Chapter 15: Ancillary And OTHER Cross-Border Cases - ABA YLD 101 Practice Series

By Johnathan C. Bolton

Chapter 15 of the United States Bankruptcy Code was enacted in 2005 to incorporate the United Nations Commissions on International Trade Law ("UNCITRAL") Model Law on Cross-Border Insolvency. This 101 Article covers the basics you need to know about Chapter 15.

Purpose of Chapter 15
The stated purpose of Chapter 15 is to: (1) promote cooperation between courts of the United States, United States trustees, trustees, examiners, debtors, and debtors-in-possession and the courts and other competent authorities of foreign countries involved in cross border insolvency cases; (2) provide greater legal certainty for trade and investment; (3) promote the fair and efficient administration of cross-border insolvencies that protect the interests of all creditors, and other interested entities, including the debtor; (4) protect and maximize the value of the debtor's assets; and (5) facilitate the rescue of financially troubled businesses, thereby protecting investment and preserving employment. See 11 U.S.C. § 1501(a).

Venue of Chapter 15 Cases
Venue of a Chapter 15 case in the United States is proper: (1) in the district in which the debtor has its principal place of business or its principal assets in the United States; or (2) if the debtor does not have a place of business or principal assets in the United States, in the district court of the United States in which there is pending against the debtor an action or proceeding in a federal or state court; or, if (1) and (2) do not apply, then (3) in the district court of the United States in which venue will be consistent with the interests of justice and the convenience of the parties, having regard to the relief sought by the foreign representative. See 28 U.S.C. § 1410.

Chapter 15 Procedure
A case is commenced under Chapter 15 by filing a petition for recognition of a foreign proceeding under Section 1515. See 11 U.S.C. § 1504.

The term "foreign representative" means "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." 11 U.S.C. §101(24). A "foreign proceeding" under Chapter 15 means "a collective judicial or administrative proceeding in a foreign country, including an interim proceeding, 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." 11 U.S.C. § 101(23).

A petition for recognition of a foreign proceeding under Chapter 15 must be accompanied by either: (1) a certified copy of the decision commencing such foreign proceeding and appointing the foreign representative; (2) a certificate from the foreign court affirming the existence of such foreign proceeding and of the appointment of the foreign representative; or (3) in the absence of (1) or (2), any other evidence acceptable to the court of the existence of such foreign proceeding and of the appointment of the foreign representative. See 11 U.S.C. § 1515(b).

From the time of filing the petition for recognition, the foreign representative must file with the court a notice of change of status concerning any "substantial change" in the status of such foreign proceeding or the status of the foreign representative's appointment and any other foreign proceeding regarding the debtor that becomes known to the foreign representative. See 11 U.S.C. § 1518.

Nothing prevents the Court from modifying or terminating recognition if it is shown that the grounds for granting it were fully or partially lacking or have ceased to exist. See 11 U.S.C. § 1517(d).

Provisional Relief Available Before Recognition is Granted
From the time the Chapter 15 petition is filed up until the time the court rules on the petition, the court may, at the request of the foreign representative, grant certain forms of provisional relief in order to protect the assets of the debtor or the interests of creditors, including "staying execution against the debtor's assets" and "entrusting the administration . . . of the debtor's assets located in the United States to the foreign representative or another person . . . in order to protect and preserve the value of assets. . .." 11 U.S.C. § 1519.

The mere fact that a foreign representative files a petition under Section 1515 of the Bankruptcy Code does not subject the foreign representative to the jurisdiction of any court in the United States for any other purpose. See 11 U.S.C. § 1510.

Recognition of a Foreign Proceeding
Section 1517 provides that a court "shall" enter an order recognizing a foreign proceeding if: (1) such foreign proceeding for which recognition is sought is a foreign main proceeding or foreign nonmain proceeding as defined under Chapter 15; (2) the foreign representative applying for recognition is a person or body; and (3) the petition meets the requirements of Section 1515. See 11 U.S.C. § 1517(a).

The order recognizing a foreign proceeding is subject to Section 1506, which states a public policy exception to recognition of foreign proceedings that are "manifestly contrary to the public policy of the United States." 11 U.S.C. § 1517(a). Additionally, Section 1503 states that "[t]o the extent that this chapter conflicts with an obligation of the United States arising out of any treaty or other form of agreement to which it is a party with one or more other countries, the requirements of the treaty or agreement prevail." 11 U.S.C. § 1503.

