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The Crystal Anniversary: Chapter 15 Turns 15

In recognition of the 15th anniversary of the passage of chapter 15 of the Bankruptcy Code, the New York City Bar Association’s Bankruptcy & Corporate Reorganization Committee hosted a webinar on May 12, 2021 to discuss the current state of chapter 15 cases and potential, corresponding and significant future developments.[1] Several dozen participants joined a panel of distinguished leaders in the field: the Honorable Allan Gropper, former United States Bankruptcy Judge for the Southern District of New York; Professor Jay L. Westbrook, Benno C. Schmidt Chair of Business Law, The University of Texas at Austin School of Law; Professor Edward Morrison, Charles Evans Gerber Professor of Law, Columbia Law School; and practitioners Rick Antonoff and Christine Okike.

Here are some of the highlights from the discussion:

  • Chapter 15 was enacted in 2005 as part of a comprehensive overhaul of the Bankruptcy Code to replace the former section 304.
     
  • Chapter 15 represents the U.S. domestic adoption of the Model Law on Cross-Border Insolvency promulgated by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997. Some form of the UNCITRAL Model Law has been adopted in 53 jurisdictions around the world.
     
  • Chapter 15 filings have increased in all but five years since 2005. Since 2016, chapter 15 filings have increased by almost 25% (in 2020, there were a total of 236 filings).
     
  • Chapter 15 emphasizes comity between jurisdictions. Some of the main objectives of chapter 15 include: (1) to freeze assets of the debtor pending the resolution of all applicable bankruptcy proceedings, (2) to increase legal certainty for trade and investment, (3) to promote the fair administration of cross-border insolvencies, and (4) to facilitate the rescue of financially troubled businesses.
     
  • Chapter 15 authorizes a foreign representative to commence an insolvency proceeding in the U.S. as long as the foreign debtor’s petition meets the requirements of section 1517 of the Bankruptcy Code.
     
  • Section 1519 authorizes a bankruptcy court to grant preliminary relief of an urgent nature if the requested relief is in the best interests of the foreign debtors and all creditors.
     
  • All actions authorized by chapter 15 are subject to section 1506 in that the requested relief cannot be manifestly contrary to U.S. public policy. In particular, bankruptcy courts have used this provision to deny relief when: (1) a foreign representative would be able to access email accounts on servers located in the U.S. based on the Fourth Amendment and analogous state law, (2) when a chapter 15 proceeding was filed after a chapter 11 proceeding since doing so would violate the automatic stay, and (3) when a failure to uphold section 365(n) of the Bankruptcy Code would prohibit the protection of U.S. patents under U.S. law. However, a conflict between U.S. law and foreign law is not sufficient in and of itself to invoke the public policy exception.
     
  • Section 1520 of the Bankruptcy Code provides for an automatic stay that will go into effect upon the recognition of a foreign proceeding that is a foreign main proceeding, but only with respect to the debtor and the property of the debtor that is within the territorial jurisdiction of the United States.
     
  • Section 1521 allows a bankruptcy court to grant "appropriate relief" as part of a chapter 15 proceeding. This includes the continuance of the automatic stay, the provision of an automatic stay for non-main proceedings, the provision of discovery rights, and the provision of any additional relief that may be available to a U.S. Trustee under a chapter 7 of chapter 11 case (with certain exceptions).
     
  • Limits on relief afforded to a foreign representative are generally found in section 1522. This section balances the interests of debtors and creditors with the goal of forcing the parties to negotiate in and out of court once the stay is implemented.
     
  • Section 1521(a)(7) bars a foreign representative from bringing chapter 5 avoidance actions in a chapter 15 case. But this prohibition does not prevent creditors from bringing avoidance actions in the U.S. under foreign law (this is a choice of law issue). There are two fairly recent cases that involve a foreign representative using state law to pursue avoidance claims. In Hosking v. Hellas Telcoms. (Lux.) II SCA (In re Hellas Telcoms. (Lux.) II SCA), 524 B.R. 488 (Bankr. S.D.N.Y 2015), the bankruptcy court held that a foreign representative could not pursue constructive fraudulent transfer claims under New York law because neither Luxembourg nor the U.K., jurisdictions, both of which had greater interests in avoiding the challenged transactions, recognized such claims. But in Laspro Consultores LTDA v. Alinia Corp. (In re Massa Falida Do Banco Cruzeiro Do Sul S.A.), 567 B.R. 212 (Bankr. S.D. Fla. 2017), the bankruptcy court held that a foreign representative can use state debtor-creditor law to pursue avoidance actions.
     
  • Third-party releases (i.e., non-consensual releases of affiliates, officers and directors of entities other than the debtor) are often the source of considerable dispute in U.S. insolvency proceedings, and they are especially uncertain in chapter 15 cases. They are banned in the Fifth and Ninth Circuits. They may be permissible in the Second Circuit, but not if the result leaves creditors without any other remedies (especially vis-à-vis guarantors).
     
  • Schemes of arrangement are proposals under English law that debtors make to satisfy financial creditors (including bondholders). If a debtor can capture a minimum amount of support, the bankruptcy judge will hold a hearing to enable affected parties to weigh in on the proposed scheme. But, a scheme of arrangement will only be approved if there is a legal opinion evidencing that the scheme will be enforceable in each country where it will have an impact. This method of reorganization has been increasingly adopted in other countries (e.g., Singapore) because the results are fast, relatively inexpensive and have a good chance of being approved in the U.S. as part of a subsequent chapter 15 proceeding.
     
  • Moving forward, the dynamic between the control country and the comity country is likely to be a significant issue. Moreover, cases where the foreign debtor is an individual rather than a business are on the rise. Accordingly, determining the establishment of a foreign main proceeding, a requirement under section 1517, when the debtor is an individual will be a key challenge.
     

[1] This webinar was organized by Daniel Lowenthal, a Partner at Patterson Belknap Webb & Tyler LLP, who is the Co-Chair of the City Bar’s Cross-Border Subcommittee, together with his Co-Chair, William Schrag.