Introduction
Background
Application of foreign avoidance laws
Lower court decisions
Fifth Circuit opinion
Implications
In Fogerty v Petroquest Resources Inc (In re Condor Ins Ltd)(1) the Fifth Circuit Court of Appeals held that, pursuant to Section 1521 of the Bankruptcy Code, the foreign representatives of Condor Insurance Ltd (appointed by the Nevis court) could use Nevis law in a Chapter 15 case to avoid asset transfers by Condor to a US affiliate, even though the foreign representatives could not have avoided the transfers under US law. The court found that "[w]hatever its full reach, Chapter 15 does not constrain the federal court's exercise of the powers of foreign law it is to apply".(2)
In doing so, the court reversed the judgment of the US District Court for the Southern District of Mississippi, which had affirmed the bankruptcy court's dismissal of an adversary proceeding predicated on Nevis law for lack of subject matter jurisdiction.(3)
The decision is the first in which a US court has permitted foreign representatives in a Chapter 15 case to bring avoidance actions under foreign law. If widely adopted, it could significantly enhance the ability of foreign representatives to recover assets transferred from their home states to the United States, so that those assets can be collected and distributed in the same fashion as other US assets.
Condor was an insurance company incorporated under Nevis law. In November 2006 a creditor filed a winding-up petition against Condor in Nevis. The Nevis court granted the petition and appointed Richard Fogerty and William Tacon as joint official liquidators.(4) While the Nevis proceeding was pending, Condor allegedly transferred more than $313 million to a US affiliate, Condor Guaranty Inc, in an effort to remove the funds from the reach of its creditors.(5) As a foreign insurance company, Condor was ineligible for relief under Chapters 7 or 11 of the code.(6) Accordingly, in an effort to recover the allegedly fraudulently transferred assets, the liquidators filed a Chapter 15 petition seeking recognition of the Nevis proceeding as a 'foreign main proceeding' under Section 1517 of the code. The bankruptcy court granted the petition and recognised the Nevis proceeding as a foreign main proceeding.(7) Thereafter, the liquidators sued the transferee to avoid and recover the $313 million as a fraudulent transfer under Nevis law.
The transferee contended that Chapter 15 did not permit avoidance actions under foreign law and that pursuant to Section 1521(a)(7) of the code, the liquidators' only recourse was to commence a Chapter 7 or 11 case and seek to avoid the transfers under US law. As stated, however, Condor was ineligible for relief under Chapters 7 or 11 of the code because it was a foreign insurance company. Accordingly, the transferee moved to dismiss the liquidators' complaint for lack of subject matter jurisdiction and, alternatively, for failure to state a claim - under Federal Rules of Civil Procedure 12(b)(1) and (6), respectively.(8)
Application of foreign avoidance laws
Chapter 15 of the Bankruptcy Code provides for the recognition of a foreign proceeding and commencement of an ancillary proceeding to assist the foreign proceeding. With recognition, a foreign representative may access US courts. Section 1521(a) of the code states that a bankruptcy court may grant "any appropriate relief" to a foreign representative and includes a non-exclusive list of such relief.(9) Section 1521(a)(7) contains a 'catch all' provision that authorises the court to grant "any additional relief that may be available to a trustee" under the Bankruptcy Code, albeit with a significant limitation - it expressly excludes relief under what are commonly known as the 'avoidance provisions' of the code.(10) If a foreign representative wants to utilise US avoiding powers, Section 1523 mandates that he or she must commence full, plenary bankruptcy proceedings under Chapters 7 or 11 of the code.(11) Sections 1521 and 1523 are silent on whether a foreign representative may employ the avoidance laws of a foreign country to recover assets transferred by the debtor from that country to the United States.