Assuming these requirements are met, the foreign proceeding will be recognized: (1) as a foreign main proceeding, if it is pending in the country where the debtor has the center of its main interests; or (2) as a foreign nonmain proceeding, if the debtor has an establishment within the meaning of Section 1502 in a foreign country where the proceeding is pending. 11 U.S.C. § 1517(b).
Under Chapter 15, a "foreign main proceeding" means "a foreign proceeding pending in the country where the debtor has the center of its main interests." 11 U.S.C. § 1502(4). A "foreign nonmain proceeding" means "a foreign proceeding, other than a foreign main proceeding, pending in a country where the debtor has an establishment." Id.§ 1502(5). An establishment is "any place of operations where the debtor carries out a nontransitory economic activity." 11 U.S.C. § 1502(2).

Relief that May Be Granted Upon Recognition
Once recognized as a foreign main proceeding, the foreign representative is entitled to certain specified relief under Section 1520, including an automatic stay with respect to the debtor and its property within the territorial jurisdiction of the United States, the right to operate the debtor's business, and the right to sell and deal with property in the same manner as a trustee or debtor-in-possession in the United States. 11 U.S.C. § 1520(a)(1)-(4).

Further, upon recognition, at the request of the foreign representative, further relief may be granted by the court under Section 1521, which includes: (1) staying the commencement or continuation of an individual action or proceeding concerning the debtor's assets, rights, obligations or liabilities; (2) staying execution against the debtor's assets; (3) suspending the right to transfer, encumber or otherwise dispose of any assets of the debtor; (4) 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; (5) entrusting the administration or realization of all or part of the debtor's assets within the territorial jurisdiction of the United States to the foreign representative or another person; (6) extending relief granted under section 1519(a); and (7) granting 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)). See 11 U.S.C. § 1521.

Notification To and Access by Foreign Creditors
Foreign creditors have the same rights regarding in a Chapter 15 case as domestic creditors. Specifically, the claim of a foreign creditor shall not be given a lower priority than that of general unsecured claims solely because the holder of such claim is foreign. Further, the allowance and priority of foreign tax claims or other foreign public law claims are governed by any applicable tax treaty of the United States. See 11 U.S.C. § 1513.

Cooperation with Foreign Courts and Foreign Representatives
Chapter 15 provides that the court and any trustee, examiner or other person shall cooperate "to the maximum extent possible" with a foreign court or a foreign representative, either directly or through the trustee. See 11 U.S.C. §§ 1525, 1526. The forms of cooperation specifically include: (1) appointment of a person or body, including an examiner, to act at the direction of the court, (2) communication of information by any means considered appropriate, (3) coordination of the administration and supervision of the debtor's assets and affairs, (4) approval or implementation of agreements concerning the coordination of proceedings, and (5) coordination of concurrent proceedings regarding the same debtor. See 11 U.S.C. § 1527.

Additionally, the court or a trustee, examiner or other person authorized by the court is entitled to communicate directly with, or to request information or assistance directly from, a foreign court or a foreign representative.

Other Matters
Upon recognition, a foreign representative may commence an involuntary case under Section 303 or a voluntary case under Section 301 or 302, if the foreign proceeding is a foreign main proceeding. See 11 U.S.C. § 1511(a).

Finally, section 1505 authorizes a court to appoint a trustee or another entity (including an examiner) to act in a foreign country on behalf of an estate created under section 541 to the extent permitted by the applicable foreign law. 11 U.S.C. § 1505.

Chapter 15 attempts to harmonize the competing demands of the domestic bankruptcy regime and the need for respect for international cooperation. Chapter 15 will become increasingly important in the global economy where multi-national companies have insolvency problems.


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About the Author

Johnathan C. Bolton is a Senior Associate in the Bankruptcy and Insolvency Section of Fulbright& Jaworski L.L.P. in Houston, Texas. He is Board Certified in Business Bankruptcy Law by the American Board of Certification and the Texas Board of Legal Specialization and concentrates his practice on U.S. and International bankruptcy and cross-border insolvency matters. He is a former Chair of the ABA YLD Bankruptcy Committee.

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