Section 157(b)(2)(P) of Title 28 of the United States Code provides that "recognition" and "other matters under Chapter 15" of Title 11 of the United States Code (the Bankruptcy Code) are "core proceedings" that a bankruptcy court can hear and determine.1 On September 19, 2011, the United States District Court for the Southern District of New York (the District Court) issued its decision in In re Fairfield Sentry Ltd. (Fairfield Sentry), holding that bankruptcy courts do not have "core" jurisdiction to hear claims brought by foreign representatives2 within a Chapter 15 ancillary case seeking to recover assets located outside of the United States by challenging pre-petition foreign transfers to foreign parties.3
Reversing a decision by the United States Bankruptcy Court for the Southern District of New York (the Bankruptcy Court) that had relied on the plain meaning of section 157 and general considerations of comity and judicial efficiency as extending the broadest possible jurisdictional grant, the District Court observed that the animating purpose of Chapter 15 is to aid foreign jurisdictions administering bankruptcies by preventing debtors from hiding assets in the United States outside of the reach of their "home" courts. In light of that perceived narrow legislative purpose, the District Court concluded that the scope of Chapter 15, unlike a plenary case under Chapter 7 or 11 of the Bankruptcy Code, is limited to actions in respect of assets located within the territorial jurisdiction of the United States. In addition, following the controversial recent decision of the United States Supreme Court (the Supreme Court) in Stern v. Marshall (Stern),4 the District Court held that a bankruptcy court in a Chapter 15 ancillary case has no authority to enter final judgment on claims arising under common law causes of action that accrued prior to the commencement of a foreign insolvency proceeding and are otherwise independent of federal bankruptcy law.
The District Court's logic in Fairfield Sentry is set to be tested on appeal. On October 12, 2011 the District Court granted a request for certification of its order for interlocutory appeal to the Court of Appeals for the Second Circuit (the Circuit Court). Pending the Circuit Court's analysis, the District Court's decision is an important addition to the jurisdiction debate generally, and may affect the utility of Chapter 15.
At a minimum, Fairfield Sentry brings the core/noncore analysis for proceedings within Chapter 15 cases in line with the analysis for proceedings in plenary cases under Chapters 7 and 11 of the Bankruptcy Code. Proceedings of the kind at issue in Fairfield Sentry would likely be non-core in a Chapter 11 case.5 But the decision may go well beyond that. It raises the same constitutional issues addressed in Stern, casting further doubt on the nature and extent of bankruptcy court jurisdiction. In the cross-border insolvency context specifically, Fairfield Sentry raises the issue of just how useful Chapter 15 can be if, as the District Court observed, its purpose is limited to uncovering assets hidden in the United States. Chapter 15, and, more broadly, the UNCITRAL Model Law6 on which it is based, has been used successfully to implement crossborder restructurings and accomplish a wide range of valuable objectives. If Chapter 15 is limited to being an asset tracing and recovery tool, cross-border restructurings will be less efficient.
Fairfield Sentry arose in the context of the ongoing fallout from the Bernie Madoff scandal and the bankruptcy of Fairfield Sentry Ltd., Fairfield Sigma Ltd., and Fairfield Lambda Ltd., the three largest feeder funds (the Funds) working with Bernard L. Madoff Investment Securities LLC (BLMIS). The Funds, whose sole business consisted of selling shares to mainly non-U.S. persons and certain tax-exempt U.S. entities and then investing the proceeds with BLMIS, initiated insolvency proceedings in 2009 in the British Virgin Islands (the BVI) after the revelation of the Madoff ponzi scheme eviscerated their assets.
The BVI liquidators of the Funds then began filing hundreds of lawsuits asserting common law causes of action (the Common Law Claims) in New York state courts to recover monies paid by the Funds to foreign parties who redeemed their shares while the fraud was still undiscovered, and thus received payments based on artificially inflated calculations of the Funds' net asset values. As of May 2011, the BVI liquidators were seeking an aggregate of over $5.79 billion, including fictitious profits in excess of $690 million paid to the Funds' shareholders.
