injunction against the Equatorial-CPFL Plan, which was denied, leaving the appeal pending.

On May 29, 2013, COPEL and Energisa announced a competing bid, the COPEL-Energisa Proposal, to acquire assets from the Rede Debtors for approximately R$3.2 billion. This proposal was not a reorganization plan and failed to address specific claims or the consolidation of the Rede Debtors. Despite support from the Ad Hoc Group, the Rede Debtors rejected the proposal on June 5, 2013, citing its non-binding nature, failure to meet restructuring requirements from ANEEL, inflated creditor recovery estimates, and potential loss of business activity. Following the rejection, COPEL-Energisa withdrew the proposal on June 12, 2013, due to insufficient information.

On July 2, 2013, Energisa submitted a Revised Energisa Proposal, closely aligned with the Equatorial-CPFL SPA and Plan. During the second creditors’ meeting on July 3, 2013, no voting occurred. Ahead of the third meeting on July 5, 2013, the Brazilian Bankruptcy Court indicated it would not permit votes on both proposals. At the third meeting, creditors were informally polled, with most preferring the Revised Energisa Proposal, leading Equatorial-CPFL to withdraw its bid. The Rede Debtors then proposed a plan based on the Revised Energisa Proposal, which secured a favorable vote from the secured creditor FI-FGTS, while the Ad Hoc Group and Indenture Trustee voted against it.

The Indenture Trustee was allowed to vote on behalf of all Noteholders except the Ad Hoc Group, resulting in a rejection of the Brazilian Reorganization Plan. Following this, on July 15, 2013, Rede appealed to the Brazilian Court of Appeals for reconsideration of the voting ruling, but the court denied the request.

At the third creditors’ meeting, objections regarding claims and voting rights of certain creditors were pending before the Brazilian Bankruptcy Court, notably the Ad Hoc Group's challenge to FI-FGTS's secured creditor status. Although all creditors on the official Creditors’ List could attend and vote on the Brazilian Reorganization Plan, those with disputes were allowed to cast provisional votes. The Bankruptcy Court instructed the Judicial Administrator to tally two sets of voting results: one including provisional votes and one excluding them. 

On July 26, 2013, the Ad Hoc Group objected to the confirmation of the Brazilian Reorganization Plan, contesting the consolidation of the Rede Debtors, to which Rede and Energisa responded. On September 9, 2013, the Court confirmed the Reorganization Plan but reversed its earlier ruling, stating that the Indenture Trustee could not vote for Noteholders lacking direction or authorization. The Court determined the Plan could still be confirmed as both secured and unsecured classes accepted it, despite the Indenture Trustee's exclusion.

Following this, on September 24, 2013, the Ad Hoc Group filed further objections, claiming that Denerge and EEVP-level creditor votes should not influence Rede-level asset outcomes and that FI-FGTS's vote was invalid due to its shareholder status in EEVP. The Court dismissed these objections, leading to an appeal by the Ad Hoc Group. On November 14, 2013, the Bankruptcy Court clarified its earlier order, noting a miscalculation in voting results and confirming the Plan under cram-down provisions, as the unsecured class narrowly failed to meet the required numbers for confirmation. The Rede Debtors appealed this decision, arguing that their Plan was consensually approved by both creditor classes and contesting the designation of votes by related parties to Equatorial and CPFL, who were seen as potential competitors.

The Ad Hoc Group is appealing on two grounds: (i) that the Indenture Trustee should have the right to vote for all Noteholders, and (ii) that FI-FGTS lacks the right to vote as a secured creditor. Both appeals are pending before the Brazilian Court of Appeals. A successful appeal by the Rede Debtors could result in the Brazilian Reorganization Plan being approved consensually by both secured and unsecured creditor classes, thereby avoiding the need for cram-down under Brazilian bankruptcy law. Conversely, if the Ad Hoc Group wins on the voting rights of the Indenture Trustee, the unsecured class may reject the plan, regardless of numerosity. If the Ad Hoc Group also prevails concerning FI-FGTS’s voting rights, the plan would fail to meet the consenting class requirement necessary for cram-down. Furthermore, if the Ad Hoc Group wins regarding consolidation, the plan would not satisfy the requirements for ordinary confirmation or cram-down.

The Brazilian Reorganization Plan includes a R$1.2 billion investment from Energisa into the Rede Concessionaires and R$1.95 billion allocated for paying the Rede Debtors' creditors. Creditors, including Noteholders, may choose between (i) receiving 25% of their claims in cash in exchange for assigning their claims to Energisa, or (ii) full reinstatement of their claims over 22 years with no interest. Additionally, the Controlling Shareholder must transfer equity interests in the Rede Group to Energisa for R$1.00 and Energisa will assume certain debt guarantees previously provided by the Controlling Shareholder.

