Recognition of a foreign main proceeding under Chapter 15 of the Bankruptcy Code has “effects” under Section 1520 that are automatic and powerful, including application of the automatic stay of Section 362 and the complementary adequate protection requirements of Section 361. In addition, Section 363 – use, sale and lease of property – applies “to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the United States to the same extent that the [section] would apply to property of an estate.” While the legislative history of Section 1520 elaborates on the benefits of allowing a foreign representative to operate a debtor’s business in the ordinary course under Section 363(c), it says nothing about the standards to be applied to sales outside the ordinary course under Section 363(b).3 If a sale has been approved in a foreign main proceeding, is the foreign court approval entitled to comity or must the bankruptcy court apply the standards applicable in domestic cases?

The United States Court of Appeals for the Second Circuit, in Krys v. Farnum Place, LLC (In re Fairfield Sentry Ltd.), No. 13-3000, 2014 WL 4783370 (2d Cir. Sept. 26, 2014) (“Fairfield”) held that, in the context of a Chapter 15 ancillary bankruptcy proceeding, a sale of a claim by the liquidator of Fairfield Sentry Limited (“Sentry”) invoked Section 363 review under standards developed in Chapter 11 cases, rejecting considerations of comity to the foreign court approval in the foreign main proceeding (the “BVI Court”) after a three day hearing. This decision – which would require U.S Bankruptcy Court oversight and review of any sales of assets meeting the U.S. territorial prerequisite, even where a sale is intimately tied to a foreign main proceeding and has previously been approved by the court in that foreign main proceeding – has the potential to upset decades of Chapter 15 jurisprudence and greatly increase the uncertainty and costs associated with any Chapter 15 ancillary proceeding in which assets are being sold.

Originally published in INSOL International on November 20, 2014.