Chapter Four Relief Available upon Recognition

• Jurisdiction: United States

Chapter Four Relief Available upon Recognition

If a court grants recognition, then the foreign representative is entitled to certain rights and privileges in a U.S. bankruptcy court. Chapter 15 contains numerous statutory provisions that become effective only after the bankruptcy court has recognized the foreign proceedings as indicated by qualifying language such as "upon recognition" or "if recognition is granted" or "if the court grants recognition under section 1517." Under this construct, the foreign representative and the debtor in a foreign proceeding on whose behalf the foreign representative acts are entitled to certain rights, privileges, and protections.¹⁶⁴

As discussed in chapter 3, one of the main differences between recognition of a foreign proceeding as a "foreign main proceeding" and one recognized as a "foreign non-main proceeding" is that with respect to a foreign main proceeding, certain provisions of the Bankruptcy Code automatically apply upon recognition under chapter 15.¹⁶⁵ This section provides that upon recognition of a foreign main proceeding, §§ 361 and 362 of the Bankruptcy Code, which deal with "adequate protection" and the "automatic stay," apply with respect to the foreign debtor and the property of that debtor that is within the territorial jurisdiction of the U.S.¹⁶⁶ similarly, §§ 363, 549 and 552 of the Bankruptcy Code apply to a transfer of an interest of the foreign debtor in property that is within the territorial jurisdiction of the U.S. to the same extent that sections would apply to property of the estate in a plenary bankruptcy case.¹⁶⁷ The foreign representative in a foreign main proceeding may also operate the debtor's business and may exercise the rights and powers of a trustee under and to the extent provided in §§ 363 and 552 of the Bankruptcy Code unless ordered otherwise by the bankruptcy court.¹⁶⁸ Finally, § 552 of the Bankruptcy Code, which addresses the effect of a security interest in property of a debtor after the filing of a bankruptcy case, applies in a foreign main proceeding to property of a foreign debtor that is within the territorial jurisdiction of the U.S.¹⁶⁹

Given that the type of "estate" that is created under § 541 of the Bankruptcy Code (which generally extends to all of a debtor's assets irrespective of where in the world they are located and by whomever they are held) is not created upon recognition of the foreign case, the foreign representative's powers are generally understood to extend only to property of the debtor that is within the territorial jurisdiction of the U.S. A number of courts have written that as a result, there is no "estate" in a chapter 15 case;¹⁷⁰ however, an alternate analysis may be to consider the chapter 15 estate as one ancillary to the foreign estate.¹⁷¹ In this context, the bankruptcy court's role is slightly different than when it exercises plenary authority over all of the assets of a debtor; its role in a foreign proceeding is to assist a foreign representative in liquidating assets in the U.S. for purposes of a foreign insolvency proceeding.¹⁷²

In addition to these provisions available to a foreign representative under § 1520 of the Bankruptcy Code, the foreign representative in a foreign main proceeding may also apply for "appropriate relief" under § 1521 or seek "additional assistance" under § 1507 of the Bankruptcy Code. These provisions are discussed in greater detail below.

The relief provided for in § 1520 of the Bankruptcy Code is not automatically available to a foreign representative of a foreign non-main proceeding. Therefore, if the bankruptcy court declines to assign "foreign main proceeding" status to a foreign proceeding in its ruling on a petition for recognition and instead determines that the foreign proceeding is "non-main," the foreign representative must affirmatively seek the grant of appropriate relief or additional assistance; however, as noted above, in many instances the foreign representative in a foreign non-main proceeding can obtain the same relief that it would have had had its case been recognized as a foreign main proceeding.¹⁷³

I. General Application of the Bankruptcy Code to Chapter 15 Cases

It is important to note at the outset that regardless of whether a foreign proceeding is recognized as "main" or "non-main," certain provisions of the Bankruptcy Code apply in all cases filed under chapter 15, and therefore provide sources of relief that originate entirely outside of chapter 15. For example, § 103(a) of the Bankruptcy Code provides that chapter 1 of the Bankruptcy Code applies in a case filed under chapter 15, as do certain provisions included in chapters 3 and 5.¹⁷⁴

