receiverships and u.s. bankruptcy proceedings …...united states and more than 95% of all debt owed...

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Business Track: The Intersection of Cross-Border Insolvency Proceedings, Receiverships and U.S. Bankruptcy Proceedings

Business TrackThe intersection of Cross-border insolvency Proceedings, Receiverships and u.s. bankruptcy Proceedings

Leyza Blanco, ModeratorGrayRobinson, PA; Miami

W. Keith FendrickHolland & Knight LLP; Tampa, Fla.

James W. FoxGlassRatner Advisory & Capital Group LLC; New York

Jeremy C. HollembeakKobre & Kim; New York

Charles A. PostlerStichter, Riedel, Blain & Postler, P.A.; Tampa, Fla.

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AmericAn BAnkruptcy institute

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Cross-Border Receiverships and Bankruptcies

Leyza Blanco, Esquire Gray Robinson, P.A.

Miami, FL Moderator

Keith Fendrick, Esquire

Holland & Knight Tampa, FL

Jim Fox, Principal

Glass Ratner Advisory & Capital Group LLC New York, NY

Jeremy Hollembeak, Esquire

Kobre & Kim LLP New York, NY

Charles A. Postler, Esquire

Stichter, Riedel, Blain & Postler, P.A. Tampa, FL

A special thanks to Daniel R. Fogarty, Esquire and Adam G. Suess, Esquire of Stichter, Riedel, Blain & Postler, P.A. in Tampa, Florida, for their writing and editorial assistance.

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Caribbean insolvenCy symposium 2016

Cross-Border Receiverships and Bankruptcies

I. Introduction

After more than 35 years, Chapter 11 of the United States Bankruptcy Code continues to offer a restructuring process with features that are unique and even controversial relative to the insolvency regimes in many other jurisdictions, including the nations throughout the Caribbean. Some of these features—in particular, the opportunity for a debtor to remain in possession of a bankruptcy estate, to quickly and non-consensually obtain new financing, to enjoin enforcement actions, and to then potentially cramdown secured creditors—continue to attract an influx of Chapter 11 filings by debtors whose businesses and assets are mostly, or even entirely, located outside the United States. When that happens, U.S. bankruptcy courts are almost always called upon to resolve important issues about whether and to what extent insolvency laws and proceedings in a foreign debtor’s home country will impact the Chapter 11 process. In particular, where a foreign creditor moves to dismiss or suspend a Chapter 11 case in favor of a pending or potential receivership, provisional liquidation, or winding-up process involving a foreign debtor in the debtor’s home jurisdiction, U.S. bankruptcy courts must consider the propriety and the utility of proceeding with the Chapter 11 case. Importantly, the court must also considered the evolving role that international comity is now playing in cross-border insolvency proceedings. In this session, the panel primarily will discuss how these considerations played out in two recent Chapter 11 cases involving Caribbean debtors that were also subject to insolvency proceedings in their home jurisdictions.

A. Baha Mar

Baha Mar owns, and is in the final stages of developing, a 3.3 million square foot resort

complex located in Cable Beach, Nassau, The Bahamas (the “Project”). The heart of the Project will consist of four new hotels, including 2,323 guest rooms, a new Las Vegas-style casino, convention center, a new premier Jack Nicklaus Signature 18-hole golf course, as well as many other first class amenities. The Project is one of the most significant single-phase resorts currently under development in the western hemisphere. Once completed and fully operational, it will be one of the largest integrated destination resorts in the Caribbean, and is expected to generate nearly 5,000 new jobs and have an annual payroll in excess of $130 million, representing 12% of the GDP of The Bahamas.

The Project was the concept of Sarkis Izmirlian (the “Developer”), as a means to

revitalize Cable Beach, which was once a go-to destination for Caribbean vacationers. With the support of The Bahamian Government, the Developer commenced the Project in 2005. By the beginning of 2008, the Developer had acquired the necessary land along Cable Beach and secured commitments for substantial financing and elite hotel and casino brand participation. The Developer had also engaged architects, designers, and engineers. Later that same year, however, the Project was abruptly wound down when substantially all of the financial and branding commitments procured by the Developer fell away as a result of the onset of the global financial crisis.


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Into that void a Chinese solution materialized. In early 2009, in an attempt to restart the

Project, the Developer met with China Construction America Inc. (“CC America”), a company incorporated and headquartered in New Jersey. CC America is a wholly owned subsidiary of China State Construction Engineering Corp. Ltd. (“CSCEC”)—a state-owned enterprise of the People’s Republic of China (“PRC”) and one of the world’s largest construction companies. CC America, in exchange for being retained as general contractor and construction manager and receiving other financial accommodations, helped the Developer obtain debt financing for the Project from The Export-Import Bank of China (“CEXIM Bank”). CEXIM Bank—itself a state-owned enterprise of the PRC—is a policy bank that provides financing to support the investment of Chinese capital and employment of Chinese labor forces throughout the world.

By May 2011, a path forward had been forged and construction had begun. In summary,

the Project contemplated $3.5 billion of financing, consisting of (a) a $2.45 billion debt facility provided by CEXIM Bank secured by a floating charge on substantially all assets of the Project; (b) a $150 million preferred equity commitment provided by a Bahamian subsidiary of CSCEC; (c) $50 million in “key money” commitments from the brands involved in the project such as Hyatt, Rosewood, and SLS Lux; and (d) an $850 million common equity investment by the Developer, consisting of cash and the land for the Project, as well as other commitments. Under the relevant contracts between Baha Mar Ltd., as ProjectCo, and a Bahamian subsidiary of CC America (“CCA”), as general contractor and construction manager, construction was scheduled to be completed by November 20, 2014.

The construction phase was riddled with disputes between Baha Mar Ltd. and CCA,

involving various contractual arbitrations and litigation, most of which remains unresolved. Before significant pre-opening costs were incurred, the parties realized the original completion deadline would be missed. In November 2014, CEXIM Bank, CSCEC, CCA and Baha Mar reached an agreement by which CCA agreed to complete construction by March 27, 2015, in exchange for immediate payment by Baha Mar of $57 million on disputed claims. As a result, in early 2015, Baha Mar Ltd. launched its marketing campaign, began taking reservations, and hired and trained over 2000 Bahamians in preparation for an April 2015 opening. But once again the completion deadline was missed, this time without advanced warning or an agreement among the parties on a path forward. By June 2015, although construction was allegedly 97% complete, (a) CCA had effectively walked off the job and was refusing to return absent payment of claims disputed by Baha Mar as well as the retainage amount withheld by Baha Mar despite construction not being finished; (b) CEXIM was refusing to lend the undrawn amount remaining on the secured financing facility, which totaled more than $100 million, absent further equity infusions by CSCEC and the Developer; (c) CSCEC was refusing to provide further equity infusions; and (d) the Developer, who had already provided an additional $15 million equity infusion in early 2015 that CSCEC was contractually obligated to match, was unwilling to provide further equity investments absent a new commitments by other parties to finish the Project. As a result, Baha Mar Ltd. was about to exhaust its remaining liquidity.

On June 29, 2015, Baha Mar Ltd. and fourteen Bahamian affiliates (together, the

“Bahamian Debtors”) and one U.S. affiliate (“Northshore,” and together with the Bahamian Debtors, the “Baha Mar Debtors”) filed for Chapter 11 in the United States Bankruptcy Court for

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the District of Delaware (where Northshore was incorporated). The cases were assigned to United States Bankruptcy Judge Kevin J. Carey. As part of the “first day” relief, Judge Carey approved a junior (to CEXIM) secured DIP facility provided by the Developer (who was also Chairman and CEO of Baha Mar Ltd.) that was contingent upon, among other things, the Debtors obtaining certain assurances that the Chapter 11 would be given effect in The Bahamas.

