In cases under both chapter 15 of the Bankruptcy Code and its repealed predecessor, section 304, U.S. bankruptcy courts have routinely recognized and enforced orders of foreign bankruptcy and insolvency courts as a matter of international comity. However, U.S. bankruptcy courts sometimes disagree over the precise statutory authority for granting such relief, because the provisions of chapter 15 are not particularly clear on this point in all cases.
This question was recently examined by the U.S. Bankruptcy Court for the Northern District of Illinois in In re Condor Flugdienst GMBH, 2021 WL 1166016 (Bankr. N.D. Ill. Mar. 26, 2021). The court ruled that, if requested relief is not specifically authorized under chapter 15, a U.S. bankruptcy court still has the discretion to grant such relief provided it would have been authorized in a cross-border "ancillary" bankruptcy proceeding under section 304. In this case, the court held that it was expressly authorized under section 1521 of the Bankruptcy Code, as guided by section 1522, to recognize and enforce a foreign court order confirming a German debtor's liquidation plan. The court also permanently enjoined prepetition litigation commenced by certain creditors because such relief was necessary to effectuate the liquidation plan.
Comity and Cross-Border Bankruptcy Cases
Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency ("Model Law"), which has been enacted in some form by more than 50 countries.
Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895). Chapter 15's stated purpose is "to provide effective mechanisms for dealing with cases of cross-border insolvency" with the objective of, among other things, cooperation between U.S. and non-U.S. courts.
Chapter 15 replaced section 304 of the Bankruptcy Code. Section 304 allowed an accredited representative of a debtor in a foreign insolvency proceeding to commence a limited "ancillary" bankruptcy case in the United States for the purpose of enjoining actions against the foreign debtor or its assets located in the United States or, in some cases, repatriating such assets or their proceeds abroad for administration in the debtor's foreign bankruptcy.
The policy behind section 304 was to provide any assistance necessary to ensure the economic and expeditious administration of foreign insolvency proceedings. In deciding whether to grant injunctive, turnover, or other appropriate relief under former section 304, a U.S. bankruptcy court had to consider "what will best assure an economical and expeditious administration" of the foreign debtor's estate, consistent with a number of factors, including comity. See 11 U.S.C. § 304(c) (repealed 2005) (listing factors that are now included in section 1507(b) as a condition to the court's decision to grant "additional assistance, consistent with the principles of comity," under chapter 15 or other U.S. law); In re Treco, 240 F.3d 148, 156 (2d Cir. 2001) (noting that "comity [was] the ultimate consideration in determining whether to provide relief under § 304").
To promote comity and cooperation among courts presiding over cross-border bankruptcies, chapter 15 of the Bankruptcy Code provides that "the court shall cooperate to the maximum extent possible with a foreign court or a foreign representative." 11 U.S.C. § 1525(a). Section 1527 specifies "Forms of cooperation," including, but not limited to: (i) the appointment of a person or entity to act at the court's direction; (ii) the communication of information by any appropriate means; (iii) coordination of the administration of the debtor's assets and affairs; (iv) implementation of agreements concerning the coordination of proceedings; and (v) coordination of concurrent proceedings involving the same debtor.
Procedures, Recognition, and Relief Under Chapter 15
Under section 1515 of the Bankruptcy Code, the representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."
"Foreign proceeding" is defined in section 101(23) of the Bankruptcy Code as:
[A] collective judicial or administrative proceeding in a foreign country, including an interim proceeding, under a law relating to insolvency or adjustment of debt in which proceeding the assets and affairs of the debtor are subject to control or supervision by a foreign court, for the purpose of reorganization or liquidation.
More than one bankruptcy or insolvency proceeding may be pending with respect to the same foreign debtor in different countries. Chapter 15 therefore contemplates recognition in the United States of both a foreign "main" proceeding-a case pending in the country where the debtor's center of main interests ("COMI") is located (see 11 U.S.C. § 1502(4))-and foreign "nonmain" proceedings, which may be pending in countries where the debtor merely has an "establishment" (see 11 U.S.C. § 1502(5)). A debtor's COMI is presumed to be the location of the debtor's registered office or habitual residence, in the case of an individual. See 11 U.S.C. § 1516(c). An establishment is defined by section 1502(2) as "any place of operations where the debtor carries out a nontransitory economic activity."
