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.
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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