As of the petition date, the Baha Mar Debtors owed CEXIM Bank $2.33 billion. CCA

was likely the Baha Mar Debtors’ largest unsecured creditor, depending upon the bona fides of its disputed claims which was estimated to be $140 million in the aggregate. The Baha Mar Debtors listed more than 5100 creditors with over 3500 of those located in the Bahamas (including the 2000+ recent hires for opening). In subsequent pleadings, the Baha Mar Debtors alleged that approximately 60% of their creditors excluding employees were located in the United States and more than 95% of all debt owed was owed to creditors located outside of The Bahamas, including fourteen of their twenty largest unsecured creditors.

B. Scrub Island

Two U.S. citizens incorporated Scrub Island Development Group Limited (“SIDG”)

under the laws of the British Virgin Islands on January 16, 1992. Shortly thereafter, SIDG purchased Scrub Island in the British Virgin Islands. In 2003, SIDG, which is headquartered in Tampa, Florida, began to develop a luxury private island resort on Scrub Island. Two years later, in 2005, SIDG contract with a related U.S. company, also headquartered in Tampa, Florida, which became the sole and exclusive developer of Scrub Island and the sole operator of what would become the Scrub Island Resort, Spa & Marina (“Scrub Island Resort”). Scrub Island Construction Limited (“SICL,” and together with “SIDG,” the “Scrub Debtors”), another company incorporated in the British Virgin Islands and owned by U.S. citizens, would become the construction company for the resort villas on Scrub Island.

In February 2010, Scrub Island Resort opened its doors as a mixed-use hotel marina

resort, ultimately becoming part of the prestigious Marriott Autograph Collection Hotel System (“Marriott Franchise Agreement”).

Beginning in November 2007 and continuing through 2013, FirstBank Puerto Rico

(“FirstBank”) was SIDG’s and SICL’s largest lender and provided substantially all the funding necessary to develop and construct Scrub Island Resort. FirstBank’s loans to SIDG and SICL were evidenced by promissory notes and land charges recorded with the Land Registry in the British Virgin Islands. By June 2011, the principal amount of SIDG and SICL’s obligations to FirstBank totaled $100,519,966.00.

Ultimately, SIDG and SICL and FirstBank engaged in a workout of the loans that proved

unsuccessful. On November 1, 2013, without notice to SIDG or SICL, FirstBank petitioned the High Court of Justice of the Eastern Caribbean Supreme Court to appoint a receiver over SIDG’s assets in the British Virgin Islands. The High Court of Justice quickly granted FirstBank’s petition and appointed a temporary receiver through November 27, 2013, and set a hearing for November 28, 2013, to consider extending the temporary receivership. The Receiver was appointed under British Virgin Islands laws that allow for a receiver over specific assets of a


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company, rather than under British Virgin Islands laws that provide for a collective liquidation procedure. On November 19, 2013, SIDG and SICL filed independent voluntary Chapter 11 petitions in the United States Bankruptcy Court for the Middle District of Florida. The cases were assigned to now-Chief United States Bankruptcy Judge Michael G. Williamson, who sits in the Tampa division.

On the date of filing the Chapter 11 cases, the Scrub Debtors’ assets included (a) the

Scrub Resort and related assets located in the British Virgin Islands, (b) cash in operating accounts located primarily in the United States; (c) personal property located in the United States to be used in furnishing the buildout of the resort villas on Scrub Island, and (d) contract and other rights. From a valuation perspective, substantially all of the Scrub Debtors’ assets were located in the British Virgin Islands.

FirstBank was the Scrub Debtors’ largest secured creditor, asserting claims of more than

$120 million. FirstBank is an FDIC-insured institution, and operates branches in Puerto Rico and Florida.

Of SIDG’s seventy-three unsecured creditors, forty-four of them had U.S. or Puerto Rico

addresses and held roughly $9.79 million of the $10.3 million in outstanding unsecured debt. The twenty-nine unsecured creditors not definitively subject to jurisdiction in the United States held only $526,000 in debt. Put another way, the creditors that were clearly subject to personal jurisdiction in the United States held more than 95% of the Scrub Debtors’ unsecured debt. As for the British Virgin Island creditors, most of them were suppliers and likely to be paid in the ordinary course of business or under a plan of reorganization.

As of the petition date, all of SIDG’s and SICL’s shareholders were U.S. citizens; SIDG,

SICL, and the operating company were still headquartered and continued to maintain their headquarters in Tampa, Florida; and of the twenty-four resort units that had been sold on Scrub Island, twenty-three were owned by U.S. citizens.

II. Jurisdictional Issues

A. A Foreign Debtor’s Eligibility to File Chapter 11

Creditors in both the Baha Mar and Scrub Island cases moved to dismiss the U.S. bankruptcy cases based on lack of jurisdiction, asserting that none of the debtors in either case could “be a debtor” under the Bankruptcy Code. 11 U.S.C. § 109(a).

Section 109(a) of the Bankruptcy Code explains that “only a person that resides or has a

domicile, a place of business, or property in the United States, or a municipality, may be a debtor under this title.” Courts have interpreted section 109(a) as establishing “very broad eligibility standards.” In re Aerovias Nacionales de Colombia S.A., 303 B.R. 1, 9 (Bankr. S.D.N.Y. 2003). Some courts have gone so far as to say that there is “‘virtually no formal barrier’ to having federal courts adjudicate foreign debtors' bankruptcy proceedings.” In re Yukos Oil Co., 321 B.R. 396, 407 (Bankr. S.D. Tex. 2005) (quoting In re Globo Comunicacoes e Participacoes S.A., 317 B.R. 235, 249 (S.D.N.Y. 2004)); In re Aerovias Nacionales de Colombia S.A., 303 B.R. 1, 9 (Bankr. S.D.N.Y. 2003). This rationale is based upon sections 109’s predecessor, section

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201(a)(1) of the Bankruptcy Act of 1898, which provided bankruptcy courts near complete discretion to exercise jurisdiction over a debtor that owned any property interest in property located in the United States. Banque de Financement, S. A. v. First Nat. Bank of Boston, 568 F. 2d 911, 919 (2d Cir. 1977); In re Yukos Oil Co., 321 B.R. at 407. Accordingly, when a bankruptcy court concludes that it should refrain from exercising its jurisdiction, it typically does so according to section 305(a)’s abstention guidelines, not under section 109(a)(1).

i. Baha Mar

CCA and CEXIM moved to dismiss the Baha Mar Debtors’ cases under section 109(a).

In first considering the issue, quoting In re Global Ocean Carriers Ltd., 251 B.R. 31, 37 (Bankr. D. Del. 2000), Judge Carey explained that “[t]he test for eligibility is as of the date the bankruptcy petition is filed,” and that “[t]he burden of establishing eligibility is on the party filing the bankruptcy petition.” In re Northshore Mainland Servs., Inc., 537 B.R. 192, 200 (Bankr. D. Del. 2015). Judge Carey also noted that the courts that have applied section 109(a)’s “property in the United States” standard to foreign debtors in the past have concluded that it is “satisfied by even a minimal amount of property located in the United States.” Id. In In re Iglesias, 226 B.R. 721 (Bankr. S.D. Fla. 1998), a case which Judge Carey cited, principally proves this point. In that case, the court concluded that a debtor who had no more property in the United States than $522.00 in a south Florida bank was an eligible debtor under section 109(a). In re Northshore, 537 B.R. at 723.

Next, Judge Carey briefly reviewed the Baha Mar Debtors’ domestic property interests in

property located in the United States. At the time of filing, Northshore had leasehold interests in New Jersey and Florida and an operations center in the United States, and Baha Mar Ltd. owned several trademarks registered in the United States and had several more trademark applications pending with the United States Patent and Trademark Office. Id. at 200-01. And seven of the Baha Mar Debtors owned banks accounts at JP Morgan Chase Bank, N.A. Notably, though, every one of these bank accounts was opened just days prior to the Baha Mar Debtors’ petition date with a $10,000 opening deposit. Id. at 197.

