An Out-of-Court “Winding Up” Entitled to Recognition Under Chapter 15? You Bet!

An Out-of-Court “Winding Up” Entitled to Recognition Under Chapter 15? You Bet!

Chapter 15 of the Bankruptcy Code – the Code’s “cross-border” provision – was enacted in 2005 to protect US-based assets and preserve US-based claims for administration overseas whenever a foreign debtor finds itself in insolvency proceedings outside the US.  Though many of Chapter 15’s “core” concepts are the same as those that existed under prior US cross-border bankruptcy law, some significant differences exist.

A recent decision by Nevada Bankruptcy Court Judge (and UNLV Law School professor) Bruce Markell highlights an important one of those differences.

The facts presented to Judge Markell in In re Betcorp Limited (In Liduiqdation) were straightforward: Betcorp was an Australian-based on-line betting operation whose customers were located in the US.  From about 2002 through 2006, the company grew its operations into a purported “one-stop shop” for on-line gamblers.  In the process, it allegedly infringed on an Interenet data-transmission technology patent held by US-based 1st Technology LLC.  Despite threats of litigation and offers to settle, Betcorp and 1st Technology could never come to terms.

Meanwhile, Betcorp’s business was effectively terminated in late 2006 when the US enacted the Unlawful Internet Gambling Enforcement Act (31 U.S.C. §§ 5361-67) and effectively cut off the company’s gambling revenues from its US customers.  At an extraordinary directors’ meeting the following year, the company appointed two Australian liquidators and began a voluntary “winding up” under Australian insolvency law.

A voluntary “winding up” is essentially a private liquidation authorized by the Australian Corporations Act, conducted by company-retained liquidators under the auspices of the Australian Securities & Investments Commission (ASIC) and reviewable on appeal by Australian courts.  It has statutory analogues in most countries whose civil law derives from the old British Commonwealth system, and is very generally anlogous to an American “assignment for the benefit of creditors” (ABC).  ABC’s are recognized under the laws of virtually every state in the US, and – in California – are commonly used as a very quick and inexpensive means of winding up a company’s affairs and disposing of its assets.

Undeterred by Betcorp’s Australian winding up, 1st Technology commenced a patent infringement action against Betcorp in Nevada’s US District Court.  After further, unsuccessful efforts to amicably resolve the infringement claims, the liquidators sought recognition under Chapter 15 to administer the dispute through the Australian winding-up process.  1st Technology disputed the request, arguing that Betcorp’s (essentially) private “winding up” was not a “foreign proceeding” to which Chapter 15 relief applies.

In a 39-page decision, available here, Judge Markell granted recogntion to the liquidators.  To do so, he gave extensive discussion to the establishment of Australia as Betcorp’s “center of main interests” (COMI) – an important element in gaining relief under Chapter 15 and the subject of a number of prior, published decisions in the US.  Of interest for this post, however, Judge Markell also delved into the amended meaning of the term “foreign proceeding.”

What is a “foreign proceeding” under the amended Bankruptcy Code?  Judge Markell devoted nearly 15 pages – over half his analysis – to spell it out, applying a seven-part test to address this question of apparent first impression . . . and finding, in the end, that Betcorp’s private “winding up” met the test.

Judge Markell was not writing purely to satisfy his own intellectual interest.  The definition of a “foreign proceeding” is a potentially critical one for international insolvency lawyers looking to strategize the preservation of assets and admnistration of claims in a multi-national case.  It is noteworthy that the Bankruptcy Court for the Southern District of New York came to exactly the opposite conclusion under prior US law about a nearly identical “voluntary winding up” proceeding, this one in Hong Kong (like Australia, a former Commonwealth jurisdiction with roots in the British civil law system).  That court’s decision – In re Tam – is located at 170 B.R. 838 (Bankr. S.D.N.Y. 1994).

Judge Markell’s decision suggests that at least some private liquidations in some foreign jurisdictions are now entitled to the very same level of recognition and protection in the US as are more formal, judicial insolvency proceedings.   If this conclusion bears out, it permits foreign debtors the potential ability to use such liquidations to exert far greater control over the disposition of US-based assets and resolution of US-based claims than was available under former US law.

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