Liability Shields Gain Ground in International Bankruptcy Cases

A New York bankruptcy judge’s recognition of a Mexican lender’s foreign restructuring with nonconsensual liability releases is among a growing list of cross-border cases testing boundaries set by the US Supreme Court’s Purdue Pharma opinion.

The English restructuring of Mega Newco Ltd., a subsidiary of Mexican nonbank lender Operadora de Servicios Mega SA, was approved with releases for related third-party entities that aren’t bankrupt. The restructuring was recognized Feb. 24 under Chapter 15 of the US Bankruptcy Code, which governs foreign cases with ties to the US.

Mega joins other recent Chapter 15 petitioners such as Americanas SA and Nexii Building Solutions Inc. in achieving recognition for cross-border plans that include such shields without consent from all creditors, a type of release that the Supreme Court rejected in Purdue’s Chapter 11 case.

The cases signal that under the right conditions, those releases can survive under Chapter 15.

Restructuring practitioners are confident that the justices’ Purdue opinion affects only Chapter 11, not Chapter 15. Still, they anticipate the decision’s impact on Chapter 15 will be litigated, creating ripe ground for future conflicts over coveted releases.

“Chapter 15 is the new battleground in which that is being fought,” said Greg Pesce, a partner at White & Case LLP’s restructuring practice.

Boundaries Tested

Since the high court decided Purdue last June, US courts have approved nonconsensual, third-party releases for multinationals in cases with few objections and a clear record from a foreign court.

But whether the releases will stand up to scrutiny by courts and creditors under the Chapter 15 context remains an open question.

“The boundaries are being tested, and I would like to think that those boundaries are going to prove to be expansive in recognizing these types of provisions,” said Lynn P. Harrison III, a partner at Dentons.

The Mexican lender’s case prompted no formal objection from the Justice Department’s bankruptcy watchdog, the US Trustee, which fought against such releases in Purdue’s bankruptcy.

It “raised some issues about the release provisions,” according to the opinion, but eventually reached a deal with Jalisco-based Mega to narrow down the way the shields would work in the US.

Varied Approach

The US Trustee has adopted varying positions on the releases in Chapter 15 cases, raising concern about their broadness but generally resolving them outside of court. That makes it difficult to anticipate when government objections might arise, some attorneys said.

“The US Trustee’s views on releases and exculpation are becoming incoherent and based on where a case is filed,” Pesce said.

The US Trustee’s office told Bloomberg Law that it “reviews the facts and circumstances of each case” and advocates for “the coherent and consistent application of bankruptcy law.”

In Americanas and Mega, the office resolved concerns over releases with the debtors. Both were approved in the Southern District of New York bankruptcy court, overseen by the same US Trustee office that fought the Purdue releases.

Judge Michael Wiles’ decision in Mega “doesn’t appear to give much indication on the position the United States Trustee’s office might take in future cases,” said Rahman Connelly, a partner with Pillsbury Winthrop Shaw Pittman LLP. “However, it does indicate that, in at least some cases, the United States Trustee’s office may be open to resolving any objection it might otherwise have via agreed-upon limiting language.”

The bankruptcy of Yuzhou Group Holdings Co., a Chinese real estate developer, became an outlier when the US Trustee challenged its releases in September 2024 as “overly broad” and “manifestly contrary to public policy.”

Yuzhou has since said it reached a preliminary agreement with the US Trustee. A recognition hearing is scheduled for April 30.

Other US federal agencies have already opposed releases, citing Purdue.

The US International Development Finance Corp., a creditor that says it’s owed about $95.8 million from Crédito Real, SAB de CV, recently said the Mexican payroll lender’s releases were too broad. It claimed that while foreign debtors could obtain relief, Chapter 15 “doesn’t provide a statutory basis” for releases.

Crédito’s releases discharge claims for fraud and intentional misrepresentation and are “manifestly contrary to public policy,” the agency said.

The US Trustee asked for changes to the releases so they don’t restrain “parties from properly exercising rights” and “instead focus on protecting property.”

More Chapter 15s

Madlyn Gleich Primoff, a partner on Freshfields US LLP’s restructuring team, said she expects more foreign schemes of arrangement followed by Chapter 15 filings. They offer a more efficient and cost-effective alternative to traditional Chapter 11 bankruptcies, she said.

Primoff said Chapter 15 cases may be especially attractive for multinational companies primarily dealing with financial debt rather than operational restructuring.

While Chapter 11 is good for restructurings that involve lease and contract rejections, they’ve become expensive, she said.

“It’s an inefficient process so I think there’s enormous pressure from clients to come up with a more efficient solution,” Primoff said. “This Chapter 15 methodology sounds like one being considered more and more.”

For some practitioners, the post-Purdue world seems to have created a “loophole.”

“Before Purdue, this wouldn’t have even been an issue as long as you have the proper record in the foreign jurisdiction showing that these are justified,” said Olya Antle, a corporate restructuring attorney at Cooley LLP. “Now, you can’t get that kind of relief in the US, but you could go to other jurisdictions, like Canada, Cayman, England, Singapore or Hong Kong, and get it that way.”

Fredric Sosnick, A&O Shearman’s global co-head of restructuring, noted that Wiles spent more time in his Mega decision wrestling with concerns over jurisdiction in the English court than on releases, perhaps signaling Chapter 15 venue fights on the horizon.

“I think he was telling the world: ‘Don’t just start running to England and forming all these companies and coming back to the US and trying to get Chapter 15 relief if there are going to be parties complaining about it,’” Sosnick said.