The plan is based on a substantive consolidation of the assets and liabilities of the five Rede Debtors for voting and distribution, without merging the entities. The Brazilian Bankruptcy Court ruled on May 27, 2013, that this consolidation was appropriate due to the interdependent corporate structure of the Rede group, highlighted by shared controls, inter-company loans, and cross-guarantees, facilitating a unified cash flow essential for effective reorganization.

On July 26, 2013, the Ad Hoc Group objected to the substantive consolidation of the Rede Debtors within the Brazilian Reorganization Plan, arguing this consolidation is a key flaw justifying the denial of relief sought by the Foreign Representative. A total of 111 claims against the five Rede Debtors amount to approximately R$3.990 billion and USD$655 million, with 33 claims against multiple Rede Debtors. Under Brazilian bankruptcy law, claims are classified into three categories: Class I (labor-related claims, none asserted), Class II (secured claims, filed by FI-FGTS and BNDES), and Class III (unsecured claims). FI-FGTS has a R$712.5 million secured claim against Denerge, while BNDES has a R$135.5 million secured claim against Rede. Class III claims against Rede total about R$1.89 million and USD$655 million, with certain inter-Debtor claims leading to a net R$500 million owed to Rede. Shareholders' interests are preserved under Brazilian law without their consent.

Secured claim holders can choose from three treatment options under the Plan. BNDES opted to assign its debt to Energisa, receiving a 25% cash distribution, while FI-FGTS selected a 22-year note with a 4% interest rate, committing to provide future financing equal to 90% of its claim.

Unsecured claims, categorized into Concessionaire Creditor Claims, Subsidiary Concessionaire Claims, and General Unsecured Claims, are treated differently. Concessionaire Creditor Claims (11 claims totaling approximately R$421 million) will be fully satisfied, while General Unsecured Claims, including those from Noteholders, will receive only a 25% recovery. The Ad Hoc Group argues that this disparate treatment is grounds for denying Plan Enforcement Relief.

Concessionaire Creditors can select from three treatment options for their General Unsecured Claims. If they refrain from enforcement actions and waive defaults, they will receive full payment for matured obligations within 60 days and have their surety and guarantees transferred to Energisa under the same terms. The eight Rede Concessionaires hold Subsidiary Concessionaire Claims totaling approximately R$504 million but were excluded from voting on the Brazilian Reorganization Plan due to their affiliation with Rede Debtors. Their claims will be fully satisfied under the ANEEL Plan, with Energisa committing at least R$1.2 million to facilitate settlements.

There are 109 General Unsecured Claims against the Rede Debtors, amounting to R$3.142 billion and approximately USD$655 million. The Brazilian Reorganization Plan grants three treatment options, with the majority preference from Noteholders determining the final consideration. Following plan approval, a majority of Noteholders, including the Ad Hoc Group, selected Option C, which involves assigning claims to Energisa for a 25 percent cash distribution on the closing date.

On January 16, 2014, the Foreign Representative filed a Petition for recognition of the Brazilian Bankruptcy Proceeding as a foreign main proceeding, seeking enforcement of the Brazilian Reorganization Plan in the U.S. This includes requests for full faith and credit to the Plan and Confirmation Decision, injunctions against conflicting U.S. actions, and directives for the Indenture Trustee and DTC to execute the Plan's terms, including the assignment of the Global Note to Energisa. The Indenture Trustee has indicated it will not proceed without a court directive.

The Foreign Representative indicates that while Energisa may deposit funds with the Brazilian Bankruptcy Court for the Perpetual Notes holders' benefit, it is unlikely to distribute funds directly to the Indenture Trustee without assurance of assignment. The Ad Hoc Group did not object to recognizing (i) the Brazilian Bankruptcy Proceeding as a foreign main proceeding under chapter 15 of the Bankruptcy Code and (ii) José Carlos Santos as Rede’s Foreign Representative. Consequently, the Court approved a stipulated order for this recognition. On February 25, 2014, the Ad Hoc Group filed an objection to the Plan Enforcement Relief, asserting that (i) the Foreign Representative is not entitled to relief under sections 1521 or 1507 and (ii) granting the relief would contradict U.S. public policy per section 1506. The Ad Hoc Group cited issues with the Brazilian Reorganization Plan, including significant shareholder value extraction, disparate treatment of creditors targeting U.S.-based creditors, local creditor protections, and questionable consolidation methods. In response, the Foreign Representative contended that the Brazilian Bankruptcy Proceeding did not violate U.S. principles and sought relief under sections 1521 and 1507. Both parties opted for a Stipulation of Facts and Law instead of an evidentiary hearing. A court hearing on May 9, 2014, addressed whether to grant the requested Plan Enforcement Relief. Chapter 15 of the Bankruptcy Code, aligned with the UNCITRAL Model Law, emphasizes comity in cross-border insolvency, allowing automatic relief upon recognition of a foreign main proceeding and enabling the bankruptcy court to grant any necessary relief to protect debtor assets or creditor interests.

