A Bark Louder Than Its Bite: Recognition Challenges Based On Chapter 15's 'Foreign Proceeding' Definition

Chapter 15 of the U.S. Bankruptcy Code can be a very useful tool for foreign companies or individuals seeking bankruptcy relief in the U.S. Before obtaining any such relief though, a Chapter 15 debtor must first demonstrate that it is subject to a proceeding abroad that is entitled to "recognition" in the U.S. The recognition analysis often focuses on the locus of a foreign debtor's operations in order to determine if the proceeding pending abroad was commenced in the appropriate country. However, an issue that is equally important to the recognition analysis, but has received less attention until recently, is whether the proceeding is also a "foreign proceeding." The U.S. Bankruptcy Code defines this as 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.1

Although this definition is broad, it has its limits, which are occasionally tested by the vast array of foreign out-of-court, judicial, quasi-judicial, and administrative processes by which creditors can recover against foreign debtors, and foreign debtors can restructure or liquidate. Some of these proceedings differ considerably from a typical U.S. bankruptcy proceeding, and parties seeking to challenge a foreign debtor's Chapter 15 petition often point to these differences as evidence that the proceeding should not be recognized under Chapter 15. This is precisely the strategy employed recently by various objectors in the hotly contested Chapter 15 case of Irish Bank Resolution Corp., the liquidation vehicle for Anglo Irish Bank Corp. Ltd. and Irish Nationwide Building Society. As this and other recent cases make clear, objections based on the "foreign proceeding" definition are an uphill climb, and even proceedings that are startlingly different from those in the U.S. often receive recognition.

Chapter 15

Chapter 15 is based on the Model Law on Cross-Border Insolvency (the "Model Law"), which was adopted by the United Nations Commission on International Trade Law ("UNCITRAL") in 1997. The Model Law was designed to encourage cooperation and coordination between jurisdictions in cross-border insolvency proceedings. Thus far, the legislatures of twenty countries and territories have enacted cross-border insolvency regimes based on the Model Law.2

Under Chapter 15, the representative of a foreign debtor that is subject to an insolvency or other proceeding abroad, can file a petition in a U.S. bankruptcy court seeking recognition of the debtor's foreign proceeding. If recognition is awarded, the Chapter 15 proceeding serves as an ancillary proceeding, the primary purpose of which is to assist the foreign proceeding with regard to U.S. matters affecting the debtor. Recognition may entitle the foreign debtor to a panoply of relief in the U.S., including a stay of all pending and future litigation in the U.S., the right to conduct its business in the U.S., and the right to commence litigation in the U.S.

A particularly useful feature of Chapter 15 is that a foreign debtor may obtain enforcement in the U.S. of an order issued in the debtor's foreign proceeding, even if that order provides relief that could not be granted to a U.S. debtor in a plenary case under the Bankruptcy Code.3However, before a foreign debtor is entitled to receive this and other relief under Chapter 15, the standards for recognition must be strictly applied to ensure that U.S. parties impacted by a foreign proceeding are treated fairly. Among these are the requirement that the proceeding satisfy the various prongs of the "foreign proceeding" definition. Courts often list these as follows:

A proceeding that is; either judicial or administrative; collective in nature; in a foreign country; authorized or conducted under a law related to insolvency or the adjustment of debts; in which the assets and affairs of the debtor are subject to control or supervision by a foreign court; and for the purpose of reorganization or liquidation.4 The prongs that are most frequently the focus of challenges to a foreign debtor's request for recognition are that the proceeding be "subject to control or supervision by a foreign court" and that the proceeding be "collective in nature." As discussed below, case law detailing such challenges provides useful guidance on the scope of these requirements in practice.

The "foreign court" requirement

1. Betcorp

   Betcorp Ltd. ("Betcorp") was an Australian company that provided online gambling services to customers in the U.S.5In 2006, Betcorp's business was severely impaired when the U.S. Congress passed the Unlawful Internet Gambling Enforcement Act, which prevented Betcorp from receiving fund transfers from U.S. customers. Shortly thereafter, in 2007, Betcorp's members commenced a voluntary winding-up of the company's operations by appointing liquidators to administer the company. Although the liquidators were regulated by the Australian Securities and Investments Commission (the "ASIC"), their appointment did not result in the commencement of a formal court proceeding in Australia.

   In 2008, litigation was commenced against Betcorp in the U.S. by a company claiming that Betcorp's gambling operations infringed a patent it held on a data transmission system. Later that year, Betcorp's liquidators filed a Chapter 15 petition in the Bankruptcy Court for the District of Nevada, requesting recognition of Betcorp's Australian liquidation. The plaintiff in the patent litigation challenged the Chapter 15 petition, alleging, among other things, that the Australian liquidation did not qualify as a "foreign proceeding," primarily because the liquidation was not subject to the supervision or control of a "foreign court," as required under Chapter 15. In support of this argument, the challenger noted that (i) there was no lawsuit or legal proceeding pending in an Australian court that involved Betcorp's creditors, (ii) Betcorp was not subject to a bankruptcy proceeding or otherwise under administration in Australia, and (iii) there was no legal process by which a judge directly supervised the Betcorp liquidators' actions. Although these facts were acknowledged by the bankruptcy court, it nevertheless held that the Australian liquidation constituted a "foreign proceeding."

   In reaching this decision, the bankruptcy court stated that "[i]nsolvency proceedings do not necessarily involve the intervention of a judicial authority,"6and that the hallmark of such proceedings is "a statutory framework that constrains a company's actions and regulates the final distribution of a company's assets."7Consistent with this approach, Chapter 15 defines the term "foreign court" as "a judicial or other authority competent to control or supervise a foreign proceeding."8The bankruptcy court acknowledged that in the U.S. the term "court" typically denotes a formal proceeding presided over by a judge. However, it noted that this interpretation was not necessarily shared abroad, and that bankruptcy courts are instructed, when interpreting Chapter 15, to "consider its international origin, and the need to promote an application of [Chapter 15] that is consistent with the application of similar statutes adopted by foreign jurisdictions."9After reviewing foreign insolvency regimes that deem government agencies such as the ASIC to be suitable bodies to supervise insolvency proceedings, the bankruptcy court determined that the ASIC constituted a "foreign court" for the purposes of Chapter 15. Accordingly, the Australian liquidation qualified as a "foreign proceeding" under Chapter 15.

   A similar result was reached in In re Tradex Swiss AG, in which the Bankruptcy Court for the District of Massachusetts determined, with little discussion, that the "foreign court" definition in Chapter 15 was sufficiently broad to encompass a Swiss proceeding supervised by the Swiss Federal Banking Commission.10These cases demonstrate that the "foreign court" component of the "foreign proceeding" definition is quite broad and can encompass nearly any governmental or other authoritative body that supervises an insolvency proceeding.

2. Avanzit

   Another case that involved a dispute over whether a foreign proceeding was subject to the "control or supervision" of a "foreign court" was In re Oversight & Central Com'n of Avanzit, S.A.11

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