Hands Across the Water: Chapter 15 and the New Bankruptcy Act
October 31, 2005
On April 20, 2005, President Bush signed into law the Bankruptcy Abuse and Consumer Protection Act of 2005 (the Act). Although its primary focus is consumer bankruptcy, the Act also has a number of provisions that impact business bankruptcies. These business-related provisions have garnered little attention from the media and, in many cases, the legal community. One set of these overlooked provisions is in chapter 15, the first new chapter of the Bankruptcy Code in almost 20 years.1
Titled “Ancillary and Other Cross-Border Cases,” chapter 15 supersedes section 304 of the Bankruptcy Code, which was repealed in its entirety by the Act.2 Chapter 15, however, does more than simply replace section 304; the chapter’s very title recognizes that, in many cases, the bankruptcy of a company may be a cross-border event, requiring the cooperation of courts in different countries and the application of their respective insolvency laws. The goal of this article is to review and compare certain provisions of section 304 with the changes to United States ancillary proceedings embodied in chapter 15.3
Section 304
Section 304 allows a debtor in a bankruptcy case (or similar insolvency proceeding) pending outside the United States to seek “ancillary” relief in a U.S. bankruptcy court “in order to administer assets located in this country, to prevent dismemberment by local creditors of assets located here, or for other appropriate relief.”4
Section 304 is divided into three sub-sections, the first (304(a)) describes how to commence an ancillary case, the second (304(b)) sets forth what relief may be obtained under section 304, and the third (304(c)) sets forth the criteria to be used in determining whether to grant the relief requested in section 304(b).
Commencing a Section 304 Case
Under section 304, a “case ancillary to a foreign proceeding”5 begins when a “foreign representative” files a petition.6 While relatively straightforward, satisfaction of this provision is neither perfunctory nor automatic, with a number of courts denying relief because the proceeding did not qualify as a “foreign proceeding” and/or the petitioner did not qualify as a “foreign representative.”7
Available Section 304 Relief
Subject to section 304(c), the bankruptcy court may (i) enjoin the commencement or continuation of any action against the debtor in the foreign proceeding or any property involved in that proceeding; (ii) enjoin the enforcement of any judgment against the debtor or its property or any act or proceeding to enforce a lien against the debtor’s property; (iii) order the turnover of the debtor’s property to the foreign representative for administration in the foreign proceeding; and/or (iv) order whatever additional relief it deems “appropriate.”8 Unlike a case under chapter 7, 11 or 13 of the Bankruptcy Code, starting a section 304 proceeding does not provide any “automatic” relief, in particular the “automatic stay.”9 Thus, the foreign representative must specify the kind of relief he or she is seeking under section 304(b).10 There is a split of authority as to the standards to be applied when the foreign representative is seeking injunctive relief under section 304(b). A number of courts have held that the criteria for relief under section 304(b) are set forth in section 304(c) (see discussion below). Thus, once the court determines that relief is appropriate under section 304(c), the court need not make any further findings.11 Other courts, however, have required a foreign representative to satisfy the customary standards for injunctive relief under applicable non-bankruptcy law in order to obtain such relief under section 304(b).12
Qualifying for Relief Under Section 304(c)
Section 304(c) provides that in determining whether to grant relief under section 304(b), the bankruptcy court is to be guided by what will best assure an economical and expeditious administration of the debtor’s estate, consistent with (i) just treatment of all holders of claims against or interests in the estate;13 (ii) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in the foreign proceedings;14 (iii) prevention of preferential or fraudulent dispositions of property of the estate; (iv) distribution of proceeds of the estate substantially in accordance with the order prescribed by the Bankruptcy Code; (v) comity;15 and (vi) if appropriate, the provision of an opportunity for a fresh start for the individual that the foreign proceeding concerns.16
For more than 30 years, section 304 has protected the rights of domestic and foreign debtors and creditors relatively well. Nevertheless, the increase in cross-border insolvencies over that period has lead to concerted efforts on the part of legal and business professionals, as well as the United Nations, to develop a universal approach to such cases.
