United States: Proposed Amendments To Chapter 15 Of The Bankruptcy Code

Last Updated: December 27 2018
Article by Mark G. Douglas

On August 20, 2018, the National Bankruptcy Conference (the "NBC") submitted a letter (the "Letter") to representatives of the House Subcommittee on Regulatory Reform and the House Committee on the Judiciary that proposed certain technical and substantive amendments to chapter 15 of the Bankruptcy Code. Chapter 15, which is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), was enacted in 2005 and establishes procedures governing cross-border bankruptcy and insolvency proceedings. To date, the Model Law has been enacted by the U.S. and 44 countries, plus two overseas territories of the United Kingdom.

The NBC is a voluntary, nonpartisan, not-for-profit organization composed of approximately 60 of the nation's leading bankruptcy judges, professors, and practitioners. It has provided advice to Congress on bankruptcy legislation for 80 years. The full text of the Letter is available here. Certain of the proposed amendments are summarized below.

Applicability of Chapters. Section 103(a) of the Bankruptcy Code provides that chapters 1, 3, and 5 apply in chapter 7, 11, 12, and 13 cases and that chapter 1 and certain specified provisions of chapters 3 and 5 apply in chapter 15 cases. The Letter recommends that the list of provisions applicable to chapter 15 cases be expanded to more specifically include sections 305 (abstention); 306 (limited appearance); and 556, 560, 561, and 562 (safe harbors for and timing of measure of damages under commodities contracts, forward contracts, swap agreements, and master netting agreements) to avoid the possibility that, under the "plain meaning" approach, these provisions might be held to be inapplicable to chapter 15 cases.

Section 103(k) limits the applicability of the provisions of chapter 15 to chapter 15 cases, with the exception of sections 1505 (court may authorize trustee to act on behalf of bankruptcy estate in foreign country), 1513 (giving foreign creditors access to a U.S. bankruptcy case), and 1514 (foreign creditor notification requirements), which apply in all bankruptcy cases, and section 1509 (foreign representatives' right to access U.S. courts), which applies whether or not a case under any chapter is pending.

The Letter recommends that the list of provisions applicable in all cases be expanded to include sections 1511 (authorizing foreign representative to commence case under another chapter after chapter 15 recognition), 1523 (giving foreign representative trustee's avoidance and strong-arm powers in case filed under another chapter), 1531 (creating presumption that foreign debtor is insolvent for purposes of involuntary bankruptcy filing), and 1532 (prohibiting double payments on same claim in concurrent U.S. and non-U.S. bankruptcy cases).

The Letter also recommends that the list of provisions applicable whether or not a U.S. bankruptcy case is pending be augmented to include section 1510, which provides that a foreign representative's filing of a chapter 15 petition for recognition does not subject the foreign representative to the jurisdiction of any U.S. court for any other purpose.

Eligibility for Chapter 15 Filing. Section 109(a) of the Bankruptcy Code provides that "[n]otwithstanding any other provision of this section, 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." Even though section 1517 sets forth the requirements for recognition of a foreign bankruptcy proceeding under chapter 15, some courts have held that section 109(a) must also be satisfied for a foreign debtor to be eligible for chapter 15 relief. The NBC has taken the position that this is incorrect and recommends in the Letter that section 109(a) be amended to provide that it "does not apply in a case under chapter 15."

Involuntary Bankruptcy Filing by Foreign Representative. The Letter recommends that section 303(b)(4) of the Bankruptcy Code be amended to eliminate a drafting inconsistency created by the 2005 amendments by clarifying that, upon recognition of a foreign proceeding under chapter 15 and consistent with section 1511, a foreign representative may file an involuntary chapter 7 or chapter 11 case against an eligible debtor.

Abstention and Dismissal. Section 305 of the Bankruptcy Code provides that a foreign representative may seek dismissal or suspension of a recognized foreign proceeding if "the purposes of chapter 15 . . . would be best served by" dismissal or suspension. The Letter proposes that "there should be a clear statutory basis for the dismissal of cases involving debtors whose center of main interests [("COMI")] is outside of the United States when those cases either conflict with the purposes of chapter 15 or involve a debtor or assets over which the court does not have effective control." The Letter accordingly recommends that section 305(a) be revised to include a new subsection, which would state: "[T]he debtor's center of main interests is not the United States and the court cannot exercise effective control over either the debtor or the debtor's material assets."

