The Court of Appeals for the Fifth Circuit recently held that Chapter 15 of the Bankruptcy Code does not prohibit a foreign representative from bringing an avoidance action so long as the claim for relief is based on the substantive laws of the jurisdiction where the foreign proceeding is located. The Fifth Circuit’s decision is consistent with the dual policy considerations of comity and predictability. Fogerty v. Petroquest Res., Inc. (In re Condor Ins. Ltd.), 601 F.3d 319 (5th Cir. 2010).

Background

On June 26, 2013, US Bankruptcy Judge Martin Glenn, overseeing the chapter 11 case of Residential Capital, LLC (ResCap), unsealed a 1,900-page report produced by court-appointed examiner, Arthur J. Gonzalez, and his professionals, Chadbourne & Parke LLP and Mesirow Financial Consulting, LLC. The Examiner Report was the culmination of a ten-month investigation that identified amyriad of causes of action, potentially worth billions of dollars, arising fromdozens of transactions involving ResCap's parent, Ally Financial Inc., its subsidiary Ally Bank, and Cerberus.

It is common for lenders to require borrowers to agree to pay a higher interest rate, known as the default rate, following an event of default under a loan. Some loan agreements also require the borrower to pay a fee in the event of a late payment. If the borrower files for bankruptcy protection, the Bankruptcy Code affords special protection to secured creditors with respect to collecting interest.

News reports in 2011 suggested that municipal bankruptcy filings were frequent and substantial. Each of Central Falls, Rhode Island, Harrisburg, Pennsylvania, and Jefferson County, Alabama filed for bankruptcy protection in the second half of 2011. Even a state-owned local monopoly on (legal) gambling was not safe from financial turmoil in 2011: Suffolk County’s Off-Track Betting Corporation filed for bankruptcy on March 18. Indeed, 2011 seemed to be the year of chapter 9, which governs municipal bankruptcy filings.