In re OI S.A.

Citation: 587 B.R. 253Docket: Case No. 16–11791 (SHL) (Jointly Administered)

Court: United States Bankruptcy Court, S.D. New York; July 9, 2018; Us Bankruptcy; United States Bankruptcy Court

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Antonio Reinaldo Rabelo Filho, the foreign representative for the Chapter 15 Debtors—Oi S.A., Telemar Norte Leste S.A., Oi Brasil Holdings Coöperatief U.A., and Oi Móvel S.A.—filed a Motion requesting that the U.S. Court grant comity to the Brazilian restructuring plan (the Brazilian RJ Plan) confirmed in Brazil's Seventh Business Court. The Brazilian RJ Debtors, which also include three non-debtor affiliates—PTIF, Copart 4, and Copart 5—collectively form the "Oi Group." Although several objections to the proposed order were resolved, Pharol, SGPS S.A. and Bratel B.V., shareholders of Oi, filed an objection seeking to delay the Court's decision until all Brazilian proceedings are concluded. Other stakeholders, including bondholder committees, supported the Motion. One party, Jasper R. Berkenbosch, the insolvency trustee for Coop in Dutch proceedings, reserved the right to object based on creditor approval in the Netherlands. The Pharol Parties did not request rulings on pending legal issues in Brazil but expressed a desire for a delay. Ultimately, the Court overruled the objection and granted the Motion. The Oi Group, a major telecommunications provider in Brazil, filed for restructuring due to approximately BRL $65 billion in debt on June 20, 2016, marking the largest restructuring case in Brazil's history.

The Oi Group's third-party indebtedness in the Brazilian RJ Proceeding includes four primary types of debt: (i) unsecured export credit facilities backed by export credit agencies or quasi-governmental institutions; (ii) unsecured bonds issued under New York, English, and Brazilian law; (iii) two series of securities related to lease payments owed by certain Brazilian RJ Debtors; and (iv) secured and unsecured bilateral and syndicated debts from Brazilian banks. The group's financial integration leads to intercompany borrowing, resulting in intercompany debts that are also subject to restructuring under the Brazilian RJ Plan.

On June 21, 2016, following the initiation of the Brazilian RJ Proceeding, Mr. Shah petitioned for Chapter 15 proceedings to recognize this proceeding as the foreign main proceeding for the Chapter 15 Debtors. On July 22, 2016, the court recognized the Brazilian RJ Proceeding as the foreign main proceeding, confirming that the Chapter 15 Debtors’ main interests are in Rio de Janeiro, Brazil. On July 18, 2017, the Chapter 15 Debtors replaced Mr. Shah with Antonio Reinaldo Rabelo Filho as their foreign representative in the U.S. for the Brazilian RJ Proceeding.

Subsequently, on July 7, 2017, Mr. Berkenbosch initiated a Chapter 15 case to request the termination of the recognition of the Brazilian RJ Proceeding for the entity Coop and sought to recognize Coop's Dutch bankruptcy proceeding instead. Objections were filed by Mr. Rabelo and the Steering Committee, with replies submitted by Mr. Berkenbosch and the IBC. After extensive litigation, the court denied the Dutch petition and upheld the recognition of the Brazilian RJ Proceeding as Coop's foreign main proceeding. The complexities of this litigation are detailed in two decisions, but it is significant that the parties involved now support the Foreign Representative's motion for comity regarding the Brazilian RJ Plan.

Since the initiation of the Brazilian RJ Proceeding, the Brazilian RJ Debtors have engaged in extensive negotiations with stakeholders over a contentious 18-month multijurisdictional restructuring process, culminating in the consensual approval and confirmation of the Brazilian RJ Plan. Various bondholder groups, including the Steering Committee and IBC, actively participated, often through litigation in Brazilian courts. Creditors of Coop and PTIF, notably Syzygy Capital Management, LTD. and Capricorn Capital Ltd., also sought relief from the Brazilian RJ Court.