Additionally, in the context of litigation in or related to a chapter 15 case, courts will apply the provisions required to be applied under chapter 1 of the Bankruptcy Code and other applicable provisions of U.S. law outside of chapter 15. For example, in a number of civil litigation cases commenced by plaintiffs that had asserted claims for false advertising and breach of warranty related to the supplements manufactured by Muscletech Research and Development ("Muscletech"), the foreign debtor sought to remove cases from disparate state courts and have them transferred and consolidated to the Southern District of New York, where Muscletech's chapter 15 case was pending. In granting Muscletech's motion, courts applied the general jurisdictional and procedural rules under the U.S.'s Judiciary Code.¹⁷⁵ In this case, the court recognized that there was a "special consideration present" in that a foreign representative had sought recognition of a Canadian proceeding and had sought the assistance of the U.S. courts under chapter 15, and that as a result, the "involvement of a Canadian court in this matter weighs heavily in favor of transferring" the cases to the bankruptcy court in New York because "cooperation will be better facilitated if all related matters are before one United States Court."¹⁷⁶

Similarly, in a chapter 15 case where a foreign representative plans on commencing litigation, there are deadlines and statutes of limitations that might be applicable to asserted claims and causes of action.¹⁷⁷ In In re Fairfield Sentry Ltd., a foreign representative filed a motion to have the date on which the chapter 15 was recognized, rather than the date on which it was filed, to be treated as the date that the time for bringing actions would toll under § 108 of the Bankruptcy Code. These "provisions allow a trustee additional time, upon stepping into the shoes of the debtor, to discover and evaluate potential causes of action or perform other acts required to preserve the debtor's rights."¹⁷⁸

The application of § 108 of the Bankruptcy Code in a chapter 15 case was challenged on the basis that such relief is not included in the limited grant of power conferred automatically under § 1520(a) of the Bankruptcy Code. The court dispensed with this argument, pointing out that inclusion of § 108 relief in § 1520 of the Bankruptcy Code would have been superfluous in light of the plain language of § 103(a) of the Bankruptcy Code. In short, the court determined that under the plain language of the relevant sections of the Bankruptcy Code and Model Law, legislative history and extant case law, that § 108 relief is automatically available to the foreign representative.¹⁷⁹ The Fairfield Sentry decision makes clear that provisions contained in chapter 1 of the Bankruptcy Code are "self-executing" statutes in chapter 15 cases, even though they are found outside the text of § 1520(a).¹⁸⁰

II. Relief Automatically Available upon Recognition

Although § 1520 makes clear that the relief it affords to a foreign representative becomes immediately available "upon recognition," the statute's incorporation of other statutory provisions of the Bankruptcy Code has given rise to ambiguity — and hence, litigation — over the proper temporal limitations that § 1520 intends to impose. specifically, § 1520(a)(2) of the Bankruptcy Code provides that, upon recognition of a foreign main proceeding, §§ 549 and 552 apply to a transfer of an interest of the debtor in property that is within the territorial jurisdiction of the U.S. to the same extent the sections would apply to property of an estate in a plenary case.¹⁸¹ Because the language of §§ 549 and 552 make clear that both apply to transfers occurring "after the commencement of the case," a question may arise as to whether, in the chapter 15 context, the "commencement of the case" refers to the chapter 15 case or to the foreign insolvency proceeding that necessarily predates the filing of the petition for recognition.

This precise question was confronted by the U.S. District Court for the Eastern District of Virginia, on appeal from the bankruptcy court's decision in In re Loy.¹⁸² In that case, the debtor was a U.K. citizen who lived in the U.S. After Mr. Loy was adjudged bankrupt in the U.K., the English trustee filed a lis pendens on the debtor's real property in Hampton, Va. Mr. Loy, who initially held the property in his name alone, thereafter executed and recorded a deed of gift for the Hampton property to himself and his wife as tenants by the entireties. Four days after the deed of gift was executed, on Oct. 28, 2007, the English trustee filed his petition for recognition of the English bankruptcy as a foreign main proceeding in the U.S. Bankruptcy Court for the Eastern District of Virginia. The petition for recognition was granted and effective as of the date of its filing in the bankruptcy court.

Following recognition of Mr. Loy's English bankruptcy as a foreign main proceeding, the English trustee filed a motion to sell the Hampton property free and clear of all liens, claims and encumbrances under §§ 1521(a)(2) and 363(b) and (f) of the Bankruptcy Code. The bankruptcy court, in a Memorandum Opinion and Order dated April 3, 2008, denied the trustee's motion.¹⁸³ According to the court, in...