Chapter 15
Starting in 1993, the United Nations Commission on International Trade Law (UNCITRAL) began studying the feasibility of establishing uniform rules on cross-border insolvencies. By 1997, UNCITRAL had developed a set of model laws called the “UNCITRAL Model Law on Cross-Border Insolvency” (Model Law). The Model Law was designed to (i) foster cooperation between and among courts in different countries where the debtor’s assets may be located; (ii) provide access to local courts for representatives of foreign insolvency proceedings and creditors; and (iii) grant recognition to orders issued by foreign courts.17 Beginning with the proposed Bankruptcy Abuse and Prevention Act of 2001, and remaining relatively unchanged through each of the various iterations of the Act that have been proposed but not passed since 2001, Congress included in the proposed bankruptcy reforms chapter 15 that tracked, for the most part, the Model Law.18
Purpose and Scope of Application19
Like the Model Law, the objectives of chapter 15 are (i) cooperation between and among U.S. courts, trustees and debtors and the courts of foreign countries involved in cross-border insolvency cases; (ii) greater legal certainty for trade and investment; (iii) fair and efficient administration of cross-border insolvencies that protects the interests of all creditors; (iv) maximizing the value of the debtor’s estate; and (v) facilitating the rescue of financially troubled companies to protect investment and preserve employment.20 It is intended to apply both when a foreign court or foreign representative seeks assistance in the United States concerning a foreign insolvency proceeding and when assistance is sought in a foreign country in connection with a case under another chapter of the Bankruptcy Code.21
Unlike section 304, chapter 15 does not apply to (i) a proceeding concerning any entity, other than a foreign insurance company, that is excluded from being a debtor under section 109(b) (as amended);22 (ii) an individual (and spouse) who have debts within the limits for a chapter 13 debtor under section109(e) and are either United States citizens or aliens permanently residing in the United States; or (iii) an entity subject to the Securities Investor Protection Act of 1970, a stockbroker subject to subchapter III of chapter 7, or a commodity broker subject to subchapter IV of chapter 7. Further, unlike under section 304, the bankruptcy court is prohibited from granting relief under chapter 15 with respect to “any deposit, escrow, trust fund, or other security required or permitted under any applicable State insurance law or regulation for the benefit of claim holders in the United States.”23
Chapter 15 contains its own set of definitions,24 although the definitions of “foreign proceeding” and “foreign representative” contained in section 101, which have been amended to comport with chapter 15, continue to apply.25
General Provisions
Chapter 15 provides that in interpreting and applying its provisions, the bankruptcy court is bound to consider “its international origin, and the need to promote an application of this chapter that is consistent with the application of similar statutes adopted by foreign jurisdictions,”26 subject to any existing treaties and/or agreements between the relevant countries.27
In addition to the other relief afforded under chapter 15, and subject to any specific limitations in the chapter, if recognition is granted, the bankruptcy court may provide “additional assistance” to a foreign representative under the Bankruptcy Code or other U.S. laws.28 In determining whether to grant such additional assistance, the court must consider, “consistent with the principles of comity,” whether such assistance will assure: (i) just treatment of all holders of claims against or interests in the debtor’s property; (ii) protection of claim holders in the United States against prejudice and inconvenience in the processing of claims in the foreign proceeding; (iii) prevention of preferential or fraudulent dispositions of property of the debtor; (iv) distribution of proceeds of the debtor’s property substantially in accordance with the order prescribed by the Bankruptcy Code; and (v) if appropriate, the provision of an opportunity for a fresh start for the individual that the foreign proceeding concerns.29
Access of Foreign Representatives and Creditors to the Court
The foreign representative may commence a case by filing a petition for “recognition of a foreign proceeding” directly with the bankruptcy court.30 If the court grants recognition, and subject to whatever limitations the court may impose, (a) the foreign representative (i) has the capacity to sue and be sued in a U.S. court and (ii) may apply directly to a U.S. court for appropriate relief in that court; and (b) the U.S. court shall grant comity or cooperation to the foreign representative.31
Upon recognition, the foreign representative (i) may commence an involuntary case under section 30332 or, under certain circumstances, a voluntary case under section 301 or 302,33 (ii) may participate as a party in interest in a case regarding the debtor under the other chapters of the Bankruptcy Code,34 and/or (iii) may intervene in any proceeding in a state or federal court in the United States to which the debtor is a party.35
Under chapter 15, foreign creditors have the same rights with respect to the commencement of or participation in a case under the Bankruptcy Code as afforded to U.S. creditors, and claims of a foreign creditor may not be given lower priority than those of other general unsecured claims solely because such claims are held by a foreign creditor.36 Further, whenever notice is to be given to creditors in a case under the Bankruptcy Code, it must also be provided to creditors with foreign addresses, and the court may order appropriate steps to be taken to notify foreign creditors whose addresses are unknown.37 Such notification must be given individually, unless the court finds that, under the circumstances, some other form of notification is more appropriate.38 When the notice of the commencement of a case under the Bankruptcy Code is given to foreign creditors, the notice must (i) indicate the time and place for filing proofs of claim; (ii) indicate whether secured creditors must file proofs of claim; and (iii) contain any other information generally required to be included.39 Any rules or orders issued by the bankruptcy court with respect to notice or the filing of proofs of claim shall provide additional time to creditors with foreign addresses as is reasonable under the circumstances.40
Recognition of Foreign Proceeding and Relief
A case under chapter 15 begins with the filing of a petition for recognition41 of a foreign proceeding in which the foreign representative has been appointed.42 The petition for recognition must be accompanied by an English translation of either a certified copy of the decision by the foreign court commencing the foreign proceeding and appointing the representative or a certificate from that foreign court affirming that such proceeding is pending and the representative has been appointed.43 After notice and a hearing, the bankruptcy court must enter the order of recognition as long as (i) the foreign proceeding for which recognition is sought is the foreign main proceeding, (ii) the foreign representative is a “person or body,” and (3) the petition is accompanied by the appropriate supporting documentation described above.44 There are no other requirements. Thus, unlike section 304, the foreign representative need not satisfy requirements such as those found under section 304(c) before relief under chapter 15 may be granted. Nevertheless, the bankruptcy court may refuse to take any action under chapter 15 if the action would be “manifestly contrary to the public policy of the United States.”45