Approximately three months after filing the state court actions, the BVI liquidators commenced an ancillary case in the Bankruptcy Court under Chapter 15 of the Bankruptcy Code. The liquidators then, in their capacity as foreign representatives (the Foreign Representatives) of the foreign main proceeding7 in the BVI, removed all of the pending New York state court actions to the Bankruptcy Court and amended a number of the complaints to include new causes of action arising under the BVI insolvency statute's avoidance provisions (the BVI-Law Claims). In a decision dated May 23, 2011, the Bankruptcy Court rejected arguments by the defendants in the actions seeking to force the actions back into state court, concluding that it could properly assert subject matter jurisdiction over both the Common Law and the BVILaw Claims because they "directly affected th[e] Court's core bankruptcy functions under Chapter 15."8
The District Court's Decision
A NARROW READING OF CHAPTER 15
Reversing the Bankruptcy Court in a 53-page ruling, the District Court held that the statutory provisions of Chapter 15 relied on by the Foreign Representatives did not confer core jurisdiction on the Bankruptcy Court over actions seeking to recover assets located outside of the territorial jurisdiction of the United States.
First, the District Court held that section 1521(a)(5) of the Bankruptcy Code could not be the basis for concluding that core jurisdiction exists because it only authorizes the court to entrust the "administration or realization . . . of the debtor's assets" to the Foreign Representatives to the extent that those assets are "within the territorial jurisdiction of the United States."9
Second, the District Court rejected the Foreign Representatives' reliance on section 1521(a)(7) of the Bankruptcy Code, a catchall provision that allows a bankruptcy court to grant "any additional relief that may be available to a trustee" (with the exception of Bankruptcy Code avoidance powers, which are expressly carved-out and only available for use in a plenary case). The District Court repeatedly stressed that unlike plenary cases under Chapter 7 or 11, the text, structure, and purpose of Chapter 15 indicates that Congress intended to limit a foreign representative's ability to obtain relief within a Chapter 15 ancillary case to those instances where the assets are located in the United States (meaning tangible property within the territorial jurisdiction of the United States and intangible property deemed under applicable non-bankruptcy law to be located within the United States). To support this reading of Chapter 15, the District Court relied on In re JSC BTA Bank,10 a 2010 case in which the court held that the application of the automatic stay that arises in a Chapter 15 case upon recognition of a Foreign Main Proceeding is limited to property and actions located in the United States.
One consequence of the District Court's section 1521(a)(7) analysis is that it constitutes an important bookend to the Court of Appeals for the Fifth Circuit's 2010 decision in In re Condor (Condor), in which the court held in a matter of first impression that a bankruptcy court has the authority under section 1521(a)(7) to permit relief under foreign avoidance law.11 Fairfield Sentry purports to limit the holding of Condor to those cases where a foreign representative is seeking to use foreign avoidance law to "turn over or realize assets" located within the territorial jurisdiction of the United States.12
More generally, Fairfield Sentry could mark an important change in direction from the tendency of courts considering Chapter 15 to interpret its provisions expansively in order to achieve the broad "objective" set forth in section 1501 of the Bankruptcy Code to ensure the "fair and efficient administration of cross-border insolvencies." To date, courts have tended to use sections 1506, 1507, and the catchall provision of 1521(a)(7) of the Bankruptcy Code, which taken together can be read to suggest that a court may take whatever additional measures it deems necessary to effectuate the purposes of Chapter 15 so long as they are not "manifestly contrary to the public policy of the United States," as the touchstones for identifying the outer limits of their authority in an ancillary case. In sharp contrast to that kind of expansive reading of the statute, the District Court concluded that the function of an ancillary case under Chapter 15 is more limited and primarily aimed at providing foreign representatives with a means of recovering assets stashed away in the United States for "shepherding" back to a foreign debtor's estate.
CONSTITUTIONAL ISSUES FOLLOWING STERN
With no basis provided by the language of Chapter 15 for core jurisdiction, the District Court had to consider whether the form and substance of the claims brought by the Foreign Representatives otherwise implicated the Bankruptcy Court's core jurisdiction. For guidance on this point the District Court turned to the Supreme Court's recent controversial decision in Stern. In that case, decided on June 23, 2011, exactly one month after the Bankruptcy Court's decision in Fairfield Sentry, the Supreme Court held that bankruptcy courts, as Article I courts, do not have the authority under the United States Constitution to render final judgments on compulsory counterclaims involving common law causes of action that arise independently of federal bankruptcy law and that are not resolved in the process of allowance and disallowance of claims.13 Expanding on the Supreme Court's reasoning in Stern, the District Court concluded that the Common Law Claims brought by the Foreign Representatives in the Fund's Chapter 15 ancillary case similarly did not fall within the Bankruptcy Court's core jurisdiction because they amounted to standard common law causes of action arising under tort and contract doctrines such as money had and received, mistaken payment, and unjust enrichment and thus were not integral to the restructuring of debtor-creditor relations.