Pending its decision on a petition for recognition, the bankruptcy court is empowered to grant certain kinds of provisional relief. Section 1519(a) authorizes the court, "where relief is urgently needed to protect the assets of the debtor or the interests of the creditors," to stay any execution against the debtor's assets, entrust the administration of the debtor's assets to a foreign representative, or suspend the right to transfer, encumber, or otherwise dispose of any of the debtor's assets. Any provisional relief granted pending approval of a request for recognition terminates at such time that the bankruptcy court rules on the request, unless the court expressly orders otherwise.
Upon recognition of a foreign "main" proceeding, section 1520 of the Bankruptcy Code provides that certain provisions of the Bankruptcy Code automatically come into force, including: (i) the automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets (section 362, subject to certain enumerated exceptions); (ii) the right of any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest (section 361); and (iii) restrictions on use, sale, lease, transfer, or encumbrance of the debtor's U.S. assets (sections 363, 549, and 552).
Following recognition of a main or nonmain proceeding, section 1521(a) provides that, to the extent not already in effect, and "where necessary to effectuate the purpose of [chapter 15] and to protect the assets of the debtor or the interests of the creditors," the bankruptcy court may grant "any appropriate relief," including a stay of any action against the debtor or its U.S. assets; an order suspending the debtor's right to transfer or encumber its U.S. assets; and "any additional relief that may be available to a trustee," with certain exceptions. Under section 1521(b), the court may entrust the distribution of the debtor's U.S. assets to the foreign representative or another person, provided the court is satisfied that the interests of U.S. creditors are "sufficiently protected."
Moreover, section 1507 of the Bankruptcy Code provides that, upon recognition of a main or nonmain proceeding, the bankruptcy court may provide "additional assistance" to a foreign representative "under [the Bankruptcy Code] or under other laws of the United States." However, any such assistance must, "consistent with the principles of comity," reasonably ensure that: (i) all stakeholders are treated fairly; (ii) U.S. creditors are not prejudiced by asserting their claims in the foreign proceeding; (iii) the debtor's assets are not preferentially or fraudulently transferred; (iv) proceeds of the debtor's assets are distributed substantially in accordance with the order prescribed by the Bankruptcy Code; and (v) if appropriate, an individual foreign debtor is given the opportunity for a fresh start. See 11 U.S.C. § 1507(b) (listing factors, that, together with comity, were previously included in repealed section 304(c)).
Section 1522(a) provides that the bankruptcy court may exercise its discretion to order any of the relief authorized by section 1519 (upon the filing of a petition for recognition) or 1521 (upon recognition of a foreign proceeding) "only if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected."
Finally, section 1506 sets forth a public policy exception to the relief otherwise authorized in chapter 15, providing that "[n]othing in this chapter prevents the court from refusing to take an action governed by this chapter if the action would be manifestly contrary to the public policy of the United States." Section 1506, however, requires a "narrow reading" and "does not create an exception for any action under Chapter 15 that may conflict with public policy, but only an action that is 'manifestly contrary.'" In re Fairfield Sentry Ltd., 714 F.3d 127, 139 (2d Cir. 2013).
A German court entered an order commencing a liquidation proceeding ("liquidation") for Germany-based commercial airline Condor Flugdienst GMBH ("CF") in 2019. In October 2020, CF's foreign representatives filed a petition in the U.S. Bankruptcy Court for the Northern District of Illinois ("bankruptcy court") seeking recognition of the liquidation under chapter 15 as a foreign main proceeding. They also sought provisional relief enjoining actions against CF's U.S. assets under sections 105(a) and 1519 of the Bankruptcy Code. The bankruptcy court granted such provisional relief until a scheduled November 2020 recognition hearing.