Similar to a section 304 proceeding, a case under chapter 15 may be commenced in the district court46 for the district (i) in which the debtor has its principal place of business or principal assets in the United States; or (ii) if there are no assets or place of business in the United States, in the district in which there is a pending action against the debtor.47 Unlike section 304, however, even when there are no assets, place of business or pending litigation, a chapter 15 may still be commenced in a district “in which venue will be consistent with the interests of justice and convenience of the parties, having regard to the relief sought by the foreign representative.”48
Substantive Relief
Similar to a preliminary injunction under section 304, for the period between the filing of the petition for recognition and the granting of the petition by the court, if relief is urgently needed to protect the assets or interests of the debtor and/or the interests of creditors, the court may grant interim relief49 including (i) staying any execution against the debtor’s assets; (ii) entrusting the administration or realization of the debtor’s assets located in the United States to the foreign representative or another person authorized by the court; (iii) suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor; (iv) granting discovery concerning the debtor’s assets or affairs; and/or (v) granting any additional relief that may be available to a trustee (with certain limitations).50 Such interim relief may be denied if it interferes with the foreign main proceeding.51 The granting of interim relief is governed by the standards and limitations generally applicable to preliminary injunctions.52 In addition, unless otherwise extended, interim relief terminates when the petition for recognition is granted.53
In probably the most significant departure from section 304, chapter 15 provides that upon recognition of a foreign proceeding, the automatic stay under section 362 applies with respect to the debtor and the property of the debtor within the territorial jurisdiction of the United States.54 Although the injunctive relief now available under section 304 may be similar to the automatic stay under section 362,55 chapter 15 will effectively eliminate the need for the foreign representative to satisfy any non-bankruptcy standards (to the extent applicable) for injunctive relief or any of the gate-keeper standards of section 304(c), before such relief can be granted.56
Chapter 15 also provides that, upon recognition of a foreign main or nonmain57 proceeding, if the court finds that it is necessary to effectuate the purpose of chapter 15 and to protect the debtor’s assets and the interests of creditors, the court may grant “appropriate” relief (supplemental relief),58 including (i) staying the commencement or continuation of any action or proceeding concerning the debtor’s assets, rights, obligations or liabilities (to the extent not already stayed under section 362); (ii) staying execution against the debtor’s assets (to the extent not already stayed under section 362); (iii) suspending the right to transfer, encumber or otherwise dispose of any assets (to the extent not already stayed under section 362); and (iv) extending the interim relief.59 In addition, the court may (a) grant discovery concerning the debtors assets, affairs, rights, obligations or liabilities; (b) entrust the administration or realization of the debtor’s assets located in the United States to the foreign representative or another person authorized by the court; and (c) grant any additional relief that may be available to a trustee (with certain limitations).60
Similar to the ability to request turnover under section 304, chapter 15 authorizes the court to entrust the distribution of the debtor’s assets located in the United States to the foreign representative (or some other person authorized by the court), provided that the court is satisfied that the interests of creditors in the United States are sufficiently protected.61 The court may condition the granting of supplemental relief (as well as interim relief) to whatever conditions it deems appropriate, including, but not limited to, the giving of security or the posting of a bond.62
Cooperation with Foreign Courts and Foreign Representatives
Consistent with the goal of cross-border cooperation, the court is required to cooperate, to the extent possible, with a foreign court or a foreign representative, and is entitled to communicate directly with, or request information from, a foreign court or foreign representative, subject to the rights of parties in interest to notice and participation.63
Concurrent Proceedings
Once a foreign main proceeding has been recognized under chapter 15, the foreign representative may commence a case under one of the other chapters of the Bankruptcy Code64 only if the debtor has assets in the United States.65 If a bankruptcy case is commenced, the case will affect only assets of the debtor within the territorial jurisdiction of the United States and extend to other assests of the debtor to the extent necessary to allow cooperation and coordination between the bankruptcy court and the foreign court.66
If the case under one of the other chapters of the bankruptcy code is already pending at the time the petition for recognition is filed, (i) any interim or supplemental relief granted in the chapter 15 case must be consistent with the relief granted in the bankruptcy case; and (ii) the provisions of section 1520 (making sections 362, 363, 549 and 552 applicable to chapter 15 cases) will not apply even if the foreign proceeding is recognized.67 If a bankruptcy case is commenced after the recognition of the foreign proceeding, any interim or supplemental relief (and, if the foreign proceeding is a foreign main proceeding, any relief granted under section 1520) is subject to modification or termination if such relief is inconsistent with the relief granted in the bankruptcy case.68
Finally, chapter 15 recognizes that creditors exist across international boundaries. Thus, chapter 15 provides that, without prejudice to secured claims or rights in rem, any creditor that has received payment on a claim in a foreign proceeding may not receive a payment on the same claim in a bankruptcy case, so long as the payment to other creditors of the same class in that bankruptcy case is proportionately less than the payment the creditor already has received.69
Conclusion
The Model Law represents a significant step towards creating a true
cross-border insolvency regime. It is clear, however, that given the limited
number of foreign jurisdictions that have adopted the Model Law, there is
still an enormous amount of work to be done before universal cross-border
cooperation can be accomplished. Nevertheless, the adoption of the Model Law
by the United States, as embodied in chapter 15, likely will spur other
jurisdictions to follow suit.
