If a foreign debtor is eligible to file for bankruptcy protection in the U.S., the debtor's foreign representative (e.g., a liquidator or administrator) may, under certain circumstances, have the power to avoid and recover pre-bankruptcy transfers of the debtor's assets, a feature of U.S. bankruptcy law that can serve to materially augment the value of a foreign bankruptcy estate. The Bankruptcy Code includes certain restrictions on that ability, depending on whether the representative files a case under chapter 15 of the Bankruptcy Code, in which a U.S. bankruptcy court can "recognize" the debtor's foreign bankruptcy proceeding(s), or under another chapter, such as chapter 7 or chapter 11. A Florida bankruptcy court addressed those restrictions in Laspro Consultores LTDA. v. Alinia Corp. (In re Massa Falida do Banco Cruzeiro do Sul S.A.), 2017 BL 94281 (Bankr. S.D. Fla. Mar. 23, 2017). The court ruled that section 1521(a)(7) of the Bankruptcy Code did not preclude a foreign representative in a chapter 15 case from prosecuting fraudulent transfer claims arising under New York law because the representative had "independent" standing to prosecute such claims under Brazilian law.
Procedures and Relief Under Chapter 15
Chapter 15 of the Bankruptcy Code is patterned on the UNCITRAL Model Law on Cross-Border Insolvency (the "Model Law"), a framework of legal principles designed to harmonize and coordinate cross-border bankruptcies that has now been adopted in 43 nations or territories.
Under chapter 15, the "foreign representative" of a non-U.S. debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." A "foreign representative" is defined in section 101(24) of the Bankruptcy Code 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 . . . 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."
Because more than one bankruptcy or insolvency proceeding may be pending against the same foreign debtor in different countries, chapter 15 contemplates recognition in the U.S. of both a "main" proceeding—a case pending in whatever country contains the debtor's "center of main interests"—and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment."
Upon recognition of a foreign "main" proceeding, section 1520(a) provides that certain provisions of the Bankruptcy Code automatically come into force, including section 362, which imposes an automatic stay preventing creditor collection efforts with respect to the debtor or its U.S. assets; section 361, which entitles any entity asserting an interest in the debtor's U.S. assets to "adequate protection" of that interest; section 363, which restricts the debtor's ability to use, sell, or lease its U.S. property outside the ordinary course of its business; and section 549, which gives a "trustee" the power to avoid unauthorized postpetition asset transfers.
The foreign representative in a recognized main proceeding is authorized to operate the debtor's business in much the same way that a chapter 11 debtor-in-possession is. Pursuant to sections 1520(c) and 1528, the foreign representative can also commence a full-fledged bankruptcy case under any other chapter of the Bankruptcy Code, so long as the foreign debtor is eligible to file for bankruptcy in the U.S. and the debtor has U.S. assets. The foreign representative may intervene in any court proceedings in the U.S. in which the foreign debtor is a party (section 1524) and can sue and be sued in the U.S. on the foreign debtor's behalf (section 1509(b)(1)). Section 1509(b)(2) provides that the foreign representative may also "apply directly to a court in the United States for appropriate relief in that court," which is obligated to grant "comity or cooperation" to the foreign representative.
If the bankruptcy court denies recognition of a foreign proceeding, section 1509(d) provides that the court may issue any appropriate order necessary to prevent the foreign representative from obtaining comity or cooperation from other U.S. courts.
However, section 1509(f) provides that the failure of a foreign representative "to commence a case or to obtain recognition under [chapter 15] 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."
If a foreign proceeding is recognized as either a main or "nonmain" proceeding, section 1521(a) authorizes the bankruptcy court to grant a broad range of provisional and other relief designed to preserve the foreign debtor's assets or otherwise provide assistance to the court or other entity presiding over the debtor's main proceeding.
Foreign Representative's Power to Avoid Transfers
Under section 1521(a)(7), the court may also "grant any additional relief that may be available to a trustee, except for relief available under sections 522, 544, 545, 547, 548, 550, and 724(a)" (emphasis added). These provisions authorize the "trustee" to, among other things, avoid and recover transfers that are fraudulent under the Bankruptcy Code and/or, under certain circumstances, "applicable" law (generally state law).
However, these avoidance powers are expressly conferred upon a foreign representative if the debtor files for protection under another chapter of the Bankruptcy Code. Section 1523 authorizes the bankruptcy court to order relief necessary to avoid acts that are "detrimental to creditors," providing that upon recognition of a foreign proceeding, a foreign representative has "standing in a case concerning the debtor under another chapter of this title to initiate actions under sections 522, 544, 545, 547, 548, 550, 553, and 724(a)."
The legislative history of sections 1521 and 1523 provides as follows:
[Section 1521] follows article 21 of the Model Law, with detailed changes to conform to United States law. The exceptions in subsection (a)(7) relate to avoiding powers. The foreign representative's status as to such powers is governed by section 1523 below.
* * * *
[Section 1523] follows article 23 of the Model Law, with wording to fit it within procedure under this title. It confers standing on a recognized foreign representative to assert an avoidance action but only in a pending case under another chapter of this title. The Model Law is not clear about whether it would grant standing in a recognized foreign proceeding if no full case were pending. This limitation reflects concerns raised by the United States delegation during the UNCITRAL debates that a simple grant of standing to bring avoidance actions neglects to address very difficult choice of law and forum issues. This limited grant of standing in section 1523 does not create or establish any legal right of avoidance nor does it create or imply any legal rules with respect to the choice of applicable law as to the avoidance of any transfer of obligation. The courts will determine the nature and extent of any such action and what national law may be applicable to such action.
H.R. Rep. 109-31(I), at 178–79 (2005) (footnotes omitted).
