Hands Across the Water: Chapter 15 and the New Bankruptcy Act
October 31, 2005
Peter Alan Zisser - New York
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Titled “Ancillary and Other Cross-Border Cases,” chapter 15 supersedes section 304 of the Bankruptcy Code, which was repealed in its entirety by the Act.2 Chapter 15, however, does more than simply replace section 304; the chapter’s very title recognizes that, in many cases, the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 i