On October 22, 2020, the German court entered an order ("confirmation order") confirming a liquidating plan for CF.
In November 2020, the bankruptcy court entered an order recognizing the liquidation under chapter 15 as a foreign main proceeding. Because such recognition automatically terminated the provisional relief, the bankruptcy court also entered an order pursuant to section 1521(a)(1) staying collection efforts against CF's U.S. assets to augment the automatic stay that became effective upon recognition under section 1520.
The foreign representatives then asked the bankruptcy court to recognize and implement the confirmation order in the United States pursuant to sections 105(a), 1521(a), 1525(a), and 1527 of the Bankruptcy Code. Several of CF's U.S. creditors objected to the requested relief. They argued that, among other things, CF's liquidation did not provide a fair recovery to all creditors and U.S. creditors did not receive adequate notice of the liquidation.
The Bankruptcy Court's Ruling
The bankruptcy court granted the foreign representatives' motion for an order recognizing and implementing the confirmation order. Also, due to concerns raised by CF's foreign representatives regarding possible attempts by CF's U.S. creditors to recommence litigation in the United States, the bankruptcy court permanently enjoined CF's U.S. creditors from continuing any litigation against CF in the United States in contravention of the confirmation order.
At the outset of his ruling, Bankruptcy Judge Timothy A. Barnes noted that "[t]he Motion before the court is both routine and complex at the same time." He explained that requests for recognition of foreign plans in chapter 15 cases have routinely been approved, although courts have sometimes disagreed on which provisions of chapter 15 provide authority for doing so.
According to Judge Barnes, in addition to the automatic relief upon recognition specified in section 1520, the Bankruptcy Code (including chapter 15) includes "a variety of sources of authority for nonautomatic, discretionary relief," including section 1507(a) ("additional assistance"), section 1521 (authorizing the court to "grant any appropriate relief"), and section 105(a), which authorizes the bankruptcy court to "issue any order, process, or judgment that is necessary or appropriate to carry out the provisions of [the Bankruptcy Code]." Each of these provisions, he wrote, "has its own, unique constraints."
If a form of discretionary relief is specifically listed among the examples set forth in section 1521(a), Judge Barnes explained, the source of court authority for the requested relief is clear, subject to the constraints of section 1522 (requiring sufficient protection of all stakeholders). In other cases, chapter 15 provides no guidance-thereby creating complexity.
In In re Vitro, S.A.B. de C.V., 701 F.3d 1031 (5th Cir. 2012), the Fifth Circuit considered the source of authority for chapter 15 relief not specifically mentioned in the provisions of the chapter:
We conclude that a court confronted by this situation should first consider the specific relief enumerated under § 1521(a) and (b). If the relief is not explicitly provided for there, a court should then consider whether the requested relief falls more generally under § 1521's grant of any appropriate relief. We understand "appropriate relief" to be relief previously available under Chapter 15's predecessor, § 304. Only if a court determines that the requested relief was not formerly available under § 304 should a court consider whether relief would be appropriate as "additional assistance" under § 1507.
Id. at 1054. According to Judge Barnes in Condor, this rationale is likely inconsistent with the intentions of the drafters of the Model Law.
He explained that the Model Law drafters "likely anticipated that a court would consider virtually all requested relief under the authority" of the Model Law counterpart of section 1521 (Article 21), rather than the broader authority contained in the Model Law equivalent of section 1507 (Article 7). The latter, Judge Barnes noted, was designed to alleviate concerns that presiding courts might restrictively interpret Article 21 to limit relief to a country's bankruptcy laws by providing that a court may grant relief under the non-bankruptcy laws of the enacting country if relief under the country's bankruptcy laws was inadequate.
Unfortunately, U.S. lawmakers complicated this analysis by providing in section 1507 that the bankruptcy court may provide additional assistance to a foreign representative "under this title or under other laws of the United States" (emphasis added). By adding the emphasized language, Judge Barnes noted, "Congress created an overlap" without providing guidance as to why the change was made and leaving courts "to their own devices in determining how to choose between the overlapping statutes." According to Judge Barnes, "the Vitro court stepped in to fill the gap," and although its approach is not based on the language of chapter 15, "it is the only cogent one available to address the overlap created by Congress."