Regarding Northshore’s domestic business operations, quoting In re Zais Investment

Grade Ltd. VII, 455 B.R. 839 (Bankr. D. N.J. 2011), Judge Carey was sure to point out that section 109(a) enables a would-be debtor to pursue bankruptcy in the United States if the would-be debtor has a place of business in the United States; that place of business need not be the entity’s principal place of business. In re Northshore Mainland, 537 B.R. at 201. Regarding the Baha Mar Debtors’ new bank accounts, Judge Carey had very little to say. “The stipulated facts note that seven of the Debtors opened their accounts in the weeks leading up to the bankruptcy filing,” and “the relevant date for making a determination of eligibility is the petition date.” Id. at 201. In this regard, Judge Carey’s decision strongly suggests that a debtor that has no property interests in the United States other than a bank account opened at any point prior to the filing of a bankruptcy petition is definitively a section-109(a)-eligible debtor. As discussed later in these materials, Judge Carey’s position on this issue may be at odds with the decision in In re Head, 223 B.R. 648, 652 (Bankr. W.D.N.Y. 1998), which concludes that debtors cannot open U.S. bank accounts merely to “manufacture eligibility.”


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Nevertheless, based on these limited U.S. property interests, Judge Carey concluded that the Baha Mar Debtors met the eligibility requirements of section 109(a). “Whether the cases should be dismissed in favor of Bahamian proceedings,” he concluded, “is more appropriately decided pursuant to [abstention principles].” In re Northshore Mainland, 537 B.R. at 201.

ii. Scrub Island

Ten days after the petition date, FirstBank, like CCA and CEXIM in the Baha Mar cases,

moved to dismiss SIDG’s and SICL’s bankruptcy cases for lack of personal jurisdiction under section 109(a). FirstBank acknowledged that Title 11’s personal jurisdictional requirements are minimal, see In re McTague, 198 B.R. 428, 432 (Bankr. W.D.N.Y. 1996) (noting that the plain meaning of section 109(a) permits “someone to obtain a bankruptcy discharge solely on the basis of having a dollar, a dime or a peppercorn located in the United States”), but contended that SIDG and SICL were manufacturing jurisdiction and that a U.S. court had no reason to entertain their cases: “The inescapable reality in these Chapter 11 cases is that the Scrub Debtors' business, operations, assets, liabilities, and employees are overwhelmingly, if not purely, foreign in identity and nature. The Scrub Debtors are incorporated under the laws of the [the British Virgin Islands], their primary asset, Scrub Island Resort, is located in the [the British Virgin Islands], and their primary liabilities, the outstanding loans owed to FirstBank, were created and secured under documents governed by the laws of the [the British Virgin Islands].”

FirstBank primarily relied on In re Head to support its position that SIDG and SICL were

manipulating their state of affairs for jurisdictional gain. In In re Head, the debtors were domiciled in Canada and in the midst of disputes with one of their significant creditors—Lloyd’s of London. In re Head, 223 B.R. at 649-50. In an attempt “to avoid the consequences of the choice-of-law and forum selection clauses of certain contracts which they entered into” with Lloyd’s, which provided that the disputes would be governed under English law and in England’s courts, the debtors, who lived, worked, and owned substantial assets in Canada, sought a “less hostile forum” in U.S. bankruptcy court. Id. at 649, 651. The debtors argued three points as to why they satisfy the jurisdictional requirements of section 109(a): (1) that they all had conducted “extensive business” in the United States; (2) that they had an interest in money that was held in trust in the United States for domestic entities insured by Lloyd’s in the event of a loss by one of those entities; and (3) that they might have direct liability—and if so, then owe debts—to Lloyd’s insureds in the United States. Id. at 651. The court rejected each one of these arguments and concluded that the debtors were not eligible debtors under Title 11.

The court first noted that “doing business” in the United States, as the debtors put it, is

not a proper basis for section 109(a) jurisdiction. The court also explained that neither the debtors’ “theoretical” interest in the money held in trust for Lloyd’s U.S. insureds—which was “too tenuous, too inchoate, and too contrived”—nor the potential that they might one day have creditors in the United States established that they had “property in the United States.” Id. at 651-52. The court also noted for completeness that if the debtors were to revive their previously-abandoned argument for eligibility based upon having recently acquired U.S. mailing addresses and having opened small bank accounts in the United States, “then this Court would directly hold that one cannot so manufacture eligibility.” Id. at 652.

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The Scrub Debtors first pointed out that section 109(a) jurisdiction can be based on very minimal contacts in the United States, such as merely owning a bank account at a U.S. bank, see In re McTague, 198 B.R. at 432, or owning an interest in retainer payments held in escrow in the United State for future legal fees, In re Global Ocean Carriers Ltd., 251 B.R. 31, 39 (Bankr. D. Del. 2000). A second and perhaps more compelling basis for personal jurisdiction, the Scrub Debtors argued, was the fact that both entities operated out of the United States, and thus had a place of business in the United States. SIDG was doing business in the United States years before its relationship with FirstBank ever began. In a similar vein, SICL contracted only with U.S. businesses. Both SIDC and SICL entities are owned exclusively by U.S. citizens. SIDG marketed the Scrub Island Resort and the properties for sale on Scrub Island entirely from its Tampa, Florida headquarters. SICL constructed and SIDG sold those properties almost exclusively to U.S. citizens. Similarly, the Scrub Debtors noted, SICL contracted only with U.S. companies. The Scrub Debtors’ bank accounts, which they opened in 2010 with a U.S. bank, were used as primary operating accounts for their business operations.

Judge Williamson denied FirstBank’s motion to dismiss for lack of personal jurisdiction,

based on the extent of the Scrub Debtors’ management operations and continued existence of bank accounts in the U.S.” Judge Williamson did not address the apparent tension between In re McTague and In re Head, finding that the Scrub Debtors had not manufactured eligibility.

In both Baha Mar and Scrub Island, the bankruptcy courts found they had jurisdiction

over the debtors, who were eligible to file for Chapter 11 protection in the United States. As explained in In re McTague, section 109(a) set a low jurisdictional standard and the maintaining something as minimal as owning a bank account—or perhaps even “a peppercorn,” 198 B.R. 428, 432 (Bankr. W.D.N.Y. 1996)—located in the United States would enable a debtor to avail itself of the United State bankruptcy laws. But, as In re Head cautions, while the jurisdictional bar is low, the Bankruptcy Code does not allow debtors to “manufacture eligibility.” 223 B.R. 648, 652 (Bankr. W.D.N.Y. 1998).

B. United States Court’s Power over Foreign Parties and Property

Finding jurisdiction over the debtors in both Baha Mar and Scrub Island, the courts also

had to address jurisdiction over the creditors and parties-in-interest, as well as over the property subject to the reorganization efforts. A practical administration problem arises when a U.S. bankruptcy court exercises jurisdiction in cases such as these where the debtor has property located in a foreign country that is subject to foreign laws and perhaps under the control of a receiver who was appointed by a foreign court.

The Bankruptcy Code gives bankruptcy courts exclusive jurisdiction “of all property,

wherever located, of the debtor as of the commencement of such case, and of property of the estate.” 28 U.S.C. § 1334(e)(1). This broad jurisdictional grant is matched by the broad language used in defining property of the bankruptcy estate, which consists of “all legal and equitable interests of the debtor in property as of the commencement of the case,” and consists of all such property “wherever located and by whomever held.” 11 U.S.C. § 541(a).


