Avoidance Actions in Chapter 15

In this Emerging Issues Analysis, Ronald Silverman, of Bingham McCutchen, describes under what circumstances a "foreign representative," as that term is defined in the Bankruptcy Code, may initiate an avoidance action. Until recently there was a dearth of case law, but the Fifth Circuit in particular has now ruled that avoidance actions under foreign law may proceed in a chapter 15 case.

Excerpt:

Section 1521 of the Bankruptcy Code delineates the relief that courts may grant upon recognition of a foreign proceeding. Section 1521(a)(7) functions as a catch-all, allowing courts to grant, with certain exceptions, "any additional relief that may be available to a trustee, except for relief under sections 522, 544, 545, 547, 548, 550, and 724(a)." The exceptions relate to exemptions and avoidance actions. However, section 1523 does grant standing to foreign representatives to initiate avoidance actions under sections 522, 544, 545, 547, 548, 550, and 724(a), but only in a case commenced under another chapter of title 11. 11 U.S.C. § 1523(a). That is, in order for a foreign representative to pursue avoidance actions under U.S. law, the foreign representative must proceed in a case under a chapter other than chapter 15. If the foreign proceeding is a nonmain proceeding, such U.S. avoidance action may be undertaken in a chapter other than chapter 15 only if the court is satisfied that such action relates to assets that, under U.S. law, should be administered in the foreign nonmain proceeding. Id. § 1523(b).

Until recently, there was a dearth of case law on the role of avoiding powers in chapter 15 cases. The first case to rule on these provisions was In re Condor Insurance Limited. Order, In re Condor Ins. Ltd., No. 07-05049 (Bankr. S.D. Miss. Jul. 17, 2008), ECF No. 158 ("Condor I"), aff'd, In re Condor Ins. Ltd., 411 B.R. 314 (S.D. Miss. 2009) [lexis.com subscribers can access the enhanced version of this opinion] ("Condor II"), rev'd, 601 F.3d 319 (5th Cir. 2010) [enhanced version / unenhanced version available from lexisONE Free Case Law]. In this case, the winding up proceedings of a Nevis corporation were recognized as a foreign main proceeding. The liquidators of the Nevis corporation then filed an adversary proceeding to recover under Nevis law assets that had been transferred to the United States. The bankruptcy court granted a motion to dismiss, concluding that the court lacked subject matter jurisdiction and the district court affirmed. Id. The language of section 1521(a)(7) and section 1523 together deny foreign representatives the right to exercise avoiding powers under U.S. law in a chapter 15 case. The district court noted that the statutes were ambiguous as to whether foreign law avoidance actions should be prohibited, and looked to the legislative history for clarification. The House of Representatives Report for section 1521 explains that "[t]he exceptions in subsection (a)(7) relate to avoiding powers. The foreign representative's status as to such powers is governed by section 1523 ... ." H.R. Rep. No. 109-31, pt. 1, at 94 (2005).

The district court found that chapter 15 was unclear with respect to a foreign representative's ability to bring an avoidance action under foreign law. The foreign representative argued that since section 1521(a)(7) and section 1523 only expressly prohibit avoidance actions brought in chapter 15 cases under U.S. law, they should not be prohibited from bringing their adversary proceeding under Nevis law.

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