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U.S. Bankruptcy Court Orders Turnover of Attached Funds for Administration in Danish Bankruptcy Proceeding

In In re Atlas Shipping A/S, 404 B.R. 726 (Bankr. S.D.N.Y. 2009), the U.S. Bankruptcy Court for the Southern District of New York vacated maritime attachments and ordered the turnover of funds in New York to the foreign representatives of a shipping company that was in bankruptcy in Denmark. The U.S. court rejected the attaching creditors’ contention that vacatur of the attachments could not be granted to the foreign representatives in a chapter 15 case due to the carve-out of avoidance relief in §1521(a)(7) of the U.S. Bankruptcy Code.

After being appointed as trustees in the Danish bankruptcy proceedings, the foreign representatives of Atlas Shipping A/S and Atlas Bulk Shipping AS (collectively, “Atlas”) commenced a chapter 15 case in the Southern District of New York, asking the U.S. court to vacate nine maritime attachments that had been obtained by non-U.S. creditors of Atlas in New York. Contemporaneously with the filing of chapter 15 petitions for recognition of Atlas’ bankruptcy proceeding in Denmark, the foreign representatives sought relief under §§1521(a)(5) and 1521(b) of the Code, requesting that the attached funds in New York be turned over to the foreign representatives for administration and distribution in the Danish bankruptcy proceeding.

The maritime attachments had been issued by the U.S. District Court for the Southern District of New York in support of arbitrations commenced by the attaching creditors in London. Two of the nine attachments were obtained before the Danish bankruptcy proceeding was commenced; seven were obtained after the Danish bankruptcy proceeding was commenced.

The foreign representatives asked the U.S. court to grant comity to the Danish bankruptcy proceeding by applying provisions of the Danish Bankruptcy Act that would dissolve all pre- and postpetition attachments as a matter of law. Id. at 733. The attaching creditors did not contest the substance of Danish law. Rather, they argued that the attachments could not be vacated and the funds turned over to Atlas’ foreign representatives because such relief was in the nature of an avoidance action that the U.S. court could not grant in a chapter 15 case due to §1521(a)(7)’s carve-out of such relief. Id. at 742-43. The attaching creditors contended that the foreign representatives were required to commence full chapter 7 or 11 cases for Atlas along with an action to avoid the attachments as preferences under §547 of the Code. Id. at 745.

In beginning its analysis, the U.S. court stated that there was “little doubt” that the attachments would be dissolved as a matter of comity under former §304 of the U.S. Bankruptcy Code and the Second Circuit Court of Appeal’s decision in Cunard S.S. Co. Ltd. v. Salen Reefer Servs. AB, 49 B.R. 614, 618 (S.D.N.Y. 1985). Atlas, 404 B.R. at 734-35. The U.S. court also cited its decision in In re Milovanovic, 357 B.R. 250 (Bankr. S.D.N.Y. 2006). Atlas, 404 B.R. at 735. The court explained that “[b]oth cases…stand for the proposition that in such circumstances, the attachments would be dissolved and the funds returned to the foreign forum without prejudice to any of the creditors raising arguments in the foreign proceedings. Therefore, unless the adoption of chapter 15 altered the principles of comity recognized in Cunard and Milovanovic, the court would grant comity to the Danish proceedings and dissolve the seven attachments filed after the Danish bankruptcy was announced.” Id. at 736. The U.S. court explained that, “[w]ith respect to the two pre-Danish-bankruptcy attachments, while Danish law is less clear, the unrebutted evidence also supports dissolving these attachments.” Id.

Although chapter 15 has replaced old §304 of the Code, the U.S. court noted that “many of the principles underlying §304 remain in effect under chapter 15” and that “chapter 15 specifically contemplates that the court will exercise its discretion consistent with the principles of comity.” Id. at 738 (citing Gropper, Current Devs. in Int’l Insolvency Law: A United States Perspective, 15 J. Bankr. L. & Prac. 2, Art. 3, at 3-5 (April 2006)). The court concluded, consistent with principles of comity, that the attachments should be vacated pursuant to §§1521(a)(5) and 1521(b) and the funds turned over to the foreign representatives for administration by the Danish bankruptcy court. Id. at 742. The court explained that the relief sought by the foreign representatives was “expressly provided for in 1521(a)(5) and 1521(b).” Id. at 741. The U.S. court also found that §1521(b)’s requirement that “the interests of local creditors are ‘sufficiently protected’” was satisfied here since the attaching creditors were all from outside the United States, their claims had no connection to the United States and the creditors had a proper forum available to them to satisfy their claims—the Danish bankruptcy court. Id. at 740-41. The court further concluded that “ordering turnover would be more economical and efficient in that it would permit all of Atlas’ creditors worldwide to pursue their rights and remedies in one court of competent jurisdiction.” Id. at 742. The U.S. court, however, did not make a determination with respect to the attaching creditors’ rights in the funds; rather, it specifically left that matter open for determination by the Danish bankruptcy court. Id. at 742, 747.

Relying on the recent case of Fogerty v. Condor Guaranty Inc. (In re Condor Ins. Ltd. (In Official Liquidation), slip copy, 2009 WL 321627 (S.D. Miss. Feb. 9, 2009), the attaching creditors contended that the U.S. court could not vacate the attachments and grant turnover relief in a chapter 15 case since such relief was prohibited by §1521(a)(7), which provides that a U.S. bankruptcy court may not grant a foreign representative avoidance relief under §§544, 547 or 548 of the Code (i.e., preference or fraudulent-conveyance relief). Atlas, 404 B.R. at 743-44. The court in Condor held that §1521(a)(7) prohibited a foreign representative in a chapter 15 case from asserting an avoidance action brought under either U.S. or foreign law. The attaching creditors tried to convince the court that the foreign representatives were seeking to avoid the attachments under Danish law and that such avoidance relief was prohibited in a chapter 15 case.

The U.S. court in Atlas rejected this argument. The court first cast doubt on the reasoning in Condor, explaining that the reasoning of Condor—that foreign representatives may not pursue avoidance actions in the U.S. under foreign law—“is open to question and it is in any event inapplicable to this case since the foreign representative has not commenced an avoidance action under U.S. or foreign law.” Id. at 744. Noting cases under old §304 and the statutory language, the court further stated that “it is unclear whether chapter 15’s replacement of §304 precludes a foreign representative from bringing an avoidance action under foreign law.” Id. The court, however, ultimately declined to decide this issue and instead held that the Atlas case was distinguishable from Condor because (1) §1521(a)(7) was not implicated since the foreign representatives had not commenced an avoidance action under foreign law, and (2) §§1521(a)(5) and 1521(b) specifically provide for turnover relief in a chapter 15 case. Id. at 744-45. Finally, the court held that the attaching creditors’ rights were not being “avoided” since the U.S. court was merely entrusting estate assets for administration by the home Danish bankruptcy court, which would determine the attaching creditors’ interests in the funds. Id. at 745-46.