United States: Chapter 15: An Effective Aid To Foreign Administrators And Creditors For Collecting And Liquidating Assets In The U.S.

In these days of continued integration of the world economy, it is not unusual for a foreign-based business enterprise to own assets of substantial value in the United States either directly or through an affiliate. If the foreign enterprise commences an insolvency proceeding in its home country, there is substantial risk that local American creditors of the insolvent company may seek to attach these assets to satisfy their own claims to the prejudice of non-U.S. creditors. In these circumstances, foreign creditors are well-advised to approach the insolvency administrator or other representative of the foreign debtor and urge him or her to commence a case in the United States under Chapter 15 of the United States Bankruptcy Code to shield these assets from local creditor collection and foreclosure actions and preserve the value of these assets for all creditors of the foreign debtor.

It is not unusual for an administrator or trustee appointed in a foreign insolvency proceeding to be charged by the supervising foreign court with the responsibility of collecting and administering assets located in the United States. Prior to 2005, a foreign administrator could petition a United States bankruptcy court to commence a "case ancillary to a foreign proceeding" under former section 304 of the United States Bankruptcy Code (the "Code"). This provision was enacted by Congress in 1978 as part of the Bankruptcy Reform Act of that year when economic globalization was in its infancy. This provision also granted American bankruptcy courts significant discretion to either accept a foreign administrator's petition to commence an ancillary case or to deny it altogether and many of these petitions were dismissed on various grounds. Dismissal of these petitions not only hamstrung foreign administrators in performing their duties to creditors but also injured those creditors, especially those holding liens in the American assets, by inhibiting (and sometimes prohibiting) them from sharing in these potential sources of recoveries.

Cooperation and Legal Certainty

In 2005, the United States Congress enacted the Bankruptcy Abuse Prevention and Consumer Protection Act which, among other things, adopted with certain language changes the Model Law on Cross Border Insolvency approved by the United Nations General Assembly in 1997 (the "Model Law"). The Model Law has been incorporated into Chapter 15 of the Code and its statutory purpose is to provide "effective mechanisms for dealing with cases of cross-border insolvency." The goals of Chapter 15 are expressed in sections 1501(a)(1)—(5) of the Code as follows: 

  • to encourage cooperation between (i) the courts of the United States and its court officers (e.g., trustees and debtors in possession); and (ii) the courts and those officers of foreign countries involved in cross-border insolvency cases;
  • to insure "greater legal certainty for trade and investment;"
  • to provide for the "fair and efficient administration" of cross-border insolvency cases which will, in turn, protect the interests of all creditors and the debtor;
  • to protect and maximize the value of the debtor's assets; and
  • to facilitate the rescue of financially troubled businesses, which will protect investments and preserve employment.

Chapter 15 of the Code permits a "foreign representative" appointed in a foreign insolvency proceeding to file a petition for the opening of a Chapter 15 case with a United States bankruptcy court that has proper venue for that proceeding as determined under 28 U.S.C. § 1410. In order for a foreign representative to prevail on his or her petition to open a Chapter 15 case, the bankruptcy court must make the following determinations:

  • the foreign proceeding in which the foreign representative was appointed must be either a "foreign main proceeding" or a "foreign nonmain proceeding" as described in section 1502 of the Code.
  • the foreign proceeding must be a "collective judicial or administrative proceeding" pending in a foreign country under laws relating to the insolvency or debt adjustment and in which proceeding the debtor's assets and affairs "are subject to the control or supervision of a foreign court, for the purpose of reorganization or liquidation." 11 U.S.C. § 101(23). A critical requirement here is that the foreign proceeding must be "collective," meaning that the proceeding must consider the rights and obligations of all of the foreign debtor's creditors and not just one or a small group of creditors. American courts have held, however, that the foreign proceeding need not be one that is identical to a regular bankruptcy case commenced under the Code. See, e.g., In re Schimmelpenninck, 183 F.3d 347, 353 (5th Cir. 1990).

These provisions of Chapter 15 of the Code were crafted to replace the discretionary test under now-repealed section 304 of the Code with an objective and mechanical test. According to one bankruptcy court applying these new principles of recognition, "the ability to provide relief to foreign petitioners [under former section 304] was largely discretionary, based on subjective factors and comity. However, with the advent of Chapter 15, courts have been divested of much of this discretion and are now directed by objective statutory guidelines." Lavine v. Ran, 406 B.R. 277, 282 (S.D. Tex. 2009), aff'd, 2010 U.S. App. LEXIS 10882 (5th Cir. May 27, 2010). One statutory exception to granting recognition under Chapter 15 is when that action "would be manifestly contrary to the public policy of the United States." 11 U.S.C. § 1506. However, American bankruptcy courts have generally construed this public policy exception narrowly, applying it only when the proposed action sought to be prohibited would violate the "most fundamental policies of the United States." See, e.g., In re SPhinX, Ltd., 351 B.R. 103, 115 n. 15 (Bankr. S.D.N.Y. 2006).

