Comity Update from my consulting firm (email me for a version with active links - [email protected])

CBInsolvency LLC (CBI): Cross-Border Insolvency 

RECENT NEWS AND IDEAS FROM CBINSOLVENCY 

COMITY ONLY GOES SO FAR 

To our friends and colleagues –

In our December 2019 newsletter “Comity Confusion”, we discussed when chapter 15 recognition was required – and when it was not - for a party to seek enforcement of a foreign court order based on principles of international comity. A recent decision by Judge Issicof in the Bankruptcy Court for the Southern District of Florida (“Court”) is a reminder that granting comity to foreign court orders may be appropriate but may not be dispositive of avoidance claims brought by a foreign representative.[1]

SUMMARY OF CASE  

Banco Cruzeiro Do Sul S.A. (“BCSUL”) began its journey into bankruptcy in June 2012 when Brazil’s central bank (“BACEN”) placed BCSUL and four affiliated companies under the Temporary Special Administration of the Credit Guarantee Fund (Brazil’s deposit insurance program). Following a failed attempt to sell the bank by the deposit insurance fund and a BACEN-ordered extra-judicial liquidation, BACEN commissioned an investigative report (the “BACEN Report”). Upon receipt of the BACEN Report, BACEN authorized the liquidator to petition the Brazilian court for BCSUL’s bankruptcy and bankruptcy was ordered in August 2015. The Brazilian court found, inter alia, that BCSUL was insolvent and that there was evidence of bankruptcy crime (we refer to the orders for the incremental steps and the bankruptcy as the “Insolvency Orders”).[2]

The controlling shareholders of BCSUL, Luis Felippe Indio da Costa and Luis Octavio Indio da Costa (the “Indio da Costas”), fought every step of the process and unsuccessfully appealed each of their losses. Four actions remain pending in the Brazilian bankruptcy court, two on behalf of the BCSUL bankruptcy estate against the Indio da Costas, essentially for harm caused to the bank, and two on behalf of the Indio da Costas against the deposit insurance agency and the company that investigated BCSUL’s loan portfolio, blaming them for the bank’s bankruptcy (the “Brazilian Liability Actions”).

THE CHAPTER 15 PETITION AND AVOIDANCE COMPLAINT

The extra-judicial liquidator filed a chapter 15 petition in June 2014 and the BCSUL bankruptcy was recognized as a foreign main proceeding. BCSUL’s bankruptcy trustee, Laspro Consultores Ltda (“Laspro”) succeeded the liquidator as foreign representative. Laspro commenced an adversary proceeding against two BVI entities (Alinia and CPS) owned directly or indirectly and controlled by the Indio da Costas seeking to recover New York apartments and artwork owned by Alinia and CPS and allegedly purchased with funds improperly obtained by the Indio da Costas from BCSUL.[3] According to the amended complaint:

The Amended Complaint alleges that the Indio da Costas “participated in a scheme of falsified loans pursuant to which funds were diverted from BCSUL ... and diverted by Felippe and Octavio for their benefit.” The Amended Complaint alleges that Felippe and Octavio inflated valuations of various assets owned by the Debtor and paid themselves dividends based on these inflated valuations. According to the Amended Complaint, Felippe and Octavio used these diverted funds and improperly paid dividends to purchase property located in New York – a penthouse … and an apartment … and artwork located therein….

The 36 count amended complaint asserted four categories of claims: constructive trust/equitable lien; fraudulent conveyance under New York law; damages against the BVI entities for aiding and abetting the Indio da Costas to breach their fiduciary duties to BCSUL; and violations of Brazilian commercial and consumer protection laws.[4] Except for the claims under Brazil’s consumer protection law, the amended complaint survived a Motion to Dismiss. The prohibition in section 1521(a)(7) against a foreign representative using the Bankruptcy Code’s avoidance powers did not block the NY fraudulent transfer claims because Brazilian law vested the foreign representative with the rights of creditors. Consequently, the foreign representative could bring fraudulent transfer claims directly as creditor and did not need to access the New York fraudulent transfer law through Bankruptcy Code section 544.[5]

REQUEST FOR COMITY

In June of 2020, the Court heard dueling motions for summary judgment filed by the Foreign Representative and the Indio da Costas. The Foreign Representative’s motion asked that comity be granted to the Insolvency Orders and asserted that those orders encompassed as findings of fact the conclusions of the BACEN investigative report – that BCSUL was insolvent at pertinent times and that the dividends paid to the Indio da Costas (and used to purchase the apartments and artwork) were improper and constituted fraudulent transfers. Consequently, argued the Foreign Representative, collateral estoppel prevented the defendants from relitigating these issues.