Staying execution against a debtor's assets can occur to the extent not already stayed under section 1520(a)(90)(3). This includes suspending the debtor's right to transfer, encumber, or dispose of assets, and providing for the examination of witnesses and evidence related to the debtor’s financial situation. The court may also entrust asset administration within the U.S. to a foreign representative or authorized individual, extend relief under section 1519(a), and grant additional relief to a trustee, excluding specific sections (522, 544, 545, 547, 548, 550, and 724(a)).

However, relief under section 1521(a) is contingent upon sufficient protection for the interests of creditors and affected entities, with the court able to impose appropriate conditions. The policy aims to balance relief for the foreign representative with the interests of those affected. Section 1507(a) allows for additional assistance to a foreign representative, provided it aligns with comity principles and fairness considerations.

The relationship between sections 1507 and 1521 is not entirely clear. The Fifth Circuit in *In re Vitro S.A.B. de C.V.* established that a court should prioritize relief under section 1521 before considering additional assistance under section 1507. Relief under section 1521 must be specifically enumerated; if not, a court can then evaluate whether the request qualifies as additional assistance under section 1507.

The excerpt emphasizes the flexible framework provided by Chapter 15 of the Bankruptcy Code, which allows courts to grant relief aligned with the chapter's objectives while respecting international comity. It references the three-part analysis from the Vitro case and notes that the relief under sections 1507 and 1521 is largely discretionary, influenced by comity principles. The excerpt highlights that relief in foreign proceedings does not have to mirror that available in the U.S. but underscores that comity does not equate to automatic deference to foreign rulings, especially when such deference could infringe upon U.S. laws or public policy. Courts retain the authority to refuse relief under section 1506 if it is deemed "manifestly contrary" to U.S. public policy, with this exception being narrowly construed. The excerpt further clarifies that foreign judgments may receive comity as long as the corresponding foreign proceedings are fair and adhere to civilized legal standards.

Under section 1506 of the Bankruptcy Code, the critical determination is whether the foreign jurisdiction's procedures align with fundamental fairness standards. The Foreign Representative has requested two forms of Plan Enforcement Relief: (i) an order granting full faith and credit to the Confirmation Decision and the Brazilian Reorganization Plan, along with an injunction against any U.S. acts that contradict this order; and (ii) an order directing the Indenture Trustee and DTC to execute necessary actions to implement the Brazilian Reorganization Plan, including the assignment of the Global Note to Energisa and payments to beneficial Noteholders.

The Court finds that the requested relief is appropriate under sections 1521 and 1507 of the Bankruptcy Code and is not barred by the public policy exception in section 1506. The relief sought by the Foreign Representative is characterized as “appropriate relief” even though it is not explicitly listed in section 1521(a). The Foreign Representative argues that such relief is consistent with what was available under section 304 of the Bankruptcy Code and is commonly granted under U.S. law.

The Court concurs, stating that enforcing the Brazilian Reorganization Plan and the Confirmation Decision, as well as enjoining conflicting acts in the U.S., are forms of relief previously granted under section 304 and applicable U.S. law. Additionally, directing the Indenture Trustee and DTC to act in accordance with the Brazilian Reorganization Plan aligns with U.S. legal provisions, specifically 11 U.S.C. § 1142(b), which allows a court to direct necessary parties to execute instruments for property transfers under a confirmed plan.

The excerpt addresses the court's considerations regarding the Plan Enforcement Relief under the Bankruptcy Code, specifically sections 1521 and 1522. The Ad Hoc Group does not contest the availability of this relief but argues that the court should evaluate the specific circumstances of the case and balance the interests involved. They assert that the Foreign Representative may not meet the burden of proving that the relief is warranted based on these balancing tests. The court, however, determines that the interests of the Rede Debtors and their creditors, including the Ad Hoc Group, will be adequately protected by granting the relief. This enforcement will facilitate the Rede Debtors' reorganization and allow distributions to creditors, including a significant portion of Noteholders not part of the Ad Hoc Group.

The Brazilian Reorganization Plan requires the court's approval for full implementation, and the Foreign Representative indicates that the Indenture Trustee will not act without this court's directive. Denying the relief could hinder the plan's execution and delay or obstruct distributions to Noteholders. The Ad Hoc Group appears motivated to renegotiate terms or pursue legal action in the United States for better distributions, yet there is no evidence suggesting their efforts would be successful. The court emphasizes that the Plan Enforcement Relief does not impede the Ad Hoc Group's rights under Brazilian law in ongoing appeals. Ultimately, the court concludes that the relief is justified under both section 1521 and section 1522 of the Bankruptcy Code, as well as section 1507, which allows for additional assistance to a foreign representative.

Section 1507(b) mandates the Court to evaluate whether assistance aligns with comity principles and ensures: 1) fair treatment of all claim holders against the debtor's property; 2) protection of U.S. claim holders from prejudice and inconvenience in foreign claim processing; 3) prevention of preferential or fraudulent property dispositions; 4) distribution of proceeds according to the Bankruptcy Code; and 5) an opportunity for a fresh start for the individual involved in the foreign proceeding. These provisions reflect protections previously found in section 304 of the Bankruptcy Code, with a significant alteration elevating the principle of comity.