Broad Scope of Relief

Once an American bankruptcy court recognizes a foreign main proceeding, the foreign representative is immediately granted a broad scope of relief under Chapter 15, including the application of the automatic stay to prohibit creditors from levying, executing upon, or otherwise enforcing claims against or rights in the debtor's assets. Other relief includes authorizing the foreign representative to operate the debtor's business in the United States. 11 U.S.C. § 1520. If the court recognizes the foreign proceeding as a nonmain proceeding, the bankruptcy court may enter an order staying identified creditors from seeking to realize upon the debtor's assets in the United States and an order entrusting the administration of the debtor's U.S. assets to the foreign representative. 11 U.S.C. § 1521. The court may also grant certain interim relief for the benefit of the foreign representative upon filing a Chapter 15 petition for recognition, which relief may include staying execution against the debtor's assets and entrusting the administration of those assets to the foreign representative to preserve and protect those assets pending a ruling on the petition. 11 U.S.C. § 1519.

Once a petition for recognition of a foreign main proceeding is granted, the foreign representative may commence a voluntary bankruptcy proceeding in the United States for a subsidiary or other affiliate of the foreign debtor. 11 U.S.C. § 1511(a)(2). If the petition for recognition is granted with respect to a foreign nonmain proceeding, then the foreign representative may file an involuntary bankruptcy petition in the United States against a subsidiary or other affiliate of the foreign debtor. 11 U.S.C. § 1511(a)(1). If such voluntary or involuntary bankruptcy petition is filed by the foreign representative, the automatic stay of section 362 of the Code will immediately apply to enjoin creditors from taking any collection or foreclosure actions against these debtors or their property.

In summary, Chapter 15 is designed to accomplish an overriding purpose: to preserve and protect assets of a foreign debtor located in the United States so that all creditors of that debtor may share in their value – and not just local American creditors who move quickly against those assets to satisfy their parochial claims. Foreign creditors should be vigilant and proactive by persuading foreign representatives to file Chapter 15 petitions in the United States promptly to increase the creditors' ultimate recoveries.

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.

To print this article, all you need is to be registered on Mondaq.com.

Click to Login as an existing user or Register so you can print this article.

Authors
Similar Articles
Relevancy Powered by MondaqAI
 
In association with
Related Topics
 
Similar Articles
Relevancy Powered by MondaqAI
Related Articles
 
Related Video
Up-coming Events Search
Tools
Print
Font Size:
Translation
Channels
Mondaq on Twitter
 
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
 
Email Address
Company Name
Password
Confirm Password
Position
Mondaq Topics -- Select your Interests
 Accounting
 Anti-trust
 Commercial
 Compliance
 Consumer
 Criminal
 Employment
 Energy
 Environment
 Family
 Finance
 Government
 Healthcare
 Immigration
 Insolvency
 Insurance
 International
 IP
 Law Performance
 Law Practice
 Litigation
 Media & IT
 Privacy
 Real Estate
 Strategy
 Tax
 Technology
 Transport
 Wealth Mgt
Regions
Africa
Asia
Asia Pacific
Australasia
Canada
Caribbean
Europe
European Union
Latin America
Middle East
U.K.
United States
Worldwide Updates
Registration (you must scroll down to set your data preferences)

Mondaq Ltd requires you to register and provide information that personally identifies you, including your content preferences, for three primary purposes (full details of Mondaq’s use of your personal data can be found in our Privacy and Cookies Notice):

  • To allow you to personalize the Mondaq websites you are visiting to show content ("Content") relevant to your interests.
  • To enable features such as password reminder, news alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our content providers ("Contributors") who contribute Content for free for your use.

Mondaq hopes that our registered users will support us in maintaining our free to view business model by consenting to our use of your personal data as described below.

Mondaq has a "free to view" business model. Our services are paid for by Contributors in exchange for Mondaq providing them with access to information about who accesses their content. Once personal data is transferred to our Contributors they become a data controller of this personal data. They use it to measure the response that their articles are receiving, as a form of market research. They may also use it to provide Mondaq users with information about their products and services.

Details of each Contributor to which your personal data will be transferred is clearly stated within the Content that you access. For full details of how this Contributor will use your personal data, you should review the Contributor’s own Privacy Notice.

Please indicate your preference below:

Yes, I am happy to support Mondaq in maintaining its free to view business model by agreeing to allow Mondaq to share my personal data with Contributors whose Content I access
No, I do not want Mondaq to share my personal data with Contributors

Also please let us know whether you are happy to receive communications promoting products and services offered by Mondaq:

Yes, I am happy to received promotional communications from Mondaq
No, please do not send me promotional communications from Mondaq
Terms & Conditions

Mondaq.com (the Website) is owned and managed by Mondaq Ltd (Mondaq). Mondaq grants you a non-exclusive, revocable licence to access the Website and associated services, such as the Mondaq News Alerts (Services), subject to and in consideration of your compliance with the following terms and conditions of use (Terms). Your use of the Website and/or Services constitutes your agreement to the Terms. Mondaq may terminate your use of the Website and Services if you are in breach of these Terms or if Mondaq decides to terminate the licence granted hereunder for any reason whatsoever.

