Bankruptcy Litigation Committee

ABI Committee News

Volume 5, Number 6 / October 2008

In This Issue

Chapter 15 Cases Show Significant Procedural Questions Remain

by: Karl Schaffer
Carter Ledyard & Milburn LLP; New York City

The U.S. Bankruptcy Court for the Eastern District of Virginia with In re Loy, No. 07-51040, 2008 WL 906503 (Bankr. E.D. Va. April 3, 2008) raises new procedural issues under chapter 15. The foreign representative in that case sought to sell a piece of the debtor's real property in Virginia free and clear of all liens, claims and encumbrances. The bankruptcy court held that the sale could not take place as planned due to procedural deficiencies.

The debtor, an individual, was adjudicated insolvent by an English court on August 17, 2006. Prior to the filing by the trustee in the English insolvency proceeding of a petition for recognition of foreign main proceeding with the bankruptcy court on Oct. 28, 2007, the debtor recorded a deed of gift transferring certain real property to himself and his wife as tenants by the entirety. On Oct. 29, 2007, the debtor executed and recorded a deed of trust for the benefit of a third party, Joseph Pinard, with respect to the same real property. Neither transfer was authorized by the English trustee. Id. at *1. The order recognizing the English insolvency proceeding as the foreign main proceeding under §1517(a) of the Bankruptcy Code with the English trustee as the foreign representative was entered by the court on Dec. 18, 2007. Id.

In moving to sell the real property, the foreign representative argued that since both the deed of gift and the deed of trust were granted after the debtor was declared insolvent in the English proceeding, they were post-petition transfers prohibited by §549(a) of the Code. He further argued that the transfers were void ab initio and therefore no adversary proceeding was required to avoid the transfers. Id. at *5.

The bankruptcy court denied the foreign representative's motion, holding that Bankruptcy Rule 7001 required an adversary proceeding to be brought in order to avoid the transfers. It also noted that the foreign representative would likely need to apply §550 in conjunction with §549 in order to recover the transfers in such an adversary proceeding. Id. at 6. Relief under §550, however, is explicitly unavailable to the foreign representative in a case pending under chapter 15. 11 U.S.C. §1521(a)(7) (2008).

As an alternative, the court considered the possibility of applying English law to avoid the transfers. It noted, "A review of decisions under chapter 15 of the Bankruptcy Code and its predecessor statute, former §304, reveal no reported instances where a foreign representative has relied upon the law of a jurisdiction of the foreign main proceeding to avoid a transfer of a property situated in the United States ..." Id. at 7. Attempting this unprecedented approach to recovering assets would also require the initiation of an adversary proceeding under Bankruptcy Rule 7001. It was therefore unavailable to the foreign representative under the procedural posture in Loy.

Procedural issues such as those raised in Loy may arise in subsequent cases. As a practical matter, there will sometimes be a period of time between the initiation of a foreign main proceeding and the filing of a petition for recognition of the foreign proceeding under chapter 15 with a U.S. bankruptcy court. In some cases, such as those involving securities fraud, an ongoing investigation by a governmental entity may prevent the debtor or third parties from transferring assets. In re Petition of Ernst & Young Inc., 383 B.R. 773, 780 (Bankr. D. Colo. 2008) (Noting that the debtors' United States bank accounts had been frozen as part of a separate investigation by the Securities Commissioner for the State of Colorado). In other cases, however, transfers will be made during the interim and the foreign representative will seek to recover them.

One bankruptcy court, in addressing open procedural issues under chapter 15, suggested that a flexible approach is required in order to make chapter 15 work with other provisions of the Code. In a decision on the procedure for applying the automatic stay in chapter 15 cases, the Bankruptcy Court for the Central District of California wrote:

It is highly unlikely that a court can simply ignore all of the rest of the bankruptcy code and the other provisions relating to bankruptcy cases in the United States, just because they are not specifically mentioned in chapter 15 or §103. The better reading is that many other provisions of the bankruptcy code can be applicable in a chapter 15 case: Some should apply in most cases, while others should be applied only on a case by case basis.