Court Opinion Review: Letting Exclusivity Lapse, Selling State Secrets in Ch. 15 Remains a No-No, and Dueling US and Brazilian Courts

✨ Summary by AI at Octus

Octus’ Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to discuss emerging trends in the bankruptcy world. Our opinions are not necessarily those of Octus as a whole. Today we consider the value of exclusivity in an overleveraged RSA world, the limits of chapter 15 recognition in Delaware (or lack thereof) and conflicting U.S. and Brazilian bankruptcy court decisions in Braskem Idesa.

 

Octus’ Court Opinion Review provides an update on recent noteworthy bankruptcy and creditors’ rights opinions, decisions and issues across courts. We use this space to discuss emerging trends in the bankruptcy world. Our opinions are not necessarily those of Octus as a whole. Today we consider the value of exclusivity in an overleveraged RSA world, the limits of chapter 15 recognition in Delaware (or lack thereof) and conflicting U.S. and Brazilian bankruptcy court decisions in Braskem Idesa.

Let’s Not Be Exclusive

The kerfuffle over exclusivity in the Hughes Satellite Systems freefall got us thinking: Why bother? In the latest episode in our highly intermittent series on Useless Bankruptcy Code Provisions, we turn our attention to section 1121: a vestigial debtor protection from an era when cases dragged on for years before confirmation that has lost a lot of its meaning in the RSA/Prepack-in-Name-Only Era, except as a cudgel for debtors to attack creditor groups who dare suggest alternate paths for a quick restructuring or liquidation early in the proceedings.

Section 1121(b) of the Code provides that “only the debtor may file a plan until after 120 days after the date of the order for relief.” That date is the petition date in voluntary cases. If the debtor files a plan within that period, section 1121(c) provides that only the debtor may solicit acceptances of a plan within the 180 days after the petition date. Finally, section 1121(d) allows the court to shorten or lengthen the plan filing exclusivity period for “cause,” with an 18-month outer limit on plan filing exclusivity inserted by the infamous Bankruptcy Abuse Prevention and Consumer Protection Act of 2005, or BAPCPA.

Section 1121 is one of numerous provisions intended to implement the Code’s biggest change to pre-Code bankruptcy practice: extending the concept of the “debtor-in-possession” (previously limited to small-ish business reorganizations under chapter XI of the Bankruptcy Act) to all business reorganization cases. Under the Act, large, publicly traded businesses had to file under chapter X, which provided for the immediate appointment of a trustee to oversee the process and propose a plan. Big businesses either tried to cram themselves into chapter XI or avoided bankruptcy entirely if they wanted to avoid losing control over their restructuring.

The Code applied the debtor-in-possession concept to all chapter 11 cases, leaving creditors with the burden to prove management should not control the case. In other words: the Code swung the pendulum of control in bankruptcy cases from creditors to debtors, and section 1121 exclusivity was one of the tools by which that goal was achieved.

Congress capped extensions of plan filing exclusivity at 18 months via BAPCPA to nudge the pendulum slightly back toward creditor control. In the 1980s and 1990s, debtor-friendly bankruptcy judges – no, that is not a new phenomenon – got in the habit of rubber-stamping exclusivity extensions forever, allowing debtors to remain in control of the chapter 11 plan process for years until creditors finally gave up and agreed to whatever the debtors proposed.

This was especially useful in cases involving large bodies of smallish nonfinancial creditors, for example, employee unions in airline cases such as Ionosphere Clubs (better known as Eastern Airlines – Ionosphere was the mailbox affiliate used to forum-shop the Miami-based debtors into the Southern District of New York, the Houston Complex Panel of the day). In that case, the debtors took five years to confirm a plan, during which the business deteriorated to the point the company ended up liquidating.

You know where we’re going with this: Nowadays, debtors virtually never take that long to get to confirmation. Cases may drag on for years, but much of that time is dedicated to post-confirmation claims reconciliation and litigation. The form of the restructuring and the final reallocated capital structure is typically established within the first six months, if not on the first day – when the controlling senior secured creditors’ DIP gets approved.

It’s not that debtors have changed. As evidenced by the growing body of liability management exercise litigation case law out there, management still prefers to drag things out for as long as possible, so long as they aren’t paying (and they never do). The difference is that the debtor control of bankruptcy cases made sacred by the Code is a mirage in most big chapter 11s for economic reasons.

