The United States Court of Appeals for the Fifth Circuit on March 17, 2010 held that foreign representatives appointed in a foreign insolvency proceed-ing have the authority to bring a foreign law based avoidance action in an ancillary bankruptcy proceeding commenced under Chapter 15 of the Bankruptcy Code, reversing the lower court opinions. This opinion is sig-nificant because it is the first published circuit court decision on this dis-crete issue and overrules the apparent understanding that foreign repre-sentatives may not pursue avoidance actions in Chapter 15 cases.
Condor Insurance, Limited (“CIL”) is a Nevis cor-poration that operated an insurance and surety bond business. In November 2006, one of CIL’s creditors initiated a winding up proceeding, (the equivalent of a Chapter 7 bankruptcy proceeding under the Bankruptcy Code), against CIL. In May 2007, Richard Fogerty and William Tacon were appointed as the Joint Official Liquidators of CIL (hereinafter, the “Foreign Representatives”).
The Foreign Representatives filed a Chapter 15 bankruptcy proceeding in the United States Bank-ruptcy Court for the Southern District of Missis-sippi. Chapter 15 of the Bankruptcy Code permits foreign representatives to seek assistance from United States’ courts in an ancillary proceeding once the foreign proceeding is “recognized” by the bankruptcy court. The Bankruptcy Court recog-nized the Nevis winding up proceeding as a foreign main proceeding, which is a foreign proceeding pending in the country where the debtor has the center of its main interests. Thereafter, the Foreign Representatives initiated an adversary proceeding against Condor Guaranty, Inc. and several other companies (collectively, “CGI”), seeking to avoid, under Nevis law, over $313 million in assets that were fraudulently transferred by CIL to CGI. CGI filed a motion to dismiss the Foreign Representa-tives’ adversary proceeding, and the Bankruptcy Court granted the motion on the basis of lack of subject matter jurisdiction, reasoning that a for-eign representative is not authorized to bring an avoidance action to set aside pre-petition transfers in a Chapter 15 case. The Foreign Representatives appealed and the District Court affirmed.
The Relevant Code Provisions
The two sections of Chapter 15 at issue are §§ 1521 and 1523 of the Bankruptcy Code. Section 1521 provides courts the discretion to grant any appropriate relief that is necessary to effectuate the purpose of Chapter 15 and to protect the as-sets of the debtor or the interest of creditors, with the exception of avoidance powers that are avail-able under certain provisions of the Bankruptcy Code. Specifically, the provision states that a bankruptcy court may grant “any appropriate re-lief,” including staying various aspects of the pro-ceedings, suspending the right to transfer assets of the debtor, providing for discovery, granting the foreign representative administrative powers and “grant-ing any additional relief that may be available to a trus-tee, except for relief available under sections 522, 544, 545, 547, 548, 550 and 724(a).” 11 U.S.C. § 1521(a)(7). Nevertheless, § 1523 permits a foreign rep-resentative to initiate these excluded avoidance actions in a full Chapter 7 or 11 case. Here, however, the For-eign Representatives did not have the option of filing a Chapter 7 or 11 case in the United States because for-eign insurance companies that have not conducted business in the United States, such as CIL, may not be debtors in a case under Chapter 7 or 11 of the Bankruptcy Code.
Thus, the core issue before the District Court was whether §§ 1521(a)(7) and 1523 restrict a foreign rep-resentative from commencing an avoidance action un-der the Bankruptcy Code only, or also under foreign law. The Foreign Representatives asserted that they were seeking relief under Nevis law, not United States law, such that the plain language of the statute merely pro-hibits them from using certain sections of the Bank-ruptcy Code when seeking avoidance and accordingly, they are not prohibited from relying on the avoidance actions available under the applicable foreign law. The parties did not disagree, however, over the fact that the plain language of §§ 1521(a)(7) and 1523 does not ex-pressly address the use of avoidance powers under for-eign law, and that no applicable case-law authority ex-ists on this specific disputed issue. The District Court held that Congress intended §§ 1521(a)(7) and 1523 to relegate avoidance actions, under both United States and foreign law, to a full Chapter 7 or 11 bankruptcy case. In re Condor Ins. Ltd., 411 B.R. 314 (S.D. Miss. 2009). The District Court’s conclusion, however, was not supported by anything specifically in the legislative history on which it based its decision. See In re Atlas Shipping, 404 B.R. 726, 744 (Bankr. S.D.N.Y. April 27, 2009) (ques-tioning the reasoning of the District Court in the Condor case).