The initial draft of the Brazilian RJ Plan was submitted on September 5, 2016, following Brazilian bankruptcy law requirements. The management held in-person meetings with key stakeholders, including Oi Group's Brazilian bank creditors and Agência Nacional de Telecomunicações (ANATEL). On March 28, 2017, the Debtors proposed modifications to the plan based on stakeholder feedback, with further revisions leading to a new draft filed on October 11, 2017. Throughout late 2017, creditor meetings continued to refine the plan, culminating in a revised version filed on November 27, 2017, which incorporated feedback from various parties, including major banks.

The material economic terms of the final Brazilian RJ Plan were established following negotiations with the IBC and Steering Committee, which included agreements on new equity capital infusion post-implementation. After the first draft was published on September 30, 2016, creditors had 30 business days to object, leading to a General Meeting of Creditors (GCM) set for October 9, 2017, with a second call on October 23, 2017, if necessary.

The Brazilian RJ Court postponed the General Creditors Meeting (GCM) several times, ultimately scheduling it for December 19 and 20, 2017, with a second call set for February 1 and 2, 2018. On November 16, 2017, the court revoked the participation rights of certain conflicted Oi executive officers and granted sole authority over the restructuring to Oi’s CEO, who was required to submit the final Brazilian RJ Plan by December 12, 2017. Following this directive, a revised plan was filed on that date, leading to the GCM on December 19 and 20, where further modifications were made based on creditor input, culminating in a final version approved by creditors and confirmed by the court.

For the GCM to proceed on first call, attendance from creditors holding over 50% of total allowed claims in each of the four creditor classes was necessary. Attendance surpassed this requirement: 92.28% of Class I, 100% of Class II, 98.57% of Class III, and 59.04% of Class IV. The GCM saw unprecedented participation, with over 36,000 creditors involved. Creditors had the option to vote for, against, or abstain from the Brazilian RJ Plan, and they first voted on whether to consolidate the Brazilian RJ Debtors for voting and distribution purposes, which was overwhelmingly approved. Approval rates by claim value included 99.5% for Oi, 96.87% for Móvel, 99.88% for Telemar, 97.68% for Coop, 99.09% for PTIF, and 100% for Copart 4 and 5. The consolidation did not result in a corporate merger.

After the consolidation vote, creditors of the Brazilian RJ Debtors overwhelmingly approved the Brazilian RJ Plan during a General Creditors Meeting (GCM) attended by a record number of creditors. Specifically, 100% of claim holders in Classes I and II, 99.56% in Class III, and 99.8% in Class IV voted in favor. On January 8, 2018, the Brazilian RJ Court ratified the Brazilian Confirmation Order, which confirmed the Brazilian RJ Plan but modified certain provisions regarding the reimbursement of creditors' advisor fees and bondholders' eligibility as backstop investors. The confirmation was published on February 5, 2018. Under Brazilian law, creditors had five business days post-publication to file motions for clarification, and within fifteen business days after a decision on such motions, they could file further motions or interlocutory appeals. Several such motions and appeals were filed regarding the Brazilian Confirmation Order, which remained in full effect despite pending appeals, as no stays were granted. A stay was sought but denied by the court. On January 9, 2018, Oi shareholder Pharol and its subsidiary Bratel requested a "partial reconsideration" of the Brazilian Confirmation Order and called for an Extraordinary Shareholders Meeting, which was ultimately rejected by the court; however, the meeting still took place. Following this, on February 13, 2018, the state public prosecutor requested the suspension of the rights of shareholders who attended the meeting, leading to a court decision on March 7, 2018, that suspended the political rights of those shareholders and removed their appointed board members until new equity was issued under the Brazilian RJ Plan.

Bratel has appealed multiple decisions from the Brazilian RJ Court, including an order revoking certain executive officers' powers and an order granting the CEO authority over Oi's restructuring process. Additionally, Bratel has pending an appeal regarding the Brazilian Confirmation Order, arguing that the RJ Court lacked jurisdiction to declare a shareholders' meeting unnecessary and that shareholder rights under Brazilian corporate law were not overridden by insolvency law. The Pharol Parties are actively pursuing their rights in Brazilian courts and related arbitration.