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The automatic stay that goes into effect upon filing of a U.S. bankruptcy proceeding is one of the fundamental protections of the bankruptcy code, and prevents both the initiation and continuation of acts against the debtor or property of the bankruptcy estate. Unlike a bankruptcy court’s more limited, ancillary role upon recognition of a foreign proceeding in a Chapter 15 bankruptcy case, the bankruptcy court in a Chapter 11 case has plenary jurisdiction over a debtor’s global estate. See, e.g., In re Gold & Honey, Ltd., 410 B.R. 37, 373 (Bankr. E.D.N.Y. 2009) (discussing differences between stay in Chapter 11 and following recognition under Chapter 15). The extraterritoriality of the automatic stay has long been recognized as a part of the Congressional intent in enacting a worldwide estate with an automatic stay of acts against such property. Hong Kong and Shanghai Banking Corp., Ltd. v. Simon (In re Simon), 153 F.3d 991, 996 (9th Cir. 1998); Underwood v. Hilliard (In re Rimsat, Ltd.), 98 F.3d 956, 961 (7th Cir. 1996); In re Yukos Oil Co., 321 B.R. 396, 406 (Bankr. S.D. Tex. 2005) (Congress’ “broad grant of jurisdiction extends to extraterritorial application of the Bankruptcy Code as it applies to property of the bankruptcy estate”); see also, In re Lykes Bros. S.S. Co., Inc., 191 B.R. 935 (Bankr. M.D. Fla 1995) (enjoining creditor actions against the debtor’s shipping fleet, whether overseas or in U.S. ports); In re Lykes Bros. S.S. Co., Inc., 207 B.R. 282 (Bankr. M.D. Fla 1997) (entering injunction against foreign creditor, finding that the post-petition arrest of a vessel in a foreign port was a violation of the automatic stay as against property of the estate).

Nevertheless, the practical reality is that a U.S. bankruptcy court’s ability to exercise

jurisdiction over or to enforce the automatic stay with respect to property located outside the territorial United States is dependent upon its ability to exercise jurisdiction over the persons and entities that control or otherwise may use or take action against such property. Alternatively, with the increasing use of multiple proceedings involving the same debtor in cross-border insolvency scenarios, U.S. bankruptcy courts are increasingly deferring to foreign courts to assist—or not—in extending the reach of Chapter 11 outside of the United States. As discussed below, Scrub Island demonstrates a U.S. bankruptcy court exercising its personal jurisdiction over the parties before it to restructure a resort project that was already in receivership in the British Virgin Islands, while Baha Mar demonstrates a U.S. bankruptcy court refusing to take similar steps to restructure a resort in The Bahamas in the face of a Bahamian court’s refusal to assist in effectuating any Chapter 11 relief.

i. Baha Mar

As noted above, the DIP Facility provided by the Developer was contingent upon the

Baha Mar Debtors obtaining certain assurances that the Chapter 11 proceedings would be given effect in The Bahamas. Perhaps most important to the Developer, given the lack of certainty as to whether a U.S. bankruptcy court had personal jurisdiction over CEXIM Bank, was obtaining an order from the Bahamian court extending the automatic stay to prevent CEXIM Bank from foreclosing on its security interest in the almost-finished resort or placing the Baha Mar Debtors into receivership in The Bahamas. To that end, the Baha Mar Debtors requested and Judge Carey entered an order empowering Northshore (as debtor-in-possession) to act as foreign representative for the Chapter 11 estates of all fifteen debtors outside the United States.

On June 30, 2015, the day after the Chapter 11 cases were commenced, Northshore made

an application in the Supreme Court of The Bahamas for an order recognizing the Chapter 11

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cases as the main and primary insolvency proceedings for the Baha Mar Debtors and enforcing the automatic stay within The Bahamas. Notably, after the Government of The Bahamas (“GOB”) appeared and objected, Northshore amended the application to expressly carve-out the GOB from any stay or effect from the relief it sought. CEXIM Bank and CCA also opposed the application.

On July 22, 2015 (as memorialized in a written decision dated July 31, 2015, of the

Supreme Court Commercial Division of the Commonwealth of the Bahamas, included in these materials as Appendix A), Justice Ian Winder of the Supreme Court of The Bahamas denied Northshore’s application in its entirety (see the brief summary of decision in Part V.). Shortly before The Bahama Court’s decision, CCA (and thereafter CEXIM Bank) moved to dismiss the Chapter 11 cases. Based on a number of statements made by Judge Carey in open court before but especially after the Bahamian Court’s refusal to recognize the Chapter 11 cases and enforce the automatic stay in The Bahamas, it was clear that he was focused on and very concerned with what, if any, effective relief he could provide, unilaterally or otherwise. Ultimately, as discuss further below, Judge Carey granted the request of CCA and CEXIM Bank to dismiss the case. In his decision, after noting the July 31 decision of The Bahamian Court and the parties’ inability to consensually agree to use Chapter 11 to achieve a restructuring, Judge Carey explained that “[u]nder these circumstances, I can perceive no greater good to be accomplished by exercising jurisdiction over these [C]hapter 11 cases . . . .” In re Northshore Mainland, 537 B.R. at 206.

Notably, as a result of reaching this conclusion, Judge Carey did not have to resolve the

allegations, disputed vociferously by the Baha Mar Debtors, that CCA and CEXIM were not subject to personal jurisdiction in the United States. Query whether it would have made any difference if CEXIM, in particular, was indisputably subject to personal jurisdiction in the United States, as FirstBank was in the Scrub Island case.

ii. Scrub Island

The Scrub Debtors were presented with an issue of obtaining effective relief enforcing

the automatic stay against the receiver appointed in the British Virgin Islands, an issue which can turn on jurisdiction over the counterparty. In re Mak Petroleum, Inc., 424 B.R. 904 (M.D. Fla. 2010) (court lacked personal jurisdiction to enjoin suit in Canada to determine rights in property claimed by the bankruptcy estate); In re Travelstead, 227 B.R. 638, 654-55 (D. Md. 1998) (“even though the court may have in rem jurisdiction over the debtor's property, in personam jurisdiction is required before the court may restrain a defendant from interfering with that property.”). Ultimately, the bankruptcy court entered an injunction, not against the Receiver, but against FirstBank, based on the court’s jurisdiction over property of the estate, wherever located, and over FirstBank as an FDIC-insured institution.

III. Abstention in the Interests of Creditors and the Debtors A. Baha Mar

In addition to jurisdictional grounds, CCA and CEXIM sought dismissal on abstention

grounds of the Baha Mar Debtors’ Chapter 11 cases under section 305(a)(1) of the United States


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Bankruptcy Code, which provides that at any time a bankruptcy court “may” dismiss or suspend all proceedings in a Chapter 11 case “if the interests of creditors and the debtor would be better served by such dismissal or suspension.” 11 U.S.C. § 305(a)(1). Citing case law, Judge Carey began his analysis by noting that courts should consider the following non-exclusive factors to determine whether to exercise discretion under section 305: (a) the economy and efficiency of administration; (b) whether another forum is available to protect the interests of both parties or there is already a pending proceeding in state court; (c) whether federal proceedings are necessary to reach a just and equitable solution; (d) whether there is an alternative means of achieving an equitable distribution of assets; (e) whether the debtor and creditors are able to work out a less expensive out-of-court arrangement which better serves all interests in the case; (f) whether a non-federal insolvency has proceeded so far in those proceedings that it would be costly and time consuming to start afresh with the federal bankruptcy process; and (g) the purpose for which bankruptcy jurisdiction has been sought. In re Northshore Mainland, 537 B.R. at 203-04.

Specifically, CCA and CEXIM argued that abstention was warranted on four separate

bases: (1) because a majority of the parties-in-interest were incorporated or located in The Bahamas, addressing the Baha Mar project in The Bahamas would be more efficient and economical; (2) the parties had legitimate expectations that Bahamian law would govern insolvency proceedings concerning the Baha Mar Project; (3) orderly resolution the disputes would be largely impossible as a result of the Bahamian Court’s refusal to recognize the Chapter 11 cases or enforce the automatic stay in The Bahamas; and (4) contrary to the Baha Mar Debtors’ contentions, Bahamian law provides for restructuring (and not just liquidation) proceedings similar to those offered under United State bankruptcy law. Id. at 204.