The Court has considered whether Plan Enforcement Relief qualifies as “additional assistance” under section 1507, concluding it does, as it assures fair treatment of creditors, protection against prejudice for U.S. creditors, prevention of fraudulent transfers, and compliance with the Code’s distribution priorities.

To confirm fair treatment, section 1507(b)(1) necessitates that the foreign proceeding offers a comprehensive, orderly, and equitable asset distribution process. The Court references the Board of Directors of Telecom Argentina, which indicates that fair treatment requires access to information and a chance for creditors to be heard. The Foreign Representative demonstrated that Brazilian creditors had meaningful access to information and opportunities to participate in the Brazilian Bankruptcy Proceeding, which adheres to Brazilian law's comprehensive procedures for equitable asset distribution. Creditors could vote on reorganization plans and submit claims, thereby satisfying the requirements of section 1507(b)(1).

Lastly, the Court determined that U.S. creditors would not face prejudice or inconvenience in processing their claims in Brazil, aligning with the second factor of section 1507(b).

The Ad Hoc Group contends that U.S. creditors faced prejudice during the voting process due to the Indenture Trustee's compromised position, which necessitated individual voting by Noteholders and presented procedural challenges. However, the Foreign Representative clarifies that all Noteholders could vote independently after verifying their identity and holdings. The Brazilian Bankruptcy Court acknowledged individual Noteholders' voting rights, and the Ad Hoc Group's argument is undermined by their admission that the Indenture Trustee's vote was irrelevant since the unsecured class opposed the Brazilian Reorganization Plan. The Court rejects any inference of bias by the Brazilian Bankruptcy Court, finding that the second factor of section 1507(b) is satisfied.

Regarding preferential or fraudulent property distributions, the Ad Hoc Group argues that the Brazilian Reorganization Plan facilitates fraudulent dispositions by allowing FI-FGTS and BNDESPar to recover significant values despite their subordinate positions. However, the record lacks evidence of such fraudulent actions. FI-FGTS is recognized as a secured creditor and its recovery cannot be deemed fraudulent. Although BNDESPar, a minority shareholder, did not exercise its right to sell shares for a debt claim, it will not receive new distributions under the Reorganization Plan. BNDESPar's shares will be diluted due to Energisa’s capital investment, but this does not constitute fraudulent or preferential distribution. Thus, the Court concludes that the third factor of section 1507(b) is also satisfied. The distribution of proceeds under the Brazilian Reorganization Plan aligns substantially with U.S. law.

The fourth factor of section 1507(b) of the Bankruptcy Code mandates that any additional assistance to a foreign representative must ensure that the distribution of a debtor's property aligns substantially with the Bankruptcy Code. The Ad Hoc Group contends that the Brazilian Reorganization Plan violates this requirement by preserving value for equity and subordinated creditors, thereby contravening the absolute priority rule. They argue that the Confirmation Decision improperly approved this treatment through a "cram-down" mechanism, which should protect creditors under the absolute priority rule. However, it is asserted that Brazilian bankruptcy law's cram-down provisions offer meaningful protections comparable to U.S. law, and the Plan's differential treatment of certain unsecured creditors is justified and necessary for its execution. Consequently, the distribution under the Brazilian Reorganization Plan is viewed as substantially aligned with U.S. law per section 1507(b)(4).

Additionally, the Ad Hoc Group claims that the Plan Enforcement Relief contradicts U.S. public policy, alleging five specific violations from the Brazilian Reorganization Proceeding: an unfair marketing process, improper consolidation and voting, excessive value extraction for shareholders, disparate treatment of creditors, and targeting U.S. creditors. However, the public policy exception in section 1506 is intended to be applied narrowly. The court finds that neither the Brazilian Reorganization Plan nor its underlying legal principles fundamentally oppose U.S. public policy, as Brazilian bankruptcy law upholds essential fairness and civilized jurisprudence standards. 

The court also addresses the Ad Hoc Group's objections regarding the asset marketing process, consolidation of assets and liabilities, and the voting process related to the Brazilian Reorganization Plan, concluding that these actions did not violate creditors' due process rights or U.S. public policy. The Ad Hoc Group's concerns primarily center around the assertion that the marketing process favored local stakeholders and insiders.

The Ad Hoc Group claims that the Rede Debtors selected the Equatorial-CPFL Plan without competitive bidding and improperly granted exclusivity to the bidder, limiting Energisa's ability to submit a competing proposal until the second creditors' meeting. They argue that rejecting Energisa's first proposal was improper, asserting it would have yielded better recoveries for Noteholders and senior creditors. However, the record indicates that the Rede Debtors' assets were marketed through a competitive bidding process, with Rothschild securing multiple binding offers, including the joint Equatorial-CPFL bid presented to the Brazilian Bankruptcy Court. 