The Brazilian RJ Plan outlines conditions subsequent, including the restructuring of bondholder credits and a capital increase to be completed by July 31, 2018, and a rights offering by February 28, 2019. Creditors can modify these conditions with a majority vote at a dedicated meeting. If conditions are not waived and fail, the RJ Court may terminate the plan after consulting with relevant authorities.

Bratel initiated arbitration against Oi based on an arbitration clause in Oi's bylaws, seeking to convene a shareholders' meeting to address issues related to the RJ Plan that may infringe on shareholder rights. Oi has contested the jurisdictional authority between the RJ Court and the arbitrator, with the Supreme Court of Justice involved in this determination. A preliminary injunction by the arbitrator recognized its jurisdiction and suspended the effects of a Board meeting concerning capital increases and other related actions under the RJ Plan.

The arbitrator's decision prevented Oi from executing a capital increase, imposing a monetary penalty, but the Superior Court of Justice issued a preliminary injunction at Oi's request, suspending the effects of the arbitrator's ruling. The Court also tasked the Brazilian RJ Court with handling further requests for preliminary injunctions. Bratel has appealed this injunction, which is currently pending. The Pharol Parties argue that the arbitrator's decision only stays the penalty, implying that Oi cannot proceed with the capital increase.

Additionally, on April 2, 2018, the Brazilian RJ Court mandated mediation among Oi and shareholders Bratel and Société Mondiale to resolve their disputes. Despite Oi's attempt to exclude Société Mondiale from mediation, the Court ordered its participation and scheduled substantive meetings throughout May, including a joint conference in the week of May 21, 2018.

In terms of ancillary proceedings, certain Brazilian RJ Debtors are involved in restructuring processes in multiple countries, including U.S. Chapter 15, Dutch, English, and Portuguese insolvency proceedings. In the Dutch proceedings, Coop and PTIF proposed plans for unsecured creditors, with voting deadlines in late April and mid-May 2018. The plans align with the previously approved Brazilian RJ Plan, and creditors voted in favor of Coop's plan on June 1, 2018, awaiting court approval. The English High Court recognized the Brazilian RJ Proceeding as a "foreign main proceeding," and the Portuguese court recognized the Brazilian RJ Proceeding for Oi and Telemar in 2017, extending it to Móvel later that year.

The overarching legal context provided by Chapter 15 aims to integrate the Model Law on Cross-Border Insolvency to facilitate effective management of cross-border insolvency cases.

Section 1501(a) outlines the objectives of Chapter 15, which include fostering cooperation among U.S. and foreign courts, enhancing legal certainty for trade and investment, ensuring fair administration of cross-border insolvencies, protecting the value of debtors' assets, and facilitating the rescue of financially troubled businesses. Chapter 15 grants courts broad, flexible authority to provide relief consistent with these objectives and international comity. The concept of comity is emphasized as central to Chapter 15, requiring U.S. courts to recognize foreign representatives and their actions once recognition is granted, thus allowing them to seek relief directly in U.S. courts. U.S. courts generally extend comity when a foreign court has proper jurisdiction and enforcement does not infringe on U.S. citizens' rights or domestic public policy. This recognition is vital for equitable distribution of a debtor's assets, as it enables comprehensive handling of claims in a unified proceeding, which is essential for successful reorganization plans.

In OUI Fin. LLC v. Dellar, the Foreign Representative bears the burden of proof to obtain requested relief, as established in various cases including In re Sivec SRL and Reserve Intern. Liquidity Fund. The necessity for proof of international comity lies with the party asserting it, as noted in Fox v. Bank Mandiri and other cited rulings. The court's analysis is guided by Sections 1521(a) and 1507 of the Bankruptcy Code, which provide for discretionary recognition assistance based on subjective comity principles. Section 1521(a) allows the court to grant "appropriate relief" upon recognizing a foreign proceeding, provided it protects the interests of creditors and the debtor, requiring a balance between such relief and the interests of affected parties. Section 1507 permits additional post-recognition assistance, contingent on a balancing of factors outlined in Section 1507(b). Both sections emphasize a case-by-case evaluation of circumstances surrounding foreign bankruptcy proceedings.