The Court acknowledged the importance of comity in cross-border insolvency and reprised the evaluative elements: 

(1) whether the foreign court was competent and used proceedings consistent with civilized jurisprudence;

(2) whether the foreign judgment was rendered by fraud;

(3) whether the foreign judgment was prejudicial because it violated American public policy notions of what is decent and just; and

(4) whether to respect the judgment of a foreign tribunal or to defer to parallel foreign proceedings.[6]

The several Insolvency Orders had been contested by the Indio da Costas and the bankruptcy order had been affirmed on appeal. U.S. courts had regularly granted comity to Brazilian decisions and this case was no different, leading the court to grant comity to the Insolvency Orders. 

REQUEST FOR COLLATERAL ESTOPPEL

While the court granted comity, the request for application of the doctrine of collateral estoppel was a different matter: 

Under the judicially-developed doctrine of collateral estoppel, once a court has decided an issue of fact or law necessary to its judgment, that decision is conclusive in a subsequent suit based on a different cause of action involving a party to the prior litigation.” United States v. Mendoza, 464 U.S. 154, 158, 104 S.Ct. 568, 78 L.Ed.2d 379 (1984). Collateral estoppel requires a final ruling on an issue in one case that will preclude the losing party from re-litigating the same issue in another proceeding. Id.[7]

Although the Insolvency Orders relied on the BACEN report, the court found that “…the findings in the BACEN report were not actually litigated. Indeed, the opportunity to fully and fairly litigate those issues is why the Brazilian Liability Actions were filed…”.[8]  The BACEN Report itself acknowledged that it lacked authority to determine “legal matters relative to civil liability.”[9] While the criteria to grant comity to the Insolvency Orders were satisfied, comity did not bind the court to accept facts that were not fully adjudicated for purposes of collateral estoppel, and the court concluded: “Consequently, the Plaintiff will have to prove all of these required elements before a trier of fact.”

The full text of the court’s opinion can be viewed and downloaded here

 _____________________________________________________________________

 [1] In re Massa Falida Do Banco Cruzeiro Do Sul, 2021 WL 734865 (Bankr. S.D. Fla, Jan. 15, 2021).

[2] The Insolvency Orders comprise the order for temporary administration, an order placing BCSUL into an extra-judicial liquidation, an order directing the extra-judicial liquidator to petition for BCSUL’s bankruptcy and the bankruptcy order. The latter has been affirmed on appeal.

[3] New York apartments appear to be a favored destination for funds allegedly appropriated from foreign banks. See In re Larisa Markus, 610 B.R. 64 (Bankr. S.D.N.Y. 2019) (Markus was in jail in Russia for embezzling from a bank she controlled and “[b]etween 2008 and 2015, Markus purchased apartments in Manhattan for more than $16 million…”

[4] In re Massa Falida Do Banco Cruzeiro Do Sul, 567 B.R. 212 (Bankr. S.D. Fla 2017).

[5] Id at 220. Section 1521(a)(7) prevents granting relief to a foreign representative under Bankruptcy Code avoidance provisions, including section 544. Section 544 provides in pertinent part: “(b) (1) … the trustee may avoid any transfer of an interest of the debtor in property or any obligation incurred by the debtor that is voidable under applicable law by a creditor holding an unsecured claim ….”

[6] 2021 WL 734865 at *10.

[7] 2021 WL 734865 at *13.

[8] Id.

[9] Id. At *14.

 To receive our Newsletters, please send us an email with your name, firm and location to [email protected]

______________________________________________________________________

In a cross-border insolvency matter, if an expert opinion is required, if skilled mediation or arbitration can help resolve disputes, or if cross-border insolvency is simply unfamiliar territory, CBI can help. 

We will be pleased to discuss your cross-border insolvency issues and agree on a case-specific arrangement to assist you. Please reach out to any of us for a quick and easy assessment of how we can help you. We welcome your thoughts, comments and questions. 

Hon. Leif Clark (ret.)  [email protected]

Jack Esher [email protected]

Dan Glosband [email protected]