Cross-Border Bankruptcy Update: Bad Faith Not A Basis For Denying Chapter 15 Recognition

• Published date: 05 April 2022
• Subject Matter: Insolvency/Bankruptcy/Re-structuring, Insolvency/Bankruptcy
• Law Firm: Jones Day
• Author: Ms Corinne Ball, Mark Douglas, Dan T. Moss, Isel M. Perez and Michael C. Schneidereit

Despite the absence of any explicit directive in the Bankruptcy Code, it is well understood that a bankruptcy court can dismiss a chapter 11 case if it not filed in good faith. A ruling recently handed down by a Bankruptcy Appellate Panel for the Ninth Circuit ("BAP") suggests that no such good faith filing requirement applies to a petition seeking recognition of a foreign bankruptcy under chapter 15 of the Bankruptcy Code. In In re Black Gold S.A.R.L., 2022 WL 488438 (B.A.P. 9th Cir. Feb. 17, 2022), the BAP reversed a bankruptcy court order denying chapter 15 recognition of a Monaco bankruptcy proceeding. After initially granting provisional relief under section 1519 of the Bankruptcy Code, the bankruptcy court concluded that the petition was inconsistent with the objectives of chapter 15 as set forth in section 1501 because of the debtor's bad faith conduct in attempting to evade payment of a judgment and shield its principals from tort liability. On appeal, according to the BAP, once the Bankruptcy Code's requirements for chapter 15 recognition are satisfied, recognition is mandatory unless it would be "manifestly contrary" to U.S. public policy'a threshold that is rarely met in chapter 15 proceedings.

Procedures, Recognition, and Relief Under Chapter 15

Chapter 15 was enacted in 2005 to govern cross-border bankruptcy and insolvency proceedings. It is patterned on the 1997 UNCITRAL Model Law on Cross-Border Insolvency ("Model Law"), which has been enacted in some form by more than 50 countries.

Both chapter 15 and the Model Law are premised upon the principle of international comity, or "the recognition which one nation allows within its territory to the legislative, executive or judicial acts of another nation, having due regard both to international duty and convenience, and to the rights of its own citizens or of other persons who are under the protection of its laws." Hilton v. Guyot, 159 U.S. 113, 164 (1895).

Chapter 15 replaced section 304 of the Bankruptcy Code. Section 304 allowed an accredited representative of a debtor in a foreign bankruptcy proceeding to commence a limited "ancillary" bankruptcy case in the United States for the purpose of enjoining actions against the foreign debtor or its assets located in the United States or, in some cases, repatriating such assets or their proceeds abroad for administration in the debtor's foreign bankruptcy.

The policy behind section 304 was to provide any assistance necessary to ensure the economic and expeditious administration of foreign bankruptcy proceedings. In deciding whether to grant injunctive, turnover, or other appropriate relief under former section 304, a U.S. bankruptcy court had to consider "what will best assure an economical and expeditious administration" of the foreign debtor's estate, consistent with a number of factors, including comity. See 11 U.S.C. ' 304(c) (repealed 2005) (listing factors that are now included in section 1507(b) as a condition to the court's decision post-recognition to grant "additional assistance, consistent with the principles of comity," under chapter 15 or other U.S. law).

Section 1501(a) of the Bankruptcy Code states that the purpose of chapter 15 is to "incorporate the [Model Law] so as to provide effective mechanisms for dealing with cases of cross-border insolvency with the objectives of," among other things, cooperation between U.S. and foreign courts, greater legal certainty for trade and investment, fair and efficient administration of cross-border cases to protect the interests of all stakeholders, protection and maximization of the value of a debtor's assets, and the rehabilitation of financially troubled businesses.

Under section 1515 of the Bankruptcy Code, a "foreign representative" may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." Section 101(24) of the Bankruptcy Code defines "foreign representative" as "a person or body, including a person or body appointed on an interim basis, authorized in a foreign proceeding to administer the reorganization or the liquidation of the debtor's assets or affairs or to act as a representative of such foreign proceeding."

Section 1502 provides that "for the purposes of [chapter 15] ' 'debtor' means an entity that is the subject of a foreign proceeding."

The basic requirements for recognition under chapter 15 are outlined in section 1517(a), namely: (i) the proceeding must be "a foreign main proceeding or foreign nonmain proceeding" within the meaning of section 1502; (ii) the "foreign representative" applying for recognition must be a "person or body"; and (iii) the petition must satisfy the requirements of section 1515, including that it be supported by the documentary evidence specified in...