In response, the Baha Mar Debtors argued that abstention was not in their best interests or

those of creditors generally, but only the best interests of CCA and CEXIM Bank, because: (1) Bahamian proceedings would not necessarily be more efficient and economical because, among other reasons, both CCA and CEXIM Bank (through its security agent on the Secured Facility, Citibank) had connections with the United States and nearly 70% of the general unsecured creditor claims were held by creditors located in the United States; (2) the parties did not necessarily expect Bahamian law to apply to a reorganization of the Project, considering that a substantial portion of the controlling documents contained New York, Texas, English, or British Columbian choice-of-law provisions; (3) the July 31st Bahamian Court decision denying recognition did not preclude the Chapter 11 cases from producing positive outcomes and playing an essential role in restructuring the Baha Mar Debtors; and (4) Bahamian law offered no real path to restructuring because it lacked key features of Chapter 11 such as the continuity of management and the abilities to obtain DIP financing, cramdown a plan, and reject contracts. Id. at 205. Notably, the official committee of unsecured creditors joined in the Baha Mar Debtors’ opposition to the abstention motions.

Moreover, two days prior to oral argument on those motions, the Baha Mar Debtors

attempted to reinforce their opposition by filing an admittedly preliminary, but allegedly confirmable, Chapter 11 plan of reorganization with the U.S. bankruptcy court. Under this plan, the Baha Mar Debtors proposed to (a) substantially reinstate the CEXIM Bank facility (i.e., change certain covenants but leave all economic terms unaltered); (b) reject all contracts with

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CCA, forcing CCA out of the Project to be replaced by new, mostly Bahamian, contractors to finish construction; and (c) allow the claims of all Bahamian creditors (including the GOB’s claims) to “ride through” the Chapter 11 cases unaffected.

Ultimately, Judge Carey granted the motions of CCA and CEXIM, finding their

arguments in favor of abstention more compelling than the Baha Mar Debtors’ arguments in opposition. Judge Carey acknowledged that the Baha Mar Debtors’ choice of forum was understandable and entitled to some weight, stating that “Chapter 11 of the United States Bankruptcy Code, with all stakeholders participating, under these circumstances, would be an ideal vehicle for the restructuring of this family of related companies with the ultimate goal of finishing a project said to be 97% complete and, upon its exit from [C]hapter 11, to be in sound financial footing, with appropriate treatment of creditors.” Id. at 206 (emphasis added). In light of the refusal of CCA, CEXIM Bank, and the GOB to participate, however, Judge Carey determined that maintaining the Chapter 11 cases would only invite further litigation, rather than bringing these parties back to the bargaining table as the Baha Mar Debtors suggested. Id. Thus, convinced that “prompt judicial action will enhance the likelihood of a successful outcome,” Judge Carey clearly believed dismissal to be the more efficient and economical outcome. Id. Furthermore, finding an absence of evidence that the parties expected any “main” insolvency proceeding for the Project would take place in the United States, Judge Carey agreed with statements by Justice Winder that the bulk of the stakeholders would have expected such proceedings to take place in The Bahamas. Id. (citing the Bahamian Court’s July 31st decision).

Finally, while also crediting statements by the Justice Winder that a form of restructuring

was at least possible under Bahamian law despite that law’s clear differences with Chapter 11, Judge Carey further held that deference to Bahamian law was appropriate as a matter of comity even if it lacked a restructuring regime because the Baha Mar Debtors are being treated fairly and equitably and there was no evidence that Bahamian law contravened U.S. public policy. Id. at 208. Notably, earlier in the decision, Judge Carey appears to have cited approvingly to the decision in In re Spanish Cay Co., Ltd., 161 B.R. 715 (Bankr. S.D. Fla. 1993), where a U.S. bankruptcy court granted abstention in the Chapter 11 case of a Bahamian debtor out of deference to a pending creditor-led liquidation of the same debtor under Bahamian insolvency law after determining that the debtor was being treated justly and impartially in the Bahamian liquidation even though abstention was not in the best interests of the debtor because Bahamian law offered no restructuring regime. In re Northshore Mainland, 537 B.R. at 205, n.8.

Accordingly, on September 15, 2015, Judge Carey ordered the dismissal of the Chapter

11 cases of the fourteen Bahamian Debtors. Notably, Judge Carey refused to dismiss the Chapter 11 case of Northshore, explaining that “[i]t may well be that the Northshore [C]hapter 11 case could serve as a useful vehicle for the parties as part of an overall resolution of the corporate family’s difficulties.” Id. at 207 n.11. As of the date of this writing, the Northshore Chapter 11 remains pending but has played no role in the provisional liquidation and receivership proceedings which are now pending in The Bahamas.


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B. Scrub Island

In addition to moving to dismiss the Scrub Debtors’ cases for lack of personal jurisdiction under section 109, FirstBank—again, like CCA and CEXIM in the Baha Mar cases—also argued that dismissal was appropriate according to § 305’s abstention principles. As FirstBank pointed out, the Eleventh Circuit Court of Appeals has explained that “abstention provisions of the [Bankruptcy Code] demonstrate the intent of Congress that concerns of comity and judicial convenience should be met, not by rigid limitations on the jurisdiction of federal courts, but by the discretionary exercise of abstention when appropriate in a particular case.” Carver v. Carver, 954 F.2d 1573, 1579 (11th Cir. 1992) (alteration in original; quotation marks omitted) (quoting In re Wood, 825 F.2d 90, 93 (5th Cir. 1987)). The Eleventh Circuit has also concluded that when properly used, the exercise of abstention “enables the assets of a debtor to be dispersed in an equitable, orderly, and systematic manner, rather than in a haphazard, erratic or piecemeal fashion,” Daewoo Motor Am., Inc. v. Gen. Motors Corp., 459 F.3d 1249, 1258 (11th Cir. 2006) (internal quotation marks omitted) (quoting Int’l Transactions, Ltd. v. Embotelladora Agral Regiomontana, SA de CV, 347 F.3d 589, 594 (5th Cir. 2003)).

FirstBank principally argued that the cases did not belong in a U.S. bankruptcy court,

stating that when foreign insolvency proceedings are pending, the court should exercise its discretion to abstain based on the principles of comity and judicial efficiency. This is particularly so, FirstBank argued, when a U.S. court is presented with a foreign debtor, holding assets in a foreign country, that are encumbered by liens that were consensually negotiated to be governed by foreign law. Under these circumstances, FirstBank said that the Scrub Debtors’ back-door attempt to unilaterally circumvent such a designation by filing in a U.S. court should not be tolerated. In re Spanish Cay Co., Ltd., 161 B.R. 715, 726 (Bankr. S.D. Fla. 1993) (“While it is obvious that the principals of the Debtor would prefer to restructure under United States bankruptcy law, the money put at risk by the investors in this project was put at risk under [foreign] law and not United States law. . . . The Debtor cites no authority in which a Chapter 11 was used to restructure interests in real property located in a foreign jurisdiction with a foreign debtor and foreign law controlling the rights of the parties. This Court finds it impermissible to use Chapter 11 to accomplish this result.”).

FirstBank also suggested that practical considerations mandated abstention. In this

regard, FirstBank’s main point of emphasis was that the property at issue—Scrub Island Resort—was located in a foreign country and subject to conflicting claims over which the court did not have personal jurisdiction. In re Mak Petroleum, Inc., 424 B.R. 904, 905 (Bankr. M.D. Fla. 2010) (noting that “even though the court may have in rem jurisdiction over the debtor’s property, in personam jurisdiction is required before the court may restrain a defendant from interfering with that property”); In re Int’l Admin. Servs., 211 B.R. 88, 93 (Bankr. M.D. Fla. 1997) (stating the same and noting that “although an American bankruptcy court may have the authority under the law of the United States to exercise in rem jurisdiction over property of a debtor's estate located in a foreign country, the bankruptcy court practically lacks the power to enforce such jurisdiction without the recognition and assistance of the courts in the foreign country. Accordingly, when property is beyond the jurisdictional reach of the court . . . the bankruptcy court has no practical control directly over the property.”).