In In re Condor Ins. Ltd., 601 F.3d 319 (5th Cir. 2010), the U.S. Court of Appeals for the Fifth Circuit considered whether sections 1521 and 1523 preclude a foreign representative in a chapter 15 case from seeking to avoid transfers under non-U.S. law without first commencing a chapter 7 or 11 case on behalf of the debtor. The Fifth Circuit reversed lower court orders dismissing a proceeding brought by a foreign representative in a chapter 15 case seeking to avoid fraudulent transfers under foreign law. The lower courts took the position that, in the words of the district court, sections 1521(a)(7) and 1523 "are intended to exclude all of the avoidance powers specified, under either United States or foreign law, unless a Chapter 7 or 11 bankruptcy proceeding is instituted."
According to the Fifth Circuit, the avoidance-power exceptions to "any appropriate relief" delineated in section 1521(a)(7) do not exist in the Model Law, and "[w]hile it is plain that relief under the listed sections is excluded, the statute is silent regarding proceedings that apply foreign law, including any rights of avoidance such law may offer." The court wrote, "If Congress wished to bar all avoidance actions whatever their source, it could have stated so; it did not."
Looking to the legislative history of the Model Law and chapter 15, the Fifth Circuit noted drafters' concerns regarding conflicts of law and choice of law issues:
The drafters of Chapter 15, responsive to the concerns raised at the UNCITRAL debates, confined actions based on U.S. avoidance law to full Chapter 7 and 11 bankruptcy proceedings—where the court would also decide the law to be applied to the distribution of the estate. The application of foreign avoidance law in a Chapter 15 ancillary proceeding raises fewer choice of law concerns as the court is not required to create a separate bankruptcy estate. It accepts the helpful marriage of avoidance and distribution whether the proceeding is ancillary applying foreign law or a full proceeding applying domestic law—a marriage that avoids the more difficult depecage rules of conflict law presented by avoidance and distribution decisions governed by different sources of law.
In Banco Cruzeiro, the bankruptcy court examined the power of a foreign representative to bring an avoidance action under U.S. state law in a chapter 15 case.
Brazilian bank Banco Cruzeiro do Sul S.A. ("BC") was placed into extrajudicial liquidation by the Central Bank of Brazil in September 2012. On June 14, 2014, BC's liquidator filed a petition in the U.S. Bankruptcy Court for the Southern District of Florida that sought recognition of the Brazilian liquidation proceeding as a foreign main proceeding under chapter 15. The court entered an order recognizing the proceeding on July 14, 2014. The Brazilian bankruptcy court declared BC bankrupt on August 12, 2014, after which the liquidator was formally appointed as the bank's trustee (the "trustee").
In July 2016, the trustee commenced an adversary proceeding in the U.S. bankruptcy court against two British Virgin Islands affiliates of BC (collectively, the "defendants") which alleged, among other things, that certain BC insiders had caused the bank to fraudulently transfer funds used to purchase various U.S. assets which were later transferred to the defendants in violation of the New York Debtor and Creditor Law. The trustee did not rely on section 544 or any other provision of the Bankruptcy Code in the adversary complaint. The defendants moved to dismiss, arguing that, as a foreign representative in a chapter 15 case, the trustee was precluded by section 1521(a)(7) from pursuing avoidance claims.
The Bankruptcy Court's Ruling
The bankruptcy court denied the motion. In doing so, the court concluded that it need look no further than the express language of sections 1521(a)(7) and 1509(f). According to the court, although section 1521(a)(7) does preclude a court from granting a foreign representative relief under "certain enumerated sections pursuant to which a bankruptcy trustee may bring avoidance actions," the provision does not "prohibit a foreign representative from bringing avoidance claims that are available to the foreign representative generally under non-bankruptcy law."
Moreover, the court explained, section 1509(f) "makes clear" that "the failure of a foreign representative to commence a case or to obtain recognition under [chapter 15] 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."
The court found that the trustee's ability to seek relief under the New York fraudulent conveyance law stemmed not from his capacity as a "foreign representative" under chapter 15, but rather, from his capacity as a Brazilian bankruptcy judicial administrator "who represents the creditors of the estate under Brazilian law." The court reasoned that, unlike a bankruptcy trustee in the U.S., who has standing to bring state law fraudulent transfer claims only by virtue of section 544 of the Bankruptcy Code, a Brazilian judicial administrator has standing under Brazilian law to pursue such claims independently on behalf of the debtor and its creditors (the massa falida). The court wrote:
There is absolutely nothing in any part of chapter 15 that remotely suggests that a foreign representative may never bring an avoidance claim that the foreign representative has the direct right to bring in his or her capacity as the foreign representative (or as section 1509(f) makes clear—in his or her independent capacity otherwise).
The court found the Fifth Circuit's ruling in Condor to be both "instructive" and supportive:
The court held that there is nothing in chapter 15 in general, or section 1521(a)(7) specifically, that prohibits a foreign representative from prosecuting an avoidance action that arises under the laws of the country governing the main proceeding. While the court unfortunately seems to refer sometimes to "U.S. Laws" and other times to claims arising under the Bankruptcy Code, the crux of the opinion is clear—if the foreign representative has a cause of action that is not dependent on the claims that he or she could only raise as a U.S. bankruptcy trustee, the foreign representative may pursue those claims.
Banco Cruzeiro may be a welcome development for foreign representatives in chapter 15 cases wishing to assert avoidance actions under U.S. state law or foreign law without having to file a chapter 7 or chapter 11 case on behalf of a foreign debtor. However, it remains to be seen whether other courts will adopt the Banco Cruzeiro court's reading of sections 1509 and 1521.