Now that virtually every company files with secured debt encumbering virtually all of its assets, favored groups of secured creditors (typically ad hoc groups holding at least two-thirds of senior secured debt) control bankruptcy cases. That’s why LMEs have become such a key issue in chapter 11 – whoever holds the two-thirds majority of senior secured debt required to carry the uppermost impaired class often dictates the restructuring outcome, so rearranging the capital structure to seize or solidify that position is dispositive. See the trial testimony in the Robertshaw/Invesco litigation for a good brief on the value of control over the cases.

Without unencumbered assets to secure third-party DIP financing, debtors are faced with a choice: Either take the DIP and RSA from the existing biggies, effectively surrendering control of the case (the “bankruptcy process sale”) or try a priming fight. Priming fights are as rare as hen’s teeth because without any equity in key assets, proving senior secured creditors are adequately protected is extremely difficult.

Instead, management takes the DIP and RSA (and proposed management incentive plan) and hands the keys to the case – at the very least, the keys to the timing of the case – to the RSA group. See, for example, Brightline Florida: All wrapped up and ready to go, without any delightful section 1163 railroad trustee issues. Booooooooo.

Controlling creditors understandably want to move fast to close their deal. In some ways, that’s good for the debtors – getting out of chapter 11 quickly means slightly less astronomical professional fees and less damage to the business from the stigma of bankruptcy (if you honestly think that still exists) – but it wasn’t what Congress had in mind when enacting section 1121.

Nor did Congress seem to anticipate that mega-case bankruptcy judges would routinely rubber-stamp debtors’ demands for accelerated timelines based on flimsy threats and bluffs from the RSA group. We have repeatedly seen that when bankruptcy judges call the RSA group’s bluff, they relent rather than bailing from their carefully negotiated sweetheart deal – but that happens rarely enough that we basically write up every instance in this column.

This setup is so well established that debtors and RSA groups have taken to manufacturing a controlling senior secured group even in cases where none exists. We’ve spilt plenty of ink on the DISH DBS/DISH Wireless intercompany loan and ensuing litigation over that manufactured creditor position.

The point for today’s business is that debtors no longer use their ostensible control over the chapter 11 process to wage lengthy wars of attrition over every yard of territory and starve creditors out until they surrender. Instead, they fight a proxy war for controlling creditors via blitzkrieg, pushing the RSA deal forward as fast as possible toward an arbitrary target while sidestepping or barreling over issues that should be litigated with appropriate due process before the post-emergence capital structure is set.

In this environment, the debtor exclusivity provisions of section 1121 make little sense. Why bother giving debtors exclusivity so they can control the case when they’ve already ceded control of the case to a group of senior creditors prepetition – maybe even a group of creditors that they made up for the purpose.

The timeframes in the statute are also totally unrealistic. In 18 months – the BAPCPA exclusivity cap – the parties might still be litigating over fraudulent transfers (Sanchez) or a prepetition LME that set up the capital structure for the RSA and plan (Incora/Wesco), but the plan itself will often have been confirmed, gone effective and boxed the dissenting creditors into a recovery months or years earlier. Potentially case-dispositive litigation becomes a mere mopping-up operation, and exclusivity is totally irrelevant.

A look at Octus’ comprehensive database of chapter 11 filings shows that even freefall debtors usually get a plan confirmed in less than 300 days, with typical prenegotiated RSA plans getting confirmed in around 150 or less:
 

We’ve praised judges who pumped the brakes on the blitzkrieg strategy – see, for example, Judge Christopher Lopez in DISH Wireless – but we doubt the hurry-up strategy will give way to the old-fashioned yearslong trench warfare that led to the 18-month exclusivity cap in BAPCPA anytime soon. Everyone is still overlevered, which means the senior secured creditors in charge of the pace of the case will continue to force debtors to go too fast to consider alternatives.

Admittedly, we don’t talk about ballooning professional fees enough in this column. But here we must note: Very few companies can afford the type of fee burn we see in modern, contested chapter 11 practice beyond a year, tops.

Meanwhile, the exclusivity cap has done little to dampen bankruptcy judges’ enthusiasm for debtor control in freefall cases such as Hughes Satellite. The Hughes case is notable precisely because the debtors filed without any sort of plan or RSA (or even DIP financing) in place, even though the ad hoc group of secured noteholders holds all the cards.