Because the recognition of a foreign bankruptcy or restructuring plan is authorized under section 1521 (within the strictures of section 1522) and had been commonly authorized under repealed section 304, Judge Barnes concluded that he need not look to either section 1507 or 105 for authority to recognize and enforce the German court's confirmation order. In so ruling, he found that the interests of stakeholders were sufficiently protected (as required by section 1522) because, among other things:
- The foreign proceeding, the liquidating plan, and the confirmation order "afford relief that is akin to," albeit not necessarily identical to, that available in U.S. bankruptcy cases;
- U.S. and non-U.S. creditors were treated no differently in the foreign proceeding, the process of all creditors submitting claims in the proceeding was ongoing, and it would not be unduly burdensome for U.S. creditors to participate in the claims process in Germany; and
- All creditors were afforded the notice required under German law, even if Germany's due process requirements were not identical to those under U.S. law. Further, U.S. creditors were afforded a second opportunity to be heard given the notice requirements attendant to the commencement of the chapter 15 case.
Finally, addressing the prospect of continued litigation by CF's U.S. creditors, Judge Barnes noted that the "point behind chapter 15 proceedings is to 'facilitate the consolidation of multinational bankruptcies into one single proceeding'" (citation omitted), which "includes recognizing and enforcing the terms of a foreign plan." As with a discharge injunction under section 524(g) of the Bankruptcy Code, Judge Barnes determined that a U.S. creditor "may be enjoined through [a] foreign plan" in a chapter 15 case. Indeed, Judge Barnes emphasized, absent the court's recognition and enforcement of the German court's confirmation order in the United States, "the aims of the Foreign Proceeding and the Debtor's efforts to consummate the Plan could be impeded, a result that would be contrary to the purposes of chapter 15."
Condor does not break any new ground on the power of U.S. bankruptcy courts to enforce the orders of foreign bankruptcy courts in cross-border bankruptcy cases as a matter of comity under appropriate circumstances. However, the ruling is instructive in parsing the statutory authority for granting such relief and in illuminating the confusion that U.S. lawmakers created on this point when enacting chapter 15 in 2005. It also reinforces the importance of comity as the foundation for chapter 15 and other laws patterned on the Model Law designed to facilitate cross-border bankruptcy cases. Lastly, Condor establishes that a U.S. bankruptcy court may permanently enjoin U.S. creditors from pursuing a foreign debtor's U.S. assets by recognizing and giving effect to the discharge provided in a foreign plan confirmation order.
Given the relatively low cost of chapter 15 (e.g., no official committee of unsecured creditors and related professionals, shorter time periods, and narrower scope of court oversight), the use of chapter 15 by foreign debtors with U.S. assets and creditors may lead to more creative cross-border restructuring cases. Recent chapter 15 cases, for example, have already demonstrated a trend of foreign debtors utilizing chapter 15 to achieve results previously thought available only under chapter 11-see, e.g., In re Perforadora Oro Negro, No. 18-11094 (Bankr. S.D.N.Y.) (authorizing extensive discovery under chapter 15); In re Just Energy Grp. Inc., No. 21-30823 (Bankr. S.D. Tex.) (authorizing relief under chapter 15 for transactions with U.S. affiliates that are part of a foreign proceeding)-or results that are controversial under chapter 11. See In re Avanti Commc'ns Grp. PLC, No. 18-10458 (Bankr. S.D.N.Y.) (authorizing nonconsensual non-debtor third-party releases); In re Syncreon Automotive (UK) Ltd., No. 19-11702 (Bankr. D. Del.) (same). In light of these developments, U.S. creditors may be well-advised to assert their rights more forcefully in foreign restructuring proceedings in addition to litigating the contours of chapter 15 relief in the United States.
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