Use of www.mondaq.com

To Use Mondaq.com you must be: eighteen (18) years old or over; legally capable of entering into binding contracts; and not in any way prohibited by the applicable law to enter into these Terms in the jurisdiction which you are currently located.

You may use the Website as an unregistered user, however, you are required to register as a user if you wish to read the full text of the Content or to receive the Services.

You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these Terms or with the prior written consent of Mondaq. You may not use electronic or other means to extract details or information from the Content. Nor shall you extract information about users or Contributors in order to offer them any services or products.

In your use of the Website and/or Services you shall: comply with all applicable laws, regulations, directives and legislations which apply to your Use of the Website and/or Services in whatever country you are physically located including without limitation any and all consumer law, export control laws and regulations; provide to us true, correct and accurate information and promptly inform us in the event that any information that you have provided to us changes or becomes inaccurate; notify Mondaq immediately of any circumstances where you have reason to believe that any Intellectual Property Rights or any other rights of any third party may have been infringed; co-operate with reasonable security or other checks or requests for information made by Mondaq from time to time; and at all times be fully liable for the breach of any of these Terms by a third party using your login details to access the Website and/or Services

however, you shall not: do anything likely to impair, interfere with or damage or cause harm or distress to any persons, or the network; do anything that will infringe any Intellectual Property Rights or other rights of Mondaq or any third party; or use the Website, Services and/or Content otherwise than in accordance with these Terms; use any trade marks or service marks of Mondaq or the Contributors, or do anything which may be seen to take unfair advantage of the reputation and goodwill of Mondaq or the Contributors, or the Website, Services and/or Content.

Mondaq reserves the right, in its sole discretion, to take any action that it deems necessary and appropriate in the event it considers that there is a breach or threatened breach of the Terms.

Mondaq’s Rights and Obligations

Unless otherwise expressly set out to the contrary, nothing in these Terms shall serve to transfer from Mondaq to you, any Intellectual Property Rights owned by and/or licensed to Mondaq and all rights, title and interest in and to such Intellectual Property Rights will remain exclusively with Mondaq and/or its licensors.

Mondaq shall use its reasonable endeavours to make the Website and Services available to you at all times, but we cannot guarantee an uninterrupted and fault free service.

Mondaq reserves the right to make changes to the services and/or the Website or part thereof, from time to time, and we may add, remove, modify and/or vary any elements of features and functionalities of the Website or the services.

Mondaq also reserves the right from time to time to monitor your Use of the Website and/or services.

Disclaimer

The Content is general information only. It is not intended to constitute legal advice or seek to be the complete and comprehensive statement of the law, nor is it intended to address your specific requirements or provide advice on which reliance should be placed. Mondaq and/or its Contributors and other suppliers make no representations about the suitability of the information contained in the Content for any purpose. All Content provided "as is" without warranty of any kind. Mondaq and/or its Contributors and other suppliers hereby exclude and disclaim all representations, warranties or guarantees with regard to the Content, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. To the maximum extent permitted by law, Mondaq expressly excludes all representations, warranties, obligations, and liabilities arising out of or in connection with all Content. In no event shall Mondaq and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use of the Content or performance of Mondaq’s Services.

General

Mondaq may alter or amend these Terms by amending them on the Website. By continuing to Use the Services and/or the Website after such amendment, you will be deemed to have accepted any amendment to these Terms.

These Terms shall be governed by and construed in accordance with the laws of England and Wales and you irrevocably submit to the exclusive jurisdiction of the courts of England and Wales to settle any dispute which may arise out of or in connection with these Terms. If you live outside the United Kingdom, English law shall apply only to the extent that English law shall not deprive you of any legal protection accorded in accordance with the law of the place where you are habitually resident ("Local Law"). In the event English law deprives you of any legal protection which is accorded to you under Local Law, then these terms shall be governed by Local Law and any dispute or claim arising out of or in connection with these Terms shall be subject to the non-exclusive jurisdiction of the courts where you are habitually resident.

You may print and keep a copy of these Terms, which form the entire agreement between you and Mondaq and supersede any other communications or advertising in respect of the Service and/or the Website.

No delay in exercising or non-exercise by you and/or Mondaq of any of its rights under or in connection with these Terms shall operate as a waiver or release of each of your or Mondaq’s right. Rather, any such waiver or release must be specifically granted in writing signed by the party granting it.

If any part of these Terms is held unenforceable, that part shall be enforced to the maximum extent permissible so as to give effect to the intent of the parties, and the Terms shall continue in full force and effect.

Mondaq shall not incur any liability to you on account of any loss or damage resulting from any delay or failure to perform all or any part of these Terms if such delay or failure is caused, in whole or in part, by events, occurrences, or causes beyond the control of Mondaq. Such events, occurrences or causes will include, without limitation, acts of God, strikes, lockouts, server and network failure, riots, acts of war, earthquakes, fire and explosions.

By clicking Register you state you have read and agree to our Terms and Conditions