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In response, the Scrub Debtors generally argued that FirstBank failed to address the principal issues of abstention. In re Eastman, 188 B.R. 621, 625 (B.A.P. 9th Cir. 1995) (“the test is whether both the debtor and the creditors would be ‘better served’ by a dismissal.”). The Scrub Debtors contended that FirstBank improperly focused on the interests of only one of the Scrub Debtors’ creditors (itself), and not on any other creditors or on the Scrub Debtors themselves, and argued that “the interests of creditors (other, perhaps, than FirstBank) and the Scrub Debtors would be better served by a collective, reorganization proceeding in which all creditors may participate and in which there is an enhanced ability to assume executory contracts and cure defaults, rather than in a receivership proceeding run exclusively for the benefit of FirstBank.”

The Scrub Debtors also believed that FirstBank focused too heavily on “hypothetical

jurisdictional issues the Court may face in enforcing its orders, without acknowledging that FirstBank itself is subject to the in personam jurisdiction of the Court and must comply with this Court's orders.” The important point, the Scrub Debtors believed, was that although a U.S. court could unlikely terminate the temporary receivership in the British Virgin Islands by court order alone, it could accomplish such an end by ordering the party responsible for the temporary receivership to take the steps necessary to reach the that result.

In ruling on FirstBank’s motion, Judge Williamson focused on three broad points, and

ultimately decided that abstention was not appropriate. Judge Williamson first confronted FirstBank’s arguments regarding comity and judicial convenience and its reliance on a decision out of the United States Bankruptcy Court for the Southern District of Florida, In re Spanish Cay Co., Ltd., 161 B.R. 715 (Bankr. S.D. Fla. 1993), in which the court granted relief from stay, allowing a creditor to pursue insolvency proceedings in a foreign country, and abstained from exercising jurisdiction over the debtor. Id. at 720. While the facts in In re Spanish Cay undeniably presented a situation similar to what SIDC and SICL were facing—a Bahamian debtor corporation whose primary asset was real property located in The Bahamas pursuing reorganization under U.S. law, id. at 720—the facts alone did not tell the whole story, Judge Williamson pointed out.

The distinguishing characteristic between In re Spanish Cay and the present cases, Judge

Williamson noted, was the nature of the foreign insolvency proceedings. Based on expert testimony, the court in In re Spanish Cay concluded that the proceeding that the creditor intended to pursue in The Bahamas was similar to a Chapter 7 proceeding under the laws of the United States and “would insure just treatment of all holders of claims against or interests in the estate.” Id. at 724. In Scrub Island, the temporary receivership that FirstBank pursued was not a collective proceeding and it cannot, therefore, be a “foreign main proceeding” within the meaning of § 1502(4). FirstBank’s receiver would not be entitled to obtain recognition of the receivership as a foreign proceeding, because an operating, non-equity receivership is not entitled to recognition as a foreign proceeding. § 101(23) (defining “foreign proceedings” as a collective judicial or administrative proceeding…”); § 1504 (petitions for recognition are filed with respect to a “foreign proceeding”). E.g., In re ABC Learning Centers Ltd., 445 B.R. 318, 329 (Bankr. D. Del. 2010) (clarifying on reconsideration that recognition would only be granted to collective liquidation proceedings, not receivership proceedings); In re Gold & Honey, Ltd.,


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410 B.R. 357 (Bankr. E.D.N.Y. 2009) (discussing differences between Israeli liquidator and receiver, and not recognizing as foreign proceeding receivership).

“It is clear that the principles of comity and judicial efficiency would only come into play

if in fact there was a foreign collective proceeding pending in the British Virgin Islands,” as there was in In re Spanish Cay, Judge Williamson reasoned. “Quite to the contrary, the only pending proceeding [in the British Virgin Islands] is one brought for the benefit of [FirstBank].”

Judge Williamson next focused on whether the creditors and SIDG and SICL would be

better served by dismissal—the express standard of § 305(a). In first discussing this issue, Judge Williamson recounted the location of the Scrub Debtors’ creditors as predominantly subject to his jurisdiction. As for the exercising jurisdiction over property of the bankruptcy estates, that was not an issue. Section 541(a) afford U.S. bankruptcy courts in rem jurisdiction over all of the Scrub Debtors’ property “wherever located and by whomever held.”

As a final point, the court discussed the reality that the governing loan documents held by

FirstBank are subject to British Virgin Island law. “The Court views this no differently from the circumstances that this Court routinely deals with in loan documents that are governed by [laws] of other jurisdictions, whether they be other states outside of Florida or countries,” Judge Williamson explained. Thus, in the event that a complex issue arises regarding British Virgin Island law, he stated, “no doubt the parties will seek the opinion of local [British Virgin Island] counsel and brief the issues just as would be done if an issue arose in this Court, for example, concerning a lien on mineral rights under Texas law.”

IV. Government Involvement

There is a long history of foreign debtors using U.S. bankruptcy proceedings to restructure or liquidate, with a recent study finding there were more than 300 such Chapter 7 and Chapter 11 cases between 2005 and 2012 alone. See Oscar Couwenberg and Stephen J. Lubben, Corporate Bankruptcy Tourists, 70 Bus. Law. 719, 726 (2015). It is unclear how many of these cases proceeded over the objection of one or more crucial stakeholders, but the existence of scant case law indicates it has happened only rarely. Moreover, the panel is unaware of any case law in which a U.S. bankruptcy court allowed a Chapter 7 or Chapter 11 case to proceed over the objection of the government of the foreign debtor’s home jurisdiction. Thus, a foreign debtor’s use of the U.S. bankruptcy system largely may depend on the position taken by its own government—which may be guided by political considerations not necessarily aligned with its expected commercial interests.

Scrub Island did not involve any material involvement by the British Virgin Island

government. In contrast, although it never made an appearance in the Baha Mar Chapter 11 cases, the GOB played a major and arguably decisive role in such cases ultimately being dismissed. In fact, the GOB had been involved in the Baha Mar Project since its inception, spurring the Developer’s initial interest in the Project and thereafter providing a number of concessions regarding taxes, utilities, casino licensing fees, and the like, that rendered the GOB a material creditor of seven of the fourteen Bahamian Debtors as of the Chapter 11 filing. As noted above, once completed and operational, the Project was expected to employ as many as 5000+

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Bahamians and provide for as much as 12% of the GDP of The Bahamas, prompting some in the local media to label Baha Mar “too big to fail.” Thus, GOB involvement in the Project beyond its direct commercial interests was likely inevitable in any event. That being said, however, Baha Mar was (and is) part of a larger policy initiative by the GOB to strengthen its relationship with and encourage PRC investments in the Bahamas. In turn, CSCEC (through CC America and CCA) was eager to grow its construction business in the Western hemisphere. Notably, in addition to working on Baha Mar, CCA acquired the British Colonial Hilton in downtown Nassau, The Bahamas, and began to re-develop the site as a new integrated living and retail complex with the support of the GOB in October 2014.

Against this background, it should come as no surprise that the GOB was actively

participating in the ongoing negotiations among the parties, and that the Developer was understandably wary of giving the GOB advance warning of its intention to file for Chapter 11 for fear that it could lead to pre-emptive actions by other parties. Nevertheless, despite the “surprise” of the Chapter 11 filing, the Baha Mar Debtors believed that the GOB eventually would support their chosen restructuring path (or at worst remain agnostic) once the GOB appreciated the Baha Mar Debtors’ dire need for liquidity and the features of Chapter 11—unavailable under Bahamian insolvency law—that would facilitate immediate new financing (from the Developer’s DIP Financing) and a swift, minimally disruptive restructuring. This belief quickly proved to be unfounded.