Limited Appearance. Section 306 of the Bankruptcy Code provides that a foreign representative's appearance in a U.S. bankruptcy court in connection with a petition or request under section 303 (involuntary bankruptcy filing) or section 305 (abstention or dismissal) does not subject the foreign representative to a U.S. court's jurisdiction for any other purpose. The Letter recommends that the provision be amended to include sections 301 (voluntary bankruptcy filing) and 302 (joint bankruptcy filings).

Date for Determining Center of Main Interests. A growing number of court decisions have determined that a foreign debtor's COMI should be determined as of the date of the filing of its chapter 15 petition for recognition in the U.S. rather than the date upon which its foreign proceeding was commenced. The NBC takes the position that this is contrary to the Model Law and a recent revision to the Model Law's Guide to Enactment, both of which measure COMI as of the date of the commencement of the foreign proceeding. The Letter accordingly recommends that sections 1502(a)(4) and (5) and 1517(b) be amended to provide that COMI is to be determined as of the date of commencement of the debtor's foreign proceeding. If adopted, such a change would likely impede the ability of foreign provisional liquidators to effectuate "COMI shifting" or "COMI migration."

Venue of Cases Commenced Under Other Chapters. The Letter recommends that section 1511 of the Bankruptcy Code and 28 U.S.C. § 1408 (specifying venue requirements for bankruptcy cases) be amended to provide that, upon recognition of a foreign proceeding under chapter 15, the foreign representative may commence an involuntary case under chapter 303 or a voluntary case under section 301 or 302 in the court presiding over the foreign debtor's chapter 15 case.

Abstention. Certain courts have held that section 305 of the Bankruptcy Code (providing that a bankruptcy court may dismiss or suspend proceedings in a chapter 15 case if doing so best serves the purposes of chapter 15) does not apply in chapter 15 cases because it conflicts with 28 U.S.C. § 1334(c), which excepts from a U.S. federal court's permissive abstention powers "a case under chapter 15." The NBC takes the position that this was not the intent of the drafters of chapter 15. The Letter accordingly recommends that 28 U.S.C. § 1334(c) be amended to limit the provision "to its original narrowly intended purpose of assuring that chapter 15 petitions, as applications for recognition, must be heard and granted or denied" and to clarify that the provision was not intended to prevent abstention from proceedings "arising in" or "arising under" chapter 15 cases.

Avoidance of Transfers and Recovery of Property. Due to drafting oversights, the Letter recommends that, consistent with the Model Law:

  • Section 1520 be amended to clarify that, upon recognition of a foreign main proceeding: (i) section 552 (limiting the postpetition effect of security interests) automatically applies; (ii) the debtor may not transfer, encumber, or otherwise dispose of its U.S. assets; (iii) section 363 (governing the use, sale, or lease of the debtor's property) automatically applies to transfers of the debtor's U.S. assets by the foreign representative; and (iv) unless the court orders otherwise, the foreign representative may operate the debtor's business and exercise the rights and powers of a trustee under sections 363 and 553 (governing setoff).
  • Section 1521 be amended to clarify that, upon recognition of a foreign main or nonmain proceeding, the bankruptcy court has the discretion to authorize the foreign representative to recover transfers under section 550 in enforcing section 549 (prohibiting unauthorized postpetition transfers) or section 553 (setoffs).
  • The definition of "foreign representative" in section 101(24) be amended to provide that the foreign representative acts as a "trustee" in exercising avoidance or recovery powers under chapter 15.
  • Section 1523 be amended to clarify that the look-back period for avoidance proceedings brought under U.S. law by or on behalf of a foreign representative should be measured from the date of the filing of the foreign proceeding.

These proposed changes, some of which are controversial, are also being studied by other bankruptcy-related organizations, including the International Insolvency Institute and the American College of Bankruptcy.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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