Chapter Three Relief Available in the Pre-Recognition "Gap" Period

• Jurisdiction: United States

Chapter Three Relief Available in the Pre-Recognition "Gap" Period

Chapter 15 provides that a foreign representative may request "relief of a provisional nature" from the filing of the petition for recognition until the court rules on the petition.¹³⁵ To obtain provisional relief, the foreign representative must demonstrate that the relief is "urgently needed" to protect the assets of the debtor or the interests of creditors.¹³⁶ The temporary remedies, which may ultimately be made permanent upon recognition, may include staying execution against the debtor's assets, entrusting the administration of the debtor's assets to a foreign representative or other authorized person, suspending the right to transfer, encumber or otherwise dispose of assets, or providing for the examination of witnesses, the taking of evidence or the delivery of information concerning the debtor's assets, affairs, rights, obligations or liabilities.¹³⁷ Additionally, the court may grant the foreign representative other relief that the Bankruptcy Code may provide to a trustee, except for relief available for the avoidance of transactions under and in accordance with §§ 522, 544, 545, 547, 548, 550 and 724(a) of the Bankruptcy Code.¹³⁸

One aspect of provisional relief that has caused confusion in the courts is the proper procedure to obtain provisional relief. This is so because § 1519(e) provides that the "standards, procedures, and limitations applicable to an injunction shall apply to relief" sought under § 1519 of the Bankruptcy Code. Under Bankruptcy Rule 7001(7), a request for injunctive relief must be commenced by a separate lawsuit called an adversary proceeding, which may take more time and delay recognition significantly;¹³⁹ however, Bankruptcy Rule 1018 provides that only certain of the Bankruptcy Rules apply with respect to a contested petition for recognition of a foreign proceeding, and that those Rules that require commencement of a separate action by adversary proceeding do not apply. Courts have construed these provisions differently and have created some procedural confusion.¹⁴⁰ As we will see below, different courts take different approaches to these issues.

I. The Not-So-Automatic Stay

The most frequently litigated aspect of 11 U.S.C. § 1519 arises in the context of a request by a foreign representative for the court's imposition of the automatic stay on a provisional basis pending the entry of an order for recognition.¹⁴¹ The plain language of 11 U.S.C. § 1519(a) explains that a stay of execution against the assets of a foreign debtor may only be granted upon the foreign representative's showing that such relief is "urgently needed" to protect the debtor's estate. This highlights that, unlike petitions filed under other chapters of the Bankruptcy Code that benefit from an "automatic stay," the petition for recognition under chapter 15 does not give rise to an automatic stay of execution upon which the foreign representative may immediately rely. Indeed, during the "gap period" between the filing of the petition for recognition and the court's ruling on the recognition request (which may last up to several weeks or months in a contested litigation setting), the automatic stay will not take effect absent affirmative and justified action on behalf of the foreign representative.¹⁴²

Courts disagree as to the procedure to be used to obtain this relief and what the foreign representative must demonstrate in order to obtain a stay during the pre-recognition gap period. One requirement, however, is that the foreign representative must identify against whom it seeks provisional relief.¹⁴³ While Bankruptcy Rule 2002(q) contemplates 21 days' notice for a hearing on a recognition petition, when it comes to provisional relief, the courts will "likely grant immediate relief if the affidavit in support of the motion adequately satisfies the standards for entering such an order, setting a hearing on notice for a later time to give an opportunity for notice to affected parties and the possibility of a hearing."¹⁴⁴ Nonetheless, as will be shown by the following discussion of some of the relevant cases, not all U.S. courts approach the procedural aspects of a case in the same fashion. Thus, the key takeaway for a foreign representative is to know what procedural preferences the relevant court prefers and to follow that procedural approach.

A. The Pro-Fit Approach

In In re Pro-Fit International Ltd.,¹⁴⁵ the foreign representatives of three affiliated debtors whose insolvency proceedings were pending in the U.K. sought provisional relief from the bankruptcy court during the gap period in the form of a stay of execution by a judgment creditor against the debtors' assets located in the U.S. The debtors' judgment creditor objected to the requested provisional relief, arguing that the foreign representative's motion failed to follow the "standards, procedures and limitations applicable to an injunction," as required by § 1519(e) of the Bankruptcy Code. The court rejected such a broad reading of the statute, finding it to be inconsistent with bankruptcy jurisprudence generally, and the legislative history of § 1519(e) specifically. "[s]uch a reading," the court reasoned, "would impose procedural barriers that are unknown in the bankruptcy law to the availability of at least some section 1519 remedies."¹⁴⁶

The court also referenced the legislative history of § 1519, which reveals that subsection (e) "contemplates injunctive relief and that such relief is subject to specific rules and a body of jurisprudence. According to this legislative comment, the rules and jurisprudence for an injunction apply ... only where a foreign representative seeks an injunction under § 1519, and not where the relief sought is not an injunction."¹⁴⁷

The Pro-Fit court was careful to explain why, in its view, the automatic stay requested by the foreign representative in that case was not an injunction within the meaning of 11 U.S.C. § 1519(a):

The stay under § 362 is fundamentally different in several respects from an injunction. Perhaps the most important difference is that the stay is in rem: its purpose is to protect property that is in custodia legis in consequence of the bankruptcy filing. Accordingly, it is not directed to a party in litigation, or even to any particular

...