The Circuit Court Opinion
On March 17, 2010, Judge Higginbotham of the Circuit Court reversed the decision of the District Court, holding that bankruptcy courts do indeed have jurisdiction and authority to offer avoidance relief under foreign law in a Chapter 15 bankruptcy proceeding. In re Tacon v. Petro-quest Res. Inc. (In re Condor Ins. Ltd.), 2010 U.S. App. LEXIS 5635 (5th Cir. 2010). The Circuit Court com-menced its decision by explaining that Chapter 15 im-plements the United Nations Commission on Interna-tional Trade Law Model Law on Cross-Border Insolvency (the “UNCITRAL Model Law”), which represents a culmination of a long standing effort by almost forty coun-tries to develop a uniform system guiding needed coop-eration. The UNCITRAL Model Law was intended to be integrated into local insolvency law and it was expected that any departures therefrom were to be as narrow and limited as possible in an effort to harmonize interna-tional bankruptcy proceedings.
Next, the Circuit Court addressed the list of excluded avoidance actions from § 1521(a)(7) of the Bankruptcy Code. This list of exclusions does not exist in the Model Law, and Chapter 15 is silent regarding proceedings that apply foreign law, including any rights of avoidance such law may offer. The Circuit Court reasoned that “where there are enumerated exceptions additional ex-ceptions are not to be implied, in the absence of a con-trary legislative intent.” Id. at *11. Judge Higginbotham opined that if Congress wished to bar all avoidance ac-tions, including under foreign law, it could have and should have explicitly so stated. Id.
The Circuit Court’s rationale was based largely on its interpretation of the purpose of Chapter 15, which in-cludes furthering cooperation between U.S. courts, par-ties in U.S. bankruptcy proceedings and insolvency courts and authorities, as well as promoting greater legal certainty, and fair and efficient administration of cross-border insolvencies. Id. at *12-13. Judge Higginbotham stated that the “silence [of the statute] is loud,” given the history of the United States to rescue financially troubled transnational businesses and the structure of Chapter 15 that suggests an expansive reading of the powers granted to courts in order to ad-vance the goals of comity to foreign jurisdictions. Id. at *13-15.
The Circuit Court also rationalized that because foreign insurance companies may not bring a Chapter 7 or 11 proceeding in the United States, precluding foreign rep-resentatives from initiating an ancillary fraudulent con-veyance action might induce debtors to hide assets in the United States outside of the reach of the foreign jurisdiction. The last basis of support for the Circuit Court’s decision is that pursuant to case-law under § 304 of the Bankruptcy Code, the predecessor to Chapter 15 which was repealed by the Bankruptcy Abuse Pre-vention and Consumer Protection Act of 2005 (“BAP-CPA”), avoidance actions under foreign law were permit-ted when foreign law applied. Congress is presumed not to have overturned precedent when amending the Bank-ruptcy Code and it intended for courts to consider § 304 case-law in interpreting the scope of Chapter 15. Id. at * 23-26.
Implications and Conclusion
One potential concern, which was raised by CGI, of al-lowing foreign representatives to use foreign avoidance law is that it might encourage “section shopping” (or Chapter shopping) by giving to foreign representatives the option to bring a Chapter 15 ancillary proceeding when using foreign law would be more favorable and a Chapter 7 or 11 proceeding when U.S. law would be more beneficial. As the Circuit Court noted, however, by allowing foreign representatives to pursue avoidance actions available under foreign law, Chapter 15 does not provide foreign representatives with any powers they do not already have under foreign law.
Although the statute may not be unambiguous on this point, prior to the Circuit Court’s decision it was gener-ally presumed that § 1521(a) authorizes any additional relief that may be available to a trustee with the exception of the exercise of avoidance powers, and avoidance pow-ers were generally understood to only be available to for-eign representatives in a full case under another chapter of title 11, such as chapter 7 or 11. See Collier on Bank-ruptcy ¶ 1521.02 (2009). Accordingly, the Circuit Court decision clearly departs from the restriction that BAPCPA was understood to place on foreign representatives who seek to bring avoidance actions in the United States.