20 Apr Avoidance Actions and Chapter 15 – The Little Things Can Make The Difference
Chapter 15 of the U.S. Bankruptcy Code is designed to assist foreign representatives appointed in non-U.S. bankruptcy proceedings. Upon recognition of a foreign proceeding, section 1521 provides bankruptcy courts with the discretion to grant any appropriate relief necessary to effectuate the purpose of Chapter 15 and to protect the assets of the debtor or the interests of the creditors in the United States.
But judicial discretion with respect to Chapter 15 relief is not unlimited: Sections 1521(a)(7) and 1523 prohibit a foreign representative from pursuing aviodance claims under Bankruptcy Code sections 544, 548 (i.e., fraudulent transfers), and 547 (i.e., preferences) outside a Chapter 7 or a Chapter 11 case.
Is there a “work-around” for this restriction? Can a foreign representative avoid the expense and risk of a Chapter 11 or Chapter 7 case by commencing an avoidance action under non-U.S. law in a Chapter 15 proceeding?
This question – apparently, one of first impression under Chapter 15 – was addressed in February, when the appointed liquidators of Nevis-based Condor insurance obtained recognition for that company’s winding-up proceeding in the U.S. and immediately sought to avoid over $300 million in allegedly fraudulently transfers on the creditors’ behalf. The defendants sought to dismiss the avoidance actions for lack of subject matter jurisdiction, and the bankruptcy court agreed. In an unpublished slip opinion – In re Condor Insurance Limited (In Official Liquidation), 2009 WL 321627 (S.D.Miss.) – the U.S. District Court affirmed the bankruptcy court’s ruling that the legislative history of Sections 1521 and 1523 indicated Congress’ intent to restrict all avoidance actions, foreign and domestic, to litigation within a Chapter 7 or 11 case. In a footnote, however, the District Court suggested an alternative remedy for Condor’s liquidators: Even though U.S.-based Chapter 7 or 11 relief was unavailable to foreign insurance companies not doing business in the U.S., Condor’s liquidators could seek avoidance of the transfers in the Nevis courts and then seek recognition of any Nevis judgment in the United States. See generally In re Ephedra Prods. Liab. Litig., 349 B.R. 333 (S.D.N.Y .2006).
The only other decision to address avoidance actions in a Chapter 15 case – In re Loy, 2008 WL 906503 (Bkrtcy.E.D.Va.) – held that a post-petition avoidance action brought under Section 549 and English insolvency law could be brought within a Chapter 15 case, but required a separate adversary proceeding and could not be heard in the context of a motion to approve a Section 363 sale.
These decisions illustrate the strategic importance of the choice of substantive law, litigation forum, and procedure for specific actions commenced in a cross-border insolvency. These initial tactical choices can have significant substantive impact.