For more information, e-mail Peter A. Zisser at
peter.zisser@hklaw.com or call toll free, 1-888-688-8500.
1 Title 11 of the United States Code, 11 U.S.C. §§ 101 et seq. (the Bankruptcy Code), was enacted in 1978. While there have been numerous amendments, sometimes with sections being added or deleted, the last new full chapter added to the Bankruptcy Code was chapter 12, “Adjustment of Debts of a Family Farmer with Regular Annual Income,” which was enacted in 1986. See Bankruptcy Judges, United States Trustees, and Family Farmer Bankruptcy Act of 1986, Pub. L. No. 99-554, 100 Stat. 3088 (1986).
2 For the most part, the Act, including chapter 15, applies only to cases filed on or after 180 days from April 20, 2005, i.e., October 17, 2005.
3 Under the Act, various other sections of the Bankruptcy Code and certain sections of the Judicial Code have been amended to correspond with the provisions of chapter 15. Where relevant, those amendments are addressed here and, for purposes of this analysis only, are cited to those sections with the notation “(as amended).”
4 House Report No. 95-595, 95th Cong., 1st Sess. 324-325 (1977); Senate Report No. 95-090, 95th Cong., 2d Sess. 35 (1978). See also, e.g., In re Rubin, 160 B.R. 269, 274 (Bankr. S.D.N.Y. 1993) (“The purpose of a section 304 filing is to prevent piecemeal distribution of assets in the United States by means of legal proceedings initiated in domestic courts by local creditors.”).
5 A “foreign proceeding” currently is defined as a “proceeding, whether judicial or administrative and whether or not under bankruptcy law, in a foreign country in which the debtor’s domicile, residence, principal place of business, or principal assets were located at the commencement of such proceeding, for the purpose of liquidating an estate, adjusting debts by composition, extension or discharge, or effecting a reorganization.” 11 U.S.C. § 101(23).
6 A “foreign representative” currently is defined as a “duly selected trustee, administrator, or other representative of an estate in a foreign proceeding.” 11 U.S.C. § 101(24).
7 See, e.g., In re Rose, 318 B.R. 771 (Bankr. S.D.N.Y. 2004) (scheme to effect corporate financial restructuring unrelated to any insolvency proceeding did not qualify as “foreign proceeding” for purposes of section 304); In re Tam, 170 B.R. 838 (Bankr. S.D.N.Y. 1994) (voluntary liquidation without regulatory oversight or creditor participation not “foreign proceeding” under section 304).
The Bankruptcy Code currently prohibits certain entities from being debtors under chapter 11 or 7, including, but not limited to, foreign insurance companies or banks doing business in the United States. See 11 U.S.C. § 109(b)(3). The prohibition of section 109, however, does not apply to section 304. Thus, foreign insurance companies and banks doing business in the United States are eligible for relief under section 304. See, e.g., Bank of N.Y. v. Treco (In re Treco), 240 F.3d 148 (2d Cir. 2001) (foreign bank); In re Koreag, Controle et Revision S.A., 961 F.2d 341 (2d Cir.), cert. denied, 506 U.S. 865 (1992) (same).
8 11 U.S.C. § 304(b). It has been suggested that section 304(b) confers authority on a bankruptcy court to “broadly mold appropriate relief in near blank check fashion.” In re Culmer, 25 B.R. 621, 624 (Bankr. S.D.N.Y. 1982).
9 See, e.g., In re MMG LLC, 256 B.R. 544, 549 (Bankr. S.D.N.Y. 2000) (“A section 304 proceeding is not … a full blown bankruptcy. … [T]he most important distinction is that the filing does not trigger an automatic stay.”).
