Putin’s Bankruptcy Crisis: How the United States Bankruptcy Code will protect the interest of U.S.-Based Creditors

By: Dor Scwartz

April 7, 2022

International Bankruptcy law has consistently strictly relied on the “principles of comity.” International courts have the tendency to create a homogenous relationship while comity is placed at the forefront in confirming Chapter 15 Bankruptcy plans. In the eve of globalization, international bankruptcy courts across the sphere emphasize the importance of working as a collective with other nations in support of confirming international insolvency plans. With the recent invasion of Ukraine by Russian Forces, neighboring countries and the “West” have initiated strict sanctions to deter the actions of Vladimir Putin. Further, with the new onslaught of sanctions, by the strongest economies in the world, including the United States and Germany, Russian companies have experienced the forefront of the war in their inevitable road to insolvency. Creditors across the nation are preparing for endless litigation on high-stake notes and bonds against large Russian-based companies filing for bankruptcy. Companies that deal with Russia directly, that are not Russian-based, have also experienced insolvency reactions. “The Swiss-based Nord Stream 2 company has gone belly-up after Germany halted the gas pipeline following Moscow’s invasion of Ukraine.”

US Creditors must prepare for their litigation defense in light of the onslaught of insolvencies reaching international bankruptcy courts in the coming months. US creditors must rely on the US Bankruptcy code to protect their interest and dampen the bleed created by the new war in Ukraine.

US-based creditors will now face a new realization of confirming bankruptcy plans with other international creditors for the reorganizations of the Russian companies. US based creditors must rely on Section § 1520, § 1507, and § 1521 of the US Bankruptcy Code. Under Section § 1520, US Bankruptcy courts may recognize a foreign main proceeding and apply the automatic stay. Under Section § 1507, the bankruptcy code intends to create a policy of just treatment to all holders of claims in the debtor’s property and protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in such foreign proceeding. Under § 1521, US bankruptcy court may grant any apparent relief in which is listed under the section of the code.

International Courts can potentially avoid the interest of US creditors or other international creditors doing business with the insolvent companies in order to confirm the plan. However, these confirmations may be unjust and thus violate the US Bankruptcy Code. Under Vitro, the US Creditors will claim that relief under §1521 is inappropriate because a potential international court’s approval order “neither sufficiently protects the interests of creditors in the United States, nor does it provide an appropriate balance between the interests of creditors, (debtor), and its non-debtor subsidiaries.” Also, under Vitro, the US bank will argue that the confirmation of the plan violates § 1522. Which notes that the court may grant relief under section § 1519 or § 1521, or may modify or terminate relief under subsection (c), only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protect.

Under Rede, the US creditors may argue that the Foreign Representative is not entitled to relief under sections § 1521 or § 1507 of the Bankruptcy Code and granting the Plan would be manifestly contrary to U.S. public policy and should be denied pursuant to § 1506. Specifically that the Plan has been “fraught with infirmities,” including (i) a significant extraction of value for shareholders; (ii) disparate treatment of similarly situated creditors; (iii) targeting of such disparate treatment at U.S.-based creditors; and (iv) protection of local creditor interests by fiat.

It is important to note that the defenses based on Section § 1506 Public Policy are clearly drafted in narrow terms and “the few reported cases that have analyzed [section] 1506 at length recognize that it is to be applied sparingly.” US based creditors will have to rely on the protections laid out in the US Bankruptcy Code to protect their interest from the attempt of international courts in treating foreign based creditors unfairly.

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