The bankruptcy court dismissed the liquidators' complaint for lack of subject matter jurisdiction.(12) It found, among other things, that pursuant to the plain language of Sections 1521(a)(7) and 1523, a foreign representative lacks standing to assert avoidance actions in a Chapter 15 case.(13)
The district court affirmed the bankruptcy court's decision on appeal. Unlike the bankruptcy court, however, the district court found that the language of Sections 1521 and 1523 of the code was ambiguous.(14) Therefore, the district court reviewed the legislative history of these sections and concluded that:
"[they] are intended to exclude all of the avoidance powers specified, under either United States or foreign law, unless a Chapter 7 or 11 bankruptcy proceeding is instituted... [and that a contrary determination] would conflict with Congress' expressed desire that courts make the choice of law determination in a full bankruptcy proceeding."(15)
In reversing the district court decision, the Fifth Circuit first looked to the plain language of Section 1521 of the code. It noted that:
"[w]hile the statute denies the foreign representative the powers of avoidance created by the [Bankruptcy Code] absent a filing under Chapter 7 or 11 of the Bankruptcy Code, it does not necessarily follow that Congress intended to deny the foreign representative powers of avoidance supplied by applicable foreign law."(16)
It concluded that "[i]f Congress wished to bar all avoidance actions whatever their source, it could have stated so; it did not".(17)
Next, the Fifth Circuit found that denying a foreign representative the ability to use the laws of the applicable foreign jurisdiction would be contrary to the international origins of Chapter 15. After reviewing the stated purpose of Chapter 15 and its legislative history, the court found that while the statute did not specifically address the use of foreign avoidance law in a Chapter 15 case, the statute should be read broadly to allow a bankruptcy court to grant that power in order to advance comity with foreign jurisdictions. The court stated that:
"The structure of Chapter 15 provides authority to the district court to assist foreign representatives once a foreign proceeding has been recognized by the district court. Neither text nor structure suggests additional exceptions to available relief. Though the language does not explicitly address the use of foreign avoidance law, it suggests a broad reading of the powers granted to the district court in order to advance the goals of comity to foreign jurisdictions. And this silence is loud given the history of the statute including the efforts of the United States to create processes for transnational businesses in extremis.
Congress did not intend to restrict the powers of the US court to apply the law of the country where the main proceeding pends. Refusing to do so would lend a measure of protection to debtors to hide assets in the United States out of the reach of the foreign jurisdiction, forcing foreign representatives to initiate much more expansive proceedings to recover assets fraudulently conveyed, the scenario Chapter 15 was designed to prevent. We are not persuaded that Congress has unwittingly facilitated such tactics - with foreign insurance companies, access to Chapter 7 and 11 otherwise denied. Nor is the suggestion that the representatives need only render their claim in Nevis an answer. Not all defendants are necessarily within the jurisdictional reach of the Nevis court."(18)
Finally, the court stated that its holding was supported by case law developed under Section 304, the predecessor of Chapter 15, noting that:
"under section 304, avoidance actions under foreign law were permitted when foreign law applied and would provide for such relief. Congress essentially made explicit... the bar on access to avoidance powers created by the US Code by foreign representatives in ancillary proceedings."(19)
The Fifth Circuit's decision bodes well for foreign representatives, although it remains to be seen whether the decision will be adopted by other courts. In courts that do follow the Fifth Circuit's decision in In re Condor Ins Ltd, a foreign representative in a foreign main proceeding will be able to apply the avoidance laws of its home nation and, in doing so, potentially enhance asset recoveries for the benefit of its creditors.
For further information on this topic please contact James L Garrity Jr at Shearman & Sterling LLP by telephone (+1 212 848 4000), fax (+1 212 848 7179) or email ([email protected]).
Endnotes
(1) 601 F3d 319 (5th Cir 2010).
(9) That non-exclusive list includes:
- staying various actions related to the proceedings;
- suspending rights of transfer;
- providing for discovery; and
- granting administrative powers to the foreign representative (11 USC Sections 1521(a)(1)-(6)).
(10) More specifically, it provides that the court cannot grant relief available under Sections 522, 544, 545, 547, 548, 550 and 724(a) of the Bankruptcy Code (11 USC Section 1521(a)(7)).
(11) Section 1523(a) ensures that foreign representatives can pursue US avoidance actions by granting standing to those wishing to pursue avoidance actions under US bankruptcy law through a Chapter 7 or 11 proceeding. Section 1523(a) does not grant substantive rights, "[r]ather it lifts a potential standing roadblock for resort to Chapter 7 or 11" (Condor Ins Ltd, 601 F3d at 324).
(12) Fogerty v Condor Guaranty, Inc (In re Condor Ins Ltd), 2008 WL 2858943 (Bankr SD Miss July 17, 2008).
(14) Fogerty v Condor Guaranty, Inc (In re Condor Ins Ltd), 411 BR 314, 318 (SD Miss 2009).