A court evaluating the provision of additional relief under 11 U.S.C. 1507(b) must consider several factors: ensuring just treatment for all claim holders, protecting U.S. claim holders from prejudice in foreign proceedings, preventing fraudulent dispositions of the debtor's property, distributing proceeds in accordance with the Bankruptcy Code, and potentially facilitating a fresh start for the individual involved in the foreign proceeding. The principle of comity is integral to this assessment. 

In the context of the Chapter 15 Debtors' Motion, both Sections 1521 and 1507 of the Bankruptcy Code are cited as governing provisions, with agreement from the Pharol Parties on their applicability, though disagreement exists regarding the court's discretion to grant comity to the Brazilian RJ Plan amidst ongoing Brazilian proceedings. The court concludes that the Chapter 15 Debtors meet the criteria for relief under both sections, allowing the Motion to proceed despite pending actions in Brazil.

Section 1521 permits the court to provide "appropriate relief," similar to that available under former Section 304, which has been routinely granted under U.S. law. The Foreign Representative’s request for the U.S. court to enforce the Brazilian RJ Plan and to prevent actions that undermine it aligns with established judicial practices. Additionally, requests for directives to the Indenture Trustee to act according to the Brazilian RJ Plan are also supported by U.S. law, reinforcing the court’s authority to facilitate the execution of the confirmed plan.

The Court has directed the indenture trustee to proceed with distributions necessary to implement the Brazilian RJ Plan, which is crucial for concluding the ongoing Brazilian RJ Proceeding previously recognized by the Court. The Brazilian RJ Plan cannot be fully executed without this recognition due to subsequent conditions, including the issuance of U.S. securities, contingent upon the relief sought by the foreign representative. Granting this relief is essential for restructuring and completing the plan, which has substantial support from stakeholders, all of whom had the opportunity to participate in the Brazilian proceedings and assert their rights.

The Court determines that the relief requested qualifies as “additional assistance” under Section 1507 of the Bankruptcy Code, meeting all necessary criteria. The first factor under Section 1507(b) assesses whether the assistance ensures just treatment of all claims against the debtor's property. Case law has established that a comprehensive foreign insolvency procedure can satisfy this requirement. Brazilian bankruptcy law provides such a framework while allowing the company to continue its operations. Approval of the plan requires a specified majority vote from each class of claims, which has been overwhelmingly achieved.

Brazilian law also offers creditor protections, such as the right to object to a plan within 30 business days of its publication, the ability to propose amendments during a general creditors meeting until final approval, and the option to file motions for clarification or appeals after confirmation orders are published. Creditors receive notice of decisions, starting the appeal timelines from the notification date.

A judicially appointed administrator oversees the bankruptcy process in Brazil, ensuring accurate information is shared with creditors and notifying the Brazilian RJ Court of any debtor failures or violations of bankruptcy law. Comity under Section 1507 requires reasonable assurance of protection for U.S. claim holders, which is met by providing adequate notice and accessible claim filing procedures for foreign creditors, who have equal rights and protections as local creditors. Upon accepting a debtor's judicial reorganization petition, a Brazilian judge publishes the decision and a creditor list, allowing creditors 15 business days to submit proofs or objections. The administrator subsequently publishes a revised creditor list, inviting new objections within 10 days, after which the court resolves any disputes and finalizes the creditor list.

Section 1507(b)(3) emphasizes the prevention of preferential or fraudulent asset transfers, which is ensured under Brazilian law, allowing any creditor or the public attorney to contest harmful transfers. The fourth factor requires that the distribution of debtor assets aligns substantially with the U.S. Bankruptcy Code, which is satisfied in Brazil as its distribution system mirrors U.S. rules, ensuring that affected creditors are compensated according to a consensually approved plan that includes all creditor classes.

Secured creditors are prioritized in the Bankruptcy Code, receiving full payment under the Brazilian RJ Plan. Brazilian bankruptcy law offers protections akin to U.S. law, and the RJ Plan's differing treatment of certain unsecured creditors is justified for its implementation. The court deems it appropriate to grant comity to the Brazilian RJ Plan, ensuring its execution aligns with its terms while avoiding delays and costs. Comity is typically denied if foreign proceedings conflict with U.S. public policy; however, Brazilian bankruptcy law aligns with U.S. standards of fairness and creditor protections. The court finds the Brazilian RJ Proceeding does not harm U.S. creditors and supports the enforcement of the Brazilian RJ Plan and Confirmation Order under Bankruptcy Code Sections 1507 and 1521.