10 Similarly, the appropriate venue for commencing a section 304 proceeding may depend on what type of relief is being sought. A section 304 proceeding to enjoin state or federal litigation, or the enforcement of a judgment, may be commenced only in the district court for the district in which the proceeding sought to be enjoined is pending. A section 304 proceeding to enjoin the enforcement of a lien or to require the turnover of property of the estate may be commenced only in the district court for the district in which the property is found. A section 304 proceeding, other than one described in the previous two sentences, may be commenced only in the district court for the district in which is located (i) the principal place of business in the United States or (ii) the principal assets in the United States of the estate that is the subject of the filing. See 28 U.S.C. § 1410(a), (b) and (c). While this provision refers to the district court, most jurisdictions provide for automatic referral to the bankruptcy court.
11 See, e.g., In re Petition of Davis, 191 B.R. 577, 584 (Bankr. S.D.N.Y. 1996); In re Rubin, 160 B.R. at 283.
12 See, e.g., In re Lines, 81 B.R. 267 (Bankr. S.D.N.Y. 1988); In re Petition of Smouha, 136 B.R. 921 (Bankr. S.D.N.Y.), dismissed on other grounds, 979 F.2d 845 (2d Cir. 1992). In the Second Circuit, for example, under applicable non-bankruptcy law, a movant must show that it will be irreparably harmed and either (i) a probability of success on the merits or (ii) the presence of sufficiently serious questions going to the merits and a balance of hardships tipping decidedly in favor of the movant. See, e.g., Sal Tinnerello & Sons, Inc. v. Town of Stonington, 141 F.3d 46 (2d Cir.), cert. denied, mot. granted, 525 U.S. 923 (1998); Time Warner Cable v. Bloomberg L.P., 118 F.3d 917, 923 (2d Cir. 1997). It should be noted that whichever standard the court employs for determining if injunctive relief is warranted, the court must still determine whether relief is appropriate under section 304(c).
13 See, e.g., In re Culmer, 25 B.R. at 629 (bankruptcy court is not “obliged to protect the positions of fast-moving American and foreign attachment creditors over the policy favoring uniform administration in a foreign court.”); accord In re Petition of Davis, 191 B.R. at 584 (injunctive relief under section 304 promotes “just treatment of all creditors by preventing the so-called ‘race to the courthouse’ and preserve[s] estate assets for the benefit of all creditors”).
14 It is generally accepted that simply requiring a creditor to press its claim in the foreign proceeding does not constitute “undue prejudice.” See, e.g., Canada Southern Railway Co. v. Gebhard, 109 U.S. 527, 537-38 (1883) (“[E]very person who deals with a foreign corporation impliedly subjects himself to such laws of the foreign government, affecting the powers and obligations of the corporation with which he voluntarily contracts, as the known and established policy of that government authorizes.”); In re Rubin, 160 B.R. at 282 (“[W]e unhesitatingly require foreign creditors to litigate in our courts if they wish a distribution from a U.S. debtor’s estate. It is thus difficult to label as so prejudicial and inconvenient to U.S. creditors as to warrant denial of injunctive relief that which we require of foreign creditors in our own cases.”) (citations omitted).
15 “Comity” has been defined as “neither a matter of absolute obligation, on the one hand, nor of mere courtesy and good will, upon the other. But it is 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). A number of courts have considered comity to be the most important of the factors under section 304(c). See, e.g., In re Treco, 240 F.3d at 156 (“[A] court’s function under § 304 is to determine whether comity should be extended to the foreign proceeding in light of the other factors.”); In re Ionica plc, 241 B.R. 829, 835 (Bankr. S.D.N.Y. 1999) (“Once a court concludes that the foreign proceeding meets the requisite standard for comity, it must decide how much weight to give to the other factors in Section 304(c).”). Generally, under section 304(c), comity will be granted to a decision or judgment of a foreign court if it is shown that the foreign court is a court of competent jurisdiction, and that the law and public policy of the forum state (i.e., U.S. law) and the rights of its residents (i.e., U.S. creditors) will not be violated. See, e.g., In re Petition of Bd. of Dirs. of Compania Gen. De Combustibles S.A., 269 B.R. 104, 111 (Bankr. S.D.N.Y. 2001) (requiring a showing of “maladministration or corruption” in order to defeat request for relief under section 304(c)(4)); In re Koreag, Controle et Revision S.A., 130 B.R. 705, 713 (Bankr. S.D.N.Y. 1991) (finding that comity should be granted as long as foreign law is not “vicious, wicked or immoral, and shocking to the prevailing moral sense.”) (quoting Intercontinental Hotels Corp. v. Golden, 15 N.Y.2d 9, 254 N.Y.S.2d 527, 529 (1964)), vacated, remanded on other grounds, 961 F.2d 341 (2d Cir.), cert. denied, 506 U.S. 865 (1992).
16 11 U.S.C. § 304(c).
