Complex Cases Relying on Chapter 15 Predictability and Flexibilit...

More than a decade after chapter 15 was added to the Bankruptcy Code,[1] there has been an influx of large, complex cases brought by foreign representatives in the U.S. Bankruptcy Court. The number of chapter 15 cases initiated in 2016 rivals the number of cases commenced as a result of the economic crisis in 2009, and many of the current cases are some of the largest and most complex chapter 15 cases filed to date.[2]

The influx of many of the chapter 15 filings is, in large part, due to the drop in the price of oil and its impact on commodity-based and industrial resource-based sectors. However, the increase in filings is likely also due in part to the expanding body of legal precedent that makes chapter 15 more predictable, and thus more attractive than it once was. For example, a developing body of case law now exists on one of the most fundamental concepts in chapter 15 — how to determine a foreign main proceeding by defining a debtor’s center of main interests. As these important concepts have been addressed and continued to be developed, foreign representatives and local practitioners have been willing to pursue more complex and ground-breaking forms of relief available under chapter 15.

Chapter 15 Relief Basics

Chapter 15, at its core, is a method for U.S. courts to cooperate with foreign insolvency proceedings.[3] Chapter 15 is a two-step process. First, the foreign representative requests a U.S. court to recognize a foreign proceeding. Second, the representative is entitled to seek various forms of relief available under chapter 15. Initially, upon the filing of a chapter 15 petition, courts may grant provisional relief, where appropriate.[4] After a court grants recognition, pursuant to section 1520(a), certain relief is available automatically for foreign main proceedings. Beyond the relief available upon recognition automatically, for both main and nonmain proceedings, courts may also grant any additional “appropriate relief.”[5] Section 1521(a) expressly authorizes courts to expand stay relief, allow discovery, entrust administration or realization of U.S. assets to an authorized person, and extend provisional relief. Furthermore, section 1521(a)(7) also allows courts to grant “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).”

Cases Applying Sections 1520 and 1521

A common reason many foreign debtors file chapter 15 petitions is to stay collection proceedings or lawsuits in the U.S.[6] The imposition of the stay under section 362 of the Bankruptcy Code is one of the forms of relief that happens automatically upon recognition under section 1520 and can be sought provisionally under section 1519. For example, in the recent case In re STX Offshore & Shipbuilding Co.,[7] the debtor sought chapter 15 relief to stay creditor efforts to garnish accounts receivables owed to the shipbuilder. STX Offshore is a Korean-based ship and carrier builder. The debtor had a $32 million arbitration award outstanding against it based on its failure to construct four tankers and, according to the foreign representative, the creditor was seeking an end-run around the Korean bankruptcy proceeding. On November 17, 2016, the court granted recognition of the Korean bankruptcy as a foreign main proceeding.[8]

Of course, foreign representatives can seek many other types of relief in addition to a stay of proceedings in a chapter 15 case. Several cases have helped collectively define the types of relief can be sought under section 1521. For example, in the landmark case In re Condor Ins. Ltd., the Fifth Circuit found that a foreign representative could bring avoidance actions in the U.S. under the laws of the foreign main proceeding.[9] The Fifth Circuit rejected the argument that because section 1521(a)(7) forbids the use of avoidance actions under U.S. law, all avoidance actions — even those brought under the law of the foreign main proceeding — were not allowed.[10] In In re AJW Offshore, Ltd., the Bankruptcy Court for the Eastern District of New York found that a foreign representative could seek turnover under section 542(e) because turnover was relief available to a trustee and section 1521(a)(7) provides for “any additional relief that may be available to a trustee.”[11]