The Pharol Parties object, arguing that granting relief would contradict Chapter 15's purposes and advocating for a delay until Brazilian proceedings, including appeals, are finalized. They claim the Foreign Representative is attempting to expedite enforcement unfairly. However, the court counters that the Foreign Representative’s motion followed standard notice procedures, allowing all interested parties to participate. The Brazilian RJ Plan was confirmed well before the hearing, providing ample notice and involving various creditor groups in negotiations, contradicting claims of rushed proceedings.

The Pharol Parties have not provided a timeline for the Court's decision regarding the Foreign Representative's Motion. They requested that the Enforcement Motion be delayed until all Brazilian appeals, arbitration, and mediation are resolved. In response to the Chapter 15 Debtors’ concerns about the lack of a temporal limit, the Pharol Parties proposed a status conference on June 18, 2018. However, this suggestion is problematic as it coincides with deadlines for conditions requiring Court relief, potentially mimicking a stay that Brazilian courts previously denied. 

The Court’s role does not include overruling Brazilian court decisions, particularly regarding comity. The Pharol Parties also suggested a meeting for creditors to vote on waiving deadlines in the Brazilian RJ Plan, but this is deemed unlikely to succeed due to the complexity and contentious nature of the plan's approval and the challenges of convening numerous creditors. 

The Court emphasized that such intervention would disrupt the Brazilian process and contradict the principles of comity intended to prevent domestic courts from acting as foreign appellate courts. The Pharol Parties cited Sections 1521 and 1507 as supportive of their position, but the balancing tests within these sections actually argue against them, given the extensive negotiations that led to the Brazilian RJ Plan.

Negotiations regarding the Brazilian RJ Plan were successful, with a strong majority of creditors approving it. The plan has been confirmed by Brazilian courts without any stays. Many creditors have relied on the timely execution of the plan's transactions. Denying the Foreign Representative's requested relief would harm these creditors while favoring the narrow interests of the Pharol Parties. Three major creditor groups—the Steering Committee, the International Bondholder Committee, and Solus—support the Foreign Representative's request. Granting the objection would effectively give the Pharol Parties, who do not represent all shareholders, a veto power over the process, contrary to the majority's wishes.

The Pharol Parties argue that approving the request could lead to legal and commercial uncertainty regarding pending appeals in Brazil, claiming that successful appeals would necessitate unwinding U.S. transactions. However, courts have previously enforced plans despite ongoing foreign appeals, as seen in several cases. The Court also noted that the potential for uncertainty would actually increase if the Motion were denied, risking the failure of the restructuring and a possible mandatory liquidation of the Oi Group, in direct contradiction to the interests of the stakeholders involved.

The Brazilian RJ Debtors may face conversion to a bankruptcy liquidation (falido) if they fail to comply with the terms of their approved judicial reorganization plan. This conversion indicates that the debtor can no longer reorganize, leading to asset liquidation. Denial of the Motion poses risks to the global restructuring of the Brazilian RJ Debtors and their affiliates, as well as adversely impacting creditors holding over $20 billion in restructured debt, including more than $5 billion in bonds governed by New York law. These creditors are entitled to new securities under the Brazilian RJ Plan, which has a deadline of July 31, 2018, for certain conditions to be met for it to remain effective. The issuance of U.S. securities is necessary for the plan's implementation, contingent on the relief requested by the Foreign Representative. Without this relief, the Oi Group cannot restructure its New York law-governed debt. Delays could result in claims being discharged in Brazil but not in the U.S., exposing the Chapter 15 Debtors to lawsuits in the U.S. for debts already discharged in Brazil. Therefore, the equities favor granting the requested relief, as it aligns with the creditors' approval of the Brazilian RJ Plan and supports the principles of comity under Chapter 15. This chapter emphasizes cooperation with foreign insolvency proceedings to ensure an equitable and orderly distribution of the debtor's assets. The role of the Chapter 15 Court is to assist rather than supervise the foreign insolvency process.