17 See Jenny Clift, United Nations Commission on International Trade Law (UNCITRAL): The UNCITRAL Model Law on Cross-Border Insolvency – A Legislative Framework to Facilitate Coordination and Cooperation in Cross-Border Insolvency, 12 Tul. J. Int’l & Comp. L. 307, 308-315 (Spring 2004); see also E. Bruce Leonard, The International Year in Review, 22 Am. Bankr. Inst. J. 22, 77 (December 2003/January 2004) (“The primary goal of the model law is to facilitate domestic recognition of foreign insolvency proceedings and to increase international cooperation in multinational cases.”). According to UNCITRAL, the Model Law has been enacted, in some form, in Eritrea, Japan, Mexico, Poland, Romania, South Africa and Montenegro. See www.uncitral.org/en-index.htm. In addition, Model Law-related legislation is either pending or has been proposed in the UK, Spain, Australia and New Zealand. See Leonard, supra, at p. 78.
18 See Jay Lawrence Westbrook, Multinational Enterprises in General Default: Chapter 15, The Ali Principles, and The EU Insolvency Regulation, 76 Am. Bankr. L.J. 1, 18-19 (Winter 2002). See also 11 U.S.C. § 1501(a) (“The purpose of this chapter is to incorporate the Model Law on Cross-Border Insolvency so as to provide effective mechanisms for dealing with cases of cross-border insolvency ...”).
19 Chapter 15 is divided into five subchapters. For purposes of this review only, subchapter titles for headings are used to follow chapter 15’s numerical order.
20 11 U.S.C. § 1501(a).
21 11 U.S.C. § 1501(b).
22 11 U.S.C. § 1501(c)(1). It is interesting to note that section 109(b) (as amended) makes foreign banks with branches or agencies in the United States (as defined in section 1(b) of the International Banking Act of 1978) ineligible for relief under the Bankruptcy Code (see 11 U.S.C. § 109(b) (as amended)), although such entities qualify for relief under section 304. See supra n. 7 and accompanying text. Sections 1501(c) and 1501(d) (see infra n. 23 and accompanying text) clearly reflect Congress’ desire to give state banking and insurance regulators significantly more control over assets that arguably are specifically intended to protect U.S. creditors, as opposed to the debtor’s creditors as a whole, control which did not exist under section 304. See, e.g., Beogradska Banka A..D., Beograd. v. Superintendent of Banks (In re Agency for Deposit Ins., Rehab., Bankr. and Liquidation of Banks, as Bankruptcy Administrator of Beogradska Banka A.D., Beograd), 313 B.R. 561 (S.D.N.Y. 2004) (holding that section 304 preempted state laws under which the Superintendent of Banks of the State of New York had authority over the disposition of assets of foreign bank branches in New York) (on appeal to the Second Circuit Court of Appeals, Case No. 04-4997-bk).
23 11 U.S.C. § 1501(d). In many states, including New York, an “alien” (i.e., non-U.S.) insurance or reinsurance company that is not licensed in the state is not permitted to transact any insurance business in the state unless it deposits funds into a trust or provides some other form of security. Similarly, domestic insurers often demand that alien reinsurers establish trust funds to secure their liability before the domestic insurer will enter a reinsurance treaty with such alien reinsurer. See, e.g., 11 N.Y.C.R.R. 126.1 et seq. (“Regulation 114”). There have been a number of cases commenced under section 304 whose primary purpose was to enjoin actions against insurance-related trust funds and/or seek repatriation of the trust funds to the domiciliary court. See, e.g., In re Ocana, 151 B.R. 670 (S.D.N.Y. 1993); In re Rubin, 160 B.R. 269 (Bankr. S.D.N.Y. 1993); In re Lines, 81 B.R. 267 (Bankr. S.D.N.Y. 1988).
24 11 U.S.C. § 1502. For the most part, the definitions in chapter 15 relate to terms found only in that chapter, except for “debtor,” which is defined as “an entity that is the subject of a foreign proceeding,” and “trustee,” which is defined as a “trustee, a debtor in possession in a case under any chapter of this title, or a debtor under chapter 9 of this title.” 11 U.S.C. §§ 1502(1), (6).
25 “Foreign proceeding” is defined 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.” 11 U.S.C. § 101(23) (as amended). “Foreign representative” is defined 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.” 11 U.S.C. § 101(24) (as amended). It should be noted that although the definition of foreign proceeding is found in section 101, the terms “foreign main proceeding,” defined as “a foreign proceeding pending in the country where the debtor has the center of its main interests,” and “foreign nonmain proceeding,” defined as a “foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment,” are defined in section 1502. 11 U.S.C. § 1502(4), (5).
26 11 U.S.C. § 1508.
27 11 U.S.C. § 1503.
28 11 U.S.C. § 1507.
29 Id.. It is not clear what additional assistance Congress had in mind. Nevertheless, as noted by Professor Westbrook, the inclusion of identical standards for granting relief under section 304 and providing additional assistance under chapter 15 was intended to
ensure the continued vitality of the generous and deferential decisions made under existing § 304, some of which may go beyond the specific language of the Model Law. … Thus any authority under the § 304 case law that might otherwise be deemed withdrawn by a provision of the Model Law will remain available, as long as it increases, rather than decreases, the assistance given to the foreign court.
