The Great Euro Siphoning Stratagem: In re Hellas Telecommunications (Luxembourg) II SCA
By: Peter Collorafi
St. John’s Law Student
American Bankruptcy Institute Law Review Staff
In August 2015, the United States Bankruptcy Court for the Southern District of New York determined, inter alia, that the Joint Compulsory Liquidators for Hellas Telecommunications (Luxembourg) II SCA (“Hellas II”) could amend their original complaint to include a foreign fraudulent transfer claim under Section 423 of the United Kingdom Insolvency Act of 1986 (“Section 423”) against certain United States defendants. The plaintiffs filed their initial complaint seeking to avoid and recover an initial transfer of approximately €1.57 billion made by Hellas II to its parent entity and a subsequent series of transfers totaling €973.7 million made to several named defendants and an unnamed class of transferees.2 The plaintiffs’ initial complaint contained actual and constructive fraudulent transfer claims under New York law in addition to an unjust enrichment claim under unspecified law.3 The court dismissed the plaintiffs’ New York law fraudulent transfer claims for lack of standing and, consequently, the plaintiffs sought to amend their complaint.4
Central to the plaintiffs’ amended complaint was a new fraudulent transfer claim under Section 423.5 In response to the motion to amend the complaint, the defendants argued that the plaintiffs should not be permitted to purse Section 423 claim in the United States because only a court in the United Kingdom may properly issue orders under Section 423.6 In support of their position, the defendants cited a case from the United States District Court for the Northern District of California where the court had previously determined that subsection four of Section 423 authorizes the High Court of England and Wales as the only court to issue orders under Section 423.7 However, the Hellas Court noted that when adjudicating claims made under United Kingdom law, federal courts are bound by federal procedural law and not foreign law to determine whether jurisdiction is proper.8 The bankruptcy court found it had non-exclusive original jurisdiction over cases arising under the Bankruptcy Code.9 A case under the Bankruptcy Code would include the instant chapter 15 case, thus making subject matter jurisdiction proper in the instant matter.10 Additionally, the court found venue was proper under 28 U.S.C. Section 1410, which governs chapter 15 cases brought ancillary to foreign proceedings.11 In particular, the Southern District of New York was the proper venue for the instant proceeding because that district is where Hellas II’s (the entity for whom the plaintiffs serve as joint liquidators) chapter 15 case is pending.12 The court found that Section 423(4) was merely a procedural provision governing which venue is proper when a Section 423 claim is brought in the United Kingdom, a question that defendants’ supporting case law from 2008 had not addressed.13 Ultimately, the court rejected the defendant’s claim that suits under section 423 could only be entertained by courts in the United Kingdom.14
In re Hellas Telecommunications (Luxembourg) II SCA reflected the importance and influence that chapter 15 cases exert on the global economy.15 Chapter 15, enacted 10 years ago, allows foreign representatives to apply to federal bankruptcy courts for relief ancillary to foreign proceedings.16 Indeed, in this instance, the foreign representatives were seemingly being allowed to pursue claims ordinarily entertained by foreign courts in the United States.17 Such authority to pursue foreign claims in the U.S. allows the bankruptcy court to entertain a matter, which offers a fascinating window into how private equity firms run and operate.18 The financial transfers at issue involved a unique type of securities called convertible preferred equity certificates (“CPEC’s”) that were used by the private equity defendants.19 Hellas II issued the securities to the defendants and were later redeemed by the defendants at over thirty-five times the securities’ par value.20 The crucial issue that will develop as the case progresses through the courts is how this valuation, made by a board comprised mostly of defendants’ representatives, was achieved.21 The case has attracted a fair degree of international attention, as authorities in Greece and Luxembourg, where Hellas II was headquartered and organized, respectively, are investigating whether the financial transfers at issue violated any laws in those jurisdictions and whether the defendants failed to pay any relevant taxes in those jurisdictions regarding the disputed transfers.22
1 Hosking v. TPG Capital Mgmt., L.P. (In re Hellas Telecomms. (Luxembourg) II SCA), 535 B.R. 543 (Bankr. S.D.N.Y. 2015).
2 Id. at 550, 553, 594–95.
3 Id. at 550–51.
6 Id. at 552, 562.
7 Id. at 564.
8 Id. (discussing defendants’ reliance on Sunnyside Development Company LLC v. Cambridge Display Technology Limited, 2008 U.S. Dist. LEXIS 74850 (N.D. Cal. Sept. 29, 2008)).
9 Id. at 566; see generally 28 U.S.C. § 1334(b) (2012) (granting Court non-exclusive original jurisdiction over civil cases (such as instant chapter 15 case) arising under United States Bankruptcy Code).
10 See In re Hellas Telecomms. (Lux) II SCA, at 566; see generally 11 U.S.C. §§ 1501–32 (2012).
11 See In re Hellas Telecomms. (Lux) II SCA, at 566.
13 Id. at 565–66.
14 See id.
15 See id.
16 United States v. J.A. Jones Constr. Group, LLC, 333 B.R. 637, 638–39 (Bankr. E.D.N.Y. 2005). (elaborating on the nature of then-recently enacted chapter 15).
17 Id.; In re Hellas Telecomms. (Lux) II SCA, at 566.
18 J.A. Jones Constr. Group, LLC, at 638–39; In re Hellas Telecomms. (Lux) II SCA, at 566; Gretchen Morgenson, Judge’s Ruling Offers Peek Into Private Equity’s Secret World, NY Times (September 4, 2015) http://nyti.ms/1KPSctj (discussing business activities of private equity defendants in instant case).
19 Gretchen Morgenson, Judge’s Ruling Offers Peek Into Private Equity’s Secret World, NY Times (September 4, 2015).