Naturally, that means the debtors want to push the timeline out as far into the future as possible, old school. In their Sept. 14 motion to strike the ad hoc noteholder group’s Sept. 10 motion to terminate exclusivity, the Hughes debtors rely heavily on the language and purpose of section 1121, as summarized above. The Code puts bankruptcy in the hands of debtors, the debtors keep saying, even though all they really control, right now, is the ability to prevent the noteholders from proposing their own plan to hurry things along.

(Note: These arguments are pretty rich coming from the same debtors’ counsel that called the, uh, problematic DISH Wireless plan a “prepack” that needed to get on the rocket docket to confirmation thanks to “overwhelming support.” If supposedly “overwhelming” creditor support allows a debtor to go blitzkrieg on a plan, then “overwhelming” creditor opposition should allow blitzkrieg on a competing plan, right? Sauce for the goose, etc.)

In the pre-overleveraged era, exclusivity balanced the debtors’ interest in getting the best possible deal against creditors’ interest in getting paid quickly and getting the company out of bankruptcy court. In the overleveraged era, exclusivity isolates RSA plans from competition and allows debtors without an RSA to ignore the demands of controlling creditors for a voice in the case commensurate with their financial interest.

In other words, exclusivity speeds up cases that need to slow down, and slows down cases that need to speed up. Seems like maybe we need to rebalance the debtor/creditor control calibration first adopted in 1978 and modified in 2005, no? Let’s get more competing plans on file, and earlier in the case.

If the debtors want to confirm a PINO in two months based on an RSA filed with the first day declaration, we should let dissenting creditors try to pitch an alternative immediately. At the very least, the alternative would illuminate the issues for the court and pierce the fog of “business judgment” debtors use to justify giving controlling creditors goodies such as DIP rollups, DIP fees, bogus “backstops” and plan rights offering discounts as unavoidable due to the controlling creditors’ unassailable position.

If the debtors want to ignore the controlling position of a group of lenders and linger in bankruptcy for as long as possible before facing reality, that group should be allowed to make their pitch to end the stalemate and get the company out of chapter 11 faster.

Where’s the harm? “Distraction” for management? Please – the directors and officers are getting handsome KEIPs to work overtime and have the assistance of brilliant advisors to help them out. Confusing smaller creditors? We doubt the trade creditors are paying close attention to exclusivity termination motions. Increased costs? Not if the creditors/putative plan proponents are paying their own freight and the existence of an alternative gets debtors and controlling creditors to negotiate with dissenters on equal footing.

Listen folks: We are NOT talking “our” book here. Arguably the only people who suffer from multiplan cases are bankruptcy clerks and humble Octus employees trying to just keep track of the overwhelming amount of paper piling up on the docket.

And here’s the thing: We don’t need a new bankruptcy statute or amendments to chapter 11 to accomplish this – G-d knows we won’t get that. Bankruptcy judges just need to take a more liberal approach to terminating exclusivity and a less liberal approach to extending it. Simple!

As for the content of the exclusivity termination motion: creditor standing motions always include a draft complaint so the court can determine whether the proposed claims are “colorable,” so why should exclusivity termination requests, merely another way to wrest control from the debtors, not include a term sheet or draft plan? If you’re going to seek termination of exclusivity, you should be forced to put your plan out there, not forced to hide behind some vague boilerplate like “straightforward liquidating plan.”

Note: This is the exact opposite of practice now, where filing a plan as an exhibit opens you up to accusations of (costly) automatic stay violations.

Under our approach, the court is still the gatekeeper – we’re only suggesting that judges make it a tad easier to get into the party. Considering how messy and expensive bankruptcy has become with exclusivity, we can’t see how limiting exclusivity could possibly make things worse?

Bright Lines

The race is back on to crown the Houston Complex Panel of Chapter 15, thanks to a new decision from an unexpected source: Friend of the Show Judge Craig T. Goldblatt in Delaware. On Sept. 23, Judge Goldblatt suggested an extremely lenient standard for recognition of foreign court orders under chapter 15 that tops the offer to prospective debtors from the Southern District of New York. Hmm, maybe competition isn’t always a good thing.

“GovTech” Saas company Thentia’s Canadian receiver sought chapter 15 recognition for the company’s Canadian CCAA proceedings in Delaware on Feb. 17. The next day, Judge Goldblatt granted provisional recognition, with the U.S. Trustee and investors reserving their right to object to final recognition of any final orders from the Canadian court. On March 10, the Delaware judge granted final recognition for the Canadian proceeding on an uncontested basis.