Westbrook, supra n. 18, at 21.
30 11 U.S.C. § 1509(a). This has always been the rule under section 304. Nevertheless, this provision is in the Model Law because of the significant procedural and diplomatic impediments in some countries that must be overcome before a foreign representative can appear in a local court. See Westbrook, supra n. 18, at 13-14.
31 11 U.S.C. § 1509 (b). The request for comity in the U.S. court (other than the court that granted recognition) must be accompanied by a certified copy of the order granting recognition. 11 U.S.C. § 1509(c). Further, if the court denies recognition under chapter 15, the court has the authority to issue “any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from courts in the United States.” 11 U.S.C. § 1509(d). Notwithstanding the foregoing, or any other provision of chapter 15, the failure of the foreign representative to commence a case or to obtain recognition does not “affect any right the foreign representative may have to sue in a court in the United States to collect or recover a claim which is the property of the debtor.” 11 U.S.C. § 1509(f). It should be noted, however, that unlike current practice, where a state or federal court may grant comity to a foreign proceeding even absent a section 304 proceeding, see Cunard S.S. Co Ltd.. v. Salen Reefer Services AB, 773 F.2d 452 (2d Cir. 1985), if the cause of action is anything other than collecting or recovering a claim (i.e., injunctive relief, etc.), the foreign representative must first obtain recognition of the foreign proceeding under chapter 15 before the foreign proceeding will be granted comity from another state or federal court.
32 In the absence of evidence to the contrary, recognition of a foreign proceeding, for purposes of section 303, constitutes proof that the debtor is not paying its debts as they become due. See 11 U.S.C. §§ 1531, 303(h).
33 11 U.S.C. § 1511. A voluntary case under section 301 or 302 can be commenced only if the foreign proceeding is a foreign main proceeding. In addition, a case under section 301, 302 or 303 can only be commenced by the foreign representative if the debtor has assets in the United States. See infra n. 65 and accompanying text. Further, we must assume that the foreign representative’s right to commence an action under section 301, 302 or 303 is still limited by the restrictions of section 109, notwithstanding the carve-out from section 109 for foreign insurance companies under section 1501 (c). See supra n. 7.
34 See 11 U.S.C. § 1512. Although not clear from the statutory language, we have assumed that because the foreign representative has the authority to commence a case under section 301, 302 or 303, this section must refer to cases pending at the time of recognition. In addition to being a party in interest, upon recognition of a foreign proceeding the foreign representative has standing in a case concerning the debtor under other chapters of the Bankruptcy Code to initiate actions under sections 522, 544, 547, 548, 550, 553 and 724(a). 11 U.S.C. § 1523(a).
35 11 U.S.C. § 1524.
36 11 U.S.C. §§ 1513(a), (b). Section 1513 also specifically provides that it does not change or codify present law as to the priority of claims under sections 507 or 726. Id. In addition, section 1513 does not change or codify present law with respect to the allowability of foreign revenue claims or other foreign public law claims, which instead are to be governed by applicable tax treaties. See 11 U.S.C. §§ 1513(b)(2)(A), (B).
37 11 U.S.C. § 1514(a).
38 11 U.S.C. § 1514(b).
39 11 U.S.C. §§ 1514(c)(1), (2), and (3).
40 11 U.S.C. § 1514(d).
41 “Recognition” is defined as the “entry of an order granting recognition of a foreign … proceeding under this chapter.” 11 U.S.C. § 1502(7).
42 See 11 U.S.C. § 1515; see also 11 U.S.C. § 1504.
43 11 U.S.C. §§ 1515(b), (d). In the absence of a copy of the decision or a certificate, the bankruptcy court can consider other evidence of commencement and appointment. It should also be noted that chapter 15 allows the court to presume that the foreign proceeding is a valid foreign proceeding and the foreign representative is a valid foreign representative for purposes of eligibility under chapter 15. 11 U.S.C. § 1516. This comports with existing case law under Section 304. See, e.g., In re Petition of Blackwell, 270 B.R. 814, 821 n.9 (Bankr. W.D. Tex. 2001) (“[A]n ancillary action is commenced by a filing vel non. If no one contests the petition, then the foreign representative is presumed to be entitled to recognition by the court (though the court may, for other reasons, elect not to grant some of the relief that representative seeks pursuant to section 304(b)). … Though the case law is less than enlightening on the issue of burdens, it would seem most sensible that, once an objection is raised, the burden of proof lies with the foreign representative to establish his or her ‘credentials,’ as it were.”).
44 11 U.S.C. § 1517.
45 11 U.S.C. § 1506. Although the granting of recognition does not require the bankruptcy court to consider comity, this provision appears to give the court the right to deny relief under chapter 15 if the court believes comity should not be granted based on public policy. See supra n. 15.