The Ad Hoc Group's assertion that the Equatorial-CPFL SPA wrongfully restricted marketing to other bidders is countered by the legal precedent allowing such provisions in large Chapter 11 cases, provided they include a carve-out for necessary communications for fiduciary duties. The record shows that COPEL-Energisa submitted two competing bids, the first of which was deemed inferior to the Equatorial-CPFL proposal and rejected for valid reasons. The Ad Hoc Group failed to provide evidence that rejecting the Energisa proposal was inappropriate or that it would have improved recovery for creditors.

Additionally, when Energisa presented a revised proposal, it was evaluated alongside the Equatorial-CPFL Plan, with creditors favoring it due to a higher recovery for unsecured creditors (25% versus 15%). The marketing and bidding process employed by the Rede Debtors mirrors standard practices in U.S. bankruptcy cases, confirming that it does not violate U.S. public policy. The Brazilian Bankruptcy Court's consolidation of the Rede Debtors' assets and liabilities for plan purposes is addressed as well.

The Ad Hoc Group asserts that the Brazilian Bankruptcy Court incorrectly permitted the substantive consolidation of the Rede Debtors for plan purposes under Brazilian law, arguing that a U.S. court would similarly reject such consolidation, referencing Union Savings Bank v. Augie/Restivo Baking Company, Ltd. The Group contends that this consolidation improperly facilitated the confirmation of a plan that would otherwise be unconfirmable due to the vote of FI-FGTS. However, substantive consolidation itself is not inherently contrary to U.S. public policy, with certain courts having approved it in chapter 11 cases under appropriate circumstances. The Brazilian Bankruptcy Court determined that consolidation was suitable, finding the Rede Debtors had a corporate group structure with interdependencies due to loans and guarantees. While the Ad Hoc Group claims the Brazilian court overlooked certain factors typically considered in the U.S., it is inappropriate for a U.S. court to impose its legal standards on a Brazilian case or question the findings of the Brazilian court. Additionally, the Ad Hoc Group had the opportunity to object and appeal the Brazilian court’s decision, reinforcing that the consolidation was not contrary to U.S. public policy.

Arguments presented by the Ad Hoc Group assert violations of creditors’ due process rights due to the Brazilian Bankruptcy Court's exclusion of the Indenture Trustee’s vote on the Brazilian Reorganization Plan, claiming the approval was achieved through unfair cram-down procedures. Initially, the Court allowed the Indenture Trustee to vote but later reversed that decision after the Trustee voted against the Plan. The Ad Hoc Group alleges this reversal, combined with the consolidation of the Rede Debtors, denied Noteholders a meaningful opportunity to participate in the proceedings. However, evidence indicates the Court excluded the vote based on the Indenture terms, which required consent from individual beneficial holders for the Trustee to vote. The Ad Hoc Group does not dispute this exclusion under U.S. law, acknowledging the Trustee’s vote was largely irrelevant since the unsecured class lacked sufficient votes to accept the Plan.

Additionally, the Ad Hoc Group contends that the Brazilian Bankruptcy Court improperly conducted the cram-down process, arguing that the affirmative vote from FI-FGTS, an affiliated entity rather than a secured creditor, invalidated the process. However, evidence confirms that FI-FGTS was classified as a secured creditor due to a put option agreement predating the bankruptcy. Although the shares related to this option were not returned prior to filing, FI-FGTS demonstrated to the Court that it had exercised the put option before the bankruptcy, thereby affirming its secured status under Brazilian law.

FI-FGTS was determined by the Judicial Administrator to have a secured claim against Denerge amounting to R$712.5 million. Following objections from the Ad Hoc Group, the Brazilian Bankruptcy Court ordered that votes be counted both with and without FI-FGTS's affirmative vote. The court later ruled that FI-FGTS had validly exercised its put option before the bankruptcy filing, establishing its status as a secured creditor. FI-FGTS was the only voting claim in Class II, which accepted the Reorganization Plan, enabling confirmation through cram-down procedures. The court found that due process was upheld, as the Ad Hoc Group's concerns were considered. The Ad Hoc Group could have contested FI-FGTS's secured status during the bankruptcy proceeding and has appealed the Confirmation Decision, which is still pending. If the Ad Hoc Group wins the appeal, the Reorganization Plan may fail to meet cram-down requirements; however, this matter is for the Brazilian Bankruptcy Court to decide. Additionally, the distribution scheme of the Brazilian Reorganization Plan was deemed not manifestly contrary to U.S. public policy, as foreign proceedings need only be "substantially" in line with U.S. priority rules, rather than identical. This aligns with case law indicating that foreign insolvency laws can be evaluated based on their general adherence to U.S. principles.