Then, on Aug. 26, the foreign representative sought final recognition of a Canadian court order approving a sale of the debtors’ assets to prepetition/DIP lender Espresso Capital – and the trouble began. On Sept. 9, investor First Ascent objected to recognition of the Canadian sale order’s nonconsensual nondebtor releases of its claims against the former CEO and other targets. Yup: We got another Purdue Pharma vs. chapter 15 situation.

The SDNY gang long ago decided Purdue doesn’t apply in chapter 15 cases – even if the nonconsensual nondebtor releases at issue weren’t included in the foreign court’s order – but the results in Delaware have been more mixed. In his April 2025 Crédito Real decision, Judge Thomas Horan agreed with the SDNY that Purdue doesn’t apply in chapter 15, at least if the foreign court actually approved the nondebtor releases under local law. The district court affirmed and the objectors appealed before settling – robbing the Third Circuit of a chance to chime in.

Meanwhile, Judge Laurie Selber Silverstein pumped the brakes a bit in the Monette Farms case, suggesting that she absolutely will not approve Canadian DIP orders on the first day of a chapter 15. That ruling didn’t relate to the Purdue issue, but we hinted it might give debtors pause before choosing chapter 15 in Delaware over the SDNY.

As we put it, “Why would you take the risk of filing in Delaware and pulling Judge Silverstein or even Judge Goldblatt when you can just venue-shop to the Southern District of New York and get whatever relief you desire, even if that relief is definitively unavailable under chapter 11 and wasn’t even approved by the foreign court?”

About that … Turns out our concerns about Judge Goldblatt’s willingness to brush back aggressive debtors might have been a bit overblown: Judge Goldblatt seems to have decided that virtually anything goes in chapter 15. In his Sept. 23 Thentia ruling, Judge Goldblatt not only approved the Canadian nondebtor releases but also suggested it would take the unearthing of a Jack Bauer-level international conspiracy to justify rejecting a foreign order as manifestly contrary to U.S. public policy under section 1506 of the Code.

First, Purdue: Judge Goldblatt agrees with Judge Horan that although nondebtor releases are not authorized in chapter 11, they are not so repugnant to public policy that a U.S. court cannot approve them in a foreign order under chapter 15. According to the judge, the Purdue issue was “awfully close” and only ended in a 5-4 Supreme Court decision, so declaring nondebtor releases “manifestly contrary” to public policy is a “stretch.”

Sidebar: This is a fun take but one we know every self-respecting Con Law professor … even the ones on TikTok … would take issue with. What if the decision had been 6-3? 7-2? Must a Supreme Court decision unequivocally rejecting something be unanimous to serve as evidence of fundamental U.S. public policy? Guess we’ll have to wait on that. If you can’t tell, we’re a little dubious that the size of the Supreme Court’s majority in a case diminishes the precedential value thereof.

That’s fine, we suppose, considering the SDNY feels the same way. Whatever. But alas, Judge Goldblatt went on, adding that the public policy exception under section 1506 is “narrow.” How narrow, you say? Judge Goldblatt gave an example: He said he would decline to recognize a foreign insolvency court’s approval of a sale of sensitive intelligence to a terrorist organization.

Got that? Feel free to sell trade secrets, patents or customers’ Social Security numbers to the baddies in your CCAA proceeding – just make sure the F-35 blueprints are in that “Excluded Assets” purchase agreement schedule, and you’re good.

After all, the judge explained, chapter 15 is not just about “comity” for foreign courts but also “good manners” and “being polite.” Downright Canadian attitude, that. Are we sure Judge Goldblatt is a local? Check his Netflix queue for Strange Brew, maybe.

Look, 2026 is a strange time. We are not immune to the fact that whenever Canada is mentioned in polite society down here, one must acknowledge their affinity for Canadians and Canadian sovereignty. Just so we are clear: We love Canada, we’ve linked to countless gems of Canadian culture here in the column. The thing is, we didn’t have to change U.S. Bankruptcy Law to show our affection for our northern neighbors.

In time-honored bankruptcy judge tradition, Judge Goldblatt qualified his whopper a bit by insisting denial of recognition under section 1506 might apply to less “extreme” situations than a foreign court order approving a sale of detailed U.S. battle plans to whatever passes as the government of Iran nowadays. Oh, well then. We know dicta when we see it, folks.

The judge probably threw that qualifier out because he realized he had said the quiet part out loud: Delaware is open for whatever chapter 15 business y’all got. We hereby respond to this affront in the sternest way possible: by cutting Judge Goldblatt off our Christmas card list this year. Good luck finding out how our kids are doing in school this year!