First, on July 2, 2015, the GOB (through the office of the Attorney General) appeared

before the Supreme Court of The Bahamas and objected to Northshore’s application for recognition of the Chapter 11 cases. As noted above, Northshore’s application was ultimately denied, but not before it amended the application to expressly carve-out the GOB from any effect of the automatic stay relief it sought. Thus, the GOB’s continued opposition to the application after this amendment clarifies that such opposition was not motivated by the GOB’s desire to protect its commercial interests as a creditor of Baha Mar.

Next, on July 16, 2015, the GOB filed a petition with the Bahamian court to commence

winding up proceedings against the fourteen Bahamian Debtors, and a companion application for the appointment of joint provisional liquidators (“JPLs”) to take control of the Project and attempt to negotiate a restructuring before the winding up petition could be ruled upon. On September 4, 2015, the Bahamian court (Justice Winder) granted the application and appointed JPLs over the seven Bahamian Debtors (out of fourteen total) against whom the GOB was a direct creditor, including Baha Mar Ltd. Notably, Justice Winder refused to grant the application on the ground asserted by the GOB that appointment of the JPLs was warranted in the public interest, instead granting the application solely on the alternative ground, asserted by the GOB in its capacity as an ordinary creditor, that appointment of the JPLs was necessary to prevent the dissipation of assets. Arguably, the GOB did not need protection in such capacity, however, in light of the Baha Mar Debtors’ efforts to prevent the GOB from being automatic stayed and the interests of all Bahamian creditors from being impacted by their proposed Chapter 11 plan. Indeed, it is difficult to defend the GOB’s motivation as anything other than the public interest, unless one assumes it was acting for the commercial benefit of other parties. To that end, it is noteworthy that CCA and CEXIM both asserted (with partial success) a Common Interest Privilege with the GOB as a basis to avoid producing to the Baha Mar Debtors certain


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communications among themselves (CCA and CEXIM) and the GOB following the Chapter 11 filing.

In any event, on September 4, 2015, the Bahamian court granted the GOB’s request for

the appointment of JPLs over the Project. Thus, though it never appeared before the U.S. bankruptcy court, the GOB no doubt had a material impact on Judge Carey’s decision to dismiss the Chapter 11 cases just eleven days later on September 15, 2015. In particular, Judge Carey cited Justice Winder’s September 4 ruling as support for the counter-argument of CCA and CEXIM—in response to the Baha Mar Debtors’ argument that Chapter 11 was their only restructuring option—that the JPLs “may work with the parties to come to an arrangement or compromise that involves a restructuring.” In re Northshore Mainland, 537 B.R. at 205.

While the impact of the GOB’s actions is highly dependent upon one’s perspective, the

aftermath of the dismissal of the Chapter 11 cases bears consideration. In his September 4 ruling, Justice Winder scheduled a hearing on the GOB’s winding up petition for November 2, 2015, ostensibly giving the JPLs approximately sixty days to forge an agreeable path forward that prevent the Project from the fate of value minimizing liquidation. In doing so, Justice Winder explained that, although the GOB “hope[s], perhaps over optimistically, that the insolvency could be abated during the provisional liquidation,” “[p]rovisional liquidation under the CWUA was not intended for the long-term management of an asset, such as the Baha Mar project to completion or for the raising of the levels of capital required for its completion. Provisional liquidation is an interim measure whilst the process to liquidation proceeds.” See Sept. 4, 2015, Decision of the Supreme Court Commercial Division of the Commonwealth of the Bahamas,, included in these materials as Appendix B, at ¶¶ 113, 115. Whether the JPLs had a realistic opportunity to negotiate a restructuring—and to what extent that impacted Judge Carey’s decision to dismiss the Chapter 11 cases—is unclear. In any event, as the hearing on the GOB’s winding-up petitions approached without an agreement having been reached by the JPLs, CEXIM Bank requested and obtained Bahamian court approval to place Baha Mar into receivership on November 2, 2015. While the GOB-commenced provisional liquidation technically remains on pending as of this writing, it is widely reported that the receivers are actively soliciting potential purchasers to buy the Project and complete construction, but have yet to receive a purchase price that would come anywhere close to paying off CEXIM Bank’s $2.33 million secured loan, let alone provide any residual value for unsecured creditors—including the GOB and local Bahamian contractors allegedly owed an estimated total of $70 million.

V. Recognition and Enforcement of Chapter 11 Outcomes in Parallel Foreign Proceedings

Frequently an issue that arises in parallel cases such as Baha Mar and Scrub Island is the concern about enforcement of one court’s order in a foreign jurisdiction. For example, as discussed above, the Scrub Debtors were faced with a receiver who was appointed in the British Virgin Islands, and thus subject to jurisdiction of the British Virgin Islands courts, but arguably not the Bankruptcy Court for the Middle District of Florida. Without an ability to enforce turnover of control of the operations of the resort, the Scrub Debtors’ ability to manage and pursue an effective reorganization would have been significantly impaired, and FirstBank’s leverage in those efforts significantly enhanced. Both sides addressed this in the U.S. bankruptcy

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court. The Scrub Debtors argued that the turnover provisions of section 543 of the Bankruptcy Code applied to foreign receivers, see Underwood v. Hilliard (In re Rimsat, Ltd.), 98 F.3d 956, 961 (7th Cir. 1996), but principally argued that bankruptcy court could enforce the court’s orders through FirstBank. As discussed above, the Judge Williamson directed FirstBank to take all necessary steps to ensure that the status quo was maintained in the pending British Virgin Island action, including dismissing the action if necessary. For its part, FirstBank sought an order from Judge Williamson excusing the Receiver’s compliance with the turnover obligations. Following a series of hearings, the parties were able to reach an interim operating understanding, whereby the Receiver remained in place as a monitor, with the Scrub Debtors managing the day-to-day affairs of the resort.

Unlike in Scrub Island, Baha Mar was not subject to any receivership or insolvency proceedings in The Bahamas when it filed for Chapter 11 on June 29, 2015. Nor did the short period of overlap between the GOB’s application to appoint the JPLs being granted on September 4, 2015, and Judge Carey’s decision to dismiss the Chapter 11 cases on September 15, 2015, provide a realistic opportunity for the Baha Mar Debtors and the JPLs to pursue the coordination and cooperation typically pursued in many parallel insolvency proceedings. Instead, the Baha Mar Debtors and the Developer pursued the ancillary proceeding route to recognition and enforcement of their attempt to restructure in the United States. This forced the Bahamian court to decide from the very onset of the Chapter 11 cases whether those cases would be treated as the Baha Mar Debtors’ “main” insolvency cases to which the Bahamian court would defer even when the Chapter 11 cases produced results that exceeded what was available under Bahamian law.

Ultimately, however, this strategy failed. As noted above, on July 22, 2015, Justice Winder denied in its entirety an application by Northshore (as foreign representative for the Chapter 11 estate of itself and each of the Bahamian Debtors) for recognition of the Chapter 11 cases and enforcement of the automatic stay in The Bahamas. Justice Winder gave a number of reasons to support the denial, and a detailed discussion is beyond the scope of this panel. In brief, Justice Winder held (a) that by enacting Sections 253-255 of the Companies (Winding Up Amendment) Act 2011 (“CWUA”) to govern the provision of recognition and assistance of foreign insolvency proceedings, the legislature of The Bahamas effected wholesale pre-emption of any previous availability of such relief at common law; (b) that recognition was precluded under this statutory scheme—which appears to be based on former section 304 of the Bankruptcy Code—because it limited the court’s power to grant recognition and assistance only to countries explicitly listed by the legislature (even though no such list has ever been issued!); and (c) that in any event the automatic stay could not be enforced against CEXIM Bank because it goes beyond the relief available in domestic winding up proceedings in The Bahamas, which are precluded by statute from impacting in any way the right of a secured creditor to exercise remedies.