The Ad Hoc Group fails to provide legal authority supporting the claim that a Brazilian insolvency scheme is manifestly contrary to U.S. public policy solely due to its divergence from U.S. insolvency law. They argue that the Brazilian Reorganization Plan violates the absolute priority rule by favoring equity and subordinated creditors (FI-FGTS and BNDESPar) and potentially enabling their full repayment at the expense of senior Note-holders. They reference the case Treco, which involved Bahamian bankruptcy law, asserting that U.S. bankruptcy courts have denied ancillary relief when foreign laws lack protections akin to those in U.S. law. However, the relevance of Treco is questioned; it dealt with the rights of a secured creditor and did not conclude that Bahamian law was contrary to U.S. public policy, as required under section 1506.

Brazilian bankruptcy law includes protections against junior stakeholders receiving value if senior stakeholders are not fully compensated, akin to U.S. law, although not identical. Specifically, a cram-down under Brazilian law requires at least one-third approval from dissenting classes and majority approval in total claims amount. In this case, 74% of claims voted in favor of the Brazilian Reorganization Plan, with 66.84% of unsecured claims voting to accept, which is close to the threshold established by the U.S. Bankruptcy Code. The Foreign Representative contends that such a minor difference undermines the assertion that the Brazilian Plan is manifestly contrary to U.S. public policy, a position the Court finds persuasive. Regarding shareholders, Brazilian law does not allow equity cancellation without consent, yet Rede equity holders do not gain significant value under the Plan compared to unsecured creditors.

The Brazilian Reorganization Plan will significantly dilute the remaining minority shares. The Rede Debtors will initiate a capital call to repay Ener-gisa approximately R$498 billion for its payment to Rede Debtors' creditors, with a repayment period of one year and a 12.5% interest rate. Additionally, Ener-gisa will assume certain guarantees previously provided by the Controlling Shareholder for the Rede Group's debts. Under the ANEEL Plan, Ener-gisa is obligated to invest at least R$1.2 billion into the Rede Concessionaires, which will be executed through capital calls to the Rede Debtors.

This dilution aligns with the absolute priority rule under U.S. law, which seeks to ensure that shareholders cannot retain equity in restructured companies without contributing new value. Approval for this treatment was granted by the dissenting unsecured class under Brazilian procedures that safeguard creditor rights. Although Brazilian bankruptcy law differs from U.S. law, the Foreign Representative has shown that the distribution under the Brazilian Reorganization Plan does not contradict U.S. public policy, warranting the court's extension of comity.

The Ad Hoc Group's concerns about unfair treatment among Class III (Unsecured) creditors are addressed, as the Brazilian Reorganization Plan provides different recoveries: Noteholders receive 25% while other Class III creditors, such as holders of Subsidiary Concessionaire Claims, are paid in full. This disparity is mandated by Brazilian law, which prohibits certain concessionaires from entering bankruptcy and requires their claims to be fully satisfied before lifting regulatory interventions. Thus, while there is a divergence in treatment among unsecured creditors, such differentiation is justified by the regulatory framework in Brazil, mirroring practices observed in U.S. Chapter 11 proceedings.

The Court evaluates whether the treatment of similarly situated claims contradicts U.S. public policy, concluding it does not. Citing cases such as JPMorgan Chase Bank, N.A. v. 106 Charter Commc’ns Operating, LLC and In re Adelphia Commc’ns, it establishes that differing treatment among unsecured creditors is permissible for valid reasons, such as distinguishing between liquidated and unliquidated claims. The Court finds the different treatment of Class III (Unsecured) creditors under the Brazilian Reorganization Plan reasonable, particularly due to ANEEL’s involvement, and necessary for plan confirmation.

The Ad Hoc Group's assertion that U.S.-based creditors faced prejudice in the Brazilian Bankruptcy Proceeding is unsupported. Brazilian law mandates equal treatment of all creditors, and the Rede Debtors’ creditors, including U.S. creditors, had ample opportunity to engage in the bankruptcy process—submitting objections, claims, and participating in meetings. No evidence indicates any U.S.-based creditors were denied notice or participation rights. Additionally, only two known creditors, including one U.S. creditor, are identified, with the majority of the Ad Hoc Group's claims held by members not in the U.S. Thus, the Ad Hoc Group's claims of mistreatment seem unfounded, especially as the only U.S. creditor within the group, Merrill, does not support the Brazilian Reorganization Plan.

No evidence shows that Merrill or any U.S.-based creditor was specifically targeted, and the Ad Hoc Group chose not to present supporting evidence to the Court. The Ad Hoc Group claims that the Brazilian government and ANEEL's adoption of MP 577, which prohibits bankruptcy filings by electricity distribution concessionaires, aimed to protect local operating creditors while shifting risk to a smaller number of financial creditors at the holding company level. However, the Ad Hoc Group did not provide evidence that MP 577's purpose was to protect local creditors; instead, the Stipulation of Facts indicates that the Brazilian government's main objective was to enhance energy supply security in Brazil. The legislative history of MP 577 shows it was intended to prevent public electric power concessionaires from filing for bankruptcy, as seen with CELPA.