The District Court's decision was not entirely clear on whether the BVI-Law Claims raised any constitutional concerns, or whether that part of the decision was limited to the Common Law Claims. The decision contains language suggesting that the Stern analysis applies equally to the Common Law and BVI-Law Claims. This view is supported by the fact that the District Court rejected the Bankruptcy Court's rationale that the addition of the BVILaw Claims tipped the balance in favor of core jurisdiction because avoidance claims, as a creature of statute, are "traditionally core in nature." Rather, the District Court concluded that the BVI-Law Claims were, at least in this particular case, "quintessentially suits at common law that more resemble state law contract claims brought by a bankrupt corporation to augment the bankruptcy estate than they do creditors' hierarchically ordered claims to a pro rata share of the bankruptcy res."14
However, the District Court was careful to distinguish Condor, and stressed that its holding "does not mean that any foreign-created bankruptcy law action asserted in a Chapter 15 may not be adjudicated by a bankruptcy court."15 The District Court pointed to the ordering of U.S. assets according to foreign law priority schemes and "standard claims by the foreign representative to avoid transfers in the United States about which there is minimal or no dispute" as examples of cases where a bankruptcy court could maintain core jurisdiction over actions arising under foreign insolvency law. 16 However, where for example an underlying transfer of assets is challenged under a common law cause of action such as fraud or unjust enrichment, the bankruptcy court's authority to hear and render final judgment on the issue may be constitutionally limited by Stern.
On October 12, 2011, the District Court granted the Foreign Representatives' request for certification of the order in Fairfield Sentry for further interlocutory appeal to the Court of Appeals for the Second Circuit. In their papers requesting certification, the Foreign Representatives focused on what they considered the District Court's overly circumscribed reading of the scope and purposes of Chapter 15. On appeal, the Foreign Representatives will press the argument that contrary to the District Court's ruling a Chapter 15 case is not limited to assets within the United States except where a specific statutory provision of Chapter 15 expressly states otherwise, which is in keeping with the express purposes of the Chapter to "protect and maximiz[e] the value of the debtor's assets."17 With respect to the District Court's constitutional analysis, the Foreign Representatives appear set to reiterate an argument they have already made that given the BVI court's apparent lack of jurisdiction over at least some of the defendants in the redeemer actions and the fact that without resolution of the actions certain of the defendants' automatic claims and distributive rights under BVI law cannot be resolved, contrary to the District Court's holding the actions at issue in Fairfield Sentry are part of the process of the allowance and disallowance of claims and thus properly understood as "core" under Stern.
A number of factors may have influenced the District Court's reasoning in Fairfield Sentry. First, without deciding the issue the District Court observed that the Bankruptcy Court's consideration of the BVI-Law Claims was "probably improper" as they were added as independent causes of action after the Foreign Representatives' notice of removal from state court was filed.18 The late addition of the foreign law claims clearly struck the District Court as being designed to "manufacture jurisdiction" by creating the appearance that the actions were of a kind typically dealt with in bankruptcy courts. Second, the litigation strategy of the Foreign Representatives was problematic, having first filed over 200 lawsuits in state court based on novel state law theories for recovery and then abruptly commencing an ancillary case under Chapter 15 and removing the actions to the Bankruptcy Court, thus opening the door to abstention and remand motions. As the District Court observed, "had the foreign representatives simply used the Chapter 15 process before filing any of the actions in state court, none of this expensive jurisdictional litigation likely would have ensued."19 Third, the influence of Stern was clearly felt. Stern placed limits on the jurisdictional reach of bankruptcy courts, and while the full extent of those limits remains unclear, the District Court in Fairfield Sentry has signaled that they extend to Chapter 15 cases.
The decision in Fairfield Sentry that emerged from this background could represent an important turning point in the continuing evolution of Chapter 15 jurisprudence. As discussed above, until now courts have tended to interpret the purpose of Chapter 15 broadly as providing a wide and expanding range of tools to bankruptcy judges to facilitate the fair and efficient administration of cross-border insolvencies. The District Court's decision, on the other hand, purports to limit the statute to the task of ensuring that critical assets and information are not hidden away in the United States beyond the reach of a Foreign Main Proceeding. That more restrictive reading of what Chapter 15 is designed to do, combined with the greater willingness of appellate courts to engage in searching separation of powers analysis in the bankruptcy area after Stern, is likely to have important consequences with respect to how Chapter 15 cases are used going forward.