PT Bakrie — Building a Record for Application of Comity

Our prior post addressed the Bankruptcy Court’s ruling in In re PT Bakrie Telecom TBK (2021 WL 1439953) regarding the “collective” nature of the foreign debtor’s Penundaan Kewajiban Pembayaran Utang (or Suspension of Debt Payment Obligations) proceeding. Judge Lane determined that the debtor’s PKPU proceeding in Indonesia was collective and recognized it as a foreign main proceeding. Please refer to that post for the meanings of all capitalized terms used but not defined herein.

In connection with recognition, PT Bakrie’s foreign representative sought an order from the Bankruptcy Court enforcing its Indonesian PKPU Plan. The foreign representative argued that the plan provided a discharge of the debtor, and all other parties, from any liability in respect of the intercompany loans at issue. By seeking enforcement of the PKPU Plan, the foreign representative effectively sought a release of non-debtor third parties from liability to the Objecting Noteholders and others, including in respect of the approximate $161 million stipulated judgment. The Objecting Noteholders argued that third-party releases were not included in the PKPU Plan, and further argued that the plan should not be enforced given their treatment in the Indonesian process. See Bakrie at 10.

Upon recognition, certain relief is granted automatically. A debtor may request other relief under Sections 1507 and 1521 of the Bankruptcy Code. Under Section 1507, the court may generally grant “additional assistance to a foreign representative….” 11 U.S.C. § 1507(a). In doing so, a court should consider whether any such assistance “will reasonably assure — (1) just treatment of all holders of claims against or interests in the debtor’s property; (2) protection of claim holders in the United States against prejudice and inconvenience…” 11 U.S.C. § 1507(b). Under Section 1521, the court may grant any appropriate relief that may be necessary to effectuate the purpose of Chapter 15, to protect the debtor’s assets, or to protect the interests of creditors. Such relief may be granted only if the interests of creditors and other interested parties, including the debtor are “sufficiently protected.” See 11 U.S.C. § 1522. While the interplay between these provisions is unclear, the Bankruptcy Court noted that relief under either section was within its discretion and dependent upon principles of comity. The Bankruptcy Court summarized the factors in applying comity as “(1) whether the foreign proceeding abided by fundamental standards of procedural fairness; (2) whether the foreign proceeding violated the laws or public policy of the United States; and (3) whether the foreign judgment was affected by fraud” (citations excluded) and provided a thorough review of its application by US courts. Importantly, the Bankruptcy Court cited the Supreme Court for the proposition that there is a need for a “clear and formal record” in evaluating comity. Hilton v. Guyot, 159 U.S. 113 at 205–06. It was in this light that the Bankruptcy Court analyzed the propriety of granting its imprimatur on the third party releases at issue through the provision of additional relief under Sections 1507 and 1521.

Judge Lane began by tackling the often opaque topic of third-party releases in bankruptcy cases, noting that certain circuits do not permit them under any circumstance, while others, including the Second Circuit, permit them under limited circumstances, including in the context of granting additional relief in Chapter 15. See Id. at 15-16. Although disputed by the parties, and unclear in the Indonesian order itself, the Bankruptcy Court found that the PKPU Plan did include third-party releases. With that, it considered the appropriateness of such releases in light of the principle of comity. Granting the relief would have the consequence of releasing many of the defendants from any liability to the Objecting Noteholders. The Bankruptcy Court explained that it “must consider whether the foreign proceeding abided by fundamental standards of procedural fairness as demonstrated by a clear and formal record. These considerations overlap with those of Sections 1521 and 1507, which assure the just treatment and protection against prejudice of claim holders in the United States through adequate procedural protections.” Bakrie at 18. The trial record before the Bankruptcy Court was bare of any facts regarding the deliberations by the Indonesian Commercial Court, or whether the Objecting Noteholders even had a right to be heard, regarding the releases. The Bankruptcy Court further noted that there was no record of any justification for the granting of the releases. The record, or lack thereof, stood out in light of the Supreme Court’s guidance in Hilton. Without even a “a rudimentary record in the foreign proceeding as to the basis for such releases and procedural fairness of the underlying process,” the Bankruptcy Court was unwilling to grant comity to the PKPU Plan and the third-party releases contained therein. Id. at 20. The Bankruptcy Court invited the foreign representative to return to Indonesia and further develop the record consistent with the requirements of Indonesian law. See Id.

Although it had decided that it would not grant additional relief based on the lack of a record regarding the third party releases, the Bankruptcy Court nonetheless addressed matters relating to the purported disenfranchisement of the Objecting Noteholders – allowing the Issuer to vote on the PKPU Plan rather than the Indenture Trustee. On this subject, Judge Lane found that the record was more clear, although not complete. The Indonesian Commercial Court made an affirmative ruling regarding the proper voting party under Indonesian law, explicitly relying on the “Record and Report” produced by the debtor for voting purposes in the PKPU proceeding. The Record and Report, however, was never produced as evidence in the Chapter 15 case. The lack of a more detailed record was concerning, particularly where the ruling so contrasts with expectations under US law. In this case, permitting the vote of an insider (a subsidiary of the debtor) rather than that of independent third party creditors that arguably held an assignment of the underlying claim at issue. The Bankruptcy Court offered these observations as guidance in the event that the foreign representative returned to the Indonesian courts to produce a more fulsome record.

It is well established that “foreign courts do not need to apply the law as American courts to receive recognition or even the grant of additional relief.” Id. at 21. Indeed, while Judge Lane provided a thorough discussion of both third-party releases and concerns regarding insider voting issues under US law, the contradictions between US and Indonesian law were not determinative of the rulings in PT Bakrie. Instead, the Bankruptcy Court focused on the failure of the foreign representative to establish a complete record on these issues in Indonesia, necessary to satisfy its burden for comity. Foreign insolvency practitioners should take note to carefully build a record regarding notice and due process, and the deliberations of foreign courts when ruling on potentially controversial issues, in matters where US connections might require recognition and additional relief in a Chapter 15 case.