The Brazilian government's regulatory actions align with U.S. public policy, as both Brazilian and U.S. electricity distribution utilities are heavily regulated to protect public interest. The Court found no evidence of targeted mistreatment of U.S.-based creditors due to MP 577. Under section 1506 of the Bankruptcy Code, a court may deny actions that contradict U.S. public policy, but since the foreign proceedings adhered to principles of civilized jurisprudence and fairness, public policy was not violated. The Court concluded that Plan Enforcement Relief is granted, directing the parties to submit an order for its enforcement. CELPA began judicial reorganization under Brazilian bankruptcy law in February 2012, and its foreign representative sought Chapter 15 recognition of this proceeding on November 9, 2012.

The foreign representative of CELPA requested plan enforcement relief similar to the relief being sought in the current case, aiming for the indenture trustee and the Depository Trust Company to assign notes to the plan sponsor as per CELPA's Brazilian reorganization plan. No parties challenged the Chapter 15 relief sought by CELPA. On December 12, 2012, the court granted recognition and the requested relief, even though the transfer of shares under CELPA’s plan had already closed and appeals regarding the confirmation of CELPA’s plan were pending in Brazil. As of March 17, 2014, these appeals were still unresolved.

The Rede Concessionaires include eight electricity distribution subsidiaries, while four additional subsidiaries not classified as Rede Concessionaires are also non-debtors in the Brazilian bankruptcy proceeding. All monetary amounts are specified in U.S. Dollars or Brazilian Real. The Indenture contains a clause allowing holders of the Perpetual Notes to initiate actions in the U.S. to recover amounts due, barring any contrary court order. 

MP 577, later enacted as Law 12.767/2012, was introduced due to the urgent need for regulatory action as CELPA faced bankruptcy, aiming to facilitate the reorganization of public electric power concessionaires through intervention. The Brazilian Ministry of Mines and Energy emphasized that MP 577 aimed to enhance energy supply security in Brazil, inspired by financial system practices. Additionally, Rothschild reached out to potential buyers and granted access to a dataroom, while on November 20, 2012, ANEEL revoked the license for Rede’s electricity trading subsidiary, CTCE.

Denerge serves as the controlling shareholder of EEVP and indirectly controls Rede. Brazilian law allows debtors to manage their assets during judicial reorganization, overseen by a court-appointed judicial administrator. Deloitte Touche Tohmatsu was appointed as the judicial administrator for Rede's reorganization on December 19, 2012. Creditors had access to a dataroom from December 2011 to February 2012 and shortly before the October 11, 2012 bid deadline. Under Brazilian bankruptcy law, creditors have ten days to object to claims after the preliminary official list is published, but objections regarding a claimant's voting rights can occur outside this period. There is a dispute over whether this ten-day objection period applied to FI-FGTS’s claim and voting rights as a secured creditor. FI-FGTS had previously exercised a put option on its shares in EEVP and, thus, was considered a creditor rather than a shareholder, allowing its vote as a secured creditor to be valid. The official committee of creditors was responsible for informing all creditors about Rede’s situation, consisting of FI-FGTS and Moneda, a Chilean investment fund representing unsecured creditors. Banco Nacional de Desenvolvimento Económico e Social (BNDES) was excluded from voting on the reorganization plan due to its minority shareholder status in Rede. Brazilian law prohibits certain entities, including significant shareholders, from voting on claims against the debtor. BNDES held an allowed claim of R$134.5 million against Rede, secured by Rede's interests in a concessionaire. Approval of a reorganization plan can occur via two specified methods under Brazilian law.

Approval of a plan under Brazilian law can occur through either a "regular creditor majorities" procedure or a "cram-down" procedure. The regular procedure necessitates approval from each class of claims, requiring more than 50% of both the number of creditors and the amount of allowed claims present at the creditors' meeting in Classes II and III. These percentages are based only on creditors who are present, allowed to vote, and do actually vote.

In the case of the Brazilian Reorganization Plan, at least four additional affirmative votes from unsecured creditors in Class III were needed for acceptance. If the required majorities are not achieved, a cram-down procedure may be utilized. This requires a simple majority by amount of total allowed claims from voting creditors, approval from one class of claims (if only two classes exist), and if majorities are unmet in Classes II or III, at least one-third of the creditors in those classes must approve the plan by both number and amount.

Moreover, Brazilian bankruptcy law stipulates that cram-down is permissible only if it does not differentiate treatment among dissenting class creditors. There is a dispute regarding whether different treatment is allowed under certain justifications, a matter currently under appeal. A 2013 Brazilian Court decision did not address certain factors typically considered by U.S. courts regarding substantive consolidation, such as corporate separateness and creditor confusion. The Brazilian Reorganization Plan will not extinguish minority shareholders' equity interests but will dilute them upon completion.

Retention of security interest allows secured creditors to restate the principal amount of their debt to be repaid over 22 years at either a two percent or four percent interest rate, with a balloon payment due in the final year, depending on the creditor's choice regarding future financing commitments as outlined in the Plan. Secured creditors may also assign their debt to Energisa for a 25 percent cash distribution at closing.

BNDESPar, which holds 15.9 percent of Rede shares, possessed a right to sell these shares for a debt claim of R$390 million, a right it did not exercise, resulting in no claim listed on the Creditors’ List or eligibility for a new distribution under the Brazilian Reorganization Plan. However, BNDESPar’s right to exercise the put option remains a contingent liability for which Energisa may ultimately be accountable.

The Inter-American Development Bank (IADB), based in the U.S., holds the majority of Concessionaire Creditor Claims, approximately USD$151 million against Rede Concessionaires, while other creditors are primarily Brazilian entities. To comply with ANEEL’s requirements, the Rede Debtors submitted a Correctional Plan on October 26, 2012, later revised to incorporate Energisa's reorganization proposal for the Rede Concessionaires.

Regarding General Unsecured Claims, holders can choose from three treatment options: 1) full debt restatement over 22 years at a one percent interest rate with a balloon payment in year 22; 2) a similar restatement with a monetary adjustment if the creditor commits to future financing; or 3) assignment of claims to Energisa for a 25 percent cash distribution at closing. The identities of the beneficial holders of Perpetual Notes are largely unknown due to their issuance in global note form, but they were issued to non-U.S. persons and qualified institutional buyers under U.S. securities regulations.

Section 1507(b) of the Bankruptcy Code mandates that courts consider several factors when determining whether to provide additional assistance under U.S. law in relation to foreign bankruptcy proceedings. These factors include ensuring just treatment of all claim holders, protecting U.S. claim holders from prejudice in foreign claims processing, preventing fraudulent transfers of the debtor's property, distributing debtor property proceeds according to U.S. law, and possibly allowing for a fresh start for the debtor. However, Section 1506 allows courts to deny actions if they conflict with U.S. public policy.

The excerpt notes that the Confirmation Decision and the Brazilian Reorganization Plan do not receive "full faith and credit" as defined in the U.S. Constitution since this principle does not apply to foreign judgments. The Ad Hoc Group argues that similar considerations arise under sections 1521 and 1507 when granting relief. It highlights that section 1522 restricts relief under section 1521 to situations where the interests of creditors and other stakeholders are adequately protected, without considering the factors listed in section 1507(b).

Case law, including Sino-Forest and Atlas Shipping, is cited to support that the balancing factors in section 1507(b) do not apply to section 1521, which may allow for the distribution of U.S. assets only if local creditors' interests are sufficiently safeguarded. The Ad Hoc Group claims that the Brazilian Reorganization Plan treats certain unsecured claims differently, which raises concerns about just treatment for creditors.

The Court determined that the differential treatment of the Rede Concessionaires' and Concessionaire Creditors' claims was essential to meet ANEEL's stipulation for adequate capitalization of the Rede Concessionaires before lifting its intervention. If ANEEL had terminated the Rede Concessionaires' agreements, the Rede Group would face a lengthy litigation claim against the Brazilian government, with recoveries already assigned to secure debts. Indenture trustees lack voting rights on Chapter 11 plans in the U.S., and foreign insolvency regimes are not required to mirror U.S. absolute priority rules. Both the Rede Debtors and Ad Hoc Group have appealed the Brazilian Reorganization Plan, which was confirmed through a cram-down process. The Ad Hoc Group argues that a prior proposal from Energisa would have ensured the purchase price benefited Rede's creditors, asserting that the "secured creditor class" consisted of only one voting creditor, FI-FGTS, which they labeled a "misnomer." The Court noted that having a single claim in a secured creditor class does not indicate unfairness or manipulation of voting, as U.S. law allows for this. Under Brazilian law, approval of a plan via cram-down requires a simple majority of over 50% of total allowed claims and specific voting thresholds in creditor classes, which were met in this case. The Ad Hoc Group specifically criticized the preferential treatment of intercompany claims owed to non-debtor subsidiaries.

Claims under the Brazilian Reorganization Plan include those that will be fully paid, specifically obligations of electricity distribution concessionaires, referred to as Subsidiary Concessionaires, which are joint obligations of a Rede Debtor. These obligations must be brought current and subsequently assumed by Energisa. Additionally, Concessionaire Creditors, who have claims against the Rede Concessionaires and also hold guarantee claims against the Rede Debtors, will receive treatment equal to other general unsecured creditors. However, if these creditors waive their enforcement rights, defaults, and penalties, their claims can be replaced by Energisa. To lift its intervention in the Rede Concessionaires, ANEEL mandates that Energisa or any potential investor must mitigate risks of defaults under concession agreements by adequately capitalizing the Rede Concessionaires, which includes settling debts owed by the Rede Debtors, curing outstanding defaults, and addressing existing debts of the Rede Concessionaires.