46 See supra n. 10.
47 See 28 U.S.C. §§ 1410 (1), (2) (as amended).
48 28 U.S.C. § 1410(3).
49 This defined term is for purposes of this analysis only and is not included in the definitions contained in chapter 15.
50 11 U.S.C. § 1519(a). Interim relief does not include relief under sections 522, 544, 545, 547, 548, 550 and 724(a). This maintains the rule under section 304. See, e.g., In re Petition of Kojima, 177 B.R. 696, 703 n.35 (Bankr. D. Colo. 1995) (holding that avoiding powers are not available in an ancillary proceeding). In addition, the court may not enjoin a police or regulatory act of a governmental unit, including a criminal action or proceeding. 11 U.S.C. § 1519(d).
51 11 U.S.C. § 1519(c).
52 11 U.S.C. § 1519(e). See also infra n. 59 and accompanying text.
53 11 U.S.C. § 1519(b).
54 11 U.S.C. § 1520(a). In addition, sections 361, 363, 549 and 552 apply to a transfer of an interest of the debtor in property located within the territorial United States and the foreign representative is authorized to operate the debtor’s business and exercise the rights and powers of a trustee under and to the extent of sections 363 and 552. It should also be noted that the automatic stay under section 362, made applicable by section 1520(a), does not affect the right of a creditor to commence an action or proceeding in a foreign court to the extent necessary to preserve its claim against the debtor. 11 U.S.C. § 1520(b).
55 See, e.g., In re Petition of Banco Nacional de Obras y Servicios Publicos, S.N.C., 91 B.R. 661, 664 (Bankr. S.D.N.Y. 1988) (“This broad injunctive relief, which is specifically permitted and so typically granted in a section 304 case, is not unlike the injunction which is automatic in a chapter 7 or 11 case pursuant to section 362 of the Code.”).
56 See, e.g., Schimmelpenninck v. Byrne (In re Schimmelpenninck), 183 F.3d 347, 366 (5th Cir. 1999) (“[W]hen declaratory and injunctive relief is sought in a bankruptcy court in this country through proceedings that are ancillary to a foreign bankruptcy from a country whose laws are compatible with and not repugnant to ours, analysis of the ancillary case should be conducted not under section 362 of the Code, but under section 304.”).
57 If it is a foreign nonmain proceeding, the court must be satisfied that the relief relates to assets that, under the laws of the United States, should be administered in the nonmain proceeding or concerns information required in that proceeding. See 11 U.S.C. § 1521(c).
58 See supra n. 49.
59 11 U.S.C. §§ 1521(a)(1), (2), (3) and (6). Like the interim relief available under section 1519, granting of supplemental relief is governed by the standards and limitations generally applicable to preliminary injunctions. See supra n. 52.
60 11 U.S.C. §§ 1521 (4), (5) and (7). Supplemental relief does not include relief under sections 522, 544, 545, 547, 548, 550 and 724(a). See supra n. 50. In addition, the court may not enjoin a police or regulatory act of a governmental unit, including a criminal action or proceeding. 11 U.S.C. § 1521(d). Further, supplemental and interim relief is not applicable to the exercise of setoff rights set forth in sections 362(b)(6) (commodity contracts), 362(b)(7) (repurchase agreements), 362(b)(17) (swap agreements), 362(b)(27) (as amended) (master netting agreements), or section 362(n) (as amended) (small businesses). 11 U.S.C. § 1519(f).
61 11 U.S.C. § 1521(b). The need to satisfy the court that the interests of U.S. creditors will be protected seems to indicate that at least some of the requirements of section 304(c), and the relevant case law, will be applicable to requests for turnover under chapter 15.
62 11 U.S.C. § 1522(b). In addition, at the request of the foreign representative or an entity affected by the relief or its own motion, the court may modify or terminate such relief. 11 U.S.C. 1522(c).
63 11 U.S.C. § 1525. Similarly, a trustee is also required, subject to supervision by the court to cooperate to the extent possible with the foreign court or foreign representative and is permitted (also subject to supervision) to communicate directly with a foreign court or a foreign representative. 11 U.S.C. § 1526.
64 See supra n. 50.
65 See 11 U.S.C. § 1528 and supra n. 33.
66 11 U.S.C. § 1528. The “other assets” referred to here are any assets within the jurisdiction of the court under section 541(a) of the Bankruptcy Code and 28 U.S.C. § 1334(e), which may include assets outside the territorial United States, but only to the extent such assets are not subject to the jurisdiction and control of the foreign proceeding.
67 11 U.S.C. § 1529(1).
68 11 U.S.C. § 1529(2). In addition, the court may dismiss a bankruptcy case or suspend all proceedings in a bankruptcy case after a foreign proceeding has been recognized if the purposes of chapter 15 “would best be served by such dismissal or suspension.” 11 U.S.C. §§ 305 (a) (as amended), 1529(4).
69 11 U.S.C. § 1532.
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