This decision raises a number of questions for those considering whether to commence insolvency proceedings outside of The Bahamas on behalf of a debtor incorporated or with assets located therein. Among others, query whether Baha Mar would have had more success by (a) not seeking recognition of the Chapter 11 cases as “main” proceedings or enforcement of the automatic stay in The Bahamas court, or (b) filing its own winding-up petition and application to


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appoint provisional liquidators of their own choosing in The Bahamas simultaneously with filing the Chapter 11 cases in Delaware?

VI. A Fiduciary’s Perspective From a fiduciary standpoint, the different results in the Baha Mar and Scrub Island matters may be related to the fact that in Scrub Island the lender, trade creditors and individuals with construction contracts on villas were all primarily located in Continental U.S. or Puerto Rico; hence, under the control of the U.S. Bankruptcy Court system. For that reason, the Court in this case anticipated that it could drive the confirmation and enforcement of a plan of reorganization. By contrast, many of the key parties in Baja Mar were not under the auspices of the U.S. bankruptcy system. There are number of other factors that appear to have had a bearing on the judge’s decision in Scrub Island, including:

While SICL and SIDG were both BVI companies, they were both run and managed out of Tampa, Florida, the location of their headquarters offices as well as their bank accounts. This suggests a level of operational control in the United States.

In addition, Mainsail, the entity which had the contract with Marriott, was also located in Tampa. (As a point of interest, Mainsail had common ownership and an operating relationship with SIDG.)

The receiver appointed by the High Court of Justice of the Eastern Caribbean Supreme Court (at the request of FirstBank) remained in place in proceedings parallel with the U.S. Bankruptcy proceedings. However, because of the injunction against the Bank, the receiver had a limited role. In addition, the receiver acted in coordination with the Debtors and the process went smoothly.

The Receiver (analogous to a state court receiver in the U.S.) focused its efforts on monitoring cash flow and maintaining the Debtor’s infrastructure intact rather than making significant operational changes.

The fact that the key parties were on-site in the Bahamas and had direct knowledge of the fluid situation in the Baha Mar project may have factored in to Judge Carey’s decision to dismiss the U.S. Bankruptcy proceedings. In particular, there may have been concerns over the ability to enforce a plan of reorganization upon key parties such as the secured lender. In addition, since the Bahamian Government had a vested interest in keeping the Debtors from being forced into a full liquidation. The Bahamian Government wanted a voice in the direction of the case since it was owed many millions by the Baha Mar debtors and also had an interest in seeing to it that unsecured creditors in the Bahamas maximized recovery of the approximately $70 million that they were owed. For its part, the Debtor feared that the Bahamian Government would seek to squeeze out the interests of the equity in the case. This would clear the way for CEXIM, the Chinese lender, to step in, complete, and take over the project through some tactics or other. If the case were to have a receiver or other fiduciary appointed, the project might easily end up being sold to a new

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player, or CCA would complete the project under the ownership of CEXIM. Indeed, when the provisional liquidator was appointed on September 4, the equity appeared to have lost its voice. VII. Reporting

As discussed above, in Scrub Island, the Scrub Debtors and the Receiver maintained an

interim operating understanding, and both remained subject to the reporting requirements in their respective courts: the Scrub Debtors filed the monthly operating reports required of all Chapter 11 debtors, and the Receiver filed regular reports with the British Virgin Island court. Information necessary for the Receiver’s reports was provided by the Scrub Debtors, with both informal interviews with on-site personnel and management and detailed financial information given to the Receiver.

From a financial advisory standpoint, the Chapter 11 process and a process involving a fiduciary involve reporting processes that each have pros and cons. For example, the monthly operating reports required of all debtors provides extensive detail about operating performance, cash inflows and outflows, and assets and liabilities, among other things. While monthly operating reports provide an opportunity for the debtor to address “significant developments,” Many debtors miss this opportunity to provide readers with narrative insights into developments or issues that may affect the debtor going forward. That is, more often, the thrust of the monthly operating reports format is the presentation of financial data. The reporting process of many fiduciaries, such as a receiver, is somewhat different from the Chapter 11 monthly operating report process. For example, the frequency of reporting varies from case to case, depending on how dynamic the case is during a given period and the requirements of the appointing court. In addition, the information addressed by the fiduciary will vary depending upon the nature of the business, issues confronting it, and the informational desires of the courts, lenders, and other relevant parties. Typically, the periodic report of a fiduciary will present a balance of narrative and financial information. Again, since cash is the key element in most distressed situations, such reports will provide reasonable detail on all components of cash. A fiduciary will likely include information pertaining to general business issues of pertinence to the case. These could relate to production activities, management, sales efforts, order backlog, competitive activity, and supplier issues. To some extent, the nature of a fiduciary’s report will reflect the nature and breadth of its mandate. For example, a lender pursuing the appointment of a Receiver is interested primarily in the preservation of the value of its collateral. Hence, the court mandate will be less comprehensive in those circumstances when compared to a situation where the lender desperately wants to see some or all of the assets sold. VIII. Perpetuating a Resolution—Reaching One Plan out of Two Parallel Proceedings A. Baha Mar

As noted above, Baha Mar involved effectively no cooperation or coordination between the divergent and barely overlapping Chapter 11 cases in Delaware and provisional liquidation


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proceedings in The Bahamas. Because of the strategy employed by the Baha Mar Debtors and the Developer, The Bahamas court was called upon at the outset of the Chapter 11 cases to decide whether those cases—and impliedly, a future plan of reorganization that might be confirmed therein—should be given effect in The Bahamas. After Justice Winder denied such recognition on July 22, 2015, and even though the Baha Mar Debtors subsequently filed a Chapter 11 plan that it alleged to be confirmable, the reality is there may have been little that Justice Winder or Judge Carey could have done to facilitate a global resolution through cooperation and coordination between their courts, other than to urge the parties to come to a consensual resolution (which both courts did). As Judge Carey explained to CCA’s counsel at the August 28, 2015, hearing on CCA’s motion to dismiss:

I’m a big proponent of cooperation between courts in different jurisdictions, domestically or internationally.

***

But as they say, [it] takes two to tango.

*** And right now one court doesn’t seem to be on the dance floor; and it seems to me that’s [the Bahamian] court’s prerogative, and I don’t question that in the least. But that having been said, the debtor, through the plan that it’s recently filed, suggests that there is a way, while keeping the Chapter 11 alive, to accomplish good things for it and its creditors while not disturbing the prerogatives to which the government of The Bahamas is entitled. And that seems to me to be a more important framework for [CCA] to be, I guess, attacking, for lack of a better word.

Aug. 28, 2015, Tr. at 67:21-68:4. “Attack” is what CCA did, ultimately prevailing upon Judge Carey that “[t]he Debtors’ proposed plan, in effect, only invites further dispute, that is, litigation in this forum and in others.” In re Northshore Mainland, 537 B.R. at 206. B. Scrub Island

Of paramount concern in any Chapter 11 bankruptcy case is confirming a plan, and thus binding creditors to the terms approved of in a confirmation order. As discussed above, in Scrub Island the creditor body primarily comprised of U.S.-based companies or individuals; the few foreign creditors held claims for routine operating expenses. Because of the unique nature of the British Virgin Island receivership, a number of the foreign creditors had been paid post petition by the Receiver, leaving small balances owing on any prepetition claims. The Scrub Debtors proposed a plan—primarily focused on restructuring their obligations to FirstBank—that included numerous classes, two of which included foreign creditors: a small debt for secured tax claims and an unsecured class. The plan addressed potential jurisdictional infirmities in the confirmation order with respect to those classes by allowing the reorganized debtor to pay, as necessary, any creditors not subject to jurisdiction on such terms as required to maintain

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operations. The place of the creditors in the capital structure allowed for the flexibility in the context of the reorganization, and obviated the need for significant concerns about enforcing a confirmation order on foreign creditors.


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receiverships and u.s. bankruptcy proceedings …...united states and more than 95% of all debt owed...

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