Foreign Representative Had "Independent" Standing to Prosecute State Law Avoidance Claims in Chapter 15

by Jones Day
Contact

Jones Day

 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.

Banco Cruzeiro

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.

Outlook

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.

DISCLAIMER: Because of the generality of this update, the information provided herein may not be applicable in all situations and should not be acted upon without specific legal advice based on particular situations.

© Jones Day | Attorney Advertising

Written by:

Jones Day
Contact
more
less

Jones Day on:

Readers' Choice 2017
Reporters on Deadline

"My best business intelligence, in one easy email…"

Your first step to building a free, personalized, morning email brief covering pertinent authors and topics on JD Supra:
Sign up using*

Already signed up? Log in here

*By using the service, you signify your acceptance of JD Supra's Privacy Policy.
Privacy Policy (Updated: October 8, 2015):
hide

JD Supra provides users with access to its legal industry publishing services (the "Service") through its website (the "Website") as well as through other sources. Our policies with regard to data collection and use of personal information of users of the Service, regardless of the manner in which users access the Service, and visitors to the Website are set forth in this statement ("Policy"). By using the Service, you signify your acceptance of this Policy.

Information Collection and Use by JD Supra

JD Supra collects users' names, companies, titles, e-mail address and industry. JD Supra also tracks the pages that users visit, logs IP addresses and aggregates non-personally identifiable user data and browser type. This data is gathered using cookies and other technologies.

The information and data collected is used to authenticate users and to send notifications relating to the Service, including email alerts to which users have subscribed; to manage the Service and Website, to improve the Service and to customize the user's experience. This information is also provided to the authors of the content to give them insight into their readership and help them to improve their content, so that it is most useful for our users.

JD Supra does not sell, rent or otherwise provide your details to third parties, other than to the authors of the content on JD Supra.

If you prefer not to enable cookies, you may change your browser settings to disable cookies; however, please note that rejecting cookies while visiting the Website may result in certain parts of the Website not operating correctly or as efficiently as if cookies were allowed.

Email Choice/Opt-out

Users who opt in to receive emails may choose to no longer receive e-mail updates and newsletters by selecting the "opt-out of future email" option in the email they receive from JD Supra or in their JD Supra account management screen.

Security

JD Supra takes reasonable precautions to insure that user information is kept private. We restrict access to user information to those individuals who reasonably need access to perform their job functions, such as our third party email service, customer service personnel and technical staff. However, please note that no method of transmitting or storing data is completely secure and we cannot guarantee the security of user information. Unauthorized entry or use, hardware or software failure, and other factors may compromise the security of user information at any time.

If you have reason to believe that your interaction with us is no longer secure, you must immediately notify us of the problem by contacting us at info@jdsupra.com. In the unlikely event that we believe that the security of your user information in our possession or control may have been compromised, we may seek to notify you of that development and, if so, will endeavor to do so as promptly as practicable under the circumstances.

Sharing and Disclosure of Information JD Supra Collects

Except as otherwise described in this privacy statement, JD Supra will not disclose personal information to any third party unless we believe that disclosure is necessary to: (1) comply with applicable laws; (2) respond to governmental inquiries or requests; (3) comply with valid legal process; (4) protect the rights, privacy, safety or property of JD Supra, users of the Service, Website visitors or the public; (5) permit us to pursue available remedies or limit the damages that we may sustain; and (6) enforce our Terms & Conditions of Use.

In the event there is a change in the corporate structure of JD Supra such as, but not limited to, merger, consolidation, sale, liquidation or transfer of substantial assets, JD Supra may, in its sole discretion, transfer, sell or assign information collected on and through the Service to one or more affiliated or unaffiliated third parties.

Links to Other Websites

This Website and the Service may contain links to other websites. The operator of such other websites may collect information about you, including through cookies or other technologies. If you are using the Service through the Website and link to another site, you will leave the Website and this Policy will not apply to your use of and activity on those other sites. We encourage you to read the legal notices posted on those sites, including their privacy policies. We shall have no responsibility or liability for your visitation to, and the data collection and use practices of, such other sites. This Policy applies solely to the information collected in connection with your use of this Website and does not apply to any practices conducted offline or in connection with any other websites.

Changes in Our Privacy Policy

We reserve the right to change this Policy at any time. Please refer to the date at the top of this page to determine when this Policy was last revised. Any changes to our privacy policy will become effective upon posting of the revised policy on the Website. By continuing to use the Service or Website following such changes, you will be deemed to have agreed to such changes. If you do not agree with the terms of this Policy, as it may be amended from time to time, in whole or part, please do not continue using the Service or the Website.

Contacting JD Supra

If you have any questions about this privacy statement, the practices of this site, your dealings with this Web site, or if you would like to change any of the information you have provided to us, please contact us at: info@jdsupra.com.

- hide
*With LinkedIn, you don't need to create a separate login to manage your free JD Supra account, and we can make suggestions based on your needs and interests. We will not post anything on LinkedIn in your name. Or, sign up using your email address.