Brazil, Nuts

Lest you think all the fun cross-border insolvency hijinks happen in chapter 15, here’s an international chapter 11 whipsaw for you. At about 10 a.m. ET on Sept. 24, Judge Christopher M. Lopez announced that he would confirm the Mexico-based Braskem Idesa debtors’ chapter 11 plan on a largely consensual basis. Nice! About two hours later, a group of dissenting noteholders filed a letter indicating that a Brazilian insolvency court entered an order prohibiting Brazilian parent Braskem SA from undertaking its obligations under the confirmed plan. Bummer.

Mexico City-based petrochemical manufacturer Braskem Idesa filed chapter 11 on Aug. 17 with a prepackaged plan supported by holders of approximately 79% of the debtors’ prepetition secured debt obligations. The proposed plan would equitize more than $1 billion, including $825 million in prepetition senior secured notes. Braskem SA would extend $486 million in DIP financing, and existing equity would be divided equally among Braskem SA, secured noteholders and existing shareholders. Third-party general unsecured claims would be unimpaired.

Everything seemed groovy, with only the UST lobbing in its now-traditional objection to the plan’s opt-out nondebtor releases under Purdue – basically, the modern chapter 11 equivalent of Red Auerbach lighting his victory cigar. The official committee of unsecured creditors met and promptly quit – another good sign! Judge Lopez granted final approval of the Braskem SA DIP on Sept. 21. Now this is a prepack.

Alas: on Sept. 23, the dissident Braskem SA noteholder group filed a letter disclosing a Sept. 21 emergency motion asking the Brazilian bankruptcy court to enjoin the Brazilian debtors, Braskem SA and Braskem Netherlands from taking part in the Braskem Idesa plan transaction. According to the SA noteholders, the proposed transaction “may improperly divert significant value” from Braskem SA creditors in the form of $800 million in support for Braskem Idesa, including the DIP.

The dissenting noteholders also maintain the debtors “failed to disclose key information” regarding the transaction, including “the economic rationale” for Braskem SA’s contributions under plan. According to the dissenting noteholders, on Sept. 22 a Brazilian public prosecutor (hey, the UST is technically part of the Department of Justice!) issued an opinion recommending that the Brazilian court grant the injunction.

The Braskem Idesa confirmation hearing went forward on Sept. 24, and Judge Lopez duly overruled the UST’s objection to the opt-out nondebtor releases and confirmed the plan. Then the dissident group filed the letter indicating that the Brazilian court granted the requested injunction and asking Judge Lopez not to sign the confirmation order until the parties can determine “whether the Plan remains feasible given Braskem’s inability to comply with its obligations thereunder.”

Spoiler alert: it ain’t feasible. Without the funds from Braskem SA, the reorganization contemplated by the plan appears dead in the water. The Brazilian court specifically ordered Braskem SA and Braskem Netherlands “to stop new DIP disbursements, transfers of funds or assets, contributions to Braskem Idesa’s exit financing, new or expanded guarantees, and commitments tied to options on Braskem Idesa shares.”

The Brazilian court gave Braskem SA and Braskem Netherlands 15 days to “file a detailed report and supporting documents on the Braskem Idesa transaction’s funding, expected returns and effects on the Brazilian restructuring,” with creditors entitled to respond within 15 days of the report. Translation: this could go on for a while. Another PINO!

Did that prevent Judge Lopez from entering the confirmation order anyway? Not at all. Maybe Judge Lopez needs some lessons from Judge Goldblatt on comity, “good manners” and “being polite” to foreign courts? Not that we wouldn’t have done the same: the parties can work out whether the plan can actually go effective after it is confirmed. Plus, it’s more fun to have a standoff between a plan actually confirmed by a U.S. court and an injunction from a Brazilian court preventing the plan from being consummated.

Later on Sept. 24, the debtors issued a statement indicating they intend to “move with all due deliberation toward consummation of the transactions contemplated” under the plan notwithstanding the Brazilian order. According to the debtors, the Brazilian order “is clear that its purpose is not to interfere with the Debtors’ restructuring, the Chapter 11 Cases, or the consummation of the Plan.” Maybe it’s a translation issue?

This is your warning, folks: be very careful before changing your LinkedIn profile to “Cross-Border Insolvency Expert.” This stuff is not for the faint of heart – even if you’re in chapter 11 instead of chapter 15.