More recent cases have tested the limits of additional and provisional relief. In In re Altos Hornos de Mexico S.A.B. de C.V.,[12] the foreign representative sought to enforce the debtor’s Mexican reorganization plan that had been 17 years in the making. In a more contentious case, In re Hanjin Shipping Co.,[13] the debtor sought various types of provisional relief to allow the South Korean shipping company to dock its ships in U.S. ports and/or unload and reload shipping containers without the threat of creditor interference. However, creditors, such as terminal operators and beneficial cargo owners, third parties that actually owned the goods in Hanjin’s containers, objected to the relief, stating that “simply because chapter 15 theoretically authorizes relief does not mean that relief may be granted without sufficient protection to creditors.” [14] These creditors had a valid point. Section 1522(a) allows a court to grant provisional or additional relief “only if the interests of the creditors…are sufficiently protected.” So while section 1521(a)(7) provides “any additional relief that may be available to a trustee,” it is not without limitation.[15] Ultimately, in Hanjin, the bankruptcy court granted provisional relief, but protected creditors by establishing a protocol to protect beneficial cargo owners.[16]

Conclusion

As foreign representatives continue to file large, complex chapter 15 cases, courts will be asked to test the outer limits of “any additional relief” in section 1521(a)(7). Cases such as Hanjin, where the court fashioned a shipping protocol, will become the norm. Even though center of main interest and recognition are more predictable concepts a decade after the enactment of chapter 15, the contours of section 1521 are still being developed. Foreign representatives’ counsel will attempt creative means to further expand application of section 1521(a)(7), with creditors’ counsel attempting to reign in its scope and questioning how creditors’ rights are protected under this practically limitless statutory provision.

 

[1] Unless otherwise noted, statutory references used in this Article refer to chapter 15 of the Bankruptcy Code.

[2] See, e.g., In re Abengoa S.A., No. 16-10754(KJC) (Bankr. D. Del.); In re Oi S.A., No. 16-11791 (Bankr. S.D.N.Y.); In re Kaisa Group Holdings Ltd., No. 16-11303 (Bankr. S.D.N.Y.); In re Pacific Exploration & Prod. Corp., No. 16-11189 (Bankr. S.D.N.Y.); In re Grupo Isolux Corsan SA, No. 16-12202 (Bankr. S.D.N.Y.).

[3] See 11 U.S.C. § 1501(a)(1).

[4] Id. § 1519.

[5] Id. § 1521(a).

[6] See, e.g., In re Toshiba Samsung Storage Technology Korea Corp., No. 16-11602-BLS (Bankr. D. Del.), Petition at 3 [Dkt. No. 1] (debtor did not have any assets or business in the U.S. but foreign representative sought to block patent infringement lawsuit pending against debtor in Delaware).

[7] No. 16-35248 (Bankr. S.D. Tex.).

[8] Id., Order Granting Recognition and Relief in Aid of a Foreign Main Proceeding Pursuant to 11 U.S.C. §§ 105(a), 1517, 1520 and 1521 [Dkt. No. 34].

[9] Fogerty v. Petroquest Resources Inc. (In re Condor Ins. Ltd.), 601 F.3d 319, 329 (5th Cir. 2010).

[10] Id. at 324.

[11] 488 B.R. 551, 559 (Bankr. E.D.N.Y. 2013).

[12] No. 16-11890 (Bankr. D. Del.).

[13] No. 16-27041 (Bankr. D.N.J.).

[14] Id., Preliminary Objection of Maher Terminals LLC to the Interim Provisional Order Granting Recognition of Foreign Main Proceeding and Certain Related Relief [Dkt. No. 50], September 8, 2016 (citing 11 U.S.C. § 1522(a)).

[15] See, e.g., Ad Hoc Group of Vitro Noteholders v. Vitro S.A.B. de C.V. (In re Vitro S.A.B. de CV), 701 F.3d 1031, 1059-60 (5th Cir. 2012) (affirming bankruptcy court’s denial of request for non-consensual, non-debtor release in part because it did not properly “balance the interests of the creditors and debtors”).

[16] Hanjin Shipping Co., Ltd., Order Granting Provisional Relief Pursuant to Sections 362, 365(e), 1519, 1520, and 105(a) of the Bankruptcy Code Pending Hearing on Petition for Recognition as a Foreign Main Proceeding [Dkt. No. 102], No. 16-27041 (Bankr. D.N.J. September 9, 2016).

 

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