Rule B Maritime Attachments, Foreign Proceedings and the U.S. Bankruptcy Code
January 27, 2009
James "Jim" Hohenstein- New York
Francesca Morris- New York
Arthur E. Rosenberg- New York
Purpose of Chapter 15
As the financial crisis continues and deepens, companies involved in maritime commerce that are perceived to be in distress might find themselves defending multiple Rule B maritime attachment actions in New York. If a company in such a situation then files a liquidation or reorganization proceeding abroad, a parallel proceeding in the United States can help protect the debtor’s estate’s assets located in the U.S. The debtor’s authorized representative can file a petition for recognition of a foreign proceeding under Chapter 15 of the U.S. Bankruptcy Code, the purpose of which is to recognize foreign liquidation or reorganization proceedings. Absent recognition under Chapter 15, a U.S. federal court will not take judicial notice of the foreign proceeding or provide comity to orders entered in the liquidation proceedings.1
Recognition of the Foreign Liquidation or Reorganization Proceedings
To commence a Chapter 15 action, the foreign court adjudicating the foreign proceeding will need to appoint one or more representatives to act for the debtor in the U.S. Bankruptcy Court.2 This representative is typically the trustee, receiver or administrator, and frequently is the party or parties appointed in the foreign jurisdiction generally to oversee the debtor’s proceeding in that jurisdiction. When the Chapter 15 case is commenced, the foreign representative can seek provisional relief, including a stay of execution against the debtor’s assets or a preliminary injunction against continuing actions already filed.3 In addition, the debtor might seek a general injunction virtually identical to the injunction granted in the automatic stay provision under Section 362 of the Bankruptcy Code, pending the determination regarding recognition.4 The automatic stay would typically apply from the date of filing a petition under any Chapter of the Bankruptcy Code other than Chapter 155 (e.g., Chapter 7 and 11), and once obtained would bar the commencement or continuation of any action or proceedings against the debtor. Stated differently, while in other bankruptcy proceedings (e.g., Chapter 7 or 11), the automatic stay is “automatically” obtained upon filing, in Chapter 15 actions the stay is not automatic as it requires a threshold procedural determination prior to the stay being issued, as discussed in the following paragraphs.
Main and Nonmain Proceedings
Under Chapter 15, the foreign proceeding can be recognized as a foreign main or a foreign nonmain proceeding.6 Thus, at the beginning of the case, the representative(s) of the foreign debtor must seek the appropriate recognition.
The difference between main and nonmain is important.
A foreign main proceeding is a proceeding pending in the country where the debtor has the “center of its main interests.”7 Recognition as a foreign main proceeding applies certain provisions of the Bankruptcy Code to the Chapter 15 proceeding, including the automatic stay8, which prevents any party from initiating or continuing any action against the debtor or its estate, including a Rule B attachment action. Any existing attachment action (whether in a U.S. District Court or any other court) against the debtor will be stayed by the recognition by the U.S. Bankruptcy Court of the foreign main proceeding.
A foreign nonmain proceeding is a proceeding pending in a country where the debtor has an “establishment,”9 but which is not the debtor’s “center of main interest.” Following the recognition of a foreign nonmain proceeding, the Bankruptcy Court may grant appropriate relief only on the further application of the foreign representative, including staying the commencement or continuation of any individual action or proceeding.10
Effect of Recognition
Under Chapter 15, upon recognition of a main or nonmain foreign proceeding, the U.S. Bankruptcy Court, at the foreign representative’s request, may entrust the distribution of the debtor’s U.S. assets to the foreign representative.11 Importantly, the Bankruptcy Court may order turn over to the foreign representative only “if the interests of the creditors and other interested entities, including the debtor, are sufficiently protected.”12 Although this condition was not present under the predecessor to Chapter 15,13 courts frequently considered the rights and protection of U.S. creditors in considering whether to permit the transfer of funds and other assets back to the jurisdiction of the debtor’s main proceeding. Thus, if at the time of the Chapter 15 filing assets of the debtor have been attached in the U.S., the foreign representative could request that the action be transferred to the U.S. Bankruptcy Court for that court to hear the motion to vacate the attachment, and could request that upon recognition of the foreign proceeding, the assets be turned over to the foreign representative.
As Chapter 15 is relatively new (2005), there is little case law on its application. However, Section 304 of the Bankruptcy Code, now repealed, was used prior to 2005 for U.S. proceedings in support of a foreign bankruptcy proceeding and one looks to the application of that statute by analogy.14 Moreover, since November 2008, at least three shipping company Chapter 15 proceedings have been commenced in the U.S. Bankruptcy Court for the Southern District of New York (New York, New York).15 At the time these proceedings were commenced, each of the debtors was a defendant in Rule B actions in the Southern District of New York.
In conclusion, Chapter 15 has the potential, when correctly applied, to promote comity between the U.S. Bankruptcy Courts and foreign courts by allowing for the orderly administration, on an international level, of a debtor’s worldwide estate.
For more information, contact:
James H. Hohenstein
212.513.3213
jim.hohenstein@hklaw.com
Francesca Morris
212.513.3431
francesca.morris@hklaw.com
Arthur E. Rosenberg
212.513.3482
arthur.rosenberg@hklaw.com
toll free: 1.888.688.8500
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1 U.S. v. J.A. Jones Constr. Group, LLC, 333 B.R. 637, 639 (E.D.N.Y. 2005); 8 A.N. Resnick & H.J. Sommer, Collier on Bankruptcy ¶ 1505.01 (15th ed. rev. 2008).
2 11 U.S.C. §§ 1515, 1519.
3 See In re Ho Seok Lee, 348 B.R. 799, 801 (Bankr. W.D. Wash. 2006).
4 In re Pro Fit Holdings Ltd., 391 B.R.850, 867 (Bankr. C.D. Calif. 2008).
5 Id. at 862.
6 11 U.S.C. §§ 1517(a)(1), 1502.
7 11 U.S.C. § 1502(a)(4).
8 11 U.S.C. §§ 1520, 362.
9 11 U.S.C. §§ 1502(a)(5), 1517(b).
10 11 U.S.C. § 1521(a).
11 11 U.S.C. § 1521(b).
12 11 U.S.C. § 1522(a);
see In re Artimm S.r.l., 335 B.R. 149, 160 (Bankr. C.D. Calif. 2005).
13 See Artimm, 335 B.R. at 160.
14 See, e.g., Cunard S.S. Co. Ltd. v. Saleen Reefer Services AB, 49 B.R. 614 (S.D.N.Y.),
aff’d, 773 F.2d 452 (2d Cir. 1985). In
Saleen Reefer, relying on international comity, the district court ordered that a Rule B attachment be vacated and the funds turned over to the debtor’s/defendant’s bankruptcy estate in Sweden to allow for an orderly and fair distribution. 49 B.R. at 618-19. The Second Circuit affirmed but noted that a decision by the bankruptcy court under § 304 would have been preferable.
Saleen Reefer, 773 F.2d at 454-55.
15 In re Armada (Singapore) Pte Ltd., No. 09-10105-JMP;
In re Britannia Bulkers A/S, No. 08-15187-REG;
In re Britannia Bulk Plc, No. 08-14543-REG.
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