First Impressions: Defining The Limits Of A Bankruptcy Court's Discretion In Chapter 15

October 17, 2012, will mark the seven-year anniversary of the effective date of chapter 15 of the Bankruptcy Code, which was enacted as part of the comprehensive bankruptcy reforms implemented under the Bankruptcy Abuse Prevention and Consumer Protection Act of 2005. Governing cross-border bankruptcy and insolvency cases, chapter 15 is patterned after the Model Law on Cross-Border Insolvency (the "Model Law"), a framework of legal principles formulated by the United Nations Commission on International Trade Law in 1997 to deal with the rapidly expanding volume of international insolvency cases. The Model Law has now been adopted in one form or another by 19 nations or territories.

The jurisprudence of chapter 15 has evolved since 2005, as courts have transitioned from considering the theoretical implications of a new legislative regime governing cross-border bankruptcy and insolvency cases to confronting the new law's real-world applications. An important step in that evolution was the subject of a ruling recently handed down by a Florida federal district court in SNP Boat Service S.A. v. Hotel Le St. James, 2012 WL 1355550 (S.D. Fla. Apr. 18, 2012). Addressing an apparent matter of first impression concerning the ability of a U.S. bankruptcy court presiding over a chapter 15 case to examine foreign-court decisions to determine whether litigants received their due-process rights, the court upheld a bankruptcy court's ruling ordering discovery of a foreign debtor's principals notwithstanding a French "blocking statute" that would have prohibited discovery. However, the district court concluded that the bankruptcy court abused its discretion in ordering discovery for the purpose of examining whether a creditor's interests were sufficiently protected in a specific French bankruptcy proceeding. The district court also reversed the bankruptcy court's dismissal of the debtor's chapter 15 case as a sanction for failing to comply with its discovery orders.

PROCEDURES AND RELIEF UNDER CHAPTER 15

Under chapter 15, a duly accredited representative of a foreign debtor may file a petition in a U.S. bankruptcy court seeking "recognition" of a "foreign proceeding." "Foreign proceeding" is defined 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.

Because more than one bankruptcy or insolvency proceeding may be pending against the same foreign debtor in different countries, chapter 15 contemplates recognition in the U.S. of both a "main" proceeding—a case pending in the country that contains the debtor's "center of main interests"—and "nonmain" proceedings, which may have been commenced in countries where the debtor merely has an "establishment."

Upon recognition of a foreign main proceeding, certain provisions of the Bankruptcy Code automatically come into force, such as the automatic stay. Recognition of a foreign proceeding (main or nonmain) also empowers the U.S. bankruptcy court to grant other relief by way of "additional assistance" to the foreign representative. In addition, relief that may be granted upon recognition of a foreign proceeding (main or nonmain) includes, pursuant to section 1521(a) (5), "entrusting the administration or realization of all or part of the debtor's assets within the territorial jurisdiction of the United States to the foreign representative or another person . . . authorized by the court." Pursuant to section 1521(b), such relief may also include "entrust[ing] the distribution of all or part of the debtor's assets located in the United States to the foreign representative or another person . . . authorized by the court, provided that the court is satisfied that the interests of creditors in the United States are sufficiently...