The Court determines that Brazilian law issues should be adjudicated by Brazilian courts, including the matter of whether ongoing litigation in Brazil warrants a stay of the Brazilian RJ Plan. If the Pharol Parties contend that such proceedings should inhibit the RJ Plan's enforcement, they must pursue a stay through the Brazilian courts, which have previously rejected similar requests despite being aware of the implications. The evidence indicates that Brazilian courts have not issued any stays, and the Pharol Parties have been unsuccessful in seeking a stay pending their appeal in Brazil.

The U.S. bankruptcy court is not obligated to evaluate the appropriateness of actions by foreign courts and should not undermine Brazilian court decisions, as doing so would contravene principles of comity. The Pharol Parties' attempts to differentiate their situation from previous cases that granted similar relief are ineffective; the core principles of comity remain incompatible with their claims. Additionally, precedent exists in this jurisdiction where foreign orders approving plans have been enforced prior to their implementation, reinforcing the idea that a U.S. court should not impose its laws or second-guess foreign rulings.

The petitioner seeks court assistance to implement the "Brazilian Confirmation Order and the Brazilian Reorganization Plans" that have not yet been executed, specifically to facilitate the exchange of existing securities for new ones. The enforcement of the Sanctioning Order is deemed necessary for the intended financial restructuring under the Safeguard Plan and the confirmed Chapter 11 plan. The argument from the Pharol Parties is counterproductive, as the Foreign Representative's requested relief is essential for substantial consummation of the Brazilian RJ Plan. The Chapter 15 Debtors assert that without prior court relief, they would violate U.S. securities law by distributing new securities to bondholders. The Pharol Parties argue against the court's relief based on the absence of the equitable mootness doctrine in Brazil; however, the Brazilian courts have already denied a stay of the RJ Plan. Should the Pharol Parties succeed in their legal challenges, both Brazilian and U.S. laws will dictate future proceedings and available relief. If the Brazilian Confirmation Order is overturned, the Pharol Parties can seek remedies in this Court, including under Rule 60(b)(5) of the Federal Rules of Civil Procedure. Chapter 15 allows bankruptcy courts significant flexibility in managing ancillary cases, respecting international comity. If the court denies the Pharol Parties' request for a delay, there will be no effect on their rights in Brazilian litigation. Additionally, concerns were raised regarding language in the proposed order that states any termination of the Brazilian RJ Plan would render the court's order null and void, which the Pharol Parties believe differs from the ex tunc and void ab initio effects under Brazilian law.

The proposed order has been revised to address concerns raised by the Pharol Parties, stating that if the Brazilian RJ Plan is terminated, the Court's order will be considered void ab initio under Brazilian law. The Court confirmed that the Pharol Parties can return to protect their rights under U.S. law, which they acknowledge. Consequently, the Court finds that the issues raised by the Pharol Parties regarding the order have been adequately addressed. The Court grants the Motion and the relief requested by the Foreign Representative, overruling the Pharol Parties' Objection entirely. The Pharol Parties did not argue that the requested relief would contravene U.S. public policy. The Court deems the additional relief—including injunctions and exemptions under Section 1145 of the Bankruptcy Code—appropriate, as there were no specific objections from the Pharol Parties regarding these requests. The Pharol Parties expressed concerns that granting relief would hinder overseas processes like mediation, but the Brazilian courts that mandated the mediation did not grant a stay on the confirmation order, undermining their argument. The Court refrains from commenting on the merits of the Pharol Parties' appeals in Brazil, agreeing that the issues of Brazilian law presented are not for this Court to resolve. The Pharol Parties submitted four legal opinions on Brazilian law to demonstrate that their appeals are not frivolous but did not intend for the Court to reconsider the Brazilian Confirmation Order. The Objection is inconsistent regarding equitable mootness, as it simultaneously claims that the relief could moot foreign appeals while asserting